The strategic analysis of costs

Definition of strategy Views of strategy Strategic management accounting

Definition of strategy
Normative view-there are certain norms within the organisation-very specifically defined strategy Mintzberg strategy has different dimensions to it-patterns of decisions about the organisations future Andrews-concerned with the way resources are focused to convert distinct competencies into competitive advantage

Views of strategy
Boston Consulting Group (BCG)multitude of products Porter (1985)-specific market issues and forces before you can look at what the organisations might beproduct differentiation/cost leader Miles and Snow-extend product life cycle-produce mass scale-leader of the market

Strategic Management Accounting

With heavy competition from tiger economies, products become more complex-it is inevitable that the product life cycle shortens Deflationary trends in markets have encouraged companies to consider ways in which they can achieve a competitive advantage & maintain profitability to contend with their competitors Important for firms to develop business strategies to support strategic planning, decision making & control Traditional management accounting information is insufficient for strategic decision making-short term-backward looking-oriented solely towards history- on past results SMA on the contrary has a longer term perspective-more timely SMA makes information more pertinent-assists in the decision making process in the longer term (Baines et al 2003) SMA is the process by which management accounting info is analysed and data is gathered about competitors, in order to develop and monitor the firms strategy (internal and external info)

Research Studies (components of

SMA):

Simmonds (1981)-advocated that firms should assess their strategic position in relation to its competitors-this would enable management to identify actions that would increase their competitive advantage In support of this Bromwich (1990)-SMA allows greater transparency of the competitors procedures-can adapt accordingly-e.g. through competitor cost assessment-can then use it as a benchmark to manage own business costs Coad (1996)-collection of competitor information-service department bid was lower than the estimate based on this information-undercut the competitor and won the contract Further support comes from Guilding et al (2000)-survey of large firms in the USA, UK and New Zealand-extensive use of competitors information such as published financial statements This suggests that SMA emphasises information about competitors Shank and Govindarajan (1992)-value chain analysis-major forest products firm-deciding whether/not to introduce a new technology-used traditional investment appraisal tool NPV-showed present & new technology identical-however, value chain analysis-cost savings with new technology Value chain analysis-broader perspective-evidence that SMA helps in revealing relevant information that can aid in the decision making process-considers firms involvement in whole life cycle of the productgiving a strategic context

Examples

The transformation in the way organisations operate has resulted in the traditional costing systems unable to provide effective costing's-product life cycles have shortened due to technologically driven companies EXAMPLE: Siemens case study-facing intense competition from Eastern Bloc who were able to offer prices that Siemens was unable to match in response to this Siemens developed customised motors-altered their strategy-production process became more complex & technologically driventraditional cost systems allocate direct labour whereas this isnt the major cost driver-with a capital intensive industry-DLH will distort the actual reality of costs-SMA takes into consideration external factors such as actions of competitors It has been contended that SMA is not used in all organisations-empirical survey conducted in the UK found that SMA is not widely practiced (Alkaran et al 2006)-in support of this studies conducted by Guilder et al (2000)-in the Uk, New Zealand and the USA-found that the uptake of SMA was not extensive-several companies resisted from using costing systems such as ABC as managers viewed them as costly, time consuming and intricate. Furthermore what constitutes SMA is not uniform across countries such as the UK, USA and new Zealand. There are many disagreements that exist.

Limitations of SMA

Dermer (1990)-strategy not always planned-it often just happens-SMA may develop w/o any involvement of accountants Harain (1994)-focusing too much on competitors-results in firms imitating their competitors-can gain an advantage by deviating & being innovative instead Suggests competitor analysis (proposed component of SMA)-may not be beneficial if the firm is over reliant on competitors information-w/o consideration of immeasurable aspects such as cooperation Cooper (1996)-firms relationship with competitors-may collaborate so that both can benefit e.g. combining their expertise to fill in the shortcomings of the other firm Lack of standardization-as no standards exist-inconsistencies often appear such as when making evaluations- There are no set regulations for management accounting or SMA as opposed to financial accounting where accountants have to abide by the generally accepted accounting principles (GAAP). Consequently, it leads to discrepancies when benchmarking. This restricts the extent to which comparisons can be made as you are not comparing like with like. Even though strategies may be operationalized -it is easy to have different interpretations-Guilder et al (2000)-SMA can be misunderstood-survey results conducted in different countries-suggests that cultural differences existsheterogeneity within cultures-applicability of SMA in global organisations needs to be further researched-SMA-room for subjectivity and bias-may place their focus on the wrong factors

