International Management accounting

7/29/2019 International Management accounting

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The strategic analysis of costs

Definition of strategy Views of strategy

Strategic management accounting


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Definition of strategy

Normative view-there are certainnorms within the organisation-veryspecifically defined strategy

Mintzbergstrategy has differentdimensions to it-patternsof decisionsabout the organisations future

Andrews-concerned with the wayresources are focused to convertdistinct competencies into competitive

advantage


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Views of strategy

Boston Consulting Group (BCG)-multitude of products

Porter (1985)-specific market issues

and forces before you can look atwhat the organisations might be-product differentiation/cost leader

Miles and Snow-extend product lifecycle-produce mass scale-leader ofthe market


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Strategic ManagementAccounting With heavy competition from tiger economies, products become

more complex-it is inevitable that the product life cycle shortens

Deflationary trends in markets have encouraged companies toconsider ways in which they can achieve a competitive advantage &maintain profitability to contend with their competitors

Important for firms to develop business strategies to support

strategic planning, decision making & control Traditional management accounting information is insufficient for

strategic decision making-short term-backward looking-orientedsolely towards history- on past results

SMA on the contrary has a longer term perspective-more timely

SMA makes information more pertinent-assists in the decisionmaking process in the longer term (Baines et al 2003)

SMA is the process by which management accounting info isanalysed and data is gathered about competitors, in order todevelop and monitor the firms strategy (internal and external info)


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Research Studies (components ofSMA): Simmonds (1981)-advocated that firms should assess their strategicposition in relation to its competitors-this would enable management to

identify actions that would increase their competitive advantage

In support of thisBromwich (1990)-SMA allows greater transparency ofthe competitors procedures-can adapt accordingly-e.g. throughcompetitor cost assessment-can then use it as a benchmark to manageown business costs

Coad (1996)-collection of competitor information-service department bidwas lower than the estimate based on this information-undercut thecompetitor and won the contract

Further support comes from Guilding et al (2000)-survey of large firms inthe USA, UK and New Zealand-extensive use of competitors informationsuch as published financial statements

This suggests that SMA emphasises information about competitors

Shank and Govindarajan (1992)-value chain analysis-major forestproducts firm-deciding whether/not to introduce a new technology-usedtraditional investment appraisal tool NPV-showed present & newtechnology identical-however, value chain analysis-cost savings withnew technology

Value chain analysis-broader perspective-evidence that SMA helps inrevealing relevant information that can aid in the decision making

process-considers firms involvement in whole life cycle of the product-giving a strategic context


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Examples The transformation in the way organisations operate has resulted in the

traditional costing systems unable to provide effective costing's-product lifecycles have shortened due to technologically driven companies

EXAMPLE: Siemens case study-facing intense competition from EasternBloc who were able to offer prices that Siemens was unable to matchinresponse to this Siemens developed customised motors-altered their

strategy-production process became more complex & technologically driven-traditional cost systems allocate direct labour whereas this isnt the major

cost driver-with a capital intensive industry-DLH will distort the actual realityof costs-SMA takes into consideration external factors such as actions ofcompetitors

It has been contended that SMA is not used in all organisations-empiricalsurvey conducted in the UK found that SMA is not widely practiced (Alkaranet al 2006)-in support of this studies conducted by Guilder et al (2000)-in theUk, New Zealand and the USA-found that the uptake of SMA was notextensive-several companies resisted from using costing systems such as

ABC as managers viewed them as costly, time consuming and intricate.

Furthermore what constitutes SMA is not uniform across countries such asthe UK, USA and new Zealand. There are many disagreements that exist.


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Limitations of SMA Dermer (1990)-strategy not always planned-it often just happens-SMA may

develop w/o any involvement of accountants

Harain (1994)-focusing too much on competitors-results in firms imitating theircompetitors-can gain an advantage by deviating & being innovative instead

Suggests competitor analysis (proposed component of SMA)-may not bebeneficial if the firm is over reliant on competitors information-w/o consideration ofimmeasurable aspects such as cooperation

Cooper (1996)-firms relationship with competitors-may collaborate so that bothcan benefit e.g. combining their expertise to fill in the shortcomings of the otherfirm

Lack of standardization-as no standards exist-inconsistencies often appear suchas when making evaluations-There are no set regulations for managementaccounting or SMA as opposed to financial accounting where accountants have toabide by the generally accepted accounting principles (GAAP). Consequently, it

leads to discrepancies when benchmarking. This restricts the extent to whichcomparisons can be made as you are not comparing like with like.

