STRATEGIC MANAGEMENT ACCOUNTING blogpost---200words
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Topic 7: Managing Customer and Supplier Value & Relationships
ACCT5931 Strategic Management Accounting
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Introduction to Strategic Management Accounting
Analysing the Internal Environment
Conclusion to Strategic Management Accounting
Analysing the External Environment
Developing Strategy
Measuring Performance and Organisational & Project Value
Topic 1
Topic 12
Topic 4
Topic 6
Topic 2
Performance Measurement & Management
Being a Responsible Corporate Citizen and
Managing Strategic Risks
Topic 9 Managing Sustainably
and Creating Shared Value
Topic 8Stakeholder & Resource Management
Topic 3
Topic 10
Strategy Analysis & Formulation
Managing Customer and Supplier Value
& Relationships
Topic 7
Developing and Using a Balanced Scorecard
Topic 5
Topic 7: Course content overview
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n Required readings: – Reading 7.1 – Kaplan, R.S., Matsumura, E. M., Young, S.M., and Atkinson, A. 2011.
Management Accounting 6e: Information for Decision-Making and Strategy Execution, Pearson Education, pp. 218-237 [Course Readings Kit 2019].
– Reading 7.2 – Langfield-Smith, K., Thorne, H., and Hilton, R. 2015. Management Accounting 7e: Information for Creating and Managing Value, McGraw-Hill, pp. 653, 656-661 [Course Readings Kit 2019].
– Reading 7.3 – Kaplan, R.S., Matsumura, E. M., Young, S.M., and Atkinson, A. 2011. Management Accounting 6e: Information for Decision-Making and Strategy Execution, Pearson Education, pp. 78-81 [Course Readings Kit 2019].
– Reading 7.4 – Grant, R., Butler, B., Orr, S., and Murray, P.A. 2014. Contemporary Strategic Management: An Australasian Perspective (2nd Edition), Milton, QLD: John Wiley & Sons, Chapter 5: Analysing Resources and Capabilities, pp. 157-158; and Chapter 6: The Nature and Sources of Competitive Advantage, p. 204-206.
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Topic 7: Required readings
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Topic 7: Desired learning outcomes
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n In Topic 7 we aim to be able to: – Appreciate the importance and components of customer value – Apply the concepts of customer relationship management (CRM) – Conduct customer profitability analysis (CPA), use CPA
information for making decisions on managing customer relationships, and understand its benefits and weaknesses
– Understand and apply the concept of Customer Lifetime Value (CLV), and understand its benefits and weaknesses
– Understand the guiding principles for considering outsourcing supply, as well as associated benefits and risks
– Evaluate outsourcing decisions with make-or-buy calculations and understand the 'Total Cost of Ownership' concept
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Topic 7: Components of customer value
n Key components of customer value are: – Price – Total product/service cost to the customer
(including ongoing product usage and disposal costs) – Product features – Functional characteristics provided – Quality – Product quality relates to performance, aesthetics and
durability; Service quality includes sales staff availability and product/service knowledge, after sales service effectiveness and complaint management
– Availability – Extent of distribution and retail network – Image – Market’s perceptions of the organisation’s customer
value proposition; generates brand loyalty – Bundling – Convenience from selling a package of
products/services together
Source: Grant et al. (2014)
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n CRM refers to collecting and analysing data to understand individual customers’ behavior patterns and needs, and to develop strong relationships with customers
n Targets the “right” customers: – Most profitable for organisation – Inherently loyal – Provide high level of net revenue – Well-suited by differentiating aspects
of the organisation’s service from that of its competitors (i.e., fits with value proposition)
Topic 7: Customer relationship management (CRM)
n Benefits: – Increases effectiveness of
marketing spend (targeted campaigns and focus groups)
– Mitigates over-spending on low value customers, under-spending on high value ones
– Easier to target customers and improve use of interactions
n Challenges: – Significant technology and
human capital investments – Long lead times to develop
infrastructure – Cross-functional co-operation
and co-ordination
Source: Grant et al. (2014); Langfield-Smith et al. (2014)
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Topic 7: Customer profitability analysis (CPA)
CPA takes into account the profitability of the product mix purchased by customers and customer-driven costs
generated by servicing these customers/segments
n Based on the principles of Activity-Based Costing (ABC) n Benefits
– Enables reconfiguring an organisation’s customer portfolio (managing unprofitable customers, conceding permanent loss customers)
– Enables formulating value propositions for customer segments (incl. pricing and discounting decisions; as well as targeted CRM for customer segments)
– Enables effective resource allocation to support most profitable customers n Weaknesses
– Static, single period perspective of customer profitability – Historical performance only
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Topic 7: Examples of high vs. low ‘cost to serve’ customers
Activity High-Cost to Serve Customers Low-Cost to Serve
Customers
Manufacturing Customised product features
Standardised product features
Order Entry Salesperson manually processes small orders
Customer electronically submits order
Distribution Overnight delivery Delayed delivery
