Key Success Factors

Customers want companies to use the value chain and supply chain to deliver ever-improving levels of performance when it comes to several (or even all) of the following:

• COST AND EFFICIENCY—Companies face continuous pressure to reduce the cost of the products they sell. To calculate and manage the cost of products, managers must first understand the activities (such as setting up machines or distributing products) that cause costs to arise as well as monitor the marketplace to determine the prices customers are willing to pay for the products. Management accounting information helps managers calculate a target cost for a product by subtracting from the “target price” the operating income per unit of product that the company wants to earn. To achieve the target cost, managers eliminate some activities (such as rework) and reduce the costs of performing other activities in all value-chain functions—from initial R&D to customer service (see Concepts in Action: Cost Leadership at Costco: Rock-Bottom Prices and Sky-High Profits). Many U.S. companies have cut costs by outsourcing some of their business functions. Nike, for example, has moved its manufacturing operations to China and Mexico, and Microsoft and IBM are increasingly doing their software development in Spain, Eastern Europe, and India.
• QUALITY—Customers expect high levels of quality. Total quality management (TQM) is an integrative philosophy of management for continuously improving the quality of products and processes. Managers who implement TQM believe that every person in the value chain is responsible for delivering products and services that exceed customers’ expectations. Using TQM, companies, for example, Toyota, design products to meet customer needs and wants, to make these products with zero (or very few) defects and waste, and to minimize inventories. Managers use management accounting information to evaluate the costs and revenue benefits of TQM initiatives.
• TIME—Time has many dimensions. Two of the most important dimensions are new-product development time and customer-response time. New-product development time is the time it takes for companies to create new products and bring them to market. The increasing pace of technological innovation has led to shorter product life cycles and more rapid introduction of new products. To make new-product development decisions, managers need to understand the costs and benefits of bringing products to market faster.

1. Customer-response time describes the speed at which an organization responds to customer requests. To increase customer satisfaction, organizations need to meet promised delivery dates and reduce delivery times. Bottlenecks are the primary cause of delays. Bottlenecks occur when the work to be performed on a machine or computer exceeds its available capacity. To deliver a product or service quickly, managers need to have adequate capacity. eBay invests in server capacity to create quality experiences for the online auction giant’s customers. Management accounting information helps managers quantify the costs and benefits of adding capacity.

• INNOVATION—A constant flow of innovative products or services is the basis for a company’s ongoing success. Many companies innovate in their strategies, business models, the services they provide, and the way they market, sell, and distribute their products. Managers at companies such as Novartis, the Swiss pharmaceutical giant, rely on management accounting information to evaluate the costs and benefits of alternative R&D and investment decisions.
• SUSTAINABILITY—Companies are increasingly applying the key success factors of cost and efficiency, quality, time, and innovation to promote sustainability—the development and implementation of strategies to achieve long-term financial, social, and environmental goals. The sustainability efforts of the Japanese copier company Ricoh include energy conservation, resource conservation, product recycling, and pollution prevention. By designing products that can be recycled easily, Ricoh simultaneously improves sustainability and the cost and quality of its products.

The interest in sustainability appears to be intensifying among companies. General Electric, Poland Springs (a bottled-water manufacturer), and Hewlett-Packard are among the many companies incorporating sustainability into their decision making. Sustainability is important to these companies for several reasons:

• Many investors care about sustainability. These investors make investment decisions based on a company’s financial, social, and environmental performance and raise questions about sustainability at shareholder meetings.
• Companies are finding that sustainability goals attract and inspire employees.
• Customers prefer the products of companies with good sustainability records and boycott companies with poor sustainability records.
• Society and activist nongovernmental organizations, in particular, monitor the sustainability performance of firms and take legal action against those that violate environmental laws. Countries such as China and India are now either requiring or encouraging companies to develop and report on their sustainability initiatives.

Management accountants help managers track the key success factors of their firms and their competitors. Competitive information serves as a benchmark managers use to continuously improve operations. Examples of continuous improvement include Southwest Airlines increasing the number of its flights that arrive on time, eBay improving the access its customers have to online auctions, and Lowe’s continuously reducing the cost of its home-improvement products. Sometimes, more fundamental changes and innovations in operations, such as redesigning a manufacturing process to reduce costs, may be necessary. To successfully implement their strategies, firms have to do more than analyze their value chains and supply chains and execute key success factors. They also need good decision-making processes.