CHAPTER :1COST MANAGEMENT AND STRATEGY -- AN OVERVIEW

QUESTIONS 1-1 Firms Using Cost Management. Here are some examples; there are many possible answers. 1. Wal-Mart: to keep costs low by streamlining restocking an sales !. C"M#$%: to keep costs low by impro&ing man'(act'ring per(ormance an by 'sing target costing an other management techni)'es *. Citicorp: to keep costs low by 'sing acti&ity analysis +see problem 1-*1, to i enti(y key operations an to (in those that a little or no &al'e -. $ local school istrict or p'blic agency: to keep costs low in or er to pro&i e the best possible ser&ice gi&en a&ailable ('n s .. #rocter / 0amble: to assess the pro(itability o( its i((erent pro 'cts 1. $ny other large2 i&ersi(ie man'(act'rer2 like #rocter / 0amble: which nee s to be able to analy3e the relati&e pro(itability o( its i((erent pro 'cts2 'sing cost management 4. $ small machine shop: which nee s cost management to etermine whether it sho'l repair or replace a machine 5. $ ance st' io: to analy3e an choose between i((erent compensation plans (or its teachers; an to etermine whether it sho'l open a new st' io Firms not expecte to be signi(icant 'sers o( cost management in(ormation: 1. Microso(t: here the (oc's is on (orming strategic alliances2 inno&ation an competition; cost management is more important (or other (irms in the in(ormation technology b'siness2 s'ch as C"M#$%2 Hewlett #ackar 2 an 67M that compete in part on inno&ation b't also on price !. 8ersace: a high (ashion (irm competes on inno&ation an pro 'ct lea ership; the e&elopment an comm'nication o( attracti&e new i eas is the key to competiti&e s'ccess rather than cost management *. "ther (irms in the (ashion in 'stry2 s'ch as Chanel2 0i&ency2 an $rmani: (or reasons similar to 8ersace -. Ma9or leag'e sports: epen ent primarily on the e&elopment o( (an s'pport2 goo coaching an player ac)'isition Cost management in(ormation is a broa concept. 6t is the in(ormation the manager nee s to e((ecti&ely manage the (irm or not-(or-pro(it organi3ation -both (inancial in(ormation abo't costs an re&en'es an rele&ant non-(inancial in(ormation abo't pro 'cti&ity2 )'ality2 an other key s'ccess (actors (or the (irm. :ypically2 cost management is the responsibility o( the Chie( Financial "((icer +CF", who o(ten elegates m'ch o( this responsibility to the Controller.

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6n the pri&ate sector2 the Financial $cco'nting ;tan ar s 7oar 2 an in epen ent organi3ation2 an the $merican 6nstit'te o( Certi(ie #'blic $cco'ntants +$6C#$, s'pply g'i ance regar ing (inancial reporting practices. :he ;arbanes-"kley $ct o( !<<! also create the #'blic Company $cco'nting "&ersight 7oar which reports to the ;=C to o&ersee a' iting stan ar s an practices. :he $6C#$ also pro&i es e 'cational opport'nities. 6n the p'blic sector2 :he Cost $cco'nting ;tan ar s 7oar +C$;7, sets cost acco'nting stan ar s (or those oing b'siness with the (e eral go&ernment2 especially e(ense contractors. :he 6nstit'te o( Management $cco'ntants +6M$, is the principal organi3ation e&ote primarily to management acco'ntants in the Unite ;tates. :he 6M$ has maga3ines2 newsletters2 research reports2 management acco'nting practice reports2 pro(essional e&elopment seminars2 an monthly technical meetings that ser&e the broa p'rpose o( pro&i ing contin'ing e 'cational opport'nities (or management acco'ntants. 6n Cana a2 the ;ociety o( Management $cco'ntants pro&i es a similar role. ;imilar organi3ations are present in most other co'ntries aro'n the worl . :he Financial =xec'ti&e 6nstit'te +F=6, pro&i es ser&ices m'ch like the 6M$ (or (inancial managers2 incl' ing controllers an treas'rers. 7eca'se o( the nat're o( its membership2 the F=6 ten s to (oc's on management an operational control iss'es2 an less on the pro 'ct costing2 planning2 an ecision-making ('nctions. :he Certi(icate in Management $cco'nting +CM$, is the most rele&ant certi(ication program (or management acco'ntants since it (oc'ses on the types o( skills that are most in eman (or management acco'ntants: economics2 (inance2 an management2 (inancial acco'nting an reporting2 management analysis an reporting2 an ecision analysis an in(ormation systems. "ther rele&ant certi(ications incl' e Certi(icate in Financial Management +CFM, an the Certi(ie #'blic $cco'ntant +C#$,. :he (o'r ('nctions o( management are: 1. ;trategic Management -- in(ormation is nee e by management to make so'n strategic ecisions regar ing choice o( pro 'cts2 man'(act'ring metho s2 marketing techni)'es an channels2 an other long term iss'es. !. #lanning an >ecision Making -- in(ormation is nee e to s'pport rec'rring ecisions regar ing replacement o( e)'ipment2 managing cash (low2 b' geting raw materials p'rchases2 sche 'ling pro 'ction2 an pricing. *. Management an "perational Control -- in(ormation is nee e to pro&i e a (air an e((ecti&e basis (or i enti(ying ine((icient operations2 an to rewar an s'pport the most e((ecti&e managers. -. #reparation o( Financial ;tatements -- in(ormation is nee e to pro&i e acc'rate acco'nting (or in&entory an other assets2 in compliance with reporting re)'irements2 (or the preparation o( (inancial reports an (or 'se in the three other management ('nctions.

