Online Tutoring on Developing Business Strategy

Question 1:     Developing business strategy – How to complete in the market?

In order to compete in the market, organizations now days need to adapt to evolving environmental changes. In order to do so, the management accounting system (MAS) helps the organizations for initiating change and manage it effectively. The two paradigms, that are useful for an organization to analyze the environment, are standard engineering control paradigm and organizational control paradigm. The most important aspect of organizations is to control costs. Goldratt (1990) has advocated the idea of using direct material costs in order to compute product costs and use for traditional costing. This helps the managers to analyze the costs of producing their products and explains the theory of constraints. Even if the managers use the full costing methods, the question of how to measure the full cost of product remains to be discussed. In order to compete in the market, innovation is the key agenda that needs to be pursued and kept in view by the managers. However, innovation without risk is not possible (Coase, 1937). This raises the question of whether managers should try to innovate while ignoring the associated risks or they can reduce innovation where they do perceive risk but not commensurate the associated benefits. Managers’ strategies can be functional or dysfunctional for the organizations that can aid in predicting advantageous conditions for the assigning the responsibility of events that are uncontrollable. A firm can set the standards of continuous improvement, benchmarking and/or engineering specifications. The road map of developing a vision and a strategy to compete in the market needs a direction for responding effectively towards the external environment changes. Decision makers always learn from the past experiences and avenue for the future development of effective strategies and decision rules.

Recognizing the impact of environmental change is a key for competing effectively in the market. With the large scale privatization of state-owned enterprises and opening of the barriers for trading, the competitive landscape has widened the scope for the firms globally (Otley & Wilkinson, 1988). Successful organizations must understand the social dynamics of the workplace so that the self-directed work teams can produce the information needed by the employees to perform their work. Customer focus and customer satisfaction has recently gained importance throughout the world. It is important for the organizations to compete while reducing the customer responses times so that the satisfaction of customers stays high and enough revenues can be reaped out. Another important aspect of organizations’ is to respond to societal and cultural changes in addition to organizational and environmental changes (Simons, 1992).

Organizational structures are basically the way through which organizations bundles up the resources to achieve the end result i.e. profits and maximization of shareholders’ wealth. Management control systems design and organization structures focus on the development of competing strategies and their influence on how and why organizations bundle up their resources. According to Amit & Shoemaker (1993), the organizations compete in the market through the resources they have command on. It means resource utilization and resource-based competitive strategies can help the firms to steer towards growth. By owning a unique resource that is difficult to replicate, organizations tend to create long lasting customer value. Traditional accounting approach doesn’t identify people as organizational resource which is a critical success factor for competing in the market. However, research is still focusing on the benefits that are produced by improving the production quality and enhancing customer services by the people working in the organization. Total Quality Management (TQM) and Just-In-Time (JIT) inventory systems have been developed for the purpose of aiding the firms in allocating and utilizing the resources in an efficient manner (Young & Selto, 1993).

Reducing inventory holding costs through utilizing EOQ and operations management models, firms can increase their competitiveness in the market. Amershi & Datar (1993) identified that by lower inventory costs make the production processes more transparent and lowers the costs of inducing workers for working harder and smarter. Workers’ motivation is identified by Alles et al. (1995) as the best tool for reducing inefficiencies in the production process of a firm. Worker motivation does play a critical role in making inventory level decisions. Just in time inventory system can prove out to be beneficial as it can reduce the costs of inventory. More transparent production process will lead to work harder and smarter.

The activity based costing system as per developed by Robert Kaplan and Robin Cooper in 1980s, helped the organizations to identify the costs and manage the money spent on resources. ABC system can be used by the organizations to trace back the overhead costs to the product by which the costs have been incurring. Through this firms are able to reduce the costs and compete in the market while striving for innovation. ABC system is basically the opposite of traditional based accounting system. Before advent of ABC system, it was considered that high volume customers are profitable customers, a loyal customer is a happy customer and profits always chase the happily satisfied customers. However, through ABC system’s advent it was considered that it is not always true (Bjørnenak, 1997). As ABC system keeps on to identify the cost pools and activity centers, while assigning costs to products and services. As a result, ABC system helps the managers in today’s competitive world to manage costs for maximizing shareholders wealth and also improve the corporate performance. Since different products require different types of resources for their production, so there is need of a highly sophisticated system of identifying costs related to each product. In order to withstand the fierce competition in the global market, companies need to develop a sophisticated system that can help them in cost management and reduce the costs associated with doing business (Bjørnenak, 1997).

Synergy can also make the companies grow in future while being at competitive edge. It cannot be neglected that by resource allocation, resource utilization and reduction in costs of production can lead to improved competitive power of a firm (Bjørnenak, 1997). A sophisticated costing system, resource allocation process and resource utilization rate will help in setting the correct price of a product and aid the managers to make strategic sound decisions.

 

Question 2:     How to relate business strategy with organization’s control systems?

Management control systems are usually described as the information feedback systems in which the goals are set in advance and the outcomes are compared with the present objectives. After the comparison, significant variances are reported to the managers for the further remedial actions to be taken. In management control process has strategy as a constraint and then these strategies approved by the upper management after which the plans are communicated down the organization. Scorecard keeping has been there from the beginning of management accounting’s roles. Managers need to choose the measures and the operationalization of those measures to have better control on their existing system. What to measure also raises the important question of controllability. The factors that can be controlled needs to be measured effectively by the managers in today’s society. The overall effectiveness of the business strategy of an organization is dependent upon the control environment and linkage between measures within and across the hierarchical levels in a firm. Kaplan and Norton (1992) developed an effective tool i.e. Balanced Scorecard, to study the linkages across the control system in an organization. Cost-benefit issues has remained in the limelight for studying the interplay between organizational structure and information for decision making process. The importance of balanced scorecard is that it links up the strategies, processes and managers decision together for providing an integrated system of planning and control. Organizations’ information system is dependent upon the organizations’ strategies and the process of implementing those strategies. In order to have better control systems, the balanced scorecard approach provides the planners and managers with a sophisticated model that can help in testing the cost and benefits associated with the strategies and their implementation. Through analyzing this model, the managers are at better position to gauge for future directions and can have better control systems in place.

