Managerial Accounting Techniques in Formulating Customer Centric Marketing Strategies - Research Paper Example

 Essential Role of Managerial Accounting Techniques in Formulating Customer-Centric Marketing Strategies I. Introduction Paper Overview This paper aims to explore the vitality of managerial accounting techniques (MAT) in marketing. Such relation, however, will be built on a much bigger context—the need for companies to adopt a more customer-focused corporate strategy to cope with the highly dynamic nature of modern markets— as driven primarily by technological innovations and rapidly-changing customer preferences. Through this, management accounting will be discussed not only as a tool for evaluating marketing operations (e.g. launching of new product, implementing new pricing policies, redesigning the distribution system, or developing new promotional campaigns), but more importantly as an element of corporate planning and decision-making. Through this viewpoint, this paper hopes to, firstly, expose the stark differences between traditional accounting that evaluates marketing operations in accordance to costs and return of investment (ROI), and managerial accounting that assesses marketing executions in relation to customer value generation and relationship-building. Secondly, it wishes to elucidate the reasonableness of using the latter more than the former— taking into consideration the assimilation of the business’ ‘Five Forces’, as well as its ‘Competitive Advantage’. Therefore, apart from exposing how accounting information can influence marketing decisions, this paper will like to focus also on: (1) why accounting is important in marketing, and (2) why accounting techniques have to be updated to suit the changing times. Paper Outline To maintain focus and succinctness in this study, this paper shall be divided into three parts. Firstly, it will give a brief overview on how technological innovations and convergence of media have given more power to consumers. Such part will underscore the role of social media in giving rise to more content-creating-and-sharing consumers. In this regard, a discussion on the role of marketing in corporate strategy formulation and implementation will be taken into consideration in relation to changing consumer tastes and intensified competition. This corporate strategy is often epitomized by the company’s choice of competitive advantage (borrowing Michael Porter’s principle). Having established the new role of marketing in corporate planning, the discussion will now shift to how accounting can provide support to marketing strategies and executions. Since there is a change in the way marketing is now defined, and more importantly practiced in companies, the employment of proper tools and measures must also be in place—thus, the differences between traditional accounting and management accounting techniques. The paper will specifically enumerate and explain the various accounting techniques used by marketing managers. The last part will conclude the discussion by reinforcing the paper’s main thesis: that the use of management accounting techniques must be of utmost importance as it helps the companies regain its focus on adopting, maintaining, and enhancing its consumer-centric business strategy. II. Consumer-Centricity: New Mantra for Corporate Strategy Development Internet will always be the biggest breakthrough in modern technology. Not only has it made information/content transmission faster and more convenient for all its users, it has also given more opportunities for content-creation and generation. Obviously, any Internet user can now create, say, a manual on how to drive an automatic transmission car through his blog, his Facebook page, or his Youtube page, in a same manner that anyone can quickly provide real-time feedbacks on any of these contents (wherever part of the globe that other user may be). Such rapidity of information transfer and digital interaction (as all facets of communication can now be done real time via Skype and other messaging platforms) have created what is now commonly called as ‘the digital community’. From a business perspective, this phenomenon has its share of positive and negative consequences. The biggest benefit of digitalization banks on the company’s capacity to now harness consumer insights in a relatively easier and less costly manner, as well optimize such digital channels in raising awareness about its current and upcoming brand campaigns. The biggest challenge, nonetheless, lies on ensuring that such contents do not harm (in any way) the brands of the companies being ‘talked about’. Indeed, because of media convergence, a Tweet on a bad experience with one product is not only announced in Twitter, but is also posted as a ‘status’ in Facebook, as well as linked to other media contents. The basic idea here is for companies not to control such web contents (as it will become a virtually impossible feat), but to actively participate in the conversation to address issues and clarify questions. Linking this mindset on the rise of consumer power to the overall external environment, it could be said that digitalization and media convergence has paved the way for a more competitive business climate. Indeed, the presence of competing brands (both local and global) and the rise of