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;trategic management is the most important management ('nction since it most irectly relates to the o&erall s'ccess o( the (irm. 6n strategic management2 top managers etermine how the (irm is to compete an what speci(ic goals it m'st set an achie&e to be s'ccess('l. :he etermination o( these strategies an goals ri&es all other acti&ities in the (irm. Merchan ising (irms p'rchase goo s (or resale. Merchan isers that sell to other merchan isers are calle wholesalers2 while those selling irectly to cons'mers are calle retailers. =xamples o( merchan ising (irms incl' e the large retailers2 s'ch as ;ears2 Wal-Mart2 an ?a io ;hack. Merchan isers 'se cost management in(ormation to control stocking2 istrib'tion2 an c'stomer ser&ice. Man'(act'ring (irms 'se raw materials2 labor2 an man'(act'ring (acilities an e)'ipment to pro 'ce pro 'cts. :hese pro 'cts are sol to merchan ising (irms or to other man'(act'rers as raw materials (or a itional pro 'cts. =xamples o( man'(act'rers incl' e 0eneral Motors2 67M2 an ;ony. :hese (irms 'se cost management in(ormation to control pro 'ction costs. ;er&ice (irms pro&i e a ser&ice to c'stomers that o((ers con&enience2 (ree om2 sa(ety2 or com(ort. Common ser&ices incl' e transportation2 (inancial ser&ices +banking2 ins'rance2 acco'nting,2 personal ser&ices +physical training2 hair styling,2 me ical ser&ices2 an legal ser&ices. :hese (irms 'se cost management in(ormation to i enti(y pro(itable ser&ices an to control costs inc'rre in pro&i ing ser&ices. 0o&ernmental an not-(or-pro(it organi3ations pro&i e ser&ices2 m'ch like the (irms in ser&ice in 'stries. Howe&er2 the ser&ice pro&i e by these organi3ations is s'ch that there is o(ten no irect relationship between the amo'nt pai an the ser&ices pro&i e . 6nstea 2 both the nat're o( the ser&ices to be pro&i e an the c'stomers who recei&e the ser&ice are etermine by go&ernment or philanthropic organi3ations. :hese organi3ations 'se cost management in(ormation to etermine an control the costs o( the ser&ices they pro&i e. :he answers here can &ary (rom large man'(act'rers s'ch as C"M#$% to small retail stores. 6( the class has tro'ble getting starte 2 the instr'ctor might 'se some o( the (irms mentione in )'estion 1-12 or (rom the instr'ctor@s own experience an 'n erstan ing. $gain2 i( the st' ents ha&e a har time2 the instr'ctor might ask them to think o( (irms close to their homes2 or to think o( (irms in a gi&en in 'stry2 etc. $s (irms mo&e to the 6nternet (or sales an c'stomer ser&ice it is likely that strategies will change. For some (irms2 a pop'lar web site can be an important i((erentiating (actor. Firms s'ch as $ma3on.com2 =tra e an e7ay ha&e achie&e power('l competiti&e a &antage thro'gh the strength o( their web sites. "ther (irms might 'se the 6nternet to achie&e cost a &antage2 by 'sing 6nternet base systems (or transactions processing2 pro 'ction sche 'ling2 p'rchasing2 employee recr'iting2 etc. 6t seems that the 6nternet co'l be e((ecti&ely 'se to enhance either a cost lea ership or pro 'ct lea ership strategy.

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1-11 $s (irms mo&e to the 6nternet (or sales an c'stomer ser&ice it is likely that their eman (or cost management in(ormation will change. For example2 or er processing costs are likely to change ramatically. 6n the web-base en&ironment2 costs are likely to increase rapi ly at (irst as new in&estments are ma e2 b't 'nit +per transaction, costs are likely to rise 'ntil the technology is in place an ('nctioning2 an then 'nit costs will come own as &ol'me b'il s. From a strategic stan point2 the key iss'es may be c'stomer ser&ice2 spee o( response an reliability which can be achie&e thro'gh the web-site. Whether an how soon the (irm can achie&e these bene(its is a critical )'estion. 1-12 :he (actors in the contemporary b'siness en&ironment that a((ect b'siness (irms an cost management are: 1. 6ncrease global competition2 which means an increasingly competiti&e en&ironment (or all (irms an th's the nee (or cost management in(ormation to become more competiti&e; the nee (or competiti&e non-(inancial in(ormation in a ition to (inancial in(ormation in cost management reports; !. Changes in man'(act'ring an in(ormation technologies2 an th's the nee (or cost management in(ormation to (acilitate the intro 'ction o( new man'(act'ring an pro 'ct technologies +e.g.2 etermining which technologies will most contrib'te to pro(itability,2 an to incorporate in cost management reports the in(ormation nee e to manage the new technologies e((ecti&ely; the importance o( li(e cycle costing -- consi ering the total costs o( the pro 'ct or ser&ice o&er its entire cost li(e cycle2 (rom raw materials to sales an ser&ice; *. $ (oc's on the c'stomer2 which re)'ires cost management reports to incl' e critical in(ormation abo't c'stomer satis(action2 changing c'stomer pre(erences2 etc.; -. Changes in management organi3ations2 new reporting practices to recogni3e the new (oc's on cross-('nctional teams in which employees (rom all areas o( the (irm work together to make the (irm s'ccess('l; .. Changes in the social2 political2 an c'lt'ral en&ironment o( b'siness2 which re)'ires an expansion o( cost management reporting to incl' e critical s'ccess (actors relate to the expectations o( those beyon the ownership o( the (irm incl' ing employees2 local go&ernment o((icials2 an comm'nity lea ers.

