Accounting for Decision Making - Assignment Example

ACCOUNTING FOR DECISION MAKING QUESTION Donald Curtis, "in THE MODERN AMERICAN ACCOUNTlNG SYSTEM: DOES IT REALLY MEASURE CORPORATE PERFORMANCE? in "The Financial Executive", criticized corporate financial accounting reporting by arguing: The SEC, the stock market, and the corporate compensation committees all seem to focus on accrual earnings (GAAP) as the only reliable and fair measure of corporate performance.... Whats wrong is that the modern American accounting system is a very imperfect measure of corporate performance. The plain fact is that it cannot "technically" do what we are asking it to do with anything like the precision we are expecting. A failure to adequately understand the systems limitations - combined with our penchant for treating things which seem to be quantifiable (such as profit) as more real than things which are difficult to quantify (such as quality of companys [product]) ­has, in my view, contributed to serious mismanagement of American business during the last several years. REQUIRED: Based upon your knowledge of financial statement reporting and what we have learned about management accounting thus far this semester, critically evaluate this statement. Donald Curtis refers to Financial Accounting—accrual accounting that ensures accuracy in the financial reports of the company to measure corporate performance before its stakeholders, most specifically its shareholders. However, it is true that Financial Accounting alone cannot gauge the true measure of corporate performance. That is why Management Accounting, a more internal rather than external method of preparing results as regards performance is more suited to gauge corporate performance, as well as direct it to the desired result a company wishes to attain that involves managerial decision-making. The difference between financial accounting and management accounting is that reports that are produced using the methods of financial accounting are shareholders of the company, especially publicly-held companies. In order for shareholders to know the current state of their company, the company where they invested their money in, they have to rely on results that are publicly available such as corporate annual reports and financial statements made under the financial accounting method. On the other hand, the audiences of the reports that are done in management accounting are managers, or the people working within the internals of the company. Management accounting thus addresses the shortcomings of financial accounting when it comes to managerial decision-making in order to address the more crucial operational issues within the company, with such less quantifiable things through financial accounting, like quality as Donald Curtis suggested in the statement. For management accounting is designed for managers, the financial statements that are prepared under this method do not only aims to measure corporate performance, but see weaknesses in a company’s operations that has to be addressed by managerial decisions. QUESTION 2: Read the attached article. Based upon what we have learned this semester and your knowledge of Wal-mart, answer the following questions. PLEASE KEEP YOUR ANSWERS CONCISE. 1. Identify Wal-mart’s product/service and market. Wal-mart is in the retailing industry with stores that offer a vast array of consumer goods and consumer durables. Wal-mart’s market is comprised of the frugal shoppers and price-conscious consumers. Wal-mart offers consumer products, electronic goods, pharmaceutical products, apparels, etc. 2. Who are Wal-mart’s competitors that it can benchmark? Wal-mart competes in a fragmented market with different sets of competitors depending on a niche in the market, which poses threats to its operations. Wal-mart offers as many products to as diverse set of consumers which make it a player in every niche where a more prevalent smaller competitor operates. Target competes with it in the discount-store niche, with the promise of better quality on products as compared to it; Best-buy competes with it in the consumer durables niche, with the promise of better customer service as compared to it; CVS Caremark and Walgreen compete with it in the pharmacy niche, with the promise of broader health services; Hennes & Mauritz ABs H&M, Inditex Groups, Zara and Los Angeles-based Forever 21, Inc compete with it in the apparel niche, with a promise of more recent styles. 3. How has Wal-mart used the survival triplet (confrontation strategy) to succeed in the past? Specifically identify how it competes in terms of functionality, cost/price, and quality. Wal-mart’s strategy is grounded on the insight that consumers should always demand lower prices during shopping. With its economies of scale and lean efficient operation, Wal-mart has made its always-low-prices positioning sustainable for the long-term. With this very powerful insight, Wal-mart thrives in the past by providing its consumers value for their money by matching an acceptable value of quality and functionality to the low price that it offers. Because functionality and quality are at acceptable levels as compared to its price, Wal-mart has used price as a strategy to form a perception of value to consumers’ money when they go to their stores and buy from there. 4. What kind of EXTERNAL value chain has Wal-marts competitors constructed in order to take away the stores dominant market share. BE SPECIFIC. In other words, how have they decided to better compete with Wal-mart? Wal-mart competitors know that on the basis of price, they will never be able to compete with Wal-mart effectively. But they also know that with price as Wal-mart’s basis for its positioning strategy, the store caters in a shotgun approach to everybody, not being able to please and satisfy very well somebody. Thus, its competitors focus on the market, or its consumers to create their competitive advantage; in contrast to Wal-mart where its competitive advantage lies in its lean operations. Competitors of Wal-mart know that due to Wal-mart’s shotgun approach, it leaves a huge gap to certain niche segments in terms of satisfaction that these competitors can capitalize on. They focus on the segments of the market that are not very much satisfied with Wal-mart’s approach: Target positions itself as provider of high quality merchandise at affordable prices as it capitalizes on Wal-mart’s weakness of providing excellent quality merchandise as demanded more by consumers; Best Buy provides customer service in its consumer durable products through associates that customize the assembly of durable parts, which Wal-mart does not provide; CVS Caremark and Walgreen that broadens their operations to include more health services aside from pharmaceuticals to provide value to consumers, if they can’t compete in providing value through price like that of Wal-mart; Hennes & Mauritz ABs H&M, Inditex Groups, Zara and Los Angeles-based Forever 21, Inc which are smaller retailers of apparels that provide