substitutes have resulted in the seeming ‘homogenization’ of products. In the industry of fast-moving consumer goods (FMCG) alone, there are dozens of brands for human shampoo (which further increases according to hair type, ingredients used, and what not). Such occurrence, therefore, has elevated the need for product or service differentiation. As noted by respected researchers of the Chartered Institute of Management Accountants (CIMA) Global, “the intensification of competition, in effect, has made a steady stream of new and improved products a pre-requisite for survival in most business sectors” (Nixon, Burns, & Jazayeri 2). Thus, for companies to own modern markets today, they have to create a product that is highly original, valuable, and relevant to the eyes of the consumer. Such endeavor, however, must still be aligned with the company’s financial and operational objectives (that culminate in the growth of its bottom line). The decision to either choose the path of differentiation or of cost-leadership becomes the company’s competitive advantage (Collier 126). However, given the stiffness of competition today due to digitalization and media convergence, it seems that the solution to surviving the rapidly changing markets may not necessarily lie in choosing between the two aforementioned factors, but in correctly combining the key attributes of each to craft a more lasting strategy. This issue of aptly combining differentiation with cost-leadership has elevated the role of marketing in the development of corporate strategy. Indeed, marketing has allowed the top management officials of companies to look at the consumers’ changing behaviors and lifestyles, more than the products they manufacture or the services they render. Thanks to marketing, consumer needs are more completely identified and solutions to satisfy those needs in a better and more effective manner (versus competitors) are implemented and measured (Collier 126). Through this consumer-centric corporate strategy, companies are said to be more inclined toward innovation, rather than being locked to the confines of ‘operational efficiency’. As explained by a renowned marketing scholar and professional, “The firm oriented towards production was based on a high level of internal focusing, but it didn’t have the necessary dynamics for a durable and tenable competitive advantage. This situation inevitably led firms towards a market orientation geared towards the outside and towards customer satisfaction which had become important factors for business management” (Gatti 2). Marketing allows the companies to be visionary and customer-oriented, as it puts premium on building relationships with customers through customer relationship management or CRM (Collier 126). However, strategy only becomes such once it is able to encompass all of the company’s business operations. In this regard, proper customer orientation helps the company plan for its long-term objectives and integrates all of its business operations (from R&D to sales to informational systems) to competitively meet customer needs (Inglis 3). In this regard, the deep and insightful understanding of consumers paves the way for inter-functional coordination and integration within the company as “customer value, customer product-attribute needs, and accounting information are interrelated conceptually from a managerial and economic perspective”(Inglis 5). But in order to do this consumer-centric approach in a profitable manner, the company must be able to understand each customer’s cost and revenue dynamics. And this can only be done effectively through accounting, specifically, managerial accounting (Inglis 5). III. Managerial Accounting and how it Supports Consumer-Centric Marketing In this part of the paper, I shall expose the differences between traditional accounting and managerial accounting, and how the latter brings more substance in supporting the aforementioned consumer-centric marketing A. Traditional Accounting and Marketing The use of traditional accounting in assessing marketing programs utilized specific tools such as budgeting, reporting, standardization of costs (Gatti 4). From a more general perspective, marketing initiatives are usually seen by accountants as investments that are created to deliver specific marketing results (either in sales growth or in stronger brand affinity) within a certain period of time. Whether it is a new product launch, a new pricing policy, a reorganization of the company’s distribution matrix, or a revamping of the company’s major promotions, traditional accounting techniques have always been applied to evaluate return on investment (ROI) (Wind 239). In this regard, traditional accounting usually considers the contribution of marketing in terms of marketing assets. Moreover, marketing and advertising costs are pegged as a percentage of sales (Wind 242). In this light, there are two basic tools to determine the profitability of any marketing initiative: cost-volume-profit analysis, sensitivity analysis, and breakeven point. Firstly, the cost-volume-profit analysis is method used for examining is the relationship between changes in activity (the number of units sold) and changes in selling prices and costs (both fixed and variable) (Collier 126). Looking at its formula: Net profit = revenue − (fixed costs + variable