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1-13 ?e(er to =xhibit 1-* in the text2 repro 'ce here. Comparison o( #rior an Contemporary 7'siness =n&ironments T!" P#$%# &'($)"(( E)*$#%)+"), MANU0ACTURING 7asis o( Competition economies o( scale2 stan ar i3ation high &ol'me2 long pro 'ction r'ns2 signi(icant le&els o( inprocess an (inishe in&entory assembly line a'tomation2 isolate technology applications )'ality2 ('nctionality2 c'stomer satis(action low &ol'me2 short pro 'ction r'n2 (oc's on re 'cing in&entory le&els an other non &al'e-a e acti&ities an costs robotics2 (lexible man'(act'ring systems2 integrate technology applications connecte by network in i&i 'al an team pace 2 high-le&el skills stri&e (or 3ero e(ects T!" C%),"+-%#.#/ &'($)"(( E)*$#%)+"),

Man'(act'ring #rocess

Man'(act'ring :echnology

?e)'ire Aabor ;kills

machine pace 2 lowle&el skills acceptance o( a normal or 's'al amo'nt o( waste

=mphasis on %'ality

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Q'"(,$%) 1-13 12%),$)'"34 MAR5ETING #ro 'cts relati&ely (ew &ariations2 long pro 'ct li(e cycles largely omestic large n'mber o( &ariations2 short pro 'ct li(e cycles global

Markets MANAGEMENT ORGANI6ATION :ypes o( Cost Management 6n(ormation Bee e Management "rgani3ational ;tr'ct're

almost excl'si&ely (inancial ata

(inancial an operating ata2 the (irmCs strategic s'ccess (actors network-base organi3ation (orms; teamwork (oc's -employee has more responsibility an control; coaching rather than comman an control long term; (oc's on critical s'ccess (actors2 commitment to the long term s'ccess o( the (irm2 incl' ing a ing sharehol er &al'e

hierarchical; comman an control

Management Foc's

short term: short term per(ormance meas'res an compensation; concern (or s'staining stock price; short ten're an high mobility o( top managers

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1-14 :he ele&en contemporary management techni)'es are: 1. 7enchmarking2 a process by which a (irm i enti(ies its critical s'ccess (actors2 st' ies the best practices o( other (irms +or other 'nits within a (irm, (or these critical s'ccess (actors2 an then implements impro&ements in the (irmCs processes to match or beat the per(ormance o( its competitors. !.:otal %'ality Management2 a techni)'e in which management e&elops policies an practices to ens're that the (irmCs pro 'cts an ser&ices excee the c'stomerCs expectations. *. 7'siness #rocess 6mpro&ement2 a management techni)'e in which managers an workers commit to a program o( contin'o's impro&ement in )'ality an other critical s'ccess (actors. -.$cti&ity-base Costing an Management: $cti&ity-base costing is 'se to impro&e the tracing o( man'(act'ring costs to pro 'cts an there(ore the acc'racy o( pro 'ct costs. $cti&ity-base management +$7M, 'ses acti&ity analysis to help managers impro&e the &al'e o( pro 'cts an ser&ices an to increase the (irm@s competiti&eness. .. ?eengineering2 a process (or creating competiti&e a &antage in which a (irm reorgani3es its operating an management ('nctions2 o(ten with the res'lt that 9obs are mo i(ie 2 combine 2 or eliminate . 1. :he :heory o( Constraints2 a strategic techni)'e to help (irms to e((ecti&ely impro&e the rate at which raw materials are con&erte to (inishe pro 'ct. 4. Mass C'stomi3ation2 a management techni)'e in which marketing an pro 'ction processes are esigne to han le the increase &ariety o( eli&ering c'stomi3e pro 'cts an ser&ices to c'stomers. 5. :arget Costing2 a management techni)'e that etermines the esire cost (or a pro 'ct 'pon the basis o( a gi&en competiti&e price2 s'ch that the pro 'ct will earn a esire pro(it. D. Ai(e-Cycle Costing2 a management techni)'e 'se to monitor the costs o( a pro 'ct thro'gho't its li(e cycle. 1<. 8al'e-Chain $nalysis2 a too that hels the (irm i enti(y the speci(ic steps re)'ire to pro&i e a pro 'ct or ser&ice. 11. :he 7alance ;corecar 2 an acco'nting report that incl' es the (irm@s critical s'ccess (actors in (o'r areas: c'stomer satis(action2 (inancial per(ormance2 internal b'siness processes2 an inno&ation an learning +h'man reso'rces,.

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&RIE0 E7ERCISES 1-15 Many st' ents will answer Wal-Mart or :arget since these are mentione in the text. $ &ariety o( answers are possible an sometimes st' ents will isagree2 as (or example2 in isc'ssing a (ast (oo resta'rant s'ch as Mc>onal s. ;ome will arg'e that it is a cost-lea er beca'se the prices in (ast (oo resta'rants are typically low. 7't other st' ents will arg'e that Mc>onal @s is i((erent than other (ast (oo resta'rants2 an th's2 i((erentiation. 6 ask them to (oc's on what brings in the c'stomer2 is it price or some )'ality o( (eat're2 then many o( the st' ents will say that (or the most part (ast (oo resta'rants are i((erentiators. 6@ll ask i( any one co'l name a (ast (oo resta'rant they wo'l go to 9'st (or price an price only2 an 6 will get a (ew examples there2 b't not many.