Even though strategies may be operationalized -it is easy to have differentinterpretations-Guilder et al (2000)-SMA can be misunderstood-survey resultsconducted in different countries-suggests that cultural differences exists-heterogeneity within cultures-applicability of SMA in global organisations needs tobe further researched-SMA-room for subjectivity and bias-may place their focuson the wrong factors


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Conclusion

Globalisation has increased uncertainty-firms are exposed to muchmore competition-managers have to not only consider internalfactors but also external factors-this is where the role of strategicmanagement accounting becomes important

SMA is very context specific-if the organisation is operating in onenation, then there is unlikely to be many variances. However, once afirm becomes global, there are many complications associated withit-led to more intricate management accounting systems-SMA iscontextually determined-not standard across systems/organisationsas it represents a variety of different management possibilities

SMA has become important due to globalisation-provides an avenue

through which it can gain a competitive advantage


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Variations in accounting styles

Country differences result from culturalinfluences

Study done to see differences inaccounting practices-found thatGermans tend to emphasise productionbased controls whereas the UK-financialcontrols(Bhimani 2006)

People have different perspectives ofhow accounting systems should be-e.g.level of detail, surveillance-mechanismbuilt into accounting system


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Approaches to InternationalManagement

3 approaches to international management; multinational, global and transnational(Bartlett et al 1989)

Multinational approach-greater level of autonomy and decentralisation-implies that thelocal culture is optimal and should be adopted--example where it failed- Procter &Gamble Co. lost $25 million in Japan because its managers would not listen toJapanese advisors-advertisement was successful in the US but not in Japan-example oftransferring management styles to foreign countries

Global approach-assumes that the companys host country culture is universallyapplicable

Transnational approach-recognises the need for intense coordination and knowledgesharing-corporate culture is developed by integrating local and global practices

Case study-General electric-acquisition of an Italian company Nuovo Pignone-globalapproach to integration-culture change was required to merge their beliefs together-vastly different cultures & business strategies-NP had poor performance measurement

systemsintroduction of six sigma served an important role in extending the culture ofmeasurement-converged to resolve the dialectic tension between the dominant cultureof GE-diffusing a global culture to achieve integration-convergence of managementaccounting practices

However, this theory can be seen as deterministic-it suggests that if we follow any ofthese approaches then organisations will be able to combat the issue of culture in amultinational corporation


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Why are there differences?

Education: proportion of managerswho have a qualified degree; Uk-24%

Arts, Germany 62% Engineering,

France-65% Engineering-reason whythere are production oriented controls-due to having an engineering

background Culture?


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Culture

Culture is more often a source of conflict than of synergy(Hofstede)

Hofstede (2001)-survey of work related values of IBMemployees-revealed substantial similarities in the values ofpeople within countries and found differences acrosscountries-studied how the values in the workplace are

influenced by culture Criticism of Hofstedes study-Lenartowicz and Johnson

(2003)-countries are grouped together that are nothomogeneous-such as Latin America-6 cultural regions whichhave some differences

Another criticism is that it is reductionist-study conducted in

IBM-therefore the extent to which generalisations can bemade is limited

Furthermore-time factor-research is outdated-many changestake place over time-therefore the applicability of his results islimited-to address this issue contemporary research has beendone-general consensus that Hofstedes original ratings aresimilar even in the 21st century


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Why is culture important?

Culture is that invisible bond which ties the people of acommunity together. It is imperative that organisationsunderstand the importance of culture in different countries, sothat they can be successful in global management

Influences management, decision making & negotiation

Compressing financial standards into a homogenous unit has

become increasingly important due to firms expanding intomultinational corporations-being geographically diversifiedhas many challenges

Cultural differences creates a barrier-Internationalisation ofbusinesses has created the need for global accounting rules.One of the most widely used accounting standards is the

generally accepted accounting principles (GAAP)-itsacceptance is not universal- due to some countries havingdifficulties in interpreting this format they follow theinternational financial reporting standards (IFRS)-examplewhere this tool of communication is not homogeneous acrossdifferent countries


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Research studies

With globalisation lateral relations (i.e. relationsbetween subsidiaries) as opposed to the verticalrelationship where there exists a level of authority(headquarters which manages the subsidiaries)-powerand authority is more dispersed (Martinez et al 1989)

Quattrone and Hopper (2005)-a more authoritativemanagement may result in a lack of communicationbetween personnel and management

Triandis study (1995)-engineer in India offered 25 timeshis salary to migrate to the USA, whilst a Californianengineer received a proposal for a 50% increase-the

Indian declined This clearly shows that differences exist across

countries. Culture manifests itself through the lifestylesof the individual of a community-USA individualisticculture vs. collectivist culture in India


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Hofstedes Study-(studied how cultureinfluences behaviour in organisations)

