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Questions
1.

Two of the major factors pressuring managers to
develop innovative practices are the advancement of
technology and the globalization of competition. Advancing
technology has increased the quality level of production
processes and allowed more processes to be automated.
Advancing technology has also led to greater integration of
information systems. Globalization of competition has
increased the quality and intensity of competition.

2.

Business process reengineering, BPR, is a method of
examining processes to identify and then eliminate, reduce,
or replace functions and processes that add little customer
value to products or services.
BPR is a tool to achieve radical changes in business
processes. Managers apply BPR to achieve wholesale gains in
cost or quality.

3.

BPR is an effective tool to improve quality. First
managers must identify the sources of quality problems.
Then, BPR can be applied to replace, change, or eliminate
those processes.


in today’s competitive markets, firms must continually
strive to increase the quality and functionality of products
while reducing costs. These pressures cause firms to
continually evaluate their processes and increase their
dependence on evolving technologies. As the level of
automation increases, efficiency increases and the demand
for labor is reduced. Layoffs are the inevitable result.

7.

The risks include the depletion of future talent
pools, a permanent loss of organizational knowledge, a loss
of trust between management and workers, and destruction of
a corporate culture of cooperation between managers and
workers.

8.

Downsizing is an accounting issue because it is
a financial decision. Costs and benefits of downsizing must
be analyzed like any other long-term decision. Also, there
are financial reporting issues to be examined including the
financial consequences of severance packages, employee
retraining, and the sale of idle assets.

9.

A downsizing decision involves the comparisons of
costs and benefits. The largest benefit derived is the
savings in labor costs that will occur over future periods.

action programs and outlaw discrimination. However, many
firms now pursue diversification beyond the legal mandates
because managers believe a more diverse workforce offers
advantages in serving a diverse customer base.

12.

ERP systems are packaged software programs that allow
companies to automate data gathering and processing
and integrate information feeder systems to provide useful
real-time information to managers.
ERP systems differ from prior generations of systems in
the extent to which the various feeder systems (e.g.,
payroll, accounts payable) are integrated into a common
database. ERP systems also integrate supply (value) chains
to a much greater extent than previous production management
systems.

13.

ERP systems link the customer to the rest of the supply
chain through, typically, a Web-based front door. The
customer can place an order for a product or service on the
Internet. The processes and inputs necessary to satisfy the
customer order are then coordinated by the ERP software
throughout the supply chain.

14.

ERP systems are built from combining modules. A typical

intentional or incidental contamination.

17.

Data mining is the application of statistical techniques to
data for the purpose of gaining new insights about problems
or opportunities. An ERP system facilitates data mining
because the central repository of information contains a
rich database of all important aspects of operations:
financial, customer, supplier, etc.

18.

Strategic alliances are agreements between firms that
result in their combining competencies and resources to
create products and services for customers.
Strategic alliances are increasingly used today because
they are an effective response to competitive pressures.
Firms have been forced to select core competencies that they
will maintain and defend. If delivery of a product or
service requires core competencies not possessed by a given
firm, that firm must contract with another firm or firms to
provide those competencies. A strategic alliance is a
flexible approach to combining the needed competencies to
deliver high-quality goods and services to customers at
competitive prices.

19.

Strategic alliances can take many forms including joint

information in a business. The central idea of open-book
management is that information should be shared and consumed
by all organizational participants—not just managers.
This view about information contrasts with the more
traditional view in which information is regarded as an
asset that must be safeguarded, and access to it must be
limited to managers who are trained in its use.

22.

The implementation of open-book management changes the roles
of accountants. Accountants must no longer act as guardians
of information but become purveyors of information.
Additionally, accountants must devise ways to help
unsophisticated users of information develop skills and
abilities in consuming financial data. Games are often
devised to aid in this process.

23.

Games can create an incentive to use financial information.
For workers who are unsophisticated in the use of accounting
data, a simplification of the data can be made by the
accounting staff and be presented in the guise of a game.
By tying employee compensation to the outcomes of the game,
an incentive is created for employees to perform well in the
game. As employees strive to compete in the game, they
consume information to improve their performance. Thus, the
game can be used as a device to create demand for
information. As employees observe ways to use the

26.

Generally, smaller firms will have more success than larger
firms in implementing open-book management because each
employee’s contribution to the bottom line is more
identifiable. Firms with decentralized structures are more
suited to open-book management because they require lower
level managers and employees to make decisions and be
accountable for results. Environments in which there is a
high level of trust between managers and workers will stand
a much better chance of surviving the cultural changes that
must occur to implement open-book practices.

27.

The environmental impact of company operations has become a
major concern of managers for two reasons. First,
legislation has imposed a larger burden on firms to be
accountable for environmental emissions and other
environmental impacts. Second, the capital market has
become sensitive to environmental issues because of the
potentially large costs associated with remediation of
environmental damage.

28.