1-16 His )'estion is set to get a positi&e response an that is 's'ally what 6 get. :hen 6 try to spen some time getting some examples o( why a strong ethical climate wo'l be bene(icial2 an note the increasing importance o( an ethical climate since the ;arbanes-"xley $ct. $lso2 a help('l reso'rce is the article in the E'ly !<<. ;trategic Finance2 F6s :here 8al'e in Corporate 8al'esGH ?eporting on a s'r&ey one by the $spen 6nstit'te an the cons'lting (irm 7oo3 $llen Hamilton2 the article notes that most respon ents belie&e that strong corporate &al'es b'il s strong relationships an rep'tations. :he st' y also reporte that nearly hal( o( (inancial lea ers s'r&ey sai that strong corporate social an en&ironmental &al'es e((ect (inancial per(ormance in the short r'n. :he article notes2 as o many other s'r&eys2 that the (irm Eohnson / Eohnson is perhaps the best know example o( a company that has high corporate &al'es. 1-17 $gain this )'estion is pose (or a positi&e response2 an the main goal 6 ha&e (or the )'estion is to ha&e the class think thro'gh the ecision as both a b'siness an an ethical iss'e. $ccor ing to a recent Wall ;treet Eo'rnal article +"ctober 12 !<<-2 p71,2 F=xperts #raise How Merck 7roke the Bews2H the anno'ncement bro'ght in positi&e p'blicity (or the company. 6nterestingly2 some o( the (irms h'rt the most by the anno'ncement were the me ia companies that were co'nting on Merck@s spen ing (or 86"II a &ertising. 1-18 Aike most be&erage companies2 there is a strong i((erentiation. ?e(er the st' ents to the in(ormation in #roblem 1--< which shows Coke as ha&ing the highest bran &al'e o( any company. :here is at least a percei&e i((erence between a Coke an ;am@s Cl'b cola2 (or example. $sk the class i( they can come 'p with an example o( a cost lea er be&erage2 an some will mention low price bran s o( cola or beer.

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$ commo ity is a pro 'ct or ser&ice that is i((ic'lt to i((erentiate (rom competitors: gasoline2 paper pro 'cts2 are some examples. Jo' can ask the class to pro&i e a itional examples. :he cr'cial point (or a commo ity: is there any reason yo' wo'l pay more (or this itemG $s s'ch2 commo ities are nat'ral cost lea ership pro 'cts or ser&ices. Most st' ents will arg'e that they chose their bank beca'se o( ser&ice an location2 th's i((erentiation. "thers will say the rates are better2 an then perhaps cost lea ership. 6t is 'se('l to isting'ish the banking nee s o( say2 a st' ent2 &ers's a small b'siness like a car ealership which will rely more hea&ily on a &ariety o( c'stomer ser&ices an will likely see banks as more i((erentiate entities.

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1-21 Here are a n'mber o( possible answers here. :he main point o( the )'estion is that the cost lea ership or i((erentiation classi(ication applies across i((erent types o( (irms in i((erent in 'stries. :here are some in 'stries +partic'larly those with commo ities, which ten to be characteri3e by cost lea ers an others +biotech2.., which ten to be characteri3e by i((erentiators. "ther in 'stries may ha&e a mix o( i((erent types o( competitors. 6 ask them to consi er the a'tomobile in 'stry an to i enti(y cost lea ers an i((erentiators. 1-22 6t is certainly likely that a new pro 'ct2 with technologically a &ance (eat'res2 may begin as a i((erentiator an then as the market (or the pro 'ct mat'res an competitors enter the market (or the pro 'ct2 then the in 'stry as a whole mo&es to more o( a cost lea ership type o( competition. Consi er cell phones as an example. 1-23 "(ten people think o( strategy as simply planning2 or Flong termH planning. 6n the broa est sense2 this is correct2 tho'gh the planning in strategy (orm'lation an exec'tion is somewhat more complex2 incl' ing e&eloping an 'n erstan ing o( the b'siness en&ironment in which the (irm operates an o( the reso'rces a&ailable within an o'tsi e the (irm to help it compete e((ecti&ely. :he steps in exec'ting a strategic plan are consi ere in chapter !.

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E7ERCISES 1-24 S,#.,"8/9 R".: E(,.," S"#*$2"( 115 +$)4 :his exercise can be 'se to pro&i e a goo perspecti&e (or the st' ents to see the role o( cost management in sol&ing b'siness iss'es2 an in placing the management acco'ntant in more o( a lea ership role in the (irm. 6t also pro&i es an early moti&ation (or the cost beha&ior iss'es to be a resse later in chapters * an -. :he management acco'ntant has a h'nch that the company is abo't to take on a potentially amaging strategic initiati&e. :his is a great opport'nity to begin to play more o( a strategic role in the company. :he (irst step sho'l be to obtain the rele&ant in(ormation abo't pro9ecte re&en'es an costs an o a care('l analysis o( the likely pro(itability o( e&eloping the new2 smaller c'stomers. Here@s how the case might be 'se in a class isc'ssion. First2 ask (or the class to i enti(y the types o( costs likely to be inc'rre by this company in pro&i ing its ser&ice. :he answers are likely to incl' e labor costs an materials (or cleaning an maintenance2 in a ition to costs (or maintaining the (irm@s o((ice. $s these examples are gi&en2 p't them on the chalkboar an collect 1 or 5 o( them. :hen2 ask how each o( these costs might i((er between large an small c'stomers. For example2 the cost o( cleaning labor an materials will likely be somewhat proportional to the s)'are (eet o( space each c'stomer occ'pies2 so that cost pro9ections base on c'rrent c'stomer experience is likely to be 'se('l in estimating the costsKpro(its o( the smaller c'stomers. Howe&er2 sec'rity costs are likely to not &ary greatly base on the si3e o( the c'stomer. How oes this a((ect the pricing an the potential pro(itability o( the smaller c'stomersG ;imilarly2 how will the o((ice-relate costs o( managing the c'stomer acco'nt i((er between large an small c'stomers L probably not m'ch at all. "&erall2 the (act that some costs will not be proportional to c'stomer si3e +as meas're by s)'are (eet o( o((ice space, means the smaller c'stomers will be more costly2 per 'nit o( (loor space2 than the larger c'stomers. :his sho'l be taken into acco'nt in pricing the smaller 9obs an in pro9ecting pro(its (rom the smaller c'stomers. $n important iss'e this case brings o't is the nee (or the management acco'ntant to take a proacti&e role in b'siness ecision making. :he isc'ssion here sho'l (oc's on what steps the acco'ntant sho'l take to become a more integral part o( b'siness ecision making. $ n'mber o( possible answers are likely to be propose .

