Cost Management and Its Interplay with Business Strategy and Context

Alf Oldman, Cyril Tomkins

• Publisher: Routledge
• Year: 2018
• Topic: Social Sciences
• eBook ISBN:
  9780429873157
• Subtopic: Sociology
• Index: Social Sciences

First published in 1999. This text aims to consider how the financial controller/management accountant decides to design a cost management system given the range of approaches to cost managment advocated in recent years. The book reports on research which tested the relationship between cost management systems adopted and the strategic orientation of the company, through five detailed case studies of well-known and named companies. The case studies trace the developments in each company through time.

PART I
SETTING UP THE STUDY

1 The Research Objectives and Design

Cost management is often assumed to be synonymous with cost reduction in the West. As a consequence, both terms are often associated with headcount reduction¹ and the very words frequently instil fear. To illustrate this point the following are some newspaper headlines on the subject of ‘cost reduction’ :²

Resolve now to better your bottom line – Prune those lean and fit costs to stay during 1995;³

Pan-European cost cutting drive destroys 850 jobs at APV;⁴

Rolls-Royce axes 600 jobs;⁵

International Company News: Woolworth jobs go in cost-cutting drive;⁶

Wm Baird cuts 600 jobs to reduce costs as demand weakens;⁷

Banks to axe 100,000 jobs.⁸

There are different views about how to reduce costs. For example, Shields and Young review the following five approaches to cost reduction:⁹

1. the technology approach (replace labour with machines);

2. ‘lean and mean’ (layoff and rehire with economic cycle);

3. offshore retreat (moving jobs overseas demotivating for remaining domestic employees);

4. mergers (layoffs and wage reductions demotivate);

5. diversification (expanding outside core competencies leads to cost of complexity).

However, such types of cost reduction programme are often considered to be ineffective in a strategic sense; in no small part because they focus upon short-term issues. An alternative perspective has emerged from Japan where cost reduction is seen positively by employees and is a critical part of the process of innovation.¹⁰ The Japanese approach views cost reduction from the perspective of the market.¹¹ It recognises the potential need to invest in areas like research and development. By investing in such areas it may be possible to reduce costs whilst retaining and even improving quality and, as a consequence, stabilising employment, rather than downsizing.

Our initial research interest was a broad one, namely to study the domain of strategic management accounting¹² and its relationship to management control.¹³ We were aware, however, of the different historical emphasis between Japanese and Western practices as alluded to above and wondered about the possible convergence of Japanese and Western best practice.¹⁴ In leading Japanese businesses, product functionality and quality are taken as given and it is cost reduction that drives strategy implementation.¹⁵ The Japanese literature¹⁶ differentiates between market-driven cost reduction prevalent in Japan and process-driven cost reduction¹⁷ which is more typical in the West. The market-driven approach takes external factors and uses these to drive internal behaviour.¹⁸ The process-driven approach is much more internally focused and generated. The Japanese cost reduction literature focuses upon Target Costing and Kaizen Costing as their best practice, whereas the Western literature abounds with BPR,¹⁹ downsizing,²⁰ and variants of Activity-based Costing (see the table of definitions in the appendix to this book for explanation of these concepts).

We were particularly perplexed as to how a practising financial controller could make sense of this growing variety of approaches to decide how to design a complete cost management system which supports the company’s strategy in its own context. Tomkins and Carr (1966)²¹ had set out in diagrammatic form a conceptual framework for linking the use of various management accounting techniques in a cross-functional manner, but we were unaware of any empirical research that had tried to address this issue directly. The question was how to frame a research project which addressed these issues, but, as we set about it, we were mindful that previous research in the area of the determinants of cost management systems has been largely inconclusive because traditional natural science methods have not sufficiently addressed the issue of context.²² We also wanted to provide some research which helped the practitioner with issues involved in implementing cost management systems. These factors meant that we probably needed to examine cost management practices in action and this, in any case, accorded with our own predisposition and interests in undertaking a style of research on this topic which involved detailed case study work. Bearing this in mind, we set out some tentative ideas on the possible main determinants of strategic management approaches and tools needed to support them, particularly accounting tools, in order to give some structure to our research. These broad ideas simply said that we would expect the conditions in which companies found themselves to determine their approaches to developing a business strategy and that, in turn, these strategic approaches would determine the accounting tools required where the latter would include: Target Costing;^{23, 24} Kaizen Costing;²⁵ Shareholder Value Analysis;²⁶ Activity-based Costing;²⁷ and Theory of Constraints²⁸ (see the table of definitions in the appendix to this book for explanation of these concepts). Having formulated these basic ideas, we then reviewed relevant literature to provide insights as to how we could provide a more clear-cut and testable basis to our work.

