The European Accounting Review2001,10:1,33–50
ABSTRACT
嘉庆的皇后Understanding of the relationship between the costs of the rm and the value the rm provides to its customers is the key to the ability of the rm to reach its pro t potential.
From this perspective the rm needs to have a thorough understanding of its activities, their costs and their relation to market prices.Advanced cost management studies and practices suggest a variety of different tools that help us understand the relationship between value and cost.However,most of the studies provide us with qualitative tools only.An exception is studies related to product cost planning,as in the ca of target costing or value analysis=value engineering.
This paper,while being a part of emerging literature on strategic cost management, extends the existing knowledge of the relationship between costs and value by introducing the value creation model(VCM).In particular,the VCM model de nes the rms’cost structure in terms of value added,non-value added but required activities,as well as of waste.A rm’s cost structure is aligned with value attributes embedded in products and rvices.The VCM model eks to understand the trade-off between what the customer is willing to pay for a product=rvice bundle(value)and the cost the rm bears to provide what the customer desires.Bad on the trade-offs, VCM de nes value multipliers,which help the rm determine which activities the rm should focus on in order to develop a competitive advantage.
1.INTRODUCTION
Understanding value,as de ned by the customer,is the basis for creating an effective competitive strategy.Value is created for customers whenever a rm provides products and rvices that meet current market demand.The market price reprents the proxy for the prent economic value derived by the customer from the product or rvice purchad.Companies that fail to understand the relationship between customer value,price and cost are likely to experience a pro t disadvantage in a competitive marketplace.
女画Address for correspondence
灰心丧气的近义词Riccardo Silvi,University of Bologna,Department of Management Studies,47100 Forl1`,Italy.E-mail:rsilvi@sun1.spfo.unibo.i t
Copyright#2001European Accounting Association
ISSN0963-8180print=1468-4497online DOI:10.1080=0963810020025321 Published by Routledge Journals,Taylor&Francis Ltd on behalf of the EAA
34The European Accounting Review
The challenge of relating customer value,price and cost has been addresd by many attempts in the literature and practice to implement‘new’cost management techniques.The techniques were designed to improve cost allocation and improve product mix decisions(ABC),increa product or rm pro tability through cost ABM,target costing,TQM),improve quality(TQM) and develop a competitive strategy along the value chain by using cost informa-tion(SCM).
While the techniques have been advocated as a means of providing‘value’to the customer,they have largely ignored the concept of value from the customer’s perspective.For example,activity-ba
d management approaches(Kaplan and Cooper,1998;Morrow,1992)are ud to divide the activities and costs of the rm into value-added or non-value-added categories,but it remains unclear whether and how customers’perspective is embedded into the approaches. Strategic cost management(Shank and Govindarajan,1993)shows the distribu-tion of‘value’along the value chain,but it ignores the nature of the relationships between costs and market value changes.Even though target costing(Ansari and Bell,1997;Cooper,1995;Horva´th,1993;Y oshikawa et al.,1993)relates cost to product attributes(Bromwich and Bhimani,1994)its primary aim remains in cost minimization and value as proxied by market price is ud only to de ne allowable costs.In fact,contribution of target costing to the overall cost management in a rm remains of very limited value(Ewert and Ernst,1999). In summary,the‘new’cost management techniques do not enable an identi- cation of which activities should be emphasized and provide no asssment of speci c linkages between internal cost structure and externally de ned value. Furthermore,the most important limitation of the new techniques remains to be their limited and mostly internally driven perspective of‘value’.
McNair(1994)introduces the pro t potential concept,which us customer perceptions of value as the basis for identifying and measuring value-added costs. Focusing on the difference between revenue
and customer-de ned value-added costs,this model goes on to argue that rm pro tability can be improved if the percentage of value-added dollars is incread.While this work reprents an important step in advancing the understanding of the relationship between value and cost,this relationship is only qualitatively de ned and not supported by any evidence.
