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Chapter 01 - Cost Management and Strategic Decision Making Evaluating Opportunities and LeadingChange

CHAPTER 1

Cost Management and Strategic Decision MakingEvaluating Opportunities and Leading ChangeANSWERS TO REVIEW QUESTIONS

1.1 Refer to the list of key terms at the end of Chapter 1 and the glossary.

1.2 The primary objective of cost management is to find opportunities forimprovements in costs and customer value and to lead changes to achieve thoseopportunities.

1.3 The value chain is a way to describe relations among an organi ation!soperations. The value chain describes how an organi ation assigns its resources

to these operations and how one operation affects other operations. "t isimportant for managers to understand the value chain because it can be the basisfor competitive advantages and is the starting point for making improvements inthe organi ation.

1.# $trategic decision making involves obtaining and using resources to meet anorgani ation%s goals by e&ploiting its competitive advantages. Competitiveadvantages may be from lower cost operations' higher customer value' and abilityto innovate. (&amples of strategic decisions include a) outsourcing supportservices to gain a cost advantage' b) adding product features that customers

value at low cost' and c) focusing resources on development or ac*uisition ofnew technology.

1.+ Cost management techni*ues include, Comparing performance over time and against competitors -enefit cost analysis of plans and decision alternatives /alue chain analysis of alternative resource arrangements and processes 0earning and educating others about the organi ation' its competitors' and

its environment easuring the e&pected efficiency of ac*uiring and using resources in

alternative operations "dentifying opportunities for improving the value and cost of new or

e&isting products and services 0eading organi ational change easuring actual outcomes of activities' products' and services

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eveloping measures and methods for motivating and evaluatingpersonnel

Communicating the results of cost management activities effectively (&plaining and interpreting differences between actual outcomes and

plans or e&pectations

1. Cross functional teams are composed of individuals who bring diverse technicaland personal attributes. Cross functional teams provide wide representation ofinterests and diversity of perspective. -ecause of this diversity' cross functionalteams may generate more creative solutions to problems and identify moreinnovative opportunities than individuals or less diverse teams.

1.4 -enefit cost analysis compares e&pected benefits and costs using both*uantitative and *ualitative information. 0ong term and short term impact onstrategic goals should be considered.

1.5 6utsourcing portions of an organi ation!s value chain means that payments aremade to others for products or services and other resources that had been usedto perform the outsourced operations have been freed up and may be saved orused for other operations. Contracts and other assurances 7market forces'reputation) also have replaced internal control of the outsourced operations.

1.8 (thical standards can guide individuals% behavior when circumstances or otherscreate pressures to make *uestionable decisions. 9n organi ation benefits fromethical standards by attracting and retaining individuals who share thosestandards and by providing a framework and climate for responsible decisionmaking. $ociety benefits from ethical standards that are followed because trustand ethical behavior is the least cost prescription for efficient business relations.

1.1: 9 code of ethics is a professional or organi ational statement of values andprescribed behavior. 9n unethical person could perform ade*uately within anorgani ation or profession by adhering to a code of ethics. ;owever' a person with a strong set of ethical standards probably does not need a code of ethics tocontrol his or her behavior. 9n ethical person can use a code of ethics to bolsterhis or her actions against those that might try to improperly influence behavior.

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1.11 The strategic missions of build' hold' harvest' and divest can represent differentstages of an organi ation%s lifecycle. The build mission is apparent when newideas and products capture the marketplace and growth is rapid 7but perhapsvariable and risky). The hold mission is appropriate when the firm%s ideas andproducts have become mainstream and the main task is to fend off imitators. Theharvest mission signals a time to control costs and manage cash flow' probablyto fund the ne&t generation of new ideas and products. The divest mission signalsthe end of the lifecycle' at least for current owners and managers' and it is time toli*uidate assets and fund new operations.

1.12 $trategic advantages derive from uni*ue capabilities' which are difficult to imitate'to create and deliver products. These uni*ue capabilities can be the results ofcreating new knowledge 7e.g.' through R< )' imitation of others 7e.g.' reverseengineering and lower cost production)' or by e&perimentation with new

processes' products' or joint ventures with other firms. aintaining competitiveadvantages is possible by staying ahead of competitors and by protectingproprietary knowledge and customer relations.

1.13 =uantitative information may be e&pressed in numerical *uantities' such asnumber of units' dollars of cost' and so on. =ualitative information describesattributes' such as color' perceived *uality' taste' and so on.

