Summary: Strategic Cost Management: New Wine or New Bottles


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This is a summary of an article by John K. Shank. Mind you, this was back in 1989, therefore should serve the purpose of historical trace.

Management Accountants were lagging to embark in the issues of strategy. When SCM finally defined, was it really a new concept, or just an old wine with a new bottle?

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  • One of the important roles of internal accounting info within a business is to facilitate the development & implementation of business strategies.The difference from Management Accounting is on SCM’s EXPLICITattention towards Strategic Management context
  • Three underlying themes of Strategic Management: Value Chain Analysis, Strategic Positioning Analysis, Cost Driver AnalysisTogether these three themes represent a coherent framework for thinking about managerial accounting.SCM framework is sufficiently different from conventional framework, and SCM cannot be easily accommodated within conventional topic list  //test with three basic questions, each under the three underlying themes.
  • Mgt accounting takes value added perspective: maximize the difference (value added) between purchases & salesValue Added perspective is ‘start too late (purchase), end too soon (sales)’  misses opportunity to exploiting linkages with suppliers as well as customers.Missing value chain concept  many problems misunderstood, many opportunities missed.
  • “Scorekeeping, attention directing, problem solving” was first articulated by Herbert Simon et. al. (1954)Example attention directing: cost variance analysis; example problem solving: contribution margin analysis.
  • “Structural vs Executional list, proposed by Daniel Riley pada 1987.Structural: Scale (how big is the investment?), Scope (degree of vertical nitegration), Experience, Technology, Complexity (how wide a line of products/services to offer). More is NOTalways better.Executional: Employee engagement, TQM, capacity utilization, plant layout efficiency, product configuration, exploiting linkage with supplier & customer per value chain approach. More is ALWAYS better.
  • SCM involves:Some ideas which are fully consistent with the management accounting paradigm, but are not well implemented today (‘today’ means 1989, mind you), such as Activity-based CostingSome ideas are largely outside the scope of the conventional paradigm, e.g. Cost of QualitySome ideas which are inconsistent with the conventional paradigm, e.g. full cost is preferable to variable cost
  • Summary: Strategic Cost Management: New Wine or New Bottles

