CHAPTER

19

EMERGING MANAGEMENT PRACTICES

Learning Objectives After reading and studying Chapter 19, you should be able to answer the following questions: 1. ". $. '. ). +. -. How do business process reengineering initiatives cause radical changes in the way firms e ecute processes! How are competitive forces driving decisions to downsi#e and restructure operations! %n what ways, and why, are operations of many firms becoming more diverse! How does the increasing diversity affect the roles of the firms& accounting systems! (hy are firms adopting enterprise resource planning systems, and how are such systems used! (hat are strategic alliances, what forms do they ta*e, and why do firms participate in them! (hat are the characteristics of open,boo* management, and why does its adoption require changes in accounting methods and practices! (hat are the three generic approaches that firms can ta*e in controlling environmental costs!

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Terminology !siness process reengineering " P#$: a method of e amining processes to identify and then eliminate, reduce, or replace functions and processes that add little customer value to products or services %ata mining: a form of analysis in which statistical techniques are used to uncover answers to important questions about business operations %o&nsi'ing: any management action that reduces employment upon restructuring operations in response to competitive pressures Enterprise reso!rce planning "E#P$ system: a pac*aged software program that allows companies to 314 have a single, comprehensive, enterprise,wide database5 3"4 ma*e quic*er decisions based on real,time information and facts5 3$4 improve decision ma*ing quality5 3'4 reconcile and optimi#e conflicting organi#ational goals5 3)4 standardi#e business processes5 3+4 improve procedures that protect assets and prevent falsification of accounting records5 and 3-4 enhance the audit planning and e ecution process Open(boo) management: a philosophy about increasing a firm&s performance by involving all wor*ers and by ensuring that they have access to the operational and financial information necessary to achieve performance improvements Organi'ational memory: the aggregation of data, facts, e periences, and lessons learned that is important to an organi#ation&s e istence #eality mining: the collection and analysis of technology,based data as it relates to social behavior *trategic alliance: an agreement between two or more firms with complementary core competencies to contribute 6ointly to the supply chain

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Lect!re O!tline LO,1: -o& .o b!siness process reengineering initiatives ca!se ra.ical changes in the &ay /irms e0ec!te processes1 A. %ntroduction 1. 7irms are presently decentrali#ing information, authority, and responsibility to ma*e decisions. ". 8nfortunately, not all employees are adequately trained to understand financial information so innovative approaches to developing information s*ills are needed. $. 9his chapter discusses innovation in management practices and the impact of innovation on accounting. a. 9he :age of change; is an apt description for the current environment. b. Although, some changes have been driven by the fast pace of evolution in management practices and techniques, many changes have been driven by the even faster evolution of technology. c. 9hese evolving management methods unite around a theme of focusing organi#ational resources on customers and ma imi#ing the value the firm delivers to its customers.

<. 9he Changing (or*place 1. 9he forces of global competition and technological advancements have caused profound changes in business organi#ations. ". 9o survive, managers must develop ways to achieve the competitive changes needed in their organi#ations. Change can be achieved immediately or gradually. $. =ome overriding principles that managers should follow when implementing changes are presented in te t E0hibit 1921. '. <usiness process reengineering is one tool with which to achieve large, quic* gains in effectiveness or efficiency through redesigning the e ecution of specific business functions. C. <usiness >rocess 1eengineering 1. !siness process reengineering " P#$ is a method of e amining processes to identify, and then eliminate, reduce, or replace functions and processes that add little customer value to products or services. a. 9he focus of <>1 is on discrete initiatives to improve specific processes. i. ? amples of processes include handling or storing purchased materials and components, issuing chec*s to pay labor and other production e penses, wrapping finished products for shipment to customers, recording 6ournal entries, and developing an organi#ational strategic plan.

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b. <>1 is designed to bring radical changes to an organi#ation&s operations and is often associated with employee layoffs, outsourcing initiatives, and technology acquisition. ". 9hree ma6or business trends are promoting the increased use of <>1 in the "1 st century: a. the advancement of technology5 b. the pursuit of increased quality5 and c. the increase in price competition caused by globali#ation.