The purpo of this paper is to ll this gap in the literature by developing a value creation model(VCM)that aligns costs to market value approximated by the current market price.It contributes to the existing advanced cost management literature by systematically and quantitatively analysing and de ning the linkages between internal costs and market value,and using the linkages to provide insights for a rm’s strategy formulation.The model commences by identifying bundles of attributes desired by customers(Lancaster,1971;Wayland and Cole, 1997)as well as their relative importance to the customers’purcha decision. Once attributes have been identi ed, rms’costs(de ned as value added, business value added and waste)are traced to the value attributes.The
Cost management and value creation:the missing link35 identi ed relationship between revenue potential and value-added costs is de ned by the model as the revenue multiplier,which is argued to be a relative measure of the effectiveness of the rms’value strategy.This paper tests the applicability of the VCM model in a small Italian rm.
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The paper is structured as follows.The following ction develops the value creation model bad on the strategic cost management,value creation and relevant marketing literature.Next,the rearch method to test the VCM model is described in detail.The ndings associated with the implementation of the model are provided next,followed by a discussion and some concluding remarks. 2.DEVELOPMENT OF THE MODEL
The management accounting practices have often been challenged in recent years and the challenges have brought about continuous improvement and incread relevance of the eld(Berliner and Brimson,1988;Johnson,1992;Johnson and Kaplan,1987).During the early stages of management accounting transforma-tion,the emphasis was placed on improving the accuracy of product costing practices(Kaplan and Cooper,1998;Turney,1991).Unbundling overhead and re-assigning it to the activities and outcomes that were determined to cau costs, the early activity-bad cost models made the questioning and change of management accounting practices legitimate.
Activity-bad management(Kaplan and Cooper,1998;Morrow,1992; Turney,1992),process value analysis(Ostrenga and Probst,1992)and business process re-engineering(Davenport,1994;Hammer and Champy,1995) approaches have all emerged to provide a potential methodology for under-stand
ing where and how rms can invest their resources to enhance their value drivers and better control their cost drivers.In the analysis performed, ABM=ABC advance our previous understanding of costs by splitting the activities into value-added or non-value-added categories,and then attempt to create ways to eliminate or compress non-value-added or enhance the value provided by ef ciency and effectiveness.While value-added issues are empha-sized,ABM=ABC do not build from the market and do not match the activity costs with customer-de ned preferences.The result is that rms can have high rates of value-added activities,but at the same time not be pro table,simply becau the value provided is not the value the customer is fully willing to pay for. Given that value creation is a market-de ned,externally evaluated construct (Cleland and Bruno,1996;Wayland and Cole,1997),this ongoing internal focus limits the ufulness of information provided by activity-bad approaches for strategic and tactical decision-making.Strategic cost management(SCM;Shank and Govindarajan,1993)emerged to address the shortcomings.
While there exist various approaches of SCM,the main unifying goal of SCM is to u cost information,provided from veral often heterogeneous sources,to create a competitive advantage(Shank and Govindarajan,1993).In the SCM framework,key issues addresd are where the rm should move in the value
迎接新生36The European Accounting Review
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chain,which activities should be performed and how cost can be compresd and value enhanced.Speci cally,Shank and Govindarajan(1993)argue that to comprehend a rm’s cost structure,and so support effective cost-bad deci-sion-making,managers should widen their perspective to include their rm’s strategic positioning,value chain and cost drivers.Related techniques,such as strategic value-chain analysis(Porter,1985;Shank et al.,1998)and value-migration concepts(Slywotzky,1996;Slywotzky and Morrison,1997)emphasize the dynamic nature of value relationships along the value chain.While they identify areas where it might be strategically convenient to focus efforts and investments,the nature of the relationships between cost and their value potential is mostly ignored or remains at a general level of analysis only.SCM assumes that managers can place a‘value’on the chain of activities.It does not attempt to u an external reference to asss‘value’.As such,SCM provides little guidance on how to improve a company’s pro tability.
