Strategic cost management

Strategic cost management (SCM) is again a decision making aimed at aligning the firm’s cost structure with its strategy and optimizing the performance of the strategy. In relation with environmental costs, there is the influence of one executional cost management tool, namely the tracking of environmental costs, on one important structural cost management activity, namely the implementation of environmental initiatives. The tracking of environmental costs is defined as the identification and accumulation of specific internal costs related to the protection of the environment. “The identification refers to the observation, description, and classification of various types of environmental costs, whereas the accumulation refers to the separate collection and recording of those costs within the cost accounting systems. It includes executional cost management activity as it motivates managers and employees to manage, control and reduce environmental costs in line with the current strategy, and it prevents suboptimal decisions being made. The implementation of environmental initiatives refers to the actions needed for organizations to master operational control over activities that might have a significant impact on the environment as well as on the cost structure. For instance, several generic initiatives have been identified in the industrial ecology literature such as product and process redesign, substitution and reduction of raw materials used, and recycling. In other words, these initiatives refer to typical environmental actions which have an influence on the business as a whole. The implementation of environmental initiatives represent structural cost management activities because they help define the gross parameters of the firm’s cost structure in terms of product design (e.g., attributes, design features, characteristics), nature and level of raw materials used (e.g., polluting vs. Non-polluting material, recycled vs. non-recycled material), and operational process design. The environmental costs have been chosen to examine the strategic cost management approach for three main purposes. First, it is now commonly recognized that environmental issues are an important part of a firm’s strategy. Therefore, there is a need to examine environmental costs at the strategic level and not only at the operational level. The environmental costs react an executional aspect aimed at managing, controlling and optimizing costs for a given business and environmental strategy, but also a structural aspect based on the influence on the firm’s cost structure notably in terms of product design, raw materials used and operational process design.