$. 9o successfully compete on the basis of price, firms must identify ways to become more efficient and reduce costs. '. <ecause <>1 is a methodical way to revolutioni#e business practices, formal steps can be defined5 however, creativity is an important element of the methodology. ). 9e t E0hibit 19(2 provides the steps for implementing <>1. +. Accountants are important participants in the <>1 process because they can provide baseline performance measurements, help determine <>1 ob6ectives, and measure the achieved performance of the redesigned process. -. 9he following *eys to a successful <>1 implementation highlight the importance of involving customers, suppliers, and top,level managers in the process: a. =et :stretch; goals for the reengineered process, e pressing them in the most appropriate performance measure, such as financial, time, or defective production5 b. 2a*e certain that the reengineering efforts have a :champion; and are supported by top management5 c. 9o the e tent possible, involve in the reengineering pro6ect all constituents of the value chain, especially customers and suppliers5

d. Assign both the authority and responsibility for the pro6ect to a single person5 and e. 8se a pilot pro6ect to identify problems that might arise during full implementation. @. %nvolvement of customers ensures that their perspective drives the process redesign and the involvement of top management signals the pro6ect&s importance to organi#ational success. 9. 9he focus of <>1 is on improvement of organi#ational operations and so whether the issue is quality, cost, or customer value, <>1 can help effect organi#ational improvements and change. 1/. <>1&s radical change is often implemented via downsi#ing and restructuring, which can have a profound impact on employees.

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LO,2: -o& are competitive /orces .riving .ecisions to .o&nsi'e an. restr!ct!re operations1 A. Aownsi#ing, 0ayoffs, and 1estructuring 1. Blobal competition and survival requires firms to improve product quality continually while maintaining competitive prices. ". 2any methods discussed in the chapter, including the use of automated technology to replace manual labor or equipment run by humans, have proven useful in improving process efficiency and effectiveness as well as product quality. $. Cne impact of such improvements is the creation of e cess personnel as fewer and fewer wor*ers are required to achieve a given level of output. 3, %o&nsi'ing is any management action that reduces employment upon restructuring operations in response to competitive pressures. ). 7irms can find that layoffs have depleted their in,house talent pool. a. 9he collective wor*force *nowledge or organi#ational memory may have been reduced to the point that the ability to solve problems creatively and generate innovative ideas for growth has been greatly diminished. i. Organi'ational memory refers to the aggregation of data, facts, e periences, and lessons learned that are important to an organi#ation&s e istence.

b. After downsi#ing, many firms have found positions that once served as feeder pools for future top management talent have been eliminated. +. =uccessive rounds of layoffs diminish wor*er morale, cause wor*er trust in managers to wane, and lead to decreases in communication between wor*ers and managers. a. (or*ers often fear that sharing information could provide insights to management about how to further increase productivity which in turn would result in the elimination of even more of the wor*force. -. Aownsi#ing can destroy a corporate culture that embraced lifetime employment as a *ey factor in attracting new employees or that was perceived as nurturing by employees. @. Aownsi#ing is an accounting issue because of its implications for financial reporting and its role in cost management. 9he financial consequences of downsi#ing can be significant. a. (hen restructuring and downsi#ing occur in the same year, the firm often reports, in that year, large one,time losses caused by sales of unprofitable assets and severance costs connected with employee layoffs. 9. <efore recommending downsi#ing to improve organi#ational efficiency, accountants should e amine the li*ely impacts on customer service, employee morale and loyalty, and future growth opportunities. 1/. 9e t E0hibit 19(+ demonstrates that strategic decisions affect the manner in which inputs, such as labor, technology, purchased material, and services are converted into outputs for customers.