Hofstedes cultural dimensions that assist in differentiating cultures:1) Power distance-represents inequality

2) Uncertainty avoidance-measures the degree to which people feeluncomfortable with uncertainty-consequently they aim to reduce it through rulesand regulations-empirical research has supported this idea-in Japan (high UAculture)-greater formalisation-utilise budgets as a tool for communicationthesefinancial metrics bring in some level of confidence for these organisations-US(low UA culture)-not very keen on these controls

3) Individualistic cultures vs. collectivist cultures (collectivist-integrated,individualist-more autonomous) Individualistic cultures such as in countries likethe USA, Australia-respond unfavourably to tight linkages between budgettargets and evaluation-rigidity contradicts their individualism (Harrison et al)Collectivist and Individualistic cultures differ in many ways in terms of beliefs.Lincoln et al (1981)-France-centralised control within organisations based in thiscountry-highly bureaucratic-on the contrary Japan-more communalrelationships of dependence

4) Masculinity vs. femininity (distribution of roles between the genders)-highmasculinity-resolution of conflicts by fighting them out

5) Long term orientation

An understanding of all these dimensions can improve the chances ofsurviving in the international arena


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Cultural Homogenisation

Increasing concern in stewardship-manycorporations have defaulted-Citi Bank forexample allowed the Chilean dictatordeposited large sums of money in the bank to

be exempt from taxation-corporategovernance is playing a significant part inbusinesses-one area where there isconsensus across the countries

Scandals have increased pressure forcorporate governance-Sarbanes Oxley Act(2002)-certifies accuracy of companiesfinancial statements-can provide an importantcultural shift in organisations


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Examples

Companies have benefitted from outsourcing as it leverages thecompany from excess burden -A key factor to consider is thatinternal failures such as having defective items can tarnish aorganisations reputation-this effect is irreversible and it can takemany years to regain the customers confidence again-Mercedesstarted to lose edge-outsourced-needed more servicing-loss of

goodwill and brand name-defects may go down-but customersbitterness with the bad experience holds on for many years-ifdissatisfied once will move away from product completely-thisexample suggests that cultural differences exist-the level ofexpertise etc.

Deal occurred in 1988 in automobile industry-merger createdDaimlerChrysler-problem with merger-clash of cultures-turned out to

be a mistake (Corporate structure Daimler-hierarchical Chrysler-team oriented)-most fundamental challenge of a merger is cultural

Legal differences: there are different legislations in differentcountries-Wal-Mart has adopted the cost leadership strategy-sellsproducts below costs to attract customers

Although this is acceptable in the United States, it is illegal in somecountries


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Cultural Homogenisation

Advances in IT such as ERP have shaped convergence andstandardisation (Granlund et al 2002). It is thought that systemssuch as ERP transcend geographical boundaries

Quattrone and Hopper (2005)-how ERP implementation mayhave different repercussions on MA and control systems-ERPsenhance integration by centralising accounting and controlsystemsThink Pink (American Corporation) Sister Act (Japanese Corporation) Implemented ERP as it was seen as

a channel whereby communication

could be improved and coordination

between headquarters andsubsidiaries

Greater level of decentralisation-

allowed employees to input data w/o

the interference of the accountants

There was more autonomy-

accountants lost the ability to

exercise control

Accounting systems can support

multinational strategies

ERP and MA practices maintained

distances Greater level of responsibility

accounting-can see how costs have

been accrued-trace costs and assign

them to the correct department-allocate

budgets on this basis-incentivise

managers-lead to greater goal

congruence

More centralised-hierarchical structurereinforced


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Conclusion

Move towards an increasingly digital society-can exacerbate existing inequalitiesbetween developed and developing countries-accessibility of technology is limitedin developing countries therefore they may not be updated with changes inmanagement accounting practices-can result in differences in their understandingof issues

Controlling at a distance for accounting can maybe lead to communication barriers

Criticism-countries such as the Uk has become a multicultural society-thereforethe apparent findings of Hofstede may not be applicable-over the years there have

been many people who enter and settle in a country to which they are not nativeto-therefore there exists some bias in the results

UK Parliamentary Office of Science and Technology (2002)-have argued thatthere have been a number of different types of fraudulent research. Therefore, theapparent positive findings from studies may be partly explained by publication bias

Managers need to be attuned to cultural nuances in order to function effectively-need to eliminate the fallacy that all people in a foreign culture think and act alike

Possible solutions to this issue-multinational corporations can provide training

which exposes members of one culture to another culture-IBM operates a 6 weektraining programme that includes a wide variety of international topics-the amountand intensity of training is proportionately related to the manager's success

Globalisation can result in cultural homogeneity but not completely

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International Management accounting