1.1# >otter!s eight elements of leading change are,1. "dentify a need for change

2. Create a team to lead and manage the change3. Create a vision of the change and a strategy for achieving the vision#. Communicate the vision and strategy for change and have the change

team be a role model+. (ncourage innovation and remove obstacles to change. (nsure that short term achievements are fre*uent and obvious4. ?se successes to create opportunities for improvement in the entire

organi ation5. Reinforce a culture of more improvement' better leadership' and more

effective management

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ANSWERS TO CRITICAL ANALYSIS

1.1+ $ome people believe that cost management is just a new label for what costaccountants have been doing for decades. "t is true that some cost accountantshave been proactive and have recogni ed how they can best add value to their

organi ations. ;owever' many cost accountants have been content to refinemeasurements of past costs and have not focused on other needs of theirorgani ations. Cost management goes well beyond traditional cost accountingand provides information that is useful for formulating' implementing' andmonitoring strategies and operations.

1.1 6ur increasingly competitive world means that our great ideas and plans of only a few years ago already may be obsolete. Thus' as rucker suggests' we shouldchallenge those ideas and plans regularly to see if they still meet current marketconditions. "f they do' then we have established an enduring competitive edge. 6n

the other hand' if they do not' we must seek to replace the outmoded ideas andplans with those that fit better with the world as it is' not as we wish it still wouldbe. Cost management analysts can use benefit cost analysis' value chain analysisand other techni*ues to measure advantages or disadvantages.

1.14 The other 8:@ of department store customers may have good reasons why theyshop elsewhere. "f so' this means that you are not meeting their needs. $toresthat meet or e&ceed customers! needs will attract more customers' eventuallycapturing a larger market share. "f the store is to remain competitive and grow' itshould find out what it could be doing to attract some of its non customers. 9n

ideal team to research this issue would include people from purchasing' sales'marketing' and accounting 7or finance). These individuals should be capable andallowed to challenge e&isting store policies and practices. $ales and marketingpersonnel should understand 7or learn) what the store and its competitors aredoing to attract and retain customers. The accounting 7or finance) person shouldseek to measure the costs and the benefits of attracting new customers. "t ispossible to Aover satisfyA customers by giving them so many incentives to shopthat the store actually loses money.

1.15 Bursuit ata might have a competitive advantage in new product development ifany or all of the e&pected benefits cannot be imitated by competitors. Can Bursuitdeliver uni*ue products more reliably than competitors to support e&pected salesgrowth Can Bursuit complete the product development more *uickly' with fewerdefects than competitors Can Bursuit control its development' production' andservice costs so that benefits of increased sales are not eliminated by highercosts (&hibit 1 + demonstrates that failing any of these activities can eliminatecompetitive advantages.

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1.18 The overriding concern is the tradeoff of the importance of ta& reporting to thegoals of the organi ation and the cost of providing this service. eciding whetherto outsource ta& services re*uires careful benefit cost analysis. The benefits ofoutsourcing must outweigh the costs. Dou should identify the types of costs andbenefits of either retaining or outsourcing ta& services. Eote that you couldalternatively classify costs of outsourcing as benefits of retaining' and vice versa.For consistency' you just need to keep the same perspective 7outsourcing orretaining) throughout the analysis. For e&ample' possible costs of outsourcinginclude costs of retraining or terminating current ta& employees. 9voiding thesecosts alternatively could be counted as benefits of retaining ta& servicesinternally. Bossible benefits of outsourcing could be lower out of pocket costsand access to better ta& e&pertise. To the e&tent possible' you should *uantifythese costs and benefits. Comparing *uantified costs and benefits is part of theanalysis' but a complete analysis also compares *ualitative costs and benefits. "f'for e&ample' ta& reporting involves sensitive information about the company%s

sources of competitive advantage' the company may decide to keep the serviceinside. ;owever' if the information is not critically important and the cost ofmaintaining the ta& reporting capability is high' the company may consideroutsourcing ta& reporting to an organi ation that speciali es in ta& work G as longas the *uality of the service can be assured. Hhether the *ualitative informationoutweigh the *uantified information is a judgment that you may have to make.

Bersons interested in ta& careers probably should anticipate that mostoutsourced ta& work will be done by professional accounting or law firms. Hhileboth types of firms employ paraprofessionals' most career opportunities areavailable to persons with law degrees andIor who have earned a CB9. "f

outsourcing of ta& services grows' there will be fewer career opportunities fornon degree or uncertified ta& preparers.