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11. 7inancial analysis of the downsi#ing decision is comple as it relies on comparing cost savings from reduced labor costs reali#ed in the future to the current outlay for restructuring and acquiring additional technology. LO,+: In &hat &ays6 an. &hy6 are operations o/ many /irms becoming more .iverse1 -o& .oes the increasing .iversity a//ect the roles o/ the /irms7 acco!nting systems1 ?. (or*force Aiversity 1. (ith globali#ation of manufacturing and other operations, companies find that their employees have very divergent religions, races, values, wor* habits, cultures, political ideologies, and education levels. ". Corporate policies and information systems must adapt to the changing wor*force and greater diversity of operations, which often results in the accounting function having a larger role in managing operations. $. Accounting concepts, tools, and measurements can be the medium through which people of diverse languages and cultures communicate. a. Accounting provides an ideal international technical language because it is a basic application of another universal languageDmathematics. '. (ithin the 8nited =tates, there is a trend toward increasing wor*place diversity driven partly by legal requirements and business initiatives to increase opportunities for minorities. ). 9e t E0hibit 19(3 presents the results of a survey see*ing to identify why self,interested firms see* a diverse group of employees.

LO,3: 8hy are /irms a.opting enterprise reso!rce planning systems6 an. ho& are s!ch systems !se.1 7. ?nterprise 1esource >lanning =ystems 3?1>4 1. 7irms commonly use networ*ed personal computers and minicomputers to handle the information management requirements of specific business functions such as finance, mar*eting, and manufacturing. a. 9he increased use of personal computers and local,area networ*s has resulted in the decentrali#ation of information. b. As data management and storage have become more decentrali#ed, firms have often lost the ability to integrate information across functions and to access quic*ly information that spans multiple functions. c. 9e t E0hibit 19(4 shows how internal processes and functions are distributed across the supply chain and the types of information that may reside in isolated databases.

". Enterprise reso!rce planning "E#P$ systems are pac*aged software programs that allow companies to 314 have a single, comprehensive, enterprise,wide database5 3"4 ma*e quic*er decisions based on real,time information and facts5 3$4 improve decision ma*ing quality5 3'4 ."/11 Cengage 0earning. All 1ights 1eserved. 2ay not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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reconcile and optimi#e conflicting organi#ational goals5 3)4 standardi#e business processes5 3+4 improve procedures that protect assets and prevent falsification of accounting records5 and 3-4 enhance the audit planning and e ecution process. $. %mplementing an ?1> system should help a company provide its customers the highest,quality products and best possible service. '. 9e t E0hibit 19(5 illustrates an integrated centrali#ed information system. %n theory, the ?1> system should lin* the customer end of the supply chain with all functional areas responsible for the production and delivery of a product or service. ). 9he benefits of an ?1> pac*age to a business are in reduced overheads, improved customer service and better quality, and more timely management information. 1educed overheads should be achieved through the elimination of duplication of effort in duplicate *eying and reconciliation of independent systems. +. ?1>&s *ey concept is a central repository for all organi#ational data so that they are accessible in real time by and in an appropriate format for a decision ma*er. a. 9e t E0hibit 19(9 provides a list of typical modules included in an ?1> system. b. 9e t E0hibit 19(: presents a survey of reasons for adopting ?1> and perceived benefits from adoption. -. %nstallation of an ?1> system impacts the finance function in three significant ways: a. 7irst, financial and system specialists become responsible for selecting and installing the software5 b. =econd, financial specialists will be responsible for analy#ing the data repository to support management decisions5 i. Aata analysis often involves :drilling down; from aggregate data 3such as total sales4 to detailed data 3such as sales by store4 to identify mar*et opportunities and to better manage costs5 Analysis may also involve .ata mining, which uses statistical techniques to uncover answers to important questions about business operations. Aata mining can uncover quality problems, study customer retention, determine which promotions generate the greatest sales impact, and identify cost drivers. 9he modern evolution of data mining is reality mining. #eality mining is the collection and analysis of technology,based data as it relates to social behavior 3e.g., trac*ing a user&s internet browsing activities4.

ii.

c.

9hird, ?1> installation places a burden on financial specialists to maintain the integrity of the data depository. i. 7ulfilling this obligation requires accountants to monitor the ?1> modules and to be confident that the system successfully converts raw data into the standardi#ed format required for the main depository.

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ii.