Managerial accounting controls help the organization in gaining the feedback that allows the firms to learn about their current environment and respond to changes in the environment effectively. In past, the management accounting techniques have always focused on supporting the middle managers’ control over the shop floor workers. However, behavioral accounting system has the similar agenda. Work groups have increased their worker empowerment as compared to the conditions in past. Work groups use different decision making procedures for reaching at a decision as compared to individual workers. In order to reach a mutual consensus, enhanced level of communication amongst the team members. In order to have better controlling systems, firms have adapted to Total Quality Management (TQM) and lean manufacturing procedures.

Responsibility accounting and profit centers have opened the new agenda of joint costing in a decentralized environment. Using joint cost allocation method in a decentralized environment can be really challenging but it can also help in achieving synergy. Thomas (1978) states that Economic Darwinism has its own value when it comes to using cost and revenue allocation methods. Transfer pricing schemes, in past have focused on the performance of organizational units relative to their counterparts in the market place. Market prices have been envisioned to be the proper mechanism for transferring goods and services amongst the responsibility units. However, this agenda has been in conflict with the observation of Coase (1937) that organizations existence is due to transaction costs or for creation of economies of scale.

The balanced scored card approach is the framework that has helped the organizations in linking up the strategies of firm with its control systems. It helps the managers to look at the organization from four different perspectives i.e. an internal perspective, innovation and learning perspective, customer perspective and financial perspective. The vision of the company is clarified through using the score card as it helps in translating the vision into measureable actions that the employees can understand well. It also helps the managers in understanding the various concerns of the stakeholders and helps in improving the overall strategic condition of an organization. Kaplan and Norton (2002) explained that the term “Balanced Scorecard” is a powerful concept in itself as it is based on simple agenda of providing the managers with the need to create a balanced set of performance indicators in order to run an organization. The indicators of balanced scorecard then goes on to measure the performance against the critical success factors. As a result, the balance between the traditional financial and non-financial operation, lagging and leading and action oriented monitoring measures is achieved.

The impact of measures on performance is been focused by the managers in todays’ competitive landscape. Measurement often goes under observed or is usually ignored to be the essential part of company’s strategy. It is often seen that managers and executives goes on to introduce new strategies and innovative operating processes with the intention of achieving breakthrough performance by using the same old short-term financial indicators (Norreklit, 2000). Here the managers fail to understand the importance of developing new indicators that can help them in monitoring new goals and processes as well as motivating the breakthrough improvements in such critical areas as product, process, customer and market development.

The balanced scorecard approach is the cornerstone of a company’s current and future success as it reports on how managers can learn from their past experiences and improve their performances in future. Ultimately, the managerial accounting controls also provide feedback that allows the firms to learn about their current environment and make prediction for the future strategy (Norreklit, 2000). The feedback achieved from the control role of the management accounting systems can also help the organizations to not to only recognize the needs for, but also provide the motivation for initiation and organizational change.

Most of the studies of control systems have been devoted to either an organizational or economical approach. Eisenhardt (1985) explained the agency theory and its importance for organizational control and establishing corporate competitive strategy. Ouchi (1992) also argued that by controlling organizations’ people’s work only two aspects of the work can be observed and monitored efficiently. These two aspects are outputs and behavior of workers. Many firms have different strategies to pursue as some focus on brand marketing, some on low price while some like to pursue product innovation as their competitive strategy. However, each strategy can only be successful if these are coupled with good management control system.

 

REFERENCES

Alles, M., Datar, S. M., & Lambert, R. A. (1995). Moral hazard and management control in just-in-time settings. Journal of Accounting Research, 177-204.

Amershi, A., & Datar, S. (1991). Incomplete contracts, production expertise and incentive effects of modern manufacturing practices. University of Minnesota (working paper).

Amit, R., & Schoemaker, P. J. (1993). STRATEGIC ASSETS AND ORGANIZATIONAL RENT. Strategic Management Journal, 14, 33-46.

Bjørnenak, T. (1997). Diffusion and accounting: the case of ABC in Norway. Management Accounting Research, 8(1), 3-17.

Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386-405.

Eisenhardt, K. M. (1989). Agency theory: An assessment and review. Academy of management review, 14(1), 57-74.

Goldratt, E. M. (1990). Theory of constraints. (Croton-on-Hudson, Ed.) New York: North River.

Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard: Measures that drive performance. Harvard Business Review, 71-79.

Norreklit, H. (2000). The balance on the balanced scorecard a critical analysis of some of its assumptions. Management accounting research, 11(1), 65-88.

Otley, D. T., & Wilkinson, C. (1988). Organizational behavior: strategy, structure, environment, and technology. Behavioural accounting research: a critical analysis , 147-170.

Ouchi, W. G. (1992). A conceptual framework for the design of organizational control mechanisms. US: Springer.

Simons, R. (1992). The role of management control systems in creating competitive advantage: new perspectives. US: Springer.

Thomas, A. L. (1974). The allocation problem in financial accounting theory (9 ed.). US: American Accounting Association.

Young, S. M., & Selto, F. H. (1993). Explaining cross-sectional workgroup performance differences in a JIT facility: a critical appraisal of a field-based study. Journal of Management Accounting Research, 5, 300.