Innovation in Entrepreneurial Organizations - Coursework Example

Management Accounting - Critical Analysis Name: Institution: Course: Lecturer: Date: Innovation in entrepreneurial organizations There are two commonly approaches used by firms to boost profitability and create sustainable competitive advantage. These are embracement of cost reduction measures and differentiation through innovation. During the economic recession, the first approach tends to disappear in three years. Therefore, innovation supersede as the main source of an overall sustainable competitive advantage. According to the Jarrar & Smith (2014), innovation mediates relationship between entrepreneurial strategy and the balance-score card, just in time, organizational performance, total quality management as well as activity based costing. Innovative firms create heightened value to their shareholders within the long-term. Lack of innovation leads to imitation of the firm’s value proposition which results to competitive price for products and services. Innovation is assumed as a prerequisite of an entry into the market. Perrini & Vurro (2006) argue that despite its value, a number of firms don’t measure immense benefits created by innovation. They lack internal structures to derive the magnitude of innovation. Innovation management is disregarded while majority of firms fail to seize the support of the management and hence work in a vacuum. In this respect, the balance scorecard is proposed as a measure of innovation. This innovation scorecard does not only evaluate the entire value derived from innovative activities but also guarantee that such activities get aligned with the firm’s strategy (Jarrar & Smith, 2014). Balance-score card is normally based on innovation metrics which is defined prior to evaluation of the project with a view of obtaining the intended results. Thus, the scorecard does not only ascertain the supplementary value to a project, but also acts as a management tool applicable to determine the specific projects to be implemented. The authors assert that TQM and innovation contains similar purpose pertaining to the firm’s performance. While used in an innovative capacity, total quality management integrates the firm’s objectives and functions with a view of satisfying the clients and realizing competitive advantage. A combination of the two lures organizational employees to be part of management process as well as the business process. Moreover, they provide continuous improvement coupled with sustainable development of the firm. The continuous improvement, open culture as well as client satisfaction forms part of the core goals exhibited by TQM and innovation. This means that the relationship prevailing between innovation and TQM is a major determining factor of the firm’s performance and development (Jarrar & Smith, 2014). Just in Time Technique is an innovative approach adopted by firms to purchase and produce as per the immediate needs of the market. The authors suggest that JIT can be used by firms that seek to gain competitive advantage within the market. JIT contains some major characteristics which include supplier cooperation, material quality, training, transportation, quantity purchased as well as employee relations (Jarrar & Smith, 2014). According to the article, JIT is directly related to the firm’s performance. The major benefits derived from this innovation include increased inventory turnover, product quality as well as improved productivity, which in essence reduce the overall costs. The high product quality coupled with reduced overall cost results to lower prices which increase market share as well as profitability (Jarrar & Smith, 2014). According to Jarrar & Smith (2014), the adoption of innovation is comprised of three phases; that is, initiation, decision to adopt and implementation. The implementation is done when such innovation has been accepted by users who are the major stakeholders. This means that for an innovation to yield organizational performance, it should be implemented by the firm (Jarrar & Smith, 2014). While defining innovation in the literal perspective, it constitutes a management perspective, process or technique with a unique newness that is bound to further organizational objectives. Examples in this case are as highlighted as above which includes, Total Quality Management, Just in Time and the Balance Scorecard. As described by the authors, innovation in this case is conceptualized as multidimensional construct. This includes structural, operational as well as administrative processes. The newness which forms part of the innovation is radical which makes the adoption of innovation result to major changes within the firm’s systems as well as the entire processes (Jarrar & Smith, 2014). Innovation impacts the firm’s performance by increasing the efficiency as well as effectiveness of the firm’s operating cum administrative processes. They impact on the structure, management system and the entire managerial skills which enable the firm to perform effectively. Therefore, innovation is perceived in two dimensions; that is, the IT dimension and administrative dimension. The IT dimension focuses on the adoption of new information systems to advance efficiency while administrative dimension focus on the management processes to make the management’s work more effective (Perrini & Vurro, 2006). In regard to activity based costing, it is always paramount to point out that it does not cause any variation to the firm’s profitability. Rather, activity based costing aligns assignment costs to the actual causes related to those costs. Therefore, having accurate costing information, firms make amicable decisions geared at improving profitability (Jarrar & Smith, 2014). The activity based costing therefore assumes a completely different approach from the others. While using ABC, each activity that is