Credit Collection
Delayed payment; manual payment
Timely payment, electronic deposit
Technical Support
Requires frequent and support; training for
customer staff demanded
Customer has in-house support infrastructure
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Topic 7: Customer lifetime value (CLV)
CLV is the sum of accumulated cash flows – discounted using the weighted average cost of capital (WACC) – of a
customer over his or her lifetime with the company
n Focuses on multi-period, future-oriented economic value n Benefits
– Considers relative profitability changes according to the customer’s lifecycle stage with the organisation
– Considers impact of tenure on the value a customer represents (1/defection rate = tenure; e.g., 1/20% p.a. defection rate = 5 year tenure)
n Weaknesses – Requires forecasts of future behaviour, making it less rigorous than CPA – Difficult to estimate components of CLV calculations
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Topic 7: Seminar exercise 1
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Robyn’s Ice Cream: Types of customers
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Topic 7: Seminar exercise 2
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AquaDrench: Customer profitability analysis (CPA)
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Topic 7: Seminar exercise 3
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Longevity Ltd: Customer Lifetime Value (CLV)
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Topic 7: Outsourcing and collaborative supply relationships
n Guiding principles when considering outsourcing: – Those activities which relate to core competencies (where
the organisation can achieve definable pre-eminence and provide unique value for customers) should be performed in-house
– Other activities (for which the firm has neither a critical strategic need nor special capabilities) should be evaluated for strategic outsourcing to better or world- class suppliers.
n Consequently, strategic supply chain management has become an issue of increasing prominence and importance in world class organisations
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Topic 7: Potential benefits from outsourcing
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STRATEGIC BENEFIT EXAMPLE Greater flexibility for the buyer, especially re rapidly developing technology and fashion goods
Nike
Decreased design cycle-times with multiple, specialist suppliers
Apple: Frogdesign
Enhanced personnel depth and technical knowledge, plus specialised facilities
Alibaba: Tech development (US)
Reduced risk for component and technology development
Dell: Network of ODM relationships (incl. Inventec)
Access to new product, process and quality improvement ideas
South 32: Cannington lead & silver mines (Coffey Geosciences)
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Topic 7: Potential risks of outsourcing
Source: Quinn & Hilmer (1994)
n Loss of critical skills – Skills of outsourced activities can be lost after a period of time – May create problems, if supplier develops/extends their core competency in
outsourced area, and they become unwilling or unable to supply (includes loss of strategic flexibility)
n Loss of cross-functional skills – Less opportunity for cross-functional insights and innovations, due to less
interactions among skilled people in different functional activities n Loss of control over a supplier
– When the supplier’s priorities do not match the buyer’s, quality of the outsourced product/activity can decline. This results in two sub-types of risk:
1. Appropriation risk: Risk that the supplier learns the organisation’s expertise and competencies and integrates forward, selling directly to the buyer’s customers
2. Diffusion risk: Risk that your competitive edge may be eroded by spreading expertise throughout the industry, as the supplier learns your expertise and competencies and passes this knowledge to its other customers
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Topic 7: Evaluating the decision to outsource financially
1. To evaluate whether outsourcing or performing an activity in-house results in greater cost benefits (‘Make-or-buy’ decision): n Identify relevant costs (and
ignore irrelevant costs) and n Apply differential cost
analysis (we are only interested in cost differences) to evaluate the likely financial benefits from outsourcing
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2. To compare alternative suppliers (by evaluating supplier performance): n Use a supplier
performance index (SPI)
n Where: SPI = Total supplier activity costs / Total purchase price
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Topic 7: Total cost of ownership (TCO)
n Asks organisations to consider overall value provided by its suppliers
n Encompasses the quoted purchase price, as well as: – costs of purchasing - including costs of ordering, freight and
incoming quality control – costs of holding - including costs of storage, obsolescence
and money – costs of poor quality - including costs of rejection, re-
receiving, scrap, rework, repackaging, downtime and warranties; and
– costs of delivery failure - including costs of dispatch, premium transportation, downtime and lost sales owing to late deliveries, and holding and administration costs related to early deliveries
Source: Langfield-Smith et al. (2014) 17
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Topic 7: Seminar exercise 4
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Air Refresh Ltd: Make-or-Buy Decision
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ACCT5931 Wrap-up: Congratulations!
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Congratulations on submitting your Team Case Project!
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