Strategic Cost Management Techniques: Adidas Case Study Analysis

This report delves into the realm of strategic cost management, providing a comprehensive overview of its principles and techniques. It explores two primary methods: activity-based cost allocation (ABC) and benchmarking. The report elucidates the benefits of ABC, such as identifying waste and improving processes, while also acknowledging its limitations, including high implementation costs. The application of ABC within Adidas is examined, highlighting the company's transition from a traditional accounting system to an ABC system, the challenges faced, and the eventual improvements in cost accuracy and operational efficiency. Furthermore, the report discusses benchmarking as a strategic tool for evaluating organizational processes against industry leaders. It outlines the pros and cons of benchmarking, emphasizing performance improvement and the identification of new paradigms. The report concludes with a case study on Adidas and its implementation of benchmarking. Overall, the report provides a detailed analysis of strategic cost management, offering valuable insights into cost optimization strategies and their practical application within a real-world business context.

Strategic Cost Management
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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................4
Activity based cost allocation system..........................................................................................4
Advantage of ABC..................................................................................................................5
Disadvantages of Activity Based Costing...............................................................................6
Adidas and Activity based cost allocation system...................................................................6
Benchmarking..............................................................................................................................8
Pros of Benchmarking.............................................................................................................9
Cons of Benchmarking..........................................................................................................10
Adidas and Benchmarking.....................................................................................................10
Conclusion and Recommendations................................................................................................12
References......................................................................................................................................14

Introduction
In the competitive marketplace, all of the spending being done by the firms and organizations are
seen as investments. The organizations are making efficient decisions on their spending on the
basis of their internal and external capabilities and their strategic vision for delivering the value
from the investment being made. Traditionally, it was seen that the firms were under intense
pressure of cutting the costs without analyzing the integration and sustainable growth of the
business strategy.
There is a need for the development of multifaceted cost competence due to increased regulation,
increased global competition, changing demographics, etc. It was seen that the tactical solutions
used traditionally had failed to deliver the cost reductions and did not produce effective results
despite considerable consumptions of the resources. Various cases saw a substantial damage to
the image, corporate structure, culture and morale of the company. Therefore, it is imperative of
the organization to understand Cost as a strategic issue and should strive to optimize their
spending in the context of the business model. Further, a balance must be maintained between
the cost and the revenue growth of the company. There is a need to scrutinize the organizational
processes so as to knock down all the departmental barriers and to understand the business of the
suppliers in order to improve the process. Further, the cost management techniques have to be
applied for improving the strategic position of the firm and further to reduce the cost. (Cooper,
R., and Slagmulder, R., 1998).
This paper will discuss the various characteristics of the strategic cost management and the
techniques of activity-based cost allocation system and benchmark relating it to Adidas and its
functioning on the organization.

Discussion
Strategic cost management is beneficial in developing a framework for the organization which
will review the strategic allocation of all the resources across all the operational functions of the
nosiness on the basis of their core business activities and processes. It is also beneficial in
improving the business and its understanding of all the cost drivers so as to maintain an
improved articulation of the strategic plans regarding the cost (Shank, J., and Govindarajan, V.,
2004). The following section discusses the two primary techniques of strategic cost management
along with discussing the usage of these techniques in Adidas.
Activity based cost allocation system
ABC can be considered as a natural outgrowth of the competitive and complex marketplace
present today. It helps in providing an approximation of the product cost rather than providing by
the traditional volume based costing method. This technique of strategic cost management
follows the principles that the activities lead to costs, and in order to control the costs, all the
activities must be controlled. In this technique of strategic cost management, all the activities are
first identified and then expense associated with each activity is clubbed together for getting a
detailed activity-based expense. Then a cost driver is selected for each activity, and product cost
is worked out in the end. Whereas the traditional cost accounting used to measure the cost related
to the task but ABC also was taken into account the cost of not doing the task. The system then
monitors every activity closely by relating the activities to their costs and bringing upon the
effectiveness of the cost. ABC helps in recognizing the activities relating to special engineering,
machine setups, special testing and others which cause costs to the company by consuming the
resources (Kaplan, R.S., and Atkinson, A.A., 2015). It is recognized as one of the most important
techniques in the recent decades due to