The Relevance of a Market-driven Orientation

Hiromoto (1991)²⁹ is an excellent introduction to the alternative approach to management accounting emanating from Japan. Hiromoto used case studies of Japanese companies to demonstrate innovative management accounting systems which were designed to support continuous innovation. Continuous innovation is a new common theme of management system design. Continuous innovation was described as:

… close to ‘Kaizen’ as described by Imai (1986). Both are incremental or evolutionary processes, not revolutionary. And both are customer oriented. However, the Japanese term ‘Kaizen’ implies the focus on the factory activities. Continuous innovation is applied to all corporate activities.

Hiromoto argued that there has been an overemphasis on ‘information for decision making’. He favoured stressing the behavioural focus and refers to considerable Western literature to support this theme.³⁰ He also argued that there has been overemphasis on ‘constrained optimisation’. Scientific management, or Taylorism,³¹ focused upon stable state situations where the norm was ‘taking constraints as given’. The reality of modern business is of ‘moving constraints’. He believes that static optimisation is often irrelevant. Hiromoto introduced the following four elements collectively representing the new theme of management accounting:

1. a behaviour-influencing focus (linking organisational strategies to action);

2. market-driven management;

3. a dynamic approach; and

4. a team oriented approach.

Hiromoto believes management accountants need to change their focus in designing their systems from an information-for-decisions approach to a behaviour-influencing approach. The information-for-decisions approach is based upon the concept of recommending optimal decisions and final choice resting with the operating manager. By comparison, the primary concern of the behaviour-influencing approach is to design a system to influence employees to do the desired things.³² Hiromoto also stated that many Japanese manufacturers adopt the practice of market-driven management, as opposed to technology driven management. He explained:

It is a way of management thinking that gives priority to market or customer requirements over technological limitations.

Hiromoto described market-driven cost management systems as:

Management accounting for motivating market-driven behaviour that is most typically conducted at Japanese companies is based upon Target Costing at the pre-production (or development and design) and production stages. Target cost systems at the development and design stage are often called genka kikaku. Under the target cost system, activities are controlled by using a target or market-based allowable cost that has to be realised if the company is to be profitable in the competitive market, and comparing it with actual or actually expected cost.

Schematically, Hiromoto compared the market-driven system to the technology-driven system using the diagram in Figure 1.1.³³ Under this schema, market-driven systems start with the customers’ needs and work back to determine the technology to meet those needs at a cost which the customers will bear. In contrast, a technology-driven system commences with existing and currently developing technology and looks for its possible commercial use, given its current cost. In the latter, design comes before any major effort at cost reduction. In the former, cost reduction is built into the earliest possible stage of design when it is still possible to make major modifications and affect costs before there is commitment to them.

Hiromoto also argued in favour of management accounting systems being dynamic, in which performance has to be judged over time without emphasising individual time periods. Finally, he stressed that the effective management accountant in Japan’s leading companies needs to be a team player and take a team oriented approach to support improvement programs. He argued that the Controller in many of the large Japanese companies assumed the responsibility for promoting Total Quality initiatives in small improvement groups.

Figure 1.1Market-driven vs. technology-driven cost management systems

Source: Hiromoto (1991).

Using Hiromoto as a general guideline for much that has been written on Japanese approaches, it seemed clear that we would need to adopt a strong or weak market orientation³⁴ as one dimension by which to try to explain company practices in strategic change and the tools used to achieve that.

There is a rich stream of supporting literature on the concept of market-d...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Preface
• Executive Summary
• Part I: Setting Up the Study
• Part II: The Five Case Studies
• Part III: The Findings
• Appendices
• Bibliography