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1-25 T!"%#/ %; C%)(,#.$),( 12 +$)4 :he concept o( thro'ghp't in the theory o( constraints +:"C, is central to :"C -to re 'ce the time an waste in pro 'cing the pro 'ct or ser&ice. :he concept also applies to the ser&ice context as well as to man'(act'ring. 6n ser&ice (irms2 :"C is 'se to i enti(y bottleneck operations in the set o( steps an operations that are nee e to pro&i e the ser&ice. For example2 in banking2 the bottleneck might be the mo&ement o( cash an transaction (orms between the branches an to the central bank processing point. ;imilarly2 in pro&i ing a pro(essional ser&ice s'ch as acco'nting2 legal or me ical2 the bottleneck might be the sche 'ling o( speciali3e pro(essionals to a gi&en client or patient. 6n a hospital2 the bottleneck might be the a mitting process. 6n each case2 the proper esign o( systems to spee the ser&ice to the c'stomer is the ob9ecti&e o( the :"C analysis. :his is one by an acti&ity analysis o( the operations necessary to pro&i e the ser&ice. $ i((erence between ser&ice an man'(act'ring (irms is the presence o( in&entory in the man'(act'ring setting. $n ob9ecti&e o( :"C (or a man'(act'rer is to re 'ce in&entory le&els; the presence o( large )'antities o( in&entory is e&i ence o( bottlenecks (or a man'(act'rer. 6n contrast2 in&entory is not an important matter in the ser&ice (irm. ?ather2 it is important to i enti(y peopleKprocesses where the eli&ery o( the ser&ice to the c'stomer is Fstalle 2H that is2 the bottleneck. :his might be a stack o( (orms waiting to be processe by a clerk2 a waiting room o( patients waiting to be seen by a octor2 etc. :he application o( the concept o( :"C is howe&er2 the same. :hat is2 how to get the ser&ice to the c'stomer as )'ickly an with as little waste as possible. ?etail an a'to repair b'sinesses are among the goo examples. $t Wal-Mart2 or any other retail (irm2 :"C can be applie to spee the pro 'ct to the c'stomer2 that is )'ick re-stocking o( items in the stores2 )'ick intro 'ction o( new pro 'cts into the stores2 an (ast c'stomer check o't. 6n an a'to repair b'siness2 :"C is applie to etermine ways to ser&e the c'stomer more )'ickly2 with less waste time 'ring an between 9obs.

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PRO&<EMS 1-26 C%),"+-%#.#/ M.).8"+"), T"2!)$='"( 13 +$)4 1. For an article on target costing2 :im sho'l consi er the types o( (irms which wo'l eman this type o( strategic costing. :hese wo'l be (irms that are in &ery competiti&e in 'stries2 where costKprice competition is critical2 s'ch as cons'mer pro 'cts. =xamples o( (irms that might 'se target costing also incl' e those that ha&e short pro 'ct li(e cycles +the time (rom intro 'ction o( the pro 'ct into the market 'ntil its with rawal (rom the market,. :he (irm m'st be &ery eliberate in planning abo't costs when there are short li(e cycles2 since there is a short time to reco&er the e&elopment costs -- the pro 'ct m'st be care('l esigne 2 'sing target costing2 so that it is pro(itable in its short li(e cycle. !. For an article on li(e-cycle costing2 :im@s search (or appropriate (irms wo'l lea him to many o( the same types o( (irms as (or target costing in +1, abo&e. 6ntense competition on priceKcost an short pro 'ct li(e cycles are in icators o( (irms that are likely to 'se li(e-cycle costing. :he reason is that in both cases2 the (oc's is on the management o( esign an there(ore the management o( ownstream costs2 so as to achie&e pro(itability (or the pro 'ct o&er its li(e cycle. ;ome Eapanese (irms2 (or example2 will intro 'ce a pro 'ct that is not pro(itable at the (irst phase o( its li(e cycle2 b't as costs are expecte to come own in the man'(act'ring process thro'gh contin'o's impro&ement e((orts2 the pro 'ct will become pro(itable later in its li(e cycle. *. For an article on the theory o( constraints2 a wi e &ariety o( (irms2 incl' ing both man'(act'ring (irms an ser&ice (irms +see answer to exercise 1-!.,2 wo'l be appropriate. $lso2 man'(act'ring (irms wo'l be goo examples to 'se (or the article since the man'(act'ring process is int'iti&e -- the rea er can easily see how the i((erent operations in the man'(act'ring process m'st be manage to spee 'p the (low o( pro 'ct thro'gh the plant. 6n a ition2 it is easy to &is'ali3e the (low o( pro 'ct an the b'il 'p o( in&entory which is an in ication o( bottlenecks in the pro 'ction process.

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1-27 P#%;"(($%).: O#8.)$>.,$%)( .)3 C"#,$;$2.,$%)( 115 +$)4 6an sho'l consi er 9oining one or more pro(essional organi3ations. :his wo'l be help('l (or e&eloping relationships with other cost management pro(essionals. ?elationships o( this type2 an the contin'ing pro(essional e 'cation programs o( these organi3ations2 o((er an excellent way to e&elop pro(essional skills an to i enti(y career opport'nities. 6an sho'l consi er 9oining the 6nstit'te o( Management $cco'ntants +6M$, right away2 an then later to consi er the Financial =xec'ti&es 6nstit'te2 or e)'i&alent2 as he progresses in his career. 6an sho'l also consi er taking one o( the certi(ication exams. :he 6M$@s Certi(ie Management $cco'ntant +CM$, program will be the most rele&ant at the start. $lso2 6an sho'l consi er certi(ication as a Certi(ie #'blic $cco'ntant +C#$,2 as it is wi ely recogni3e not only within management acco'nting2 b't also in p'blic acco'nting an (inancial management. :he nat're o( 6an@s nee (or pro(essional organi3ations an certi(ications might change2 as 6an@s career changes. 6(2 (or example2 his work shi(ts to incl' e (inancial management tasks2 the 6M$@s certi(ication program in (inancial management +the Certi(ie Financial Manager, will then be rele&ant.