Conclusion

Globalisation has increased uncertainty-firms are exposed to much more competition-managers have to not only consider internal factors but also external factors-this is where the role of strategic management accounting becomes important SMA is very context specific-if the organisation is operating in one nation, then there is unlikely to be many variances. However, once a firm becomes global, there are many complications associated with it-led to more intricate management accounting systems-SMA is contextually determined-not standard across systems/organisations as it represents a variety of different management possibilities SMA has become important due to globalisation-provides an avenue through which it can gain a competitive advantage

Issues in International Management Accounting

Variations in accounting styles Role of culture Implications for multinational companies

Variations in accounting styles

Country differences result from cultural influences Study done to see differences in accounting practices-found that Germans tend to emphasise production based controls whereas the UK-financial controls(Bhimani 2006) People have different perspectives of how accounting systems should be-e.g. level of detail, surveillance-mechanism built into accounting system

Approaches to International Management

3 approaches to international management; multinational, global and transnational (Bartlett et al 1989) Multinational approach-greater level of autonomy and decentralisation-implies that the local culture is optimal and should be adopted--example where it failed- Procter & Gamble Co. lost $25 million in Japan because its managers would not listen to Japanese advisors-advertisement was successful in the US but not in Japan-example of transferring management styles to foreign countries Global approach-assumes that the companys host country culture is universally applicable

Transnational approach-recognises the need for intense coordination and knowledge sharing-corporate culture is developed by integrating local and global practices
Case study-General electric-acquisition of an Italian company Nuovo Pignone-global approach to integration-culture change was required to merge their beliefs togethervastly different cultures & business strategies-NP had poor performance measurement systems introduction of six sigma served an important role in extending the culture of measurement-converged to resolve the dialectic tension between the dominant culture of GE-diffusing a global culture to achieve integration-convergence of management accounting practices However, this theory can be seen as deterministic-it suggests that if we follow any of these approaches then organisations will be able to combat the issue of culture in a multinational corporation

Why are there differences?

Education: proportion of managers who have a qualified degree; Uk-24% Arts, Germany 62% Engineering, France-65% Engineering-reason why there are production oriented controlsdue to having an engineering background Culture?

Culture

Culture is more often a source of conflict than of synergy (Hofstede) Hofstede (2001)-survey of work related values of IBM employees-revealed substantial similarities in the values of people within countries and found differences across countries-studied how the values in the workplace are influenced by culture Criticism of Hofstedes study-Lenartowicz and Johnson (2003)-countries are grouped together that are not homogeneous-such as Latin America-6 cultural regions which have some differences Another criticism is that it is reductionist-study conducted in IBM-therefore the extent to which generalisations can be made is limited Furthermore-time factor-research is outdated-many changes take place over time-therefore the applicability of his results is limited-to address this issue contemporary research has been done-general consensus that Hofstedes original ratings are similar even in the 21st century

Why is culture important?

Culture is that invisible bond which ties the people of a community together. It is imperative that organisations understand the importance of culture in different countries, so that they can be successful in global management Influences management, decision making & negotiation Compressing financial standards into a homogenous unit has become increasingly important due to firms expanding into multinational corporations-being geographically diversified has many challenges Cultural differences creates a barrier-Internationalisation of businesses has created the need for global accounting rules. One of the most widely used accounting standards is the generally accepted accounting principles (GAAP)-its acceptance is not universal- due to some countries having difficulties in interpreting this format they follow the international financial reporting standards (IFRS)-example where this tool of communication is not homogeneous across different countries

Research studies
With globalisation lateral relations (i.e. relations between subsidiaries) as opposed to the vertical relationship where there exists a level of authority (headquarters which manages the subsidiaries)-power and authority is more dispersed (Martinez et al 1989) Quattrone and Hopper (2005)-a more authoritative management may result in a lack of communication between personnel and management Triandis study (1995)-engineer in India offered 25 times his salary to migrate to the USA, whilst a Californian engineer received a proposal for a 50% increase-the Indian declined This clearly shows that differences exist across countries. Culture manifests itself through the lifestyles of the individual of a community-USA individualistic culture vs. collectivist culture in India

