1. CHAPTER 3:
CONTEMPORARY BUSINESS
ENVIRONMENT AND
STRATEGIC FOCUS OF COST
MANAGEMENT
Group 2:
Jake Laurence Magas
Aniza Chyll G. Abante
Maria Cleryen Sinfuego
Blessy Bernadith Boral
Erika Doro
Nathalie Merin Borbe
Noemi Villar
Melenio Zamora
2. EXPECTED LEARNING OUTCOMES
After studying this chapter, you should be able to...
1. Describe the more recent changes 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 & Cultural Environment
2. Explain the strategic focus of cost management
3. Describe the relationship between cost management and the accounting
systems
4. Explain the concept of integrative framework on how the accounting
system is used in the firm's organizational architecture
3. CONTEMPORARY BUSINESS ENVIRONMENT AND STRATEGIC FOCUS OF
COST MANAGEMENT
CONTEMPORARY BUSINESS ENVIRONMENT
The business environment in recent years has been characterized by increasing
competition and relentless drive for continuous improvement. These changes
include
1) an increase in global competition;
2) advances in manufacturing technologies;
3) advances in information technologies, the Internet, and e- commerce;
4) a greater focus on the customer;
5) new forms of management organization; and
6) changes in the social, political, and cultural environment 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 data that was separate from financial-oriented data.
4. The Global Business Environment
The growth of international markets and trade are the key development
that drive the extensive changes in the contemporary business changes
in the contemporary business environment. Profit-oriented business
and not-for-profit organization, consumers and regulators are all
affected significantly by the rapid growth of economic independence
and increased competition from other continues. The growing number
of alliance among large multinational, the increasing trade agreements
among countries indicate clearly that the opportunities for growth and
profitability lie in global markets. As low-cost, high quality goods are
traded worldwide, most consumers are benefited. Manager, business
owners and investors benefit likewise when sales and production
activities are pursued in foreign countries.
Global business environment is very competitive and firms need cost
management information to sustain competitiveness. They also need
5. Advances in Manufacturing Technologies
Firms around the world adopt new manufacturing technologies
to remain competitive in the face of the increased global
competition. Many firms adopt 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.
6. Advances in Information Technologies, The Internet and E-
Commerce
The increasing use of information technology, the internet and e-
commerce perhaps the most fundamental of all business changes in
recent years. This new economy is manifested in the rapid growth of
Internet-based firms (the dot-com's such as Amazon, eBay, and E-
trade) and the increased use of the Internet for business data
processing, communication, and sales. These have resulted in the
growing focus in cost management by reducing the time required to
process transactions, thereby expanding the individual's access to
information within the firm, the industry and the business
environment around the world.
7. A Greater Focus on Customers
To succeed in this era, customer value is the key focus that
businesses of all types must be concerned with. A key change
in increased customer demand for product functionality and
quality. As business firms seek to add new features and new
products as quickly as possible, shorter product life cycle
thereby increasing the overall intensity of competition. The
new business process focuses on customer satisfaction.
Producing value for the customer has changed the orientation
o. low-cost production of large quantities to quality, service,
faster delivery and ti ability to respond to the customer's
desire for specific feature. Today, many of the critical success
factors are customer oriented. Cost management practices are
also changing, cost management reports now include specific
8. The value of a 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).
9. New Forms of Management Organization
Management organization has changed in response to the changes in
marketing and manufacturing. Because of the focus on customer
satisfaction and value, the emphasis has shifted from financial and
profit-based measures of performance to customer-related,
nonfinancial performance measures such as quality, time to delivery
and, service. Similarly, the hierarchical command-and-control type of
organization is being replaced by a more flexible organizational from
that encourages teamwork and coordination among business
functions. Ins response to these changes, cost management practices
are also changing to include reports that are useful to cross-
functional teams of managers; the reports reflect the multinational
roles of these teams and include a variety of operating and financi
information: product quality, unit cost, customer satisfaction,
bottlenecks. The changes in management organization and n 5/12 n
10. Figure 3-1: Comparison of Prior and Contemporary Business
Environments
Prior Business
Invironment
Contemporary Business
Environment
Type of information
recorded and reported
Almost exclusively
financial data
Financial and operating
data, the firm's strategic
success factors.
Management
organizational structure
Hierarchical, command
and control
Network-based
organization forms,
teamwork focus-
employee has more
responsibility and
control, coaching rather
than command and
control.
