Management & Accounting

Costing in a Competitive Environment 

Costing and pricing products in the traditional way began at the start of the industrial revolution. Modern businesses with machines and tech at their heart, have a high level of overheads relative to direct costs.This is due to massive depreciation, servicing, & power costs.Also personnel and staff welfare costs. Scarcely envisaged in the early days of the industrial revolution. We save money on more efficient production methods, this leads to less waste and, therefore, less total material cost. A highly competitive international market is key. Production, much of it highly sophisticated, is carried out worldwide. Transport,including air-freight,is relatively cheap. Telecommunications are cheaper, but its the Internet which ensures potential customers can quickly & cheaply find prices of range of suppliers. 

In the UK, as in many developed countries,service industries dominate the economy,employing the great majority of the workforce & producing most of the value of productive output.There are many self-employed individuals supplying services,many service providers are vast businesses such as banks, insurance companies & cinema operators. For most of the large service providers, the activities very closely resemble modern manufacturing activity. They too are characterised by high capital intensity, overheads dominating direct costs and a competitive international market. 

Management accountants provide economic information to their clients the managers. The quality of the service provided would be determined, by the extent to which the managers' information needs have been met. It can be argued that, to be useful, management accounting information should possess certain key qualities or characteristics. This can be applied to management accounting user groups. Several are interested in the accounting information.A majority outside the business. there are 10 main user groups affecting most businesses. This list is not exhaustive, it refers to the most important: 

• Owners
• managers
• lenders
• suppliers
• customers
• competitors
• employees & reps
• government
• community reps
• investment analysis

A divisional manager.What might you do to access contribution the contribution performance? Controllable profit. Expenses is so vital. The cumulative impact of individual expense accounts. 

Divisional net profit. Again not exhaustive-

• marketing,
• personnel,
• accounting,
• planning,
• information technology,
• research development expenses.    

Planning for this can be extremely contentious. Divisional directors who sub-consciously shift blame, complaining about apportionment. With less scope for success.

Cost of common resources as a % of revenue: 0-5% in  44.4% of divisionalised businesses in manufacturing sector.

This is another highlight of controllable costing analysis. I saved the merged business unit 10's of thousands in wage & expenses.

The fact that a number of companies such as Wal-Mart,Zara,Dell,and Toyota managed to record extraordinary success while doing ordinary things. Just running supermarkets, selling clothes, or making computers or cars .Making managers more fully aware that what their organisations produce. This can matter a lot less than the way that they produce it. Its the WHAT they produce not the WAY. Supply chain management has been eased by management information systems. International complexities would have been more pronounced if IT systems hadn't advanced.

"Are you the weakest link in your company's supply chain"?  Said the Harvard Business Review,in Sept 2007. "The warehouses of many large companies still operate with 20-year-old technology, producing  incomplete & unintegrated information flows". Some companies have been disappointed by the failure of business-to-business exchanges to develop on the internet and provide them with supplies more efficiently than via traditional routes. 

Active Inertia

Donald Sull  an associate professor at London Business School. He is a fully established management guru. He's an author of some books which come highly recommended by the business bible, the Financial Times. 

Educated almost exclusively at the Harvard Business School (first degree, doctorate, and MBA), Sull worked in consulting and private equity before moving to an academic career. 

At the core of his idea is the observation that managers often get stuck in rut, so when an entirely new situation arises they revert to old responses. 

This was common of the managers with poor profit and loss records in my stint in management. The most common complaint was "I haven't got time to be doing anything extra". A majority of the new material we were being presented with was vital for its efficiency savings. It was something which would replace something else on most occasions. The negative responses were always from those with poor records. If you get stuck in this neagtive frame of thought process, you are stuck in the rut Sull is referring to.

Sull says, is "management's tendency to respond to the most disruptive changes by accelerating activities that succeeded in the past". 

He quotes the example, of tyre company Firestone's response to the introduction by Michelin of radical technology. Instead of embracing the new technology and all the changes that it implied, Firestone undertook more of the activities that had worked for it in the past, in the pre-radial era-extending its existing technology, making more tyres on existing equipment and keeping old factories working at full throttle. As Sull puts it, "It just dug itself an even deeper hole."

When managers are in a hole, they should stop digging. Instead, like a car stuck in the mud, they keep the engine turning as if they are on a normal road. They do this partly because they "equate inertia with inaction". But inaction does not have to mean that nothing is going on. When troops are not in battle they keep themselves in a state of active preparedness. Companies should do likewise.

Sull calls for "active waiting" a strategy he calls himself "anticipating and preparing for opportunities and threats that executives can neither fully predict nor control".

We all know the power of waiting quietly for the right moment to pounce upon an opportunity. Sull's idea is that waiting does not have to be quiet. While they are waiting there are lots of useful things that companies can do-build up a war chest, for instance, streamline operations, carry out scenario planning, and so on.

To avoid active inertia, Sull says leaders should not march "headlong toward a well-defined future". Instead, they should "articulate a fuzzy vision...a fuzzy vision works because it provides a general direction and sets aspirations without prematurely locking the company into a specific course of action". 

Reference: Management Ideas and Gurus - The Economist