associated with production of an item is always determined and assigned a cost. In this approach, the costs which are treated as indirect costs by the traditional methods are assumed to be direct costs. The overall cost regarding each and every activity is assigned to consumers, products and services that require the application of the activity in determination of true profitability level. Therefore, ABC is an approach that is recommended for companies possessing significant overhead costs and which deliver broad range of products and services to a multivariate customer base (Jarrar & Smith, 2014). Curbing Cost Inefficiencies of Insurers The article depicts cost inefficiencies of insurers in the United Arab Emirates. There have been major contributors of such inefficiencies under various model specifications. However, a number of value drivers can be used by an accountant to turn around such inefficiencies via adoption of effective measures including client mapping, risk prioritization and the ALM techniques. 1. Client Mapping The inefficient insurance companies can reduce cost by performing advance risk mapping. This process is bound to save the company 15 percent of the total cost. The accountant in such a company should curb the risks by performing the following activities; a. Risk assessment – this entails use of geographical data to predict risk. It then means that higher risks should attract higher premiums. On the other hand, lower premiums should be charged for geographical localities with less risk (Marie, Rao & Kashani, 2009). This is done by dividing the localities into territories. For instance, individuals residing along coastlines prone to hurricanes will pay higher premiums. b. Claims Management – this entails processing claims in regard to compensation, restoration and repayment following loss or eventual damage. The use of insurance technology such as Geographical Information System assists in comprehending where such risk happened and hence responding quickly (Klein, 2013). c. Insurance Underwriting – this is involved with evaluation of risks as well as exposure regarding potential clients. The process of underwriting then decides total amount of coverage, overall cost and whether customer should be insured. The accountant should use insurance technology to determine the target sales as well as the target market, which stipulates whether underwriters took the right decision (Marie, Rao & Kashani, 2009). d. Insurance Fraud – this is a fraudulent activity for personal gain. It emanates from address misrepresentation. However, the use of insurance technology alleviates the suspicious behaviors through the use of statistics. This is done by adding a location to the fraud investigation technique which analyses opportunistic behaviors related to claims (Klein, 2013). 2. Risk Prioritization One of the best ways that an accountant mitigates inefficiencies in an insurance firm is through the use of enterprise risk management. This entails preparing for future uncertainties. Instead of being conservative with the identification and assessment of risks, it’s always imperative to improve process efficiencies (Marie, Rao & Kashani, 2009). The use of same criteria as well as scale enables collection of data, combination and comparison in a manner which is accessible and comprehensible. A standard scale plus common root cause also reveals the very high level risks which affects most of insurance firms which makes prioritization systematic (Marie, Rao & Kashani, 2009).. While assessing specific risks, it is therefore paramount to use the scale that provides much detail. The categorization of risk as per the impact enables a planner think about the prevailing risks in a more active manner. This mandates the user to make selection of high or low in each category making prioritization easier (Klein, 2013). 3. ALM Techniques ALM stands for Asset and Liability Management. The main idea behind this technique is managing both the assets and liabilities that the company has simultaneously. The assets are perceived as an interplay through which gains and risks are obtained. Thus, accountant ensures that the company is growing at a gradual pace without taking obligations that it can’t finance (Klein, 2013). The timing and decision on when to acquisition the asset is determined by the following techniques: a. Monitoring Asset Value – the assets include fixed and current assets. Examples of fixed assets are machinery and land while current assets are composed of cash and inventory. Asset valuation is important in determining whether the firm has enough resources to take obligations. b. Cash-flow Payment Calendar – this reflect receipt and cash outflow from the business. This enables the firm know when it has surplus cash to pay off her bills. This hence balances assets with liabilities (Marie, Rao & Kashani, 2009). c. Standard Immunization – the assets available in a firm should generate income. Since liabilities consumes part of the income, determining the total amount that the assets generates is very important. It shows whether the enterprise has generated enough to service loans as well as other obligations (Klein, 2013). References Jarrar, N.S. and Smith, M., 2014. Innovation in entrepreneurial organisations: A platform for contemporary management change and a value creator. The British Accounting Review, 46(1), pp.60-76. Marie, A., Rao, A. and Kashani, H., 2009. Cost efficiency and value driver analysis of insurers in an emerging economy. Managerial and Decision Economics, pp.265-280. Klein, R.W., 2013. Insurance market regulation: Catastrophe risk, competition, and systemic risk. In Handbook of Insurance (pp. 909-939). Springer New York. Perrini, F. and Vurro, C., 2006. Social entrepreneurship: Innovation and social change across theory and practice. In Social entrepreneurship (pp. 57-85). Palgrave Macmillan UK. Read More