more recent clothing styles and rapid change of new designs that Wal-mart cannot provide. These competitors, instead of focusing on their internal value chain, creates external value chain by listening to consumers and providing them what they want that Wal-mart currently does not provide. By targeting these segments according to their internal capabilities, and focusing on these segments’ wants that can be fulfilled by providing value to create maximum satisfaction, they are able to lure these customers away from Wal-mart. 5. What part(s) of the internal value chain has Wal-mart concentrated on in the past? Specifically, from the article, what will the store focus on in the future? Wal-mart capitalizes on its ‘always-low-prices’ positioning strategy by concentrating on enhancing its competitive advantage, which is its lean operations as part of its internal value chain. The focus then, is on lean operations as it tries to cut down its costs to maintain positioning. According to the article, Wal-mart will still focus on its competitive advantage with the adoption of a new technology to replace its barcode system. This is in line with its efforts to maintain lean operations and cut its costs through the use of the new technology. 6. How could a balanced scorecard be of use to Wal-mart? For each dimension of the balanced scorecard, list ONE strategy and ONE measure of success that Wal-mart could adopt. Because operational measures, in the case of Wal-mart are viewed as the drivers of future financial success, it is only wise for Wal-mart to capitalize on its internal competitive advantage. With this, a balanced scorecard can be used in order to measure performance. Financial perspective: return on capital employed. With its investment in new technology to further lower down its costs, it should use the return on capital employed as one measure of success for its operations. However, this should not be limited to fixed capital only. By investing in marketing activities to provide higher satisfaction levels to customers, it can also be included in the measure. Customer perspective: customer loyalty, better satisfaction level through better value to match price. By means of marketing research studies and customer satisfaction surveys, Wal-mart will know if it gains the desired satisfaction level among its consumers to ensure customer loyalty. It should pursue marketing activities that will build long-term relationships with its consumers. Internal/business process perspective: process quality, process cycle time. Wal-mart should continue to employ its lean processes by checking the quality of its processes, such as the quality of customer service, the quality of purchasing processes as well as the cycle time in order to eliminate waste and continue on improving its lean operations. Learning and growth: employee skills. In order to sustain its ability to change and adapt to the preferences of its consumers while not sacrificing its positioning, it has to invest in training its employees. For certain skills of employees that are gauged and measure to contribute to its lean processes and customer service, it will be able to sustain its positioning and support its strategy to meet financial success. 7. Quality is a factor for Wal-mart. Briefly describe one quality cost, as it relates to Wal-mart, that can be used to exemplify the four types of quality cost s(Prevention, Appraisal, Internal Failure, External Failure) that we discussed. One quality cost that Wal-mart can utilize is to incorporate quality checking of merchandise as soon as it is delivered into its warehouses. Before the merchandises can be stored into the warehouse and ready for distribution to its stores, in order to prevent unsatisfactorily customer experience due to damaged products. By investing in quality systems such as that will minimize customer complaints, thus the quality of the products are not sacrificed, which is an important component in providing value to the customers. 8. Wal-Mart is a customer as well as a seller. As a customer, what difficulties has it encountered with its suppliers? What changes in strategy will Wal-mart have to adopt to be more successful with its relationship suppliers? It used to be that Wal-mart, with its enormous bargaining power, dictated the terms of their relationship. Being the largest customers of manufacturers, Wal-mart can use its powers to lower down its inventory costs in order to support its positioning. However, it was during the time that Wal-mart seems to be the ‘best and only’ channel where manufacturers could put their products to sell well. As Wal-mart’s competitors began to become more focused, targeting a segment in the market with a distinct profile, other manufacturers realized that there were more ‘appropriate’ channels aside from Wal-mart—these retailers that cater to the profile their products were designed for. With these ‘more appropriate’ alternatives, Wal-mart was no longer the best and only; it rather became the largest, but not the best. What these suppliers were looking for in a distribution channel was a channel that could best support its strategy—would bring its products to the people who had been the basis for their operations, their end-users and consumers. Wal-mart, still catering to a broad number of people who goes to its stores is still a major consumer, but its failure to incorporate the strategy of its manufacturers to its strategy has made it lose its power of them. This is especially true in the case of Pepsi, when it has chosen not to introduce its Fuelosophy in Wal-mart. Wal-mart should provide its manufacturers a more focused approach to selling—it has to define its target market well, and convince its retailers that the profile of its target shoppers fit the profile of the end-users of its product to maintain the relationship it has used to have with its manufacturers without sacrificing its positioning. 9. We have learned that the management accountant is a key component in the strategic cycle of the business. Explain what that individuals role is in assisting Wal-­mart adapt to new business conditions. A management accountant’s role is very important in the strategic cycle of a business, especially in strategic planning. The management accountant provides managers information for decision-making, problem-solving and addressing inefficiencies, weaknesses, as well as opportunities. As the strategic planning process starts with environmental assessment, then setting goals and strategy, the management accountant provides information such as budgets that tailor to meet these objectives. With the help of this information such as budgeted financial statements, the company is able to assess which part of its strategy has weaknesses and needs adjustments to match with the opportunities and threats to its environment. Because a strategy has to be matched with a certain objective, the management accountant helps to suggest ways to gauge and measure performance, in order to determine when objectives are met. Read More