7inancial specialists are also accountable for integrating e ternally purchased data 3such as industry sales data4 with internally generated data.

d. As ?1> systems become increasingly integrated into %nternet,based technology, customers will have ease of access to a worldwide mar*etplace. @. %n turn, customer,driven competition will cause firms to see* continually innovative ways to attract potential customers, such as through strategic efforts that combine the talents and capabilities of two or more firms.

LO,4: 8hat are strategic alliances6 &hat /orms .o they ta)e6 an. &hy .o /irms participate in them1 B. =trategic Alliances 1. (hile the traditional supply chain structure has no fu##y boundaries that create an inability to determine where one firm ends its contribution to the supply chain and another begins its contribution, in some cases companies have incentives to develop interorgani#ational agreements that go beyond normal supplierEcustomer arrangements. ". A strategic alliance is an agreement, involving two or more firms with complementary core competencies, to contribute 6ointly to the supply chain. $. =trategic alliances can ta*e many forms including 6oint ventures, equity investment, licensing, 6oint 1FA arrangements, technology swaps, and e clusive and buyerEseller agreements. a. A strategic alliance differs from the usual interactions among independent firms in that there is a 6oint output and the rewards of the 6oint effort are split among the allied firms. b. %n a typical strategic alliance, a new entity is created. c. <eyond simply contributing cash, many new ventures require inputs of human capital, technology, access to distribution channels, patents, and supply contracts.

'. An overriding concern in designing a strategic alliance is aligning the interests of the parent organi#ations with the new entity. ). ?stablishing strategic alliances involves a series of comple decisions that are based on inputs from many specialists. +. 9he process of managing an alliance requires the use of virtually every tool and concept discussed in the te t, including cost management systems, product costing systems, relevant costing, cost allocation, inventory management, decision ma*ing, and performance evaluation.

LO,5: 8hat are the characteristics o/ open(boo) management6 an. &hy .oes its a.option re;!ire changes in acco!nting metho.s an. practices1 H. Cpen,<oo* 2anagement 1. Beneral

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a. Open(boo) management is a philosophy about increasing a firm&s performance by involving all wor*ers and by ensuring that all wor*ers have access to the operational and financial information necessary to achieve performance improvements. b. 7irms practicing open,boo* management typically disclose detailed financial information to all employees, train them to interpret and use the information, empower them to ma*e decisions, and tie a portion of their pay to the company&s bottom line. i. ii. c. =ee te t E0hibit 19(9 for ten common principles of open,boo* management. Application of this philosophy is appropriate in decentrali#ed organi#ations that have empowered employees to ma*e decisions.

2erely opening the financial records to a firm&s employees will not necessarily solve any problems or improve performance5 the *ey to understanding the records is training.

d. %f financial information is to be the basis of employee decision ma*ing, the information must be structured with the level of sophistication of the decision ma*er in mind. ". 8sing Bames to 9each Cpen,<oo* 2anagement a. Bames can be used to teach financially unsophisticated employees how to understand and use accounting and financial information. b. Bames ma*e learning both fun and competitive and can motivate employees to understand comple financial practices as illustrated by the game described in this section of the te t. i. c. Aata for the game is provided in te t E0hibit 1921<.

9o e ploit the financial information they are given, wor*ers should be trained in ways to improve profits. i. ii. 9he :game; of trying to increase profits serves as motivation for wor*ers to learn about cost and operational management methods. 1elating training to the game allows wor*ers to see the relevance of training so that they will see* training to help them understand financial information and to identify approaches that can be used to improve results.

$. 2otivating ?mployees a. 9he obvious way to motivate wor*ers to use the game information to improve profits is to lin* their compensation to profits. i. Cpen,boo* management wor*s only if it is accompanied by adequate incentives.

b. =ome companies offer performance,based bonuses to motivate employees, some offer employee stoc* ownership plans 3?=C>s4, and some offer both. c. >ay and performance lin*s can also be based on non,financial measures such as on,time delivery rates, defect rates, output per labor hour, and other measures to ma*e wor*ers aware of how their inputs and outputs affect other departments and financial outcomes.

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i.