Hofstedes Study-(studied how culture

influences behaviour in organisations)
Hofstedes cultural dimensions that assist in differentiating cultures: 1) Power distance-represents inequality 2) Uncertainty avoidance-measures the degree to which people feel uncomfortable with uncertainty-consequently they aim to reduce it through rules and regulations-empirical research has supported this idea-in Japan (high UA culture)-greater formalisation-utilise budgets as a tool for communication these financial metrics bring in some level of confidence for these organisations-US (low UA culture)-not very keen on these controls 3) Individualistic cultures vs. collectivist cultures (collectivist-integrated, individualist-more autonomous) Individualistic cultures such as in countries like the USA, Australia-respond unfavourably to tight linkages between budget targets and evaluation-rigidity contradicts their individualism (Harrison et al) Collectivist and Individualistic cultures differ in many ways in terms of beliefs. Lincoln et al (1981)-France-centralised control within organisations based in this country-highly bureaucratic-on the contrary Japan-more communal relationships of dependence 4) Masculinity vs. femininity (distribution of roles between the genders)-high masculinity-resolution of conflicts by fighting them out 5) Long term orientation An understanding of all these dimensions can improve the chances of surviving in the international arena

Cultural Homogenisation
Increasing concern in stewardship-many corporations have defaulted-Citi Bank for example allowed the Chilean dictator deposited large sums of money in the bank to be exempt from taxation-corporate governance is playing a significant part in businesses-one area where there is consensus across the countries Scandals have increased pressure for corporate governance-Sarbanes Oxley Act (2002)-certifies accuracy of companies financial statements-can provide an important cultural shift in organisations

Examples
Companies have benefitted from outsourcing as it leverages the company from excess burden -A key factor to consider is that internal failures such as having defective items can tarnish a organisations reputation-this effect is irreversible and it can take many years to regain the customers confidence again-Mercedes started to lose edge-outsourced-needed more servicing-loss of goodwill and brand name-defects may go down-but customers bitterness with the bad experience holds on for many years-if dissatisfied once will move away from product completely-this example suggests that cultural differences exist-the level of expertise etc. Deal occurred in 1988 in automobile industry-merger created DaimlerChrysler-problem with merger-clash of cultures-turned out to be a mistake (Corporate structure Daimler-hierarchical Chryslerteam oriented)-most fundamental challenge of a merger is cultural Legal differences: there are different legislations in different countries-Wal-Mart has adopted the cost leadership strategy-sells products below costs to attract customers Although this is acceptable in the United States, it is illegal in some countries

Cultural Homogenisation

Advances in IT such as ERP have shaped convergence and standardisation (Granlund et al 2002). It is thought that systems such as ERP transcend geographical boundaries
Quattrone and Hopper (2005)-how ERP implementation may have different repercussions on MA and control systems-ERPs enhance integration by centralising accounting and control systems Think Pink (American Corporation) Sister Act (Japanese Corporation)
Implemented ERP as it was seen as a channel whereby communication could be improved and coordination between headquarters and subsidiaries Greater level of decentralisationallowed employees to input data w/o the interference of the accountants There was more autonomyaccountants lost the ability to exercise control Accounting systems can support multinational strategies ERP and MA practices maintained distances Greater level of responsibility accounting-can see how costs have been accrued-trace costs and assign them to the correct department-allocate budgets on this basis-incentivise managers-lead to greater goal congruence More centralised-hierarchical structure reinforced

Conclusion

Move towards an increasingly digital society-can exacerbate existing inequalities between developed and developing countries-accessibility of technology is limited in developing countries therefore they may not be updated with changes in management accounting practices-can result in differences in their understanding of issues Controlling at a distance for accounting can maybe lead to communication barriers Criticism-countries such as the Uk has become a multicultural society-therefore the apparent findings of Hofstede may not be applicable-over the years there have been many people who enter and settle in a country to which they are not native to-therefore there exists some bias in the results UK Parliamentary Office of Science and Technology (2002)-have argued that there have been a number of different types of fraudulent research. Therefore, the apparent positive findings from studies may be partly explained by publication bias Managers need to be attuned to cultural nuances in order to function effectivelyneed to eliminate the fallacy that all people in a foreign culture think and act alike Possible solutions to this issue-multinational corporations can provide training which exposes members of one culture to another culture-IBM operates a 6 week training programme that includes a wide variety of international topics-the amount and intensity of training is proportionately related to the manager's success Globalisation can result in cultural homogeneity but not completely