CHAPTER PORARY BUSINESS CONTE T AND STRATEGIC us oF COST MANAGEMENT EXPECTED after studyin: «this chapter, you should be able to... the more recent — changes in contemporary business environment such as The Global Business Environment Advances in Manufacturing Techniques Advances in Information ... A greater focus on customers New forms of organization Changes in the Social, Political & Cultura Environment : Explain the strategic focus of cost management Describe the relationshi ip — between cost management and the accounting systems Explain the Concept of integrative framework on v the accountin, is Me system i it " organizational orchitverio. is used in the firm'sCHAPTER 3 CONTEMPORARY BUSINESS ENVIRONMENT AND STRATEGIC FOCUS OF COST MANAGEMENT CONTEMPORARY BUSINESS ENVIRONMENT eee Civ cement in recent years has been characterized by increasing 5 include au increase in global competition; (2) advances in technologies: ) advances in information technologies the Interact ced aannny: (4) 2 greater focus on the customer; (5) new forms of management organization; and (6) changes in the social, political, and caltural eavireament of business. As businesses turned global and product lines expanded, operations have become more complex, forward-looking companies saw a tremendous need for management oriented dats that was separate from financial-oriented data. Corporate executives are now using cost data to chart successful futures for their companies. Adapting management sccounting system to better meet management's needs for informatioh is crucial to an organization's survival when competing in global markets. Global conipetitors now have relatively free access to markets around the world. As a result, domestic markets on virtually every_ Country face greater challenges from foreign competition. With increased reliance on global markets, companies need not only respond quickly to changing market Conditions but also tailor products to different consumer tastes and demands and this has to be done at a level that assures profit and gives satisfactory retums to shareholders. In today’s automated environment management accountants use their management control systems to support and reinforce manufgcturing and other operating Strategies. It is in this light that one leams to appreciate the role of sccountant which is more of an influencing role rather than just an informing role, The change in the business environment in at least the last two decades where Organization have to transform themselves to become more competitive, have Profound effect in the practice of management accountitg, Of particular importance are the changes in business, especially the increase in global competition and the changes in management techniques, that have created the need for a new, strategic approach to management and to cost management.56_ Chapter 3 : the development that drive sotto ay pen cange in the ~ ee extensive changes in Oe oriented business and not forpro ee organization, business environment, Pall affected significantly by BTOWth of consumers and regul and increased Conk ponbiamareny, Soviag auaber of see faite tunities for growin, agreement untries it - ES pettbilty Tie in global mache a lea c0tt igh oly goods nied worldwic sumers . Manage put ness, owners n protec eecar: likewise when sales and production activities are pursued in foreign countries. ; i is itive and firms need cost I business environment is very competitive ° , ieraate eee competitiveness. They also need financial and nonfinancia} information about doing business and competing effectively. - Advances in Manufacturing Technologies t new manufacturing technologies to remain Firms around the world adopt es competitive in the face of the increased global competition. Many firms methods applied in some Japanese manufacturing firms that produced significant Cost and quality improvements using quality teams, and statistical quality control. Some firms include just-in-time inventory method in order to reduce the cost and waste of maintaining large levels of raw materials and unfinished Product,-A key competitive edge that forms have is the ability to deliver the product, or service faster than the competition. This is known as Speed-to-market. : Advances in Information Technologies, The Internet and E-Commerce The increasing use of j : (the dot-com’s increased use of the Internet for_ Contemporary Business Environment and Srategie Focws of Cost Mandgement 51 A Greater Focus on Customers To succeed in this era, customer value is the focus that businesse types must be concerned with. A key change in tacctaad sieaveser Qomiecl Bic prednt jonality and quality. ‘As business firms seek to add new features and new jucts as quickly as possible, shorter product li thereby increasing wean intensity of competition. The new ulin joensd focuses on catia satisfaction. producing value for the customer has changed the orientation of managers Jow-cost production of large quantities to quality, service, ae delivery saps ability to respond to the customer's desire for specific feature. Today, many of the critical wens ee are customer oriented. Cost management practices are also changing. ment reports now include specific measures of customer preference and customer satisfaction. pene + ‘The value of @ product or service to the customer is affected by such diverse attributes as product Price, quality, functionality, user-friendliness, customer service, warranty and maintenance costs. By managing activities that will increase customer value, the firms can establish a competitive advantage by creating better customer value for the same or lower cost than that of competitors. Cost information plays an important part in the process called strategic cost management. Generally, firms chose a strategic position corresponding to one of two general strategies: (a) cost leadership, and (b) superior product through differentiation. A focus on customer value means that the management accounting system should produce information about both realization and sacrifice. The system should be able to measure various attributes of customer value. Successful pursuit of cost leadership and/or differentiation strategies requires an understanding of a firm’s value chain (internal) and supply chain (external).ee pee oe New Forms of ae changed in response to the changes in marketin, Management onpiation Wei te Sc customer satisfaction and value, nw sod ars sited from financial and profit-based measures of performance to castomer-related, it measures such as quality, time to delivery and service. Similarly, the hierarchical command-and-control type of izati rein replaced by a more flexible organizational from that encourages teamwork and ‘coordination among business functions. Ins response to aarrenges cost management practices are also changing to include repors that see eel to cross-functional teams, of managers; the reports reflect the = hinational roles of these teams and include a variety of operating and financial information: product quality, unit cost, customer satisfaction, and production bottlenecks. The changes in management organization and marketing in the environment of business are summarized in Figure 3-1. Figure 3-1: Comparison of Prior and Contemporary Business Environments Financial and operating data, the firm's strategicCont femporary Business Environment and. Strategic Focus of Cost Management _59 | Required labor skits Emphasis on quality | Acceptance of a normal or usual amount of waste b Marketing Products Relatively few variations, long 2 product life cycles Markets Largely domestic Changes im the Social, Political, And Cultural Environment of Business Significant changes have taken place in the social, political, and cultural environments that affect business. Although the nature and-extent of these changes vary a great deal from country to country, they include a more ethically and racially diverse workforce, a renewed sense of ethical responsibility among managers and employees, and an increased deregulation of business by the national government. The new business environment requires firms to be flexible and adaptable and to place greater ibility in the hands of a more highly skilled workforce. Additionally, the changes tend to focus the firm factors outside the production of its product or provision of its service to the ultimate consumer and the global society in which the costumer lives,a= : [AGEMENT TEGIC FOCUS OF COST MAN. ane STRA’ s the emerging and expecter hange in the ‘A competitive firm i t of business into its uations neice iri} ve fe eon devel uses advanced manu! ao ler speed eae aikies es the effect of changes in om ei an Soa its complex social, political tural em Omer tastes, ronment. ‘ Se Vie aieiher ts oc tieiag oe ooh comet oa retin successful rather than just focusing on contro! magne jot on the measurement per — but on the iaanifost aoe an recrtical to the firm’s success. 5 identification of those measures Phases of the development of cost management systems should consider the following: : Cost management systems are basic transaction Teporting systems. me As they develop into the second stage, cost management systems focus on extemal financial reporting. The objective is Teliable financial reports; accordingly, the usefulness for cost management is limited. Stage3: Cost management systems track key Operating data and deve! more accurate and relevant cost information for decision making; Cost management information is develo Stage 4: eengically televant cost management information is an integral Part system. n part, t, not just a Partner, with the skills of, identifying, Summarizing and for the firm’s Success, f (CSFs) are measures of those’ Performance essential to its Competitive Advantage Bes = of these critical Success fy CSFs for any given fj pects of the firm’s d, therefi i i ‘actors are financial, but m: Eee Tm depend on the nature , ‘any are nonfinancial. The of the Competition it faces.Busi Contemporary ness Environment and Swasegte: Focus of Cost Management “a OST MANAGEMENT AND ACCOUNTING SYSTEMS term cost management is wide! i i Pim iti cee ey. cal ol sci vale fo out Tun sod long-run planning and control decisions that re deans ind lower posts of products and services. For example, managers make decisions regarding the amount and kind of material being used, changes of plant processes, and changes in product designs Information from acoounting systems helps managers make such decisions ‘but the information Accounting systems themselves, are not cgst management. Cost management has a broad focus. For example, it includes ~ but it not confined ey the.continuous reduction of costs. The planning and control of cone is usually ‘ riage ape revenue mi Profit planning. For instance, to enhance revenues managers of deliberately i additional advertising and product modifications. Snes neat Cost management is not practiced in isolation. It's an integral part of general management strategies and their implementation. Examples include programs that enhance customer satisfaction and quality, as well as programs that promote “blockbuster” new product development. WHEN SHOULD THE INTERNAL ACCOUNTING SYSTEM BE CHANGED? The succeeding sections will analyze organizational innovations. These innovations illustrate that internal accounting systems are an integral part of the organization’s architecture. When managers change the architecture of their organization by decentralizing decision rights and empowering employees via TQM programs because the firm’s business strategy changes, accounting systems are likewise modified. Similarly, when JIT production systems are installed, accouriting system changes