All critical dimensions of performance including cost, quality, and investment management can be captured in performance measurements.

d. As soon as wor*ers have become accustomed to receiving financial and other information to manage their departments, more elaborate information systems can be developed as the sophistication of the information consumers 3wor*ers4 evolves. '. %mplementation Challenges a. Cpen,boo* management can be difficult to implement. i. Characteristics of firms that are best suited to a successful implementation include small si#e, decentrali#ed management, a history of employee empowerment, and the presence of trust between employees and managers.

b. Cne significant obstacle to overcome in most organi#ations is a history of carefully guarding financial information. i. ?ven in publicly owned organi#ations that are required to release financial information, top managers have historically limited access of employees to financial data that the top managers regard as sensitive. Accountants have historically viewed themselves as the custodians of this sensitive information rather than the conveyors. 9o successfully implement open,boo* management, accountants must develop an attitude about information sharing that is as fervent as traditional attitudes of guarding information.

c.

Accountants must develop ways to convey accounting information so that unsophisticated users will understand it. 7urthermore, by teaching users to have a better understanding of financial data, accountants help facilitate better organi#ational decision ma*ing.

d. 9he information system must be designed to be sensitive to the user&s financial sophistication. e. =imilarly, performance measures that employees can understand must be devised. i. ii. f. 9he measures must capture the actual performance relative to the ob6ectives of organi#ational segments and the organi#ation as a whole. 9he primary principle of measurement is to measure what is important.

7inally, because principles of open,boo* management include involving all employees and evaluating and rewarding their performance, measures that can be integrated across segments and functional areas must be devised.

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LO,9: 8hat are the three generic approaches that /irms can ta)e in controlling environmental costs1 %. ?nvironmental 2anagement =ystems 1. 9he impact of organi#ations on the environment is of increasing concern to governments, citi#ens, investors, and managers. a. Accountants are increasingly concerned with both measuring business performance with regard to environmental issues and to management of environmental costs. b. %n the future, investors are li*ely to evaluate a company&s environmental trac* record along with its financial record when ma*ing investment decisions. ". 2anagement of environmental costs requires the consideration of environmental issues in every aspect of operations. a. 7or e ample, there are environmental effects related to the amount of scrap and by,product produced in manufacturing operations, materials selected for product components, actions of suppliers that produce necessary inputs, and habits of customers in consuming and disposing of products and pac*aging. b. %n short, environmental issues span the entire value chain. $. 9here are three generic strategies for dealing with environmental effects of operations, each with its own unique financial implications. a. 7irst, end,of,pipe strategies may be employed wherein managers produce the waste or pollutant and then find a way to clean it up. i. Common tools used in this approach are wastewater cleaning systems and smo*estac* scrubbers.

b. A second strategy involves process improvements. i. c. >rocess improvements involve changes to recycle wastes internally, reduce the production of wastes, or adopt production processes that generate no waste.

A third strategy is pollution prevention. i. 9his approach involves complete avoidance of pollution by not producing any pollutants.

'. Although minimi#ing the impact of operations on the environment may be a reasonable goal, it must be remembered that some impact on the environment is unavoidable. 7or e ample, energy must be consumed to manufacture products. ). Cther managerial concerns related to environmental costs include managing quality, research and development, and technology acquisition. a. Although the relationship between quality costs and environmental costs is not fully understood, many e amples can be cited suggesting that quality and environmental costs are highly related.

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b. 1esearch and development identifies new products and new production processes, and develops new materials. c. Gew product design influences the 314 types and quantities of materials produced, 3"4 types and quantities of waste, scrap, and by,products produced, 3$4 amount of energy consumed in the production process, and 3'4 potential for gathering and recycling products when they reach obsolescence.

d. 9echnology acquisition also has many environmental impacts. i. 7or instance, technology affects energy consumption and conservation5 environmental emissions5 the quantity, types, and characteristics of future obsolete equipment5 the rate of defective output produced5 the quantities of scrap, waste, and by,products produced5 and the nature and e tent of support activities necessary to *eep the technology operating.

+. 9e t E0hibit 19(11 lists considerations for the financial professional to evaluate to determine whether a firm&s information systems provide relevant information for managing environmental costs. a. An analysis of the chec*list will show that the accountant must effectively gather both quantitative and non,quantitative data from both within and outside the firm.