Management focus Emphasis on the short
term, short-term
performance measures
and compensation,
concem for sustaining
the current stock price,
Emphasis on the long
term, focus on critical
success factors,
commitment to the long-
term success of the firm,
including adding
11. Manufacturing
Basis of compensation Standardization, economies of
scale
Quality, functionality, customer
satisfaction
Manufacturing process High volume, long production
runs, significant levels of in-
process and finished Inventory
Low volume, short production
runs, focus on reducing inventory
levels and other non-value-added
activities and costs
Manufacturing technology Assembly-line automation, isolated
technology applications
Robotics, flexible manufacturing
systems, integrated technology
applications connected by
networks
Required labor skills Machine-paced, low-level skills Individually and team- paced,
high-level skills.
Emphasis on quality Acceptance of a normal or usual
amount of waste
Goal of zero defects
Marketing
Products Relatively few variations, long
product life cycles
Large number of variations, short
product life cycles
12. Changes in 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 responsibility 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
13. STRATEGIC FOCUS OF COST MANAGEMENT
A competitive firm incorporates the emerging and expected
change in the contemporary environment of business into its
business planning and practices. This firm is customer-driven,
uses advanced manufacturing technologies when appropriate,
anticipates the effect of changes in regulatory policies and
customer tastes, and recognizes its complex social, political and
cultural environment.
Guided by strategic or long-term thinking, the management
accountant focuses that make the company successful rather
than just focusing on cost control and other financial measure.
Cost management should focus not on the measurement per but
on the identification of those measures that are critical to the
14. Phases of the development of cost management systems should
consider the following:
Stage 1: Cost management systems are basic transaction reporting systems.
Stage 2:As they develop into the second stage, cost management systems focus on external
financial reporting. The objective is reliable financial reports; accordingly, the usefulness for
cost management is limited.
Stage 3: Cost management systems track key operating data and develop more accurate
and relevant cost information for decision making; cost management information is
developed.
Stage 4: Strategically relevant cost management information is an integral part of the
system.
Stages 1 and 2 of cost system development focus on the management accountant's
measurement and reporting role. Stage 3 shifts to operational control. Stage 4, the
management accountant becomes an integral part of management, not just a reporter but a
full business partner, with the skills of identifying, summarizing and reporting critical
factors necessary for the firm's success.
Critical Success Factors (CSFs) are measures of those aspects of the firm's performance
essential to its competitive advantage and, therefore, to its success. Many of these critical
15. COST MANAGEMENT AND ACCOUNTING SYSTEMS
The term cost management is widely used in businesses today.
Unfortunately, there is no uniform definition. We use cost
management to describe the approaches and activities of
managers in short-run and long-run planning and control
decisions that increase value for customers and lower costs 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 accounting systems helps managers make such decisions,
but the information and the accounting systems themselves are
not cost management.
16. Cost management has a broad focus. For example, it includes but it not confined
to the continuous reduction of costs. The planning and control of costs is usually
inextricably linked with revenue and profit planning. For instance, to enhance
revenues and profits, managers often deliberately incur additional costs for
advertising and product modifications.
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,
accounting system changes follow. However, there were no organization changes
17. There is no such thing as the ideal management accounting
system. Each organization has different circumstances that lead
to different management accounting decisions. Also, accounting
must continually deal with trade-off's 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 revising their business structures
and organizational architectures. Because organizational
architectures are in a constant state of change, the accounting
system must regularly adapt.
18. INTEGRATIVE FRAMEWORK
Succeeding chapters of this book will describe and analyze cost management accounting
systems. Besides being used for both decision making and control, 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 internal uses of accounting system, this book reinforces the
importance of viewing the accounting system as part of the firm's organizational
architecture. 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.
19. 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 " firm's business strategy caused by external shocks fre
shifting market conditions.
20. Technological
innovation
Organizational architecture
Decision rights partitioning
Separation of decision management from decision
control
Centralization/decentralization
Performance evaluation system
Accounting system
Nonfinancial systems
Performance reward and punishment system
Compensation policy
Promotion policy
Business strategy
Asset structure
Customer base
Nature of knowledge creation
Firm value
Incentives and actions
Market
conditions
21. Three significant managerial implications are derived from
these two observations. First, before implementing an
accounting or other organizational change, it is important
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 reacting to a different
set of external shocks. Third, an accounting system should
not be changed without concurrent, consistent changes in
the way decision rights are partitioned as well as in the
performance reward systems. All three parts of the
organization's architecture must be internally consistent
and coordinated.