follow. However, there were no organization changes associated with productivity measurement systems and these accounting systems were not widely implemented. There is no.such thing as the ideal mann ee an organization has .different circumstances that lead to different: management accounting decisions, Also, accounting must continually deal with trade-offs among external users wanting information describing firm performance and internal users wanting information for decision making and control. Surviving organizations must meet the demands of changing technologies and markets by‘62 Chapter «ational architectures. Beca, ‘ and organizational use ising their business structures constant state of change, the accounting re’ on al architectures are in & system must regularly adapt. : , i ting system is in ot indicate that the internal accoun not There are certain signs that ito behavior on the part of maniagers because working well. One sign he sal measures. Managers will. make decisions 1. of poorly chosen perfo wires, If those performance measures are noy tively influence performance ME ill make decisi positively inf f the organization, management will m ions that consistent with the goals 0 ization’s goals. Another sign of problems with the do not pepe eer ing decisions. If pees ae and pricing accounting ; adding to the organizational isions based nt accounting are not s " nese te the secanteg syste is either providing inaccurate estimates of copoly costs and/or creating dysfunctional incentives. i izatic i liers to change Often changes in customers organizational architectures cause supp! 2 their wchecture (and accounting systems). If your major customers are modifying ‘their organizational architectures, they are likely responding to technological and market conditions. The way in which knowledge is generated and disseminated has probably changed. These changes are likely affecting your firm’s organizational architecture. Organizations should not necessarily look to the latest management accounting fads to give them direction in changing their management accounting systems. Activity-based costing (ABC), for example, is only appropriate for certain types of organizations. Each organization must continually evaluate and improve its management accounting system to meet the challenges of a changing environment and a changing ‘organization. This text will emphasize the dual role of internal accounting systems for decision making and control. Because the internal accounting eyateih is performing two separate roles (it is also being used for taxes and financial reporting), trade-offs making only under very ike the past.Contemporary Business Environment and Stra tegic Focus of Cost Management _ 63 INTEGRATIVE FRAMEWORK succeeding chapters of this book will descri accounting systems. Besides being ted for bh ene ae aid OHO ae. these accounting systems support external reporting for shareholders, taxes, and government regulations. Thus, one of the central themes of this text is that trade- offs arise when the accounting system is designed for multiple purposes. In addition to providing a better understanding of the iriternal uses of accounting system, this book reinforces the importance of viewing the accounting system as part of the firm’s organizational architectute. ‘This analytic structure will help readers better understand, use, and design future accounting systems as well as other systems that evaluate and reward performance and partition decision rights. Figure 3-2 shows the integrative framework for understanding how the accounting system is used in the firm’s organizational architecture. Starting at the top, two external factors (technological innovation and market conditions) affect the firm’s business strategy. The business strategy then interacts with the firm’s organizational architecture to provide incentives for managers and employees. These incentives affect the actions taken, which in turn affect the value of the firm. Thus, Figure 3-2 emphasizes that external factors like technology and market conditions affect investments, organizational architecture, incentives, actions, and ultimately the value of the firm. Figure 3-2 provides two important observations: 1. Changes in the accounting system rarely occur in a vacuum. Accounting system changes generally occur at the same time as changes in the firm’s business strategy. and other organizational changes, particularly with regard to the partitioning of decision rights and the performance evaluation and reward systems. ; 2. Alterations in the firm’s organizational architecture, including changes in the accounting system, are likely to occur in response to changes in the firm’s business strategy caused by external shocks from technology and shifting market conditions.64__Chapter i, = Figure 3-2: The determinants of business strategy, orga architecture, and firm value nal Customer base Nature of knowledge creation Organizational architecture Decision rights partitioning Separation of decision management from decision contro! Centraization/decentralization Performance evaluation system Accounting system Nonfinancial systems and punishment system policy Promotion policyContemporary Business Environment and Strategic Focus of Cost Management _ 65 Three significant managerial ‘implications are derived from these two observations. First, before implementing an accounting or other organizational change, it is f to understand what is driving the change. Second, an accounting system should not be adopted merely because other firms are doing so; they may be to a different set of extemal shocks, Third, an accounting system should i ‘urrent, consistent changes in the way decision rights partitioned as well as in the performance reward systems. All three parts of the srpanization’s architecture must be internally consistent and coordinated.