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1.2: 9n absurd outcome of the directive to minimi e costs might be that nodepartment does any work and avoids ac*uiring or using any resources. That'however' ignores the opportunity costs of lost outputs. $ince opportunity costsalmost never show up on accounting reports' it is easy for managers to ignore orbe unaware of them. 9 less e&treme but possibly damaging outcome could be foreach department to minimi e the costs of its assigned work' but ignore itsimpacts on other departments. "f all the processes of an organi ation arebalanced 7that is' all can produce just the right amounts of output when needed)'then minimi ing the cost of each process will minimi e overall costs. ostorgani ations are not perfectly balanced' however' and minimi ing the costs ofeach process may impair the ability of another process to meet its objectives.Thus' one process may produce too much output' leading to waste. 9notherprocess may produce too little output' leading to missed opportunities for otherprocesses that depend on the former process output. ?ne&pected or changed

demands from internal and e&ternal customers may re*uire changes in schedulesand outputs in many parts of the company. To not meet those changes couldresult in significant opportunity costs for the company as a whole. Thus'encouraging managers to focus only on their process7es) may be a myopicmanagement policy. Companies also need to encourage cooperation amongdepartments.

1.21 This was an unfortunate outcome for Jeneral otors% employees' stockholders'and customers. The hoped for cost savings from automating some manufacturingprocesses did not materiali e because the company apparently automated an

infle&ible' inefficient process. Thus' the company replaced humans with moree&pensive robots but did not take advantage of the fle&ibility that automatedmanufacturing offers. Though J could make cars more *uickly' there wasinsufficient demand for the kinds of cars J was prepared to make to justify theincrease in capacity and cost. 9s a result' J %s total costs increased' but salesdid not increase sufficiently to cover the increased costs. To learn how to benefitfrom automated manufacturing' Jeneral otors later formed a joint venture withToyota and then started the separate $aturn ivision.

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1.22 "nternet shopping may be a serious threat to traditional shopping malls anddepartment stores because of improved "nternet security' convenience' andaccess to the widest possible range of products. "n many developed economies'the majority of adults work outside of the home and 7a) do not need a break fromhousehold routines and 7b) do not have the time to shop leisurely at the mall. Thischange in shopping patterns has serious implications for traditional' physicalstores. For e&ample' 9ma on.com has established a strong' virtual presence inthe book and music markets. -arnes < Eoble' which had based its retail strategyon large physical stores with large' on site inventories' also has established astrong "nternet outlet to compete with Amazon.com . Kust as it is no longernecessary for some banks to have a physical presence 7e.g.' -E9 "nternational'"nc.)' some department stores may find it unnecessary to have a costly retailbuilding and staff. Careful consideration of the costs and benefits of alternativeretail outlets may indicate that a virtual' on line catalog is cheaper and reaches

more customers than shopping mall outlets 7e.g.' ell Computing' www.dell.com#.$ince many customers may want to touch or feel the merchandise before buying'some combination of physical and virtual stores may be optimal. "t seems safe topredict continuing and growing developments in electronic commerce.

1.23 Continually putting out daily fires is not conducive to strategic planning. This canbe a sign of understaffing or a failure of the C(6 to delegate tasks to others.$ometimes managers of small companies 7large ones' too) micromanage allaspects of the business either because no one is available or competent toperform them or because the C(6 is unwilling to share power and decision

making with others. The cost of micromanaging can be an elimination of strategicplanning' which guides the organi ation through the future. Dou might suggestthat the C(6 delegate many of the routine tasks he or she performs to acompetent assistant. "f none e&ists' then the C(6 needs to train or hire someone.Then the C(6 needs to block out time for strategic planning' either alone or with a small group of key employees. The C(6 also might consider hiring a consultantto facilitate the planning effort' but cost might be a concern.

1.2# any routine' number crunching accounting tasks have been automated.9lthough understanding how the numbers are LcrunchedM is important 7and we will crunch numbers in this te&t)' it is important to understand why certain factsand figures are measured and reported and whether they are the right informationto support important decisions. "f one learns only how to crunch numbers and not why' one is limited in how much one can help an organi ation improve.

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SOLUTIONS TO EXERCISES

1.2+ 71+ min) Cost management techni*ues

atches of cost management techni*ues and management decisions are,

Cost management techni*ue anagement decision

a. 0earning about how operations work NNgN The design of incentive bonuses of upto 12@ of salary by (lectricityCorporation 7(CEO) for middlemanagers based on meeting difficultprofit goals

b. 6rgani ing resources into efficientactivities and operations

NNfN The use of seminars called LHhat if "owned the business M by TelevisionCorporation 7T/EO) to introduce staffto issues of competition

c. easuring actual and e&pected costsof activities' products' and services

NNbN (CEO%s decision to restructure intofour major operating divisions,Broduction' arketing' BowerTransmission' and Construction

d. "dentifying profitable products'

services' customers' and distribution

NNaN The decision by Coal Corporation

7CoalCorp) to evaluate every jobcurrently performed by employees todetermine which jobs were essentialto the goal of profitability

e. "dentifying opportunities forimprovements in the value ofproducts and services