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M!ltiple Choice =!estions 1. 30C.14 (hich of the following is not a ma6or business trend promoting the increased use of business process reengineering! a. %ncreasing use of the corporate form of business organi#ation b. Advancement of technology c. >ursuit of increased quality d. %ncrease in price competition caused by globali#ation ". 30C.14 <usiness process reengineering changes the way firms e ecute processes by: a. ma*ing better use of technology. b. ma*ing less use of technology. c. using more employees. d. eliminating all but the most profitable products in order to simply operations. $. 30C."4 Blobal competition is forcing firms to downsi#e and restructure operations to: a. defend core competencies. b. remain cost competitive. c. eliminate non,value activities. d. all of the above. '. 30C."4 Cne of the grim realities of ever,improving efficiency is that a. %nput costs are declining b. Cycle times are increasing c. 7ewer wor*ers are required d. All of the above ). 30C."4 9he data, facts, e periences, and lessons learned important to an organi#ation&s e istence are referred to as: a. a data depository. b. an enterprise resource planning system. c. wor*force diversity. d. organi#ational memory. +. 30C.$4 Aifferent languages and cultures can impede communication within globally dispersed operations. (hy is accounting a useful coordinating mechanism! a. <ecause accounting represents an application of the universal language of mathematics b. <ecause the interpretation of accounting information need not depend on local culture c. <ecause accounting is the universal language of business d. All of the above -. 30C.'4 All of the following are ob6ectives of enterprise resource planning 3?1>4 systems except: a. to automate accounting processes. b. to share data across the enterprise. c. 9o eliminate information system installation costs. d. to provide real,time access to company data. @. 30C.'4 %nstallation of an ?1> system impacts the financial function in all of the following ways except: a. 7inancial specialists have to find ways to finance the acquisition of the ?1> system. b. 7inancial and system specialists become responsible for selecting and installing the software. c. 7inancial specialists will be responsible for analy#ing the data repository to support management decisions. d. 7inance specialists are accountable for integrating e ternally purchased data with internally generated data. ."/11 Cengage 0earning. All 1ights 1eserved. 2ay not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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9. 30C.'4 (hich technique uses statistical techniques to uncover answers to important questions about business operations! a. business process reengineering 3<>14 b. data mining c. employee to capital cost ratio 3?CC4 d. enterprise resource planning system 3?1>4 1/. 30C.)4 Hoint ventures, equity investments, and technology swaps are e amples of a. venture capitalists. b. licensing agreements. c. strategic alliances. d. e clusive buyer,seller agreements 11. 30C.)4 An agreement involving two or more firms to 6ointly contribute to the supply chain a. involves the e ploitation of partner *nowledge. b. includes partners with access to different mar*ets. c. allows sharing of ris*s and rewards. d. all of the above. 1". 30C.+4 Characteristics of firms that are best suited to a successful implementation of open,boo* management include all of the following except: a. small si#e. b. centrali#ed management. c. a history of employee empowerment. d. the presence of trust between employees and managers. 1$. 30C.+4 Cpen,boo* management: a. decreases the transparency of information within an organi#ation. b. requires accountants to change from a mind,set of sharing to guarding information. c. frequently uses games and meetings to ma*e information understandable to financially unsophisticated employees. d. centrali#es both authority to ma*e decisions and responsibility for decision results. 1'. 30C.+4 (hich of the following is not a common principle of open,boo* management! a. 9each employees to understand the company&s financial results b. 0in* nonfinancial measures to financial results c. ?mpower employees by allowing them to evaluate their own performance d. 9urn the management of the business into a game that employees can win 1). 30C.-4 (hich of the following is not a general approach to controlling environmental costs! a. =igning the Iyoto >rotocol to reduce pollution b. Cleaning up pollutants after they are produced c. %mproving processes to reduce the amount of waste produced d. >reventing pollution by never producing polluting materials

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Chapter 19: Emerging Management Practices Multiple Choice Solutions 1. ". $. '. ). +. -. @. 9. 1/. 11. 1". 1$. 1'. 1). a a d c d d c a b c d b c c a

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