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1-28 &.:.)2"3 S2%#"2.#3 115 +$)4 1. :he balance scorecar can help a (irm by explicitly rawing managers@ attention to critical s'ccess (actors in (o'r key areas: c'stomer satis(action2 (inancial per(ormance2 internal b'siness processes2 an inno&ation an learning +h'man reso'rces,. :he balance scorecar helps managers to (oc's on the strategically important2 critical s'ccess (actors2 an to take a long-term perspecti&e to the (irm@s per(ormance. 6n e((ect2 it helps managers to (oc's on the broa set o( critical (actors that the (irm m'st atten to in or er to compete s'ccess('lly. !. :he 7alance ;corecar : ;ome example (actors that might be incl' e 7alance ;corecar are as (ollows: a. c'stomer satis(action )'ality on-time eli&ery (eat'res an ('nctionality2 relati&e to competition responsi&eness o( sales an ser&ice sta(( percei&e inno&ati&eness sales growth n'mber o( new c'stomers n'mber o( lost c'stomers an why b. (inancial per(ormance earnings earnings per share li)'i ity meas'res: c'rrent ratio2 )'ick ratio ret'rn on e)'ity ret'rn on assets cash (low 'nit cost2 tren in costs c. internal b'siness processes cycle time in&entory le&els: (inishe goo s2 work in process2 an raw materials pro 'ct )'ality waste2 scrap2 an re-work materials an labor 'sage relati&e to stan ar in E6C@s

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P#%?:"+ 1-28 12%),$)'"34 n'mber o( engineering impro&ements pro 'cti&ity warranty ret'rns &en or )'ality sche 'ling errors an a 9'stments . inno&ation an learning +h'man reso'rces, t'rno&er training ho'rs n'mber o( acci ents n'mber o( 'se('l employee s'ggestions n'mber o( employee complaints n'mber o( rele&ant e 'cational certi(icates earne

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1-29 &.)@$)89 S,#.,"8/9 S@$::( 12 +$)4 :he p'rpose o( this exercise2 an 1-*< which is an alternate2 is to ha&e the st' ent consi er the role o( the cost management pro(essional in an act'al company. What are the 9ob skills re)'ire to be an e((ecti&e employee2 an thereby2 help the company to be s'ccess('lG 1. :here are a n'mber o( possible answers here. Here are some i eas: C'stomer satis(action C'stomer retention =mployee satis(action =mployee t'rno&er :ransaction processing error rate :ime: c'stomer wait time L at cashier2 (or opening an acco'nt2 (or getting loan appro&al2 etc. B'mber o( new branches B'mber o( $:Ms :he bank remains competiti&e an s'ccess (actors. s'ccess('l by atten ing to these critical

!. $gain2 there are a &ariety o( ways the materials might be e&elope . :he key i ea is that the recr'iting materials an the 9ob escription sho'l (ollow (rom the critical s'ccess (actors note abo&e. Here is an example: 7'siness Mnowle geKUn erstan ing strategy Has a goo 'n erstan ing o( b'siness ('n amentals; cost an re&en'e ri&ers2 the reg'latory en&ironment in banking2 etc. Un erstan s the strategy an b'siness en&ironment o( bank c'stomers he or she works with. C'stomer Foc's =mployee works well with c'stomers an other employees =((orts are c'stomer-(oc'se Creati&e #roblem ;ol&ing :hinks creati&ely Un erstan complexities

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P#%?:"+ 1-29 12%),$)'"34 #ers'asi&e 6s able to present i eas concisely an clearly Un erstan s who FownsH a problem2 an who can sol&e it Flexibility Bot easily isappointe ; han les con(lict well 6s able to see m'ltiple &iewpoints while asserting a position Can be a b'siness partner2 c'stomer a &ocate2 as well as loyal employee an (rien =mbraces change 0oo s'per&isor Creates a positi&e climate #ro&i es opport'nities (or e&elopment2 learning an promotion Can make to'gh personnel ecisions 6s able to elegate2 an teaches others how to o the same Aooks (or new i eas an rewar s s'ggestions 7'il s commitment #er(ormance ;hows enth'siasm Has high stan ar s Willing to work extra ho'rs when necessary 6s willing to take risks Meeps s'per&isors in(orme Works well on a team =((ecti&ely manages time Comm'nication ;kills Comm'nication is clear an (oc'se 0oo sense o( con(i entiality where appropriate :echnology ;kills F'lly &ersatile in 'sing comp'ter applications that apply in the banking in 'stry >e&elops new skills where appropriate #ro(essional =thics >isplays high stan ar (or ethical beha&ior

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1-3

C%)(':,$)89 S@$::( 12 +$)4 :his exercise can be 'se as an alternati&e to 1-!D. 0enerally2 the personal attrib'tes will be the same as (or banking. What skill areas might be especially important in cons'ltingG #erhaps creati&ity an problem sol&ing2 an the ability to (ollow a logical tho'ght process. $lso2 cons'ltants m'st be able to e&elop an analy3e alternati&es.