    1. 1. SummaryModul 1 Reading 3B, Kelompok 1Strategic Cost Management:New Wine, or Just NewBottles?John K. Shank CMA-IPMI 2012 1
    2. 2. Abstract There was a kind of disconnection between the changing need of business and the „current‟ (in 1989) academic curricula, with regards to management accounting system. This paper seek evidence that the concept of management accounting are changing towards Strategic Cost Management, and it‟s not just an „old wine in a new bottle’. SCM is defined as the managerial use of cost information explicitly directed at one or more of the four stages of Strategic Management Cycle The emergence of SCM results from a blending of three underlying themes that are each taken from the strategic management literature: Value Chain Analysis, Strategic Positioning Analysis, and Cost Drivers Analysis. For each of the themes, conventional managerial accounting has not provided the financial support deemed necessary. SCM emerged as the financial analysis that meet those needs. Each of the themes deals with a basic question for which SCM and management accounting pose answers which tend to differ substantially. Thus, support the view that SCM constituted a paradigm shift. A new wine. CMA-IPMI 2012 2
    3. 3. Prologue: A Disconnect?Tektronix revamped its Tektronixs successcompetitive strategy, featured in Sloanincluding set up of a Management Review:suitable, new accounting highlighting elimination ofsystem  anticipating ‘core components’ ofJapan comp. ‘current’ Mgt Acctg system. American Management Association promoted oncoming seminar on “Fundamental of Cost Accounting”. „Current‟ system, that was. CMA-IPMI 2012 3
    4. 4. New Wine or New Bottles?The paper addresses questions: What is the evidence that the fundamental concepts of management accounting are changing or they need to change? What is the evidence that many management accountants are lagging this change rather than leading it? What is the evidence to support Kaplan‟s charge (1986) that the management accounting taught for the last 30 years is becoming obsolete? CMA-IPMI 2012 4
    5. 5. Mgt. Accounting Transition Cost Manageria Strategic Accountin l Cost Cost g Analysis Manageme nt The increasing interest of „strategic management‟ arose in around 1970s, both in industrial as well as academic world  had created a big industry of “Strategic Analysis” Until now (1989), however, little attention given for this topic in major accounting journals… CMA-IPMI 2012 5
    6. 6. Strategic BusinessManagement Communicate Strategies Formulate Implement Strategies Cost Strategies Information Monitor Results SCM is defined as the managerial use of cost information explicitly directed at one or more of the four stages of Strategic Management Cycle CMA-IPMI 2012 6
    7. 7. The Emergence of SCM Value Chain Analysis Strat. Positioning Analysis Cost Driver Analysis Together these three themes represent a coherent framework of thinking (i.e. paradigm) about managerial accounting Is Strategic Cost Management a paradigm shift? CMA-IPMI 2012 7
    8. 8. Value Chain Analysis”What is the most useful way to analyze costs?” The Mgt. Acctg Paradigm The SCM Paradigm Strongly INTERNAL focus Strongly EXTERNAL focus In terms of: Products, In terms of various stages of Customers, Functions the overall value chain of which the firm is part „Value Added‟ is a key concept „Value Chain‟ is a key concept. „Value Added‟ is seen as a dangerously narrow concept CMA-IPMI 2012 8
    9. 9. Strategic Position Analysis”What is the objective of cost analysis?” The Mgt. Acctg Paradigm The SCM Paradigm Three objectives, regardless The three remains, but the strategic context: design of management system changes dramatically • Scorekeeping depending on basic strategic • Attention directing positioning: • Problem solving • Cost leadership strategy, or • Product differentiation strategy CMA-IPMI 2012 9
    10. 10. Cost Driver Analysis”How should we try to understand cost behaviour?” The Mgt. Acctg Paradigm The SCM Paradigm Cost is primarily f (output Cost is f (strategic choices). volume): i.e. strategic choice about the structure of how to compete & • Variable cost managerial skill in execution: • Fixed cost • Step cost • ‘Structural’ cost drivers • Mixed/semi variable cost • ‘Executional’ cost drivers CMA-IPMI 2012 10
    11. 11. Epilogue: It‟s a New Wine!“Strategic Cost Management is a Paradigm Shift” Rather than being totally different, the SCM perspective is just more inclusive than the management accounting perspective. Many of individual SCM concepts (e.g. life cycle costing, cost of quality, or value chain analysis) are sufficiently different from conventional ways that they cannot be easily accommodated into the list of conventional key topic areas. Accepting all SCM concepts together requires rejecting some of the basic attitudes which shape current thinking about Mgt. Accounting. Are we, the management accountants ready? CMA-IPMI 2012 11
    12. 12. Extra Slides CMA-IPMI 2012 12
    13. 13. Appendix: Tektronix, 1983In 1983, the Portables Division of Tektronix Inc. adopted a program ofcontinuous improvement to dull the Japanese competitive threat. Portablesstrategy was to set a standard for performance and price that the rest of theindustry tried to emulate. To do this, new philosophies were required inmanufacturing, engineering, and marketing; and Portables set up a newaccounting system. The successful innovation involved: 1. a new managerial team, 2. a new accounting philosophy 3. the building of trust with employees, and 4. the management of excess capacity.Obsolete accounting systems were eliminated and replaced with approachesthat worked well in the new environment. These included: (1) continuous flow;(2) people involvement; (3) continuous process improvement; (4) elimination ofwaste; (5) elimination of inventory; (6) elimination of unevenness; and (7) visualcontrol.Measures of continuous improvement were developed that they report on howwell manufacturing is delivering value to its customers. 2012 CMA-IPMI Overhead allocation was13
    14. 14. Appendix: About the Author Dr. John K. Shank (1942 – 2006) was a professor in the Amos Tuck School at Dartmouth and a visiting professor each winter term at the Olin Graduate School at Babson College. His teaching assignments included required and elective courses in the Tuck and Olin MBA programs. Professor Shank had published 16 books, more than 100 case studies and more than 100 articles in leading journals in accounting, finance and management. His research interests mostly centered around the strategic cost management theme. Professor Shank holds the AB degree from Oberlin College, the MBA degree from the University of Pittsburgh, and the Ph.D. in accounting from The Ohio State University. He was a member of the American Accounting Association, the AICPA, and the IMA. Before joining the Amos Tuck Faculty, he taught at The Ohio State University for eight years and The Harvard Business School for seven years CMA-IPMI 2012 14