The first strategy is to clean up environmental contaminants
after they have been produced. The second strategy is to
develop processes to reduce and recycle waste that is
created. The third strategy is to avoid producing

justified. Next, financial experts help screen the
products of competing vendors to identify the product
that meets the firm’s needs at the lowest cost.
Finally, the financial experts manage the process of
implementation to ensure that the product functions as
promised by the vendor and confirm that the costs
incurred and benefits generated are consistent with the
expectations.

30.

The use of higher technology is commonplace in
business today. Further, technology is increasingly a major
component of strategies being planned and executed by firms.
Financial professionals, having responsibility for managing
the process of technology acquisition, must now have a
broader understanding of their businesses. Without fully
understanding competitive strategies and business
operations, financial professionals will be unable to make
the appropriate recommendations about acquiring new
technology and will not be capable of understanding whether
technology is serving as an effective strategic and
operational tool.

31.

There is currently debate in the academic and
practitioner communities as to how TQM and BPR relate
to each other. While some argue that BPR can be viewed as a
tool of TQM, others argue that BPR is a philosophy about

proceeding with a change in product offerings.

b.

Analysts probably interpreted this announcement as bad
news largely because they viewed the layoffs not as an
effective response to control costs, but as evidence
that the strategy Agere elected to pursue was failing.

35.

No solution provided.

36.

At a minimum, the financial professionals can monitor
compliance with existing laws and ethical guidelines
pertaining to diversity. However, if greater diversity is
stated to be an organizational objective, the financial
experts in the business can develop control systems to set
objectives for diversity, monitor achievements, and connect
achievements to managerial rewards. By developing formal
measuring and reporting systems, managers will be forced to
consider how their hiring, promotion, and performance
evaluation criteria influence the objective of greater
diversity.


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identify any problems that are likely to be encountered in
the implementation.

38.

Through the Internet storefront much demographical
information can be gathered about purchasers of products
including information about gender, race, age, marital
status, economic status, hobbies, and buying habits.
This information can be related to product sales. The
idea is to develop profiles of buyers of particular types of
products. Once such profiles are compiled, specific target
groups of customers can be contacted using questionnaires,
phone calls, and e-mail to obtain input about details of
features, price points, and quality expectations so that as
the car is designed, fairly precise specifications regarding
price, quality, and functionality can be followed.


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39.

a.

Customer satisfaction should improve because a
closer link between manufacturing and marketing allows
more customer feedback to be incorporated into product

schedule where it is available to the entire supply chain
simultaneously. By sharing information in real time
throughout the entire value chain, coordination of
activities can occur across all links of the supply chain.

41.

No solution provided.


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207

42.

The establishment of a strategic alliance requires all of
the systems and structures required to form any new
business. The financial professional should provide input
on issues such as the organizational form of the strategic
alliance, the organizational structure of the alliance, and
financing. Further, the financial professional should be
directly responsible for developing management control
systems, financial reporting systems, reward structures for
management and employees, and product costing systems. Once
the strategic alliance is operational, the financial
professional should contribute to the ongoing management of
the business including participating in planning, decision
making, and performance evaluation.

measurement and employee rewards are linked and how changes
in the performance measures lead to changes in the payoffs.


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208
44.

45.

46.

a.

An end-of-pipe strategy could be applied to this
waste. An end-of-pipe strategy is most applicable to
situations in which the waste is of low toxicity, can
be disposed of safely and at relatively low cost, and
costs would be exorbitant to eliminate or dramatically
reduce the waste.

b.

This waste is a likely candidate for total
elimination. Because it is highly toxic and can be
disposed of only at great cost, the most likely
strategy is to redesign production processes so that
the waste will not be produced.


Cases
47.

a.

b.

Analysts would have two competing effects to evaluate.
On the one hand, higher profits in the near term
increase the ability of the firm to remain solvent,
maintain liquidity, and provide a return to investors
in the form of dividends.
Alternatively, cutting R&D spending may result in
a reduction in the growth of the firm. A slower growth
rate implies profits in the future will be lower than
levels that are reasonably achievable before the cut.
The result will be lower profits to be distributed in
the future to shareholders.
Whether an analyst would interpret the
announcement as good news or bad news would depend on
which of the two preceding effects the analyst
identifies as the dominant effect.
As indicated in the article, convincing evidence
supports the long-run payoff for management in
encouraging innovation. The mean market-to-book ratio
of 3,500 companies tracked during the 24-year period
between 1964 and 1998 rose 4.3% with each 1% increase
in R&D spending. Financial professionals in a company
should promote and maintain in top management a high

of managers who have outperformed their peers. This subset
can serve as a talent pool to fill vacated top executive
positions.


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49.

211

The memo to Ms. Gale should address the following points:
 The implementation of open-book management should be
preceded by training. Specifically, Mr. Wallace must
receive training so that he will understand the
accounting information that he is to be provided. The
training must also show Mr. Wallace how the accounting
information can be used to change operations in his
department.
 The financial information that is to be used as a basis
for managing specific departments may need to be modified
to match the sophistication of the information consