section v financial and accounting dimensions. financial and accounting dimensions three myopic...

Section V

Financial and Accounting

Dimensions

Financial and Accounting Dimensions

• Three Myopic Views• Exchange Rates; Asymmetry in Pricing• Capital Investments; Platform Investment • Accounting Tools: Japanese Accounting

Effect of Exchange Rate on Foreign Trade:

• Asymmetry in Pricing Behavior• The Concept of Pass-through• Changes in Domestic and Export Prices in

Japan• Discriminatory Trade Practices; “Dumping”• Dependence on the Imports of Raw materials

Hysteresis and the Planning Horizon• Two Major Factors: Degree of Hysterisis and the

Corporate Planning Horizon• Hysteresis: Supply-side and Demand Side • Supply-side, Market Leaders Vs Upstart firms,

“sunk costs”• Demand-side, Brand Loyalty and Market

stickiness, “Promotional Costs”, “Differentiated Cost Shock”

• Planning Horizon: Individual and Institutional Investors, and Focus on Capital Gains

Different Strategies for Japanese &U.S. firms in the U.S. Market

• U.S. Firm– Maximize profit in dollars

• Japanese Firm– Maximize profit in terms of Yen

Japanese Firms

• High Yen, Low Dollar– Profits are determined by difference between

revenue and costs

• Low Yen, High Dollar– Profits are determined by promotional cost also,

if the firm is to expand operation

U.S. Firms

• It is not affected by exchange rate directly, the yen/dollar rate matters only to the extent that the rival firm’s output responds to it

Myopia

• Principles of organizing work, radical technologies, and globalization

• Willingness to invest capital for long-term payoffs

• Bias towards the short term

• Source of the current myopia

• Investment in opportunity

Platform Investment as Options

• Flexibility

• Platform investment– Design of an operating flexibility– Growth opinion

• Options on the future

The Problem of Myopic Heuristics

• Methods to evaluate option opportunities

• Four most telling sources of myopia– Financial Institutions– Budgeting Rules

• Strategic Planning– Strategic Business Units

Underinvestment

• Myopic biases will hurt industries when it matters the most

• Myopic versus far-sighted

• Stable versus volatile environments

• Uncertainty represents opportunity

• Advantage to early investment

Heuristics for Platform Investment• Platforms, as options, valuable due to

– uncertainty• if this is present, then there needs to be flexibility

– opportunity• value of platform directly related to this

• some are more valuable than other

– time dependence• there is a dependence of decisions on time

– discretion• critical issue, needs to be accompanied by discretion

to exercise the option

Platform Investments as Capabilities

• Organizational Capabilities– create quality, flexibility

– most important platform a firm can build

– support investment strategies into wide spectrum of opportunities

• Examples– Core Technologies

– Joint Ventures

– Flexible Manufacturing Systems

– Country Platforms

Short-run Accountability for Long-run Results

• Accountability rests with managers– gather appropriate information– understand sources of uncertainty

Market Structure• It is important not to forget about competition

Luxury of Losing Money• Underwrite Losses in short term for long- term gains

Another Hidden Agenda: Japanese Management Accounting

• Japanese manufacturers continue to out perform U.S. competitors in cost, quantity, and on time delivery.

• Direct link between management accounting and long-term corporate goals

• Unlike the US, Japanese management accounting is used to influence, not just inform

Allocation & Market Design

• The Japanese allocate overhead based on direct labor – that creates the desire for more automation

throughout the Company and encourages employees to work in harmony with it's long-term goals.

• Accounting for Market Driven Design: – The design stage holds the greatest promise for

supporting low cost production

Goodbye Standard Costs

• Standard costs reflect an engineering mind-set and technology driven management. The goal is to minimize variances between budgeted costs and actual costs.

• Japanese market-driven philosophy requires doing what it takes to achieve a desired performance level under market conditions

Accounting & Strategy

• The central principle: accounting policies should be subservient to corporate strategy, not independent of it.

• Japanese focus on: quality , time delivery, and low cost production

• Extensively use nonfinancial measures to evaluate factory performance