Customers buy speci c products or rvices,not value chains.In fact, extensive marketing literature provides evidence that customers buy a bundle of product=rvice attributes when making a choice in the market(Green and Srinivasan,1990;Wayland and Cole,1997).This is not a new insight into busi
纹理烫男ness economics or marketing,but this product attribute concept does lead to a change in the nature of management accounting practices.Target cost manage-ment(TCM;Ansari and Bell,1997;Cooper,1995;Horva´th,1993;Y oshikawa et al.,1993)and product attribute costing(Bromwich and Bhimani,1994)have emerged to meet the need for product-speci c value measurements.Re ecting parallel developments in ,quality function deployment;value engineering;value analysis),TCM-bad approaches are driven by external, customer-driven de nitions of value.The models bring together the cost and revenue components of a product=rvice bundle to help prioritize and choo among a broad range of potential product or rvice designs.The goal of TCM is to build pro t and performance requirements from the market by controlling the relationship between cost and revenue.
Speci cally,TCM states that products can be launched only when they meet de ned pro tability goals and their related level of target costs.In the TCM perspective,a target pro t is subtracted from the price of the product as de ned by the market in order to de ne the allowable unit cost of a product.When the actual product cost exceeds the target cost,the cost planning process is ud to question the reasons for the pro tability gap and to identify ways to eliminate the discrepancy.In this process,value analysis and value engineering are necessary steps in ensuring the product or the r
目光长远vice delivers or meets customers’value expectations,both internal or external(Horva´th,1993;Y oshikawa et al.,1994). As a conquence,cost and value are aligned with product pro tability to ensure that the company jointly meets customer and shareholder requirements.While TCM refers to the market to determine acceptable cost targets,its objective is primarily in cost minimization.TCM does not provide information to enable managers to make‘value’=cost trade-offs.In fact,recent evidence suggests that
Cost management and value creation:the missing link37 when more‘strategic’dimensions are added to the problems of cost management, TCM contributes very little to the success of long-term cost management in an organization(Ewert and Ernst,1999).
A related technique,product attribute costing is frequently employed in cost planning process and in target costing practices.This management accounting tool argues that the product has to be de ned around a t of usage functions(life cycle,easy asmbly,easy maintenance,innovative design,etc.).For each of the functions,management estimates the relative costs to provide them compared to their ability to meet customer-de ned functionality requirements. As in TCM,any gap between cost and value is subject to analysis and interventions in product attribute costing to ensure that desired cost and value relationships are attained.
In introducing the pro®t potential concept(revenues less value-added costs) McNair(1994)and McNair and Vangermeersch(1998)measure the magnitude of the existing relationships between cost and value by matching current revenues with their associated amount of value-added costs.Citing evidence from the eld where the value-added costs of rms are about25%of total costs(McNair and Vangermeersch,1998),the underlying message of this work is that every dollar invested in value-added activities generally produces a minimum return of four dollars in revenue.The relationship between revenue and value-added cost is de ned as the value multiplier.
Even though the value multiplier ratio reprents a milestone concept in the literature,it only highlights an average level of performance for the rm.In other words,a ratio of four simply means that the rm performed ts of value-added activities that were leveraged to create roughly four times their initial resource investment in revenue yields.As the activities related with speci c customers’requirements are not investigated by the model,the pro t potential concept does not offer actionable leverage points nor does it identify which activities the rm should emphasize in its efforts to meet customers’needs in a pro table way. Looking at the issues mentioned above,each tool mentioned fails to fully explain the complex relationship between cost and value.Our paper contributes to this literature by de ning the linkages between the value customers place on product a
ttributes and the cost of activities the rm incurs in order to provide the value attributes.Linking value to costs enables the managers to evaluate many choices on resource u in an organization in order to improve their pro ts and strengthen their competitive position in the market.It is the development of this dual approach that underlies the rest of this paper and its empirical analysis.
3.MODEL
As consumers ek to maximize utility,they choo bundles of product characteristics or attributes embedded in goods and rvices.It could be argued that a pro t-eking rm should strive to offer a t of product characteristics that is either similar to tho of competitors but at a lower price or better than tho of