1. Increment in the manufacturing overhead costs;
2. No relation to the manufacturing overhead costs with the direct labor hours or the
productive machine hours;
3. Production of some products in large and small batches respectively and
4. The diversity of the demands of the customers and the products.
Advantage of ABC
1. Identification of waste
Usually, the overhead costs are seen to include few wasteful products, and these can
easily be identified with the help of ABC method of cost allocation. These wastes can be
removed from the business to manage effectively.
2. Improvement of overall Processes
With the help of ABC system, the activity based costing method can scrutinize all the
processes and look into the depth. This way all the processes can be seen in the bigger
picture, and all the processes can be improved.
3. Pricing is organized
With the help of ABC, the cost associated with each and every activity can be identified,
and various pricing strategies can be developed and marketed. This helps in organizing
the spending in an efficient manner.
4. Can Be Applied To The Entire Business
It can be seen to be an effective method for production costs along with reducing the
overhead costs by using this method. Therefore, the system of allocating cost can be
applied to entire organization so as to get desired results (DRURY, C.M., 2013).

Disadvantages of Activity Based Costing
1. High Implementation Costs
Activity based costing is not the best method to be implemented in case the overhead
waste is low in the organization due to high cost of the implementation of the activity
based costing. Along with its implementation, other factors have to be brought in the
system for this system to be highly effective.
2. Reduction Is Not Always Possible
In case the overhead costs are extremely high due to volume issues, it is unlikely to have
any benefit to the organization. Furthermore, it is not seen to be efficient if the system is
representing the small portion of the costs.
3. Time Involved
The period involved in this system is extremely long, and it takes the time to examine all
the employee actions, production processes and other aspects of business for gaining a
larger view on the business issues.
4. Data Flaws
For successful implementation of ABC, all the departments and individuals must collect
and then input the data. In the case of smallest flaw, the information can be damaged
throughout the process and lead to tainting of the outcome. This can be seen as the
biggest risks while implementation of the system (DRURY, C.M., 2013).
Adidas and Activity based cost allocation system
Before the introduction of ABC system in Adidas, the company operated on the traditional
accounting system where a large amount of manual bookkeeping work was seen to be performed
in the organization. The process of accounting was driven by the external financial reporting
purposes which lead to high amount of inaccuracy in the product costs.

Figure 1: Adidas' traditional accounting system
The inaccuracy caused due to the traditional costing information lead to impede the ability of the
organization to compete on the basis of the pricing. Therefore, Adidas required a better costing
system, which led to the commissioning of ABC system implementation. The organization
wanted to get right product costs. The cost structure comprised of 15% direct labor and 85%
direct materials, fixed and variable overheads. The organization had out of date planned material
cost information and also lacked various working practices and lack of inventory control. Huge
discrepancies were found between the accounting figures and the physical stock, and these were
treated as monthly manufacturing overheads. Adidas also invested on computerization of
material cost recording system for capturing the stock movement between assembly lines and
warehouse and actual material and actual material quantity information. The organization also
put in place, standardized procedures for inventory control and recording control and further
enforced the personal key performance indicators (KPIs) of the employees. Four years were
spent to implement it completely (Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and
Burgstahler, D., 2013). All the operations managers who were from engineering background
were seen to accept the system efficiently and quickly as compared to the accountants and
adapted all the concepts of ABC and embraced its implementation for improvement of the
operations. The management conveyed the concept of non-value added activities along with
process mapping; this led to the identification of waste in the overall processes. The moving time

was reduced due to the reorganization of the assembly line layout, and the top management was
seen to become highly confident of the accuracy of their calculations and direct costs.
Figure 2: ABC System
Benchmarking
Benchmarking is considered as a process of evaluating services, products, and processes of an
organization against the functions of another organization known to be leaders in one or more
aspects of different business operations. It is an efficient tool for strategic cost management
which help an organization in measuring the overall operational proficiency of an organization. It
gives a significant understanding about how an organization compares itself with the similar
function organization, even if they are in a different field or have different customers. In addition
to it, benchmarking help an organization in recognizing systems, areas, and processes which

