Strategic Costing

Paper on Strategic Costing

In 1980, Mike Porter developed his classic model of industry driving forces, which is one of the methodologies companies use to attempt to evaluate investments in technological change. While this model is a good representation of the relationship between technological change and competition, it lacks the ability to conduct a formal financial analysis within an industry.

One of the key strengths of this model is the concept that firms must either strive to become the low-cost producer or find a way to differentiate their products and services from others. Using technology to reduce risk might be a way of reducing cost in the exploration and production industry. Additionally, quality and service can differentiate a firm's products and services in the market. Gasoline is basically gasoline, but people will buy one brand or the other, and in fact appear to have brand loyalty.

Porter's 1985 concept of the Value Chain augments his original model. This concept suggests that information technology should be treated as part of the corporate infrastructure. It is a thread that weaves its way throughout the entire corporation— inbound logistics, operations, and outbound logistics as well as the company's marketing, sales and services efforts. This indicates that the effects of IT might be cumulative. A small change in the input segment could have a profound impact on later divisions of the Value Chain. This model also suggests, as determined by Paul Strassman in The Business Value of Computers, that the

value of IT cannot be measured directly. Finally, the value-chain model takes into consideration structural cost drivers like complexity, experience, capacity utilization, and Total Quality Management (TQM). These drivers exist throughout the value chain. As Shank and Gouindarajan stated in 1992, technology is an important driver of cost at the critical junctures in the chain. Furthermore, technologies are interrelated and different...