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1-31 A2,$*$,/ A).:/($( $) . &.)@ 12 +$)4 1. $cti&ity analysis is 'se to i enti(y a etaile escription o( the speci(ic acti&ities per(orme in the operations o( the bank. :he acti&ity analysis is 'se in two ways: acti&ity-base costing an acti&ity-base management. $cti&ity-base costing +$7C, co'l be 'se to impro&e the tracing o( the bank@s costs to its pro 'cts an ser&ices2 there(ore impro&ing the acc'racy o( ecisions base on the cost in(ormation. $cti&ity-base management +$7M, 'ses acti&ity analysis to impro&e operational control an management control. !. =xample acti&ities might be to: process eposits process with rawals answer c'stomer in)'iries sell tra&eler checks balance cash rawer +at the en o( the ay, recei&e an installment loan application process an installment loan application pro&i e a &ice regar ing in&estments2 incl' ing an explanation o( in&estment ser&ices pro&i e by the bank recei&e a mortgage loan application process a mortgage loan application mail o't monthly statements: checking c'stomers2 sa&ings c'stomers2 loan c'stomers :he acti&ity analysis (or processing eposits2 (or example2 wo'l incl' e a etaile escription o( the n'mber o( i((erent ways the acti&ity is initiate an per(orme 2 the time re)'ire 2 the skills re)'ire 2 reso'rces re)'ire +e.g. labor2 technology2 (acilities,2 etc.

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1-32 E,!$2(A P#%3'2, Q'.:$,/ 115 +$)4 ;ome will recogni3e this as similar to the case o( the 6ntel #enti'm chip reporte in the news in the mi 1DD<s. =&en i( the (a'lt will occ'r in &ery rare an 'n's'al circ'mstances2 i( the conse)'ence co'l be some amage to a 'ser2 the (irm sho'l a &ise 'sers o( the (a'lt an the potential implications. "n the other han 2 there sho'l be no nee to a &ise 'sers i( the (a'lt is not likely to ha&e any noticeable conse)'ence on the 'se o( the chip2 as (or example2 i( the chip simply takes m'ch longer (or a &ery rare type o( processing2 b't ret'rns the proper res'lt. :he e((ect o( the elay is not likely to ha&e a amaging e((ect on any known 'ser.

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1-33 S,#.,"8/9 G")"#.: M%,%#( 12 +$)4 :he strategy a opte by 0M is consistent with the i((erentiation strategy2 a (oc's on )'ality2 style2 an inno&ation rather than price an cost. Un(ort'nately2 the ealers an some analysts were in('riate by 0M@s mo&e2 belie&ing that Fthe reality is this is a price- ri&en marketH +Merrill Aynch / Co a'to analyst Bicholas Aobaccaro,. 0M@s response to the criticism was to state that bran &al'e is what creates market share an pro(its2 altho'gh it can take time to o so. :he inci ent shows that it can be i((ic'lt to etermine the (irm@s strategy2 an experts can isagree. How o yo' think 0M competesG ;ee: F0M >ealers $ren@t 7'ying 6t2H Business Week2 Febr'ary 52 1DDD2 pp -1--4.

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1-34 S,#.,"8/9 C.:*$) 5:"$) 12 +$)4 Cal&in Mlein pro 'cts are clearly i((erentiate on the basis o( high (ashion an cost. What remains at iss'e is whether some i((erentiate pro 'cts can be sol in isco'nt retail stores. :hinking that the presence o( so m'ch o( his pro 'cts in isco'nt retail stores co'l h'rt his bran 2 Cal&in Mlein s'e Warnaco to stop this practice. :he s'it was settle o't o( co'rt in Ean'ary !<<1 an Warnaco was allowe to retain the l'crati&e Cal&in Mlein contract. ;ee: F7ehin a 7itter ;'it File by Cal&in Mlein Aies 0rit o( Aicensing2H The Wall Street Journal2 E'ne 12 !<<<2 p 1.

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1B35

S,#.,"8/A &MW 115 +$)4 :he critical )'estion (or 7MW is how the 'se o( another man'(act'rer might a((ect c'stomers@ con(i ence in the 7MW bran . Most wo'l say that 7MW is a i((erentiate (irm2 an its c'stomers expect )'ality an (eat'res o&er cost. :he I* has been a great s'ccess (or 7MW +both in sales an re&iews,2 so it is apparent that c'stomers ha&e accepte the contract man'(act'ring o( the &ehicle #erhaps more interesting is 7MW@s plan to Fprotect its bran by not entering the mini&an market.H $ccor ing to 7MW@s C="2 FWe o not ha&e a &an beca'se a &an as it is in the market to ay oes not ('l(ill any o( the 7MW gro'p bran &al'es.H "n balance2 7MW has s'ccee e in the l'x'ry2 high-en o( the ;U8 market2 b't has etermine that the l'x'ry2 high-en market c'rrently has no place (or a mini&an. ;o'rce: F7MW;@s C=" E'st ;ays Bo to #rotect 7ran 2H The Wall Street Journal2 Bo&ember !12 !<<*2 p 71; F$h2 :hat =xcellent 0erman =ngineering L ;traight (rom ;o'thern $'stria2H The Wall Street Journal2 ;eptember 1<2 !<<*2 p 71

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1B36

S,#.,"8/9 I))%*.,$%) 115 +$)4

1. :he rate o( inno&ation is higher in so(tware an ser&ices2 semicon 'ctors2 r'gs2 biotech2 an technology har ware beca'se the (irms in these in 'stries compete largely on inno&ation. For example2 a r'g (irm is s'ccess('l to the extent it is able to e&elop new r'gs; cost e((iciency is not a key to its s'ccess2 an it is 'nlikely to be a cost lea er. :he only exception to this might be a man'(act'rer o( generic r'gs2 where )'ality as well as cost lea ership wo'l be important. !. ;omewhat lower le&els o( inno&ation are seen in the (oo an be&erage2 cons'mer goo s2 an ho'sehol pro 'cts2 beca'se a larger portion o( these pro 'cts an (irms will compete on cost lea ership. :hese are the pro 'cts we b'y in Wal-Mart2 Mmart2 7est 7'y an Home >epot2 all cost-conscio's retailers. :he a'tomobile in 'stry has some (irms that are more inno&ati&e than others +see 7MW in problem 1-*. abo&e, while others are less inno&ati&e. Bote howe&er2 that William For 2 the C=" o( For Motor has stresse in recent months the importance o( inno&ation to that (irm@s strategy going (orwar . ;o'rce: #eter Coy2 F:he ;earch (or :omorrow2H Business Week2 "ctober 112 !<<-2 pp !11-!!<.