require necessary improvements either dramatic or incremental improvements (Camp, R.C.,
2013). Benchmarking can be of two types:
Technical Benchmarking
It is the benchmarking which is performed with the help of design staff to evaluate the
capabilities of products and services, especially in comparison to products and services of the
nearest competitors. If an organization is not able to gain hard data, the design efforts prove
inadequate, and products and services may become a failure in comparison to the leading
competitor.
Competitive Benchmarking
It is utilized by various organizations to analyze their existing position in the marketplace.
Competitive benchmarking mainly compares the ability of an organization with respect to the
growing competitive organization, especially with respect to more important operations, values
or attributes related to the products and services of an organization. If the organization is not able
to obtain the hard data, all marketing efforts prove misdirected and design efforts misguided.
Pros of Benchmarking
 Performance Improvement: The main benefit of benchmarking is that it develops the base
of performance improvement aimed at increasing competitiveness. By displaying how to
improve competitors, benchmarking ensures the long-term survival of an organization.
With the help of benchmarking the management of an organization able to identify the
best practices of different business processes and determines what factors improve the
existing performance.

 New Paradigms: A regular benchmarking program of an organization brings organization
out of their comfort zones and offer various measurable and specific short-term
improvement plans with which the organizations can significantly improve their
performance. Most of the time organizations establish their objectives on the basis of
established internal patterns and past trends. With the help of benchmarking, the
organizations able to remove their paradigm blindness and can establish a fresh approach
towards a settlement of goal. (Davies, J., ONS, D.E., Aston, J. and Sayal, H., 2015)
 Change: Benchmarking helps the organizations to focus more on creating change and
also provide significant directions towards different change processes.
Cons of Benchmarking
The key cons of benchmarking are that it helps the organization in evaluating the efficiency of
their operational metrics, but it is not able to properly measure the overall effectiveness of such
metrics. Due to which it provide the wrong outcomes about their operational performance.
Benchmarking represents the principles and standards utilize by different competitors but does
not consider the circumstances under which the competitors able to obtain such standards. If the
objectives and goals of the competitors were flawed or prohibited due to any available factor, an
organization by benchmarking able to runs the risk of trying to ape such standards. The most
important cons of benchmarking are the danger of arrogance and complacency. This will reduce
the overall performance of an organization (Camp, R. C., 1995).
Adidas and Benchmarking
The strong market position of Adidas in London, United Kingdom led the company to achieve
great heights and the organization grew immensely and acquired various companies and a
majority stake. It also diversified itself in terms of technology by acquiring various information
technology techniques in the organization. Later on, the organization became increasingly

vulnerable when it started facing intense competition from other strong brands like Nike. As per
the analyst, the organization failed to provide a strategic direction to the company. The operating
cost of the company was seen to be high and its products were seen to be of inferior quality when
compared with Nike products. Further, it was seen to suffer from the centralized decision-
making process which resulted in fall of assets, and the market share was also seen to come
down sharply. The top management started emphasizing on reduction in the manufacturing costs
giving a new thrust for improvement in the quality control (Hinton, M., Francis, G., Holloway,
J., 2000). The organization now implemented a new program wherein the benchmarking
program was incorporated in the company. This led to playing a major role in the company, and
the implementation of the program led to reap various benefits in the company.
The company introduced a five-stage process which involved the following activities:
1. Planning: the subject to be benchmarked it determined and the most suitable data
collection technique is selected.
2. Analysis: The strengths of all the competitors are assessed, and the performance of
Adidas is compared with its competitors like Nike for determining the competitive gap
and to gain the projected competitive gap.
3. Integration: The necessary goals are established based on the data collected for attaining
best performance wherein all the objectives and goals of the company are integrated.
New goals and objectives of the company are determined which are communicated across
the whole organization.
4. Action: The action plans are established and then assesses periodically for determining
the achievement of the company’s objectives. Any type of deviations from the selected
plan are scrutinized.

5. Maturity: The superior performance level of the company is determined. The chances of
successful incorporation of the benchmarking process are also determined.
Figure 3: Adidas benchmarking model
Conclusion and Recommendations
Activity Based Costing and Benchmarking enables the decision-makers of the organization to
assess the degree of improvements required so as to achieve the desired results and superior
performance. The Activity Based Costing (ABC) help in looking upon each and every process
involved in the operational functioning of the management, thereby controlling the pricing
strategies. Whereas regular and frequent benchmarking help in creating measurable and specific
plans on the basis of historical performance and current reality which helps in supporting step-