NNcN T/EO%s new focus on estimating thecosts of television programming andproduction

f. Communicating effectively NNdN The decision by Bublic HorksCorporation%s 7H6R>$) to sell its

poorly performing Broperty andComputing $ervices divisions

g. otivating and evaluating personnel NNe N T/EO%s analysis of T/3%s programmingand advertising practices' its newcommercial rival

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1.2 71+ min) Teamwork

atches of types of teams and operations or decisions are,

Type of team 6peration or decision

a. "ndividual 7no team) NNdN Hord processing center of a largeuniversity where most of the work ispreparation of e&ams' copyingarticles' and preparation ofpromotional materials

b. $mall' Ldoubles tennisM team wheremembers have special skills thatcomplement each other% strengthsand weaknesses

NNbN evelopment of a new businesscurriculum to meet specificeducational needs

c. 0arge' LsoccerM team where all teammembers have assignments but workclosely together

NNbN esign of advertising campaign tocounter a rival%s new productannouncement

d. 0arge' LswimmingM team where teammembers have individualresponsibilities' often do not interact'but share in team outcomes

NNbN evelopment of a new video game forBlay $tation

NNb or cN Hriting a new' cost managementte&tbook

Nb or cN Completion of a comple& project with a short' rigid deadline

NNaN Completion of an application tograduate school

NNcN Competition in a collegiate' intramuralvolleyball league

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1.24 72: min) $trategic decision making

There are many solutions to this e&ercise' but here is one possibility,

$trategic ission Types of ecisions "nformation Eeeded

1. -uild Compete on *uality or priceFull or limited range of products

Customers% needs ande&pectations for price' *uality'and products

Competitors% strategy

2. ;old Capacity 0ocation7s) Costs and benefits of alternativecapacities' beverages offered

3. ;arvest Replace or keep old e*uipment

Eumber and types of employees

Cash and or credit card sales

Replacement and operating costs

$ales per employee

Competitors% sales practices#. ivest Timing

6ther opportunities

Hilling buyers' highest sales price

Timing' investment costs

1.25 72: min) "nternal controls

a. The separation of dutiesPsandwich making versus sale recordingIcash receivingPprovides an internal control. Hithout this control' the sandwich maker could

sell sandwiches at a discount to friends or give them away or pocket some of thecash from the sale. 9s it stands' overriding this control would re*uire collusionon the part of both people involved in the transaction.

b. Companies use a variety of control methods. Hhether these are better is*uestionable. $ome methods include a camera that records all production andsale activities' a pseudo customer who is actually a spy for management toobserve what goes on 7this approach is used in bars' for e&ample)' and makingsure that the number of sandwiches sold based on a count of the bread used iscommensurate with the cash receipts and record of sales.

c. 9s noted in a' the two employees could collude 7i.e.' work together to override thecontrol).

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1.28 73: min Q document search) $trategic decisionsThere are many ways to analy e these two companies' one way is to contrast CocaCola%s and Bepsico%s value chains 7taken from Forms 1: > from the $(C%s ( J9Rdatabase).

/alue chain element Coca Cola BepsicoR< Eumerous patents' copyrights'trade secrets' proprietarytechnology' and trademarks

(mphasis on trademarks' ownsor licenses patents

esign 9ll in house 7 )Focus on beverages

$ome outsourced 7i.e.' licensedfrom others)Focus on beverages and snackfoods 7Frito 0ay)

$upply ?ses materials specialists tosecure commodities on open

market. 9lso long term supplyrelationships with -ra ilianproducer of orange juiceconcentrate

?ses materials specialists tosecure commodities on open

market

Broduction Broduce and sell beverageconcentrates' syrups andfinished beverages

Broduce and sell finishedbeverages and beverageconcentratesanufactures snack foods inown plants

arketing Compete on pricing' advertising

and sales promotion programs'product innovation' increasedefficiency in productiontechni*ues' the introduction ofnew packaging' new vending anddispensing e*uipment and brandand trademark development andprotection.

Compete on price' *uality'

variety' customer service

istribution Finished beverages'concentrates and syrups sold toauthori ed distributors andIorbottlers$elected investments and longterm relations with strongbottlers G strategic alliances onevery continent

Finished beverages'concentrates and syrups sold toauthori ed distributors andIorbottlers

Frito 0ay delivers directly fromfactories to store shelves

Customer service Eot disclosed Eot disclosed

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1.3: 72: min) -enefit cost analysis

This analysis contains both *uantitative and *ualitative information. -oth are importantto choosing among the alternatives.

a. 9lternatives for $upply ofisk rive Components

Cost per year7?$

thousands) 6ther costs and benefits

Continue current supply andassembly operations Gdetect and replace faultycomponents.

2'331

Costs, Foregone cost savingsS missedopportunities to use resourceselsewhereS missed opportunities toimprove processesS resources

wasted on defective products -enefits, 9void costs of changes

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