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1-37 S,#.,"8/9 C%++%3$,/ &'($)"(( 115 +$)4 ;an>isk is apparently trying to mo&e (rom a cost lea ership strategy that (its well the commo ity b'siness it is in to a i((erentiate strategy. :his approach has been s'ccess('l (or other tech (irms2 s'ch as 6ntel2 which has establishe itsel( as a i((erentiate bran in a commo ity market. :he inno&ations escribe in the article are signi(icant an point to s'ccess2 b't at the time o( p'blication it is too early to tell.

;o'rce: F$ Memory Car Jo' Won@t Forget2H Business Week2 $'g'st 1.2 !<<.2 p 1!.

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1-38 E,!$2(: T!" W%#:3C%+ S2.)3.: 115 +$)4 :he Worl Com scan al is one o( the most signi(icant an extensi&e (ra' s in U.;. history. :he important part o( this story is that the s'r&i&or organi3ation2 MC62 is oing well 'n er new lea ership an has beg'n an ethical compliance program. :he )'estion is inten e primarily as a basis (or class isc'ssion2 an there are likely to be a wi e range o( &iews. 6 begin by noting that the anno'ncement o( a Chie( =thics "((icer is a goo strategic mo&e (or MC62 gi&en the recent history o( the company. 6t is important (or the (irm to make a clear statement abo't the importance o( ethical beha&ior in the years ahea . 6t is i((ic'lt to etermine the precise role (or an ethics o((icer; the concept is new an there is not m'ch experience to pro&i e g'i ance. :he ('nctions set o't in the MC6 anno'ncement make sense L employee training2 hotline2 ple ge2 an co e o( ethics. 6t is clear in the MC6 case that the o((icer has the strong s'pport o( top management. ;o the role an responsibilities o( the chie( ethics o((icer sho'l be watche closely at the top management le&el -- both C=" an CF". From the experience with Worl Com an other (ra' s2 where both the C=" an CF" were c'lpable2 it is probably also important that the chie( ethics o((icer report not only to the C=" an CF"2 b't also to the (irm@s a' it committee +a s'bset o( the (irm@s boar o( irectors with responsibility (or managing the a' it ('nction an pro&i ing o&ersight o( internal control proce 'res within the (irm,.

;o'rce: FWorl Com ;ta((er "r ere to Commit Fra' 7alke 2 then Ca&e 2H The Wall Street Journal, E'ne !*2 !<<*2 p1.; MC6 web site; [Link]

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1-39 S,#.,"8/: A',% T$#" M.)';.2,'#$)8 115 +$)4 Michelin@s contin'e s'ccess at selling high-en tires at premi'm prices is e&i ence that this (irm is s'ccee ing at i((erentiation in an in 'stry that is largely characteri3e as a commo ity b'siness base on cost lea ership. Michelin also e((ecti&ely markets the importance o( the )'ality it pro&i es in a &ertisements that note the importance o( sa(ety in choosing an a'to tire.

;o'rce: FMichelin ?olls2H 7'siness Week2 ;eptember *<2 !<<!2 pp.5-1!

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1-4

S,#.,"8/: &#.)3 V.:'" 115 +$)4

:his )'estion is inten e (or class isc'ssion. ;ome st' ents will be s'rprise by some o( the (irms on the two lists2 an (rom (irms that are missing (rom the lists. :he ma9or point o( the exercise is to isc'ss the nat're o( the i((erentiation strategy an how (irms that ha&e e&elope &al'able bran s ha&e s'ccee e in making this i((erentiation. $sk the class i( they themsel&es2 or they expect others2 wo'l pay more (or pro 'cts o( the (irms on the top bran s list. :hose that say yes will be acknowle ging the Fearnings premi'mH that 6nterbran Corp. re(ers to in the $'g'st !<<. Business Week article. Can the same be sai (or the (irms on the most-inno&ati&e listG #robably not. Bote that some on this list are clear cost lea ers2 s'ch as >ell an arg'ably2 Bokia. "ther (irms s'ch as $pple an *M s'ccee by pro&i ing new an attracti&e pro 'cts2 s'ch as $pple@s i#o .

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1-41 E,!$2(A P#%3'2, Q'.:$,/ 115 +$)4 :ho'gh 0reen $cres is bene(iting (inancially (rom its cons'mers@ misperception an has not p'rposely one anything mislea ing +since it has ne&er labele its pro 'cts as ForganicH,2 it cannot contin'e to allow cons'mers to think its pro 'cts are organic. $s it knows that its cons'mers percei&e its pro 'cts as ForganicH an that many cons'mers b'y 0reen $cres pro 'cts speci(ically (or this reason2 0reen $cres has a moral obligation to in(orm them abo't its tr'e practices. =&en i( the health an en&ironmental conse)'ences o( genetically mo i(ie organisms are yet 'nknown2 the potential (or harm to the cons'mer necessitates that 0reen $cres a &ise cons'mers o( its 'se o( genetically mo i(ie crops an noti(y them that risks might potentially exist (rom cons'ming its pro 'cts.

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