Strategic Cost Management

Capital budgeting and investment analysis have, to this point, been beyond the scope of this text. However, a recent conceptual development by John K. Shank and Vijay Govindarajan in the capital budgeting literature is of interest to operations managers because it (1) employs some of the cost management tools outlined earlier in this text and (2) provides a useful framework for using cost management techniques to improve the competitive position of the firm. ft Shank and Govindarajan present a method of analyzing proposed expenditures that is not based on discounted cash flow measures. Their approach employs a combination of three analytical tools: value chain analysis, strategic positioning analysis, and cost driver analysis. In each of these, cost and revenue information is used in ways normally not associated with conventional budgeting. Using this framework, capital projects are selected based on their ability to improve the firm's strategic position. Shank and Govindarajan have termed this approach "strategic cost management."