AYB321 Strategic Management Accounting

Tutorial Solutions
TUTORIAL 1
INTRODUCTION TO SMA

Review Questions:
1. Name and describe the three aspects of organisational architecture. 1. Assignment of decision rights - this assignment indicates who has authority to make particular decisions within the organisation. 2. Performance-evaluation system - this system specifies the criteria that will be used to judge the performance of agents within the organisation (for example, employees). 3. Reward system - this system specifies how compensation (and other rewards and punishments) will be distributed among agents within the firm. 2. Briefly describe Economic Darwinism. Economic Darwinism is the economic counterpart of natural selection in biology. Competition in the market place weeds out those organisations that are less efficient and fail to adapt to the environment. The result is survival of the fittest. 3. It is often argued that self-interest can result in a diminished value in organisations. Briefly explain how the design of a firms organisational architecture can be used as a managerial tool to affect human behaviour and increase the value of the organisation. Economics provides a theory to explain the way individuals make choices. It also explains that individuals respond to incentives. Since managers and employees can be resourceful in devising ways to exploit the opportunities they face, inappropriately structured incentives may result in them acting in ways that reduce the firms value. The appropriate design of the organisational architecture provides managers with a tool to motivate individuals in the organisation to make choices that increase firm value. The design focuses on assigning decision rights to those within the organisation with the relevant information and on developing performanceevaluation and reward systems to provide them with appropriate

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incentives to make decisions that increase firm value. Neglecting to focus on appropriate design of the organisational architecture invites individuals to game the system. This gaming can result in diminished firm value.

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Analytical Thinking, Critical Thinking and Problem Solving Questions:

1. The Darwinian perspective is often perceived as being synonymous with the view that nice guys finish last. In particular, in order to survive, firms should avoid cooperating with competitors. Rather, firms should take advantage of opportunities to destroy current or potential competitors. Similarly, managers should view the motives of other firms with a great deal of suspicion. Do you agree with this perspective? Explain why or why not. Economic Darwinism suggests that competition in the marketplace provides strong pressures for efficient decisions including organisational decisions. If firms adopt inefficient high cost policies including organisational architecture competition will place strong pressures on them to either adapt or close. Benchmarking provides managers with an opportunity to look at companies that are doing something best and to learn how they do it in order to emulate it. Survival of the fittest does not imply nice guys finish late. Cooperation, helping and trusting is not necessarily inconsistent with the assumption of self-interested behaviour. Sharing best practices and cooperating with (or helping) competitors can enhance profitability and reduce costs. However, the uncritical adoption of another companys best practices can expose a firm to the risk of failure. Unintended organisational side effects from sharing, copying, or cooperating can increase competitive pressures and reduce profits. Managers should have a good understanding of how the best firm arrived at its existing architecture and develop a broad perspective of why specific types of organisations work well in particular settings. 2. In the process of benchmarking, a colleague of yours notes that Lincoln Electric, a producer of electric arc welders, has much higher productivity than does your company. Unlike your firm, Lincoln has an extensive piece-rate compensation system; much of its employees total compensation is simply the number of units produced multiplied by the piece rate for that type of unit. Your colleague recommends that your company adopt a piece-rate compensation system to boost productivity. What do you advise?

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Benchmarking is identifying the best practices of firms operating within similar environments, so that the benchmarking firm can learn from the experience of the others. Piece rates are only one part of Lincoln Electrics organisational architecture. Piece rates work well for them because they fit well with Lincolns particular economic environment, business strategy, and other elements of the organisational architecture. It might be inappropriate to use Lincoln Electric as a benchmark if the firm is in a different environment or has a different business strategy. Before adopting Lincolns system, the firm should gain an understanding of how Lincoln arrived at this compensation system and why piece-rate system works well at Lincoln. Uncritical adoption Lincolns compensation system without due consideration to the other aspects of the organisational architecture exposes the firm to risk of failure.

3. Competition in the marketplace weeds out inefficient firms. Managers use benchmarking as a process of finding and adapting the best practices of other organisations to their own organisation. Briefly explain how benchmarking may help and/or hinder managers in making better decisions. Suggested Approach to the Question:

Problem Theory Analysis Solution/Conclusion.

Problem/Question: Question implies that benchmarking has advantages and disadvantages, and asks how the use of benchmarking can help and/or hinder decision-making

Theory Economic Darwinism: o Alchian: Whenever successful enterprises are observed, the elements common to those observed successes will be associated with success and copied by others in their pursuit of profits or success. o That is, copying (benchmarking) the organisational architecture of successful firms can lead to success. In fact, if a firm fails to do so it is likely to become extinct.

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o But: uncritical copying can lead to failure if the innovations do not suit the firms environment (technology, competition and regulation). Analyse and Conclude Not much to analyse in this question. Need to first explain benchmarking, then provide the benefits, and then identify the possible pitfalls.

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Suggested Solution: When faced with competition, firms must be quick to adopt efficient architectures. Benchmarking generally means looking at those companies that are doing something best and learning how they do it in order to emulate them. Sharing best practices and cooperating with (or helping) competitors can help firms improve their performance. In fact, the concept of Economic Darwinism points out that those firms that do not benchmark are in danger of failing. However, simply copying another firms processes may lead to disastrous results caused by unintended (but largely predictable) organisational side effects. This occurs when a firm attempts to adopt an organisational architecture that is not suited to their particular industry or environment (technology, competition and regulation). Each firm must understand their environment, develop a strategy that fits that environment, and then design their organisational architecture to fit.

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