Costing is the base for success of any business but strategic decision making aims at smooth and continuous progress. Even a street vendor knows the basics of costing and why it is needed. At the very initial stage of business, costing is required to calculate total cost of a product and fixing the price for trading the same. However, it may not be the case for well-established business network. These large corporations need costing for strategic planning to earn a competitive advantage.
Before we move to the tools and techniques of strategic decision making, let us first answer the question – How Costing is useful in Strategic Decision Making?
How Costing is useful in Strategic Decision Making?
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Large scale organizations deal in a number of product lines and to make each of them profitable is the point where the need of strategic decision making arises. Assigning proper weights to every event or project requires very minute analysis of costs. Following points help one to identify the importance and requirement of strategic decision making.
Untangle Complex Business Decisions
Management of an organization always aims at expanding the business and making it successful in long run. Such expansion requires a huge amount of expenditure. In order to calculate how much investment is required or what will be the cost of expanding business, management opts for strategic analysis. Similarly, there could be other decisions or project such as diversification of business, shutdowns, sub-contracting and much more. How beneficial these projects are can be calculated with the help of financial accounting but to know the cost which is must in order to calculate benefits, cost accounting is the only way out.
Platform for Rational Comparison
Among the various products a company manufactures, there could be possibility that some of these products are generating profits while a few may incur heavy losses. This could affect the company’s overall profitability. The management have to choose among the various options available, which one is more rewarding and which one can be eliminated. Why there are such losses and how these products can be made fruitful? The management seeks the help of strategic analysis to prioritize products on the basis of benefits derived from them. Same way it could make a comparison between the competitors and plan accordingly to succeed in this competitive business environment.
Considers Opportunity Cost
Opportunity cost is the profit foregone by the company by choosing one alternative over other and hence becomes the cost of alternative selected. It exists because of limited resources. The concept of opportunity concept comes into the picture when a selection is to be made between two or more options. If the opportunity cost is negative, this simply means that there are no alternatives available. These may not be monetary in nature but can affect the decision-making process significantly. Generally, people do not take into account the opportunity costs as these have no existence in our financial statements but these costs are real and also material.
Facilitate Internal Management
Accuracy of data can be maintained with the help of cost accounting which enables management to trace the objects that requires improvement. Preparing budgets can be facilitated by maintaining such data, looks for variances and try to eliminate them. Helps in keeping appropriate stock of inventories. Any error or omission in preparing these records may lead to confusion and mis-coordination internally. All the activities of an organization are inter-linked and hence, any default in one will automatically hamper all other activities. Various long-term investments are dependent on the accuracy of this process. Therefore, management is required to supervise the working from time to time.
Competitive Pricing
With the arrival of globalization, the business competition has taken a vast form. Every enterprise, in order to survive this competition, has to fix their prices competitively. Sometimes, with a view to capture the whole market, company sells its products internationally at very low prices or even by incurring losses. This may create a price war. Such practices significantly impact the profitability of other companies or may lead them to the path of bankruptcy. Companies always have to stay ready with their backup plan in case of encounter with practices.
Tools & Techniques for Strategic Decision Making
A company have to take help of several tools and techniques for framing strategic decisions. These includes:
SWOT Analysis
SWOT stands for Strength, Weakness, Opportunity and Threat. Management analyses what are the strengths of the company and what are the areas where it can excel to become successful. What are the weakness and how company can overcome the same? What opportunities can company caught from changing and fluctuating market environment and external factors? And plan for efficiently surviving the threats.
Strength and weakness are derived internally while opportunities and threats come from external environment.
Portfolio Analysis
Portfolio analysis is the best tool for product-market analysis and it basically considers SWOT analysis to describe the relation between product and market in which it is operating.
Factors that affect portfolio analysis strategy includes values of company, current business of company and its scope in near future, government policies, portfolio strategies followed by parent company and much more.
PESTEL Framework
PESTEL is abbreviated for Political, Economic, Socio-cultural, Technological, Environmental and Legal factors. Or simply we can say the macro-environment factors. Before taking any decision, a proper evaluation of these factors can help company avoid most obstacles.
Porter’s 5 Forces Framework
The five forces that affects an entity includes: threat of entry, competitive rivalry, bargaining power of buyers, bargaining power of suppliers and threats of substitutes tell a company about the level of competition in its industry.