Strategic cost management can be defined as the use of cost information to help formulate and communicate strategies. Strategic cost management combines three elements:

1. Value chain analysis – It is for any business a linked set of value creating activities all the way from basic raw material source to the ultimate and used product delivered into the customers hands. So to gain competitive advantage company must either reduce the cost or it should offer superior products at higher prices, if it does not do either of the two it will be at significant competitive disadvantage.

2. Strategic location – It refers to the route which can significantly influence the real cost analysis for a company. So a firm which is in the business where cost is low for its products then it has to pay attention to target cost while a firm which is in the business of differentiation products target costing is not that important.

3 .Cost driver analysis – It identifies the factors that cause functions to be performed so as to calculate competitors relative cost and pinpointing the specific cost advantage which the competitors has so that management can decide the future course of actions on the basis of those factors.

In short strategic cost management is a way of assessing competitive advantage by determining the strategic advantages and disadvantages of all the activities undertaken by the company in comparison to the competitors and then deciding on how to change the activities undertaken by the company so as to get past the competitor and became market leader in the industry.

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