costs) Net profit = (units sold × selling price) − [fixed costs + (units sold × unit variable cost)] Secondly, sensitivity analysis is an approach used to understand “how changes in one variable (e.g. price) affect other variables (e.g.volume) (Collier 128). This, as the author pointed out, is essential since to both accountants and operational managers for revenues and costs cannot be predicted with certainty and there is always a range of possible outcomes, i.e. different mixes of price, volume and cost (Collier 128). Lastly, the breakeven point pertains to the condition in which the total costs are equal to the total revenue—thus, there is neither a profit nor a loss. Aside from this, traditional accounting techniques also guide pricing strategies via four general approaches: cost-plus pricing, target rate of return pricing, and optimum selling price. Firstly, cost-plus pricing works when the company is a market leader since the margin is usually added to the total product/service cost to identify the selling price (Collier 134). Secondly, target rate of return pricing “estimates the (fixed and working) capital investment required for the business and the need to generate an adequate return on that” (Collier 135). Lastly, the optimum selling price is the point at which profit maximized through an intensive study of fixed and variable cost behaviors. In all of these accounting techniques, it can be claimed that marketing activities are regarded more as a function of sales results, and not as tools to deliver sales growth or increase market share. As pointed out “traditional control (accounting) tools that focused on the productive activities had become less useful because the product and its costs were no longer considered the only critical success” (Gatti 2). This notion, therefore, leads us to concluding that the traditional accounting techniques respond to a relatively traditional understanding of marketing (one that adopts a superficial understanding of consumer value and technological improvements). B. Managerial Accounting and Customer-Centric Marketing The use of managerial accounting, as clearly pointed out, “has shifted the focus from quantitative indicators of short term efficiency to qualitative indicators of long term effectiveness such as, for instance, the indicators of customer satisfaction, or customer lifetime value, or the tools of marketing audit, and customer loyalty (Gatti 4). As such, managerial accounting regards marketing activities as a ‘value adder’ to the products’ differentiation versus its competitors. Such differentiation may be influenced by the following drivers (which marketing executions can provide): a) Product drivers include performance, features, reliability, operating costs and serviceability; b) Services drivers include ease of credit availability, ordering, delivery, installation, training, after-sales service and guarantees; c) Personnel drivers include the professionalism, courtesy, reliability and responsiveness of staff; and d) Image drivers reflect the confidence of customers in the company or brand name, which is built through the other three drivers and by advertising and promotional activity (Collier 127). In this light, four specific managerial accounting techniques to evaluate the ability of marketing programs to effectively satisfy consumer needs. The first approach is called function cost analysis (FCA) which focuses the cost of product launch based on its intended function and how it could directly respond to consumer demands (Inglis 6). The second approach is comprised of the previous analysis and other interrelated value engineering and analysis techniques. It is called target costing and it seeks to “reduce the life-cycle costs of products while ensuring all customer requirements are met (Inglis 6). The third approach is called whole-life costing which considers the costs from “a customer point of view by highlighting both the acquisition and ownership costs of the customer” (Inglis 6). The last and most important approach is called attribute-based costing which “aims to cost the attributes (or “benefits” as they are more often described) that create value for customers rather than to cost the organizational functions or value chain activities” (Inglis 6). Attributes, as further defined, include a range of tangible and intangible assets such as reputation, image, perceived expertise of sales staff, response time to customer queries, ease of payment, and prompt delivery of product and consistent quality levels. In all of these techniques, it is easy to see just how the mindset has shifted from the cost considerations of operations to the value the customers are willing to pay for the differentiated product or service. Conclusion Given the contributions of marketing in driving the future of corporate strategies (with its emphasis on innovation as a consequence of consumer-centric thinking), it can be said that companies must invest in mastering the art of market intelligence to continually monitor changing consumer preferences, and in effect, come up with product attributes that “embody those characteristics, features and benefits desired by, and that create value (or utility) for, the customer and which the organization will need to provide competitively in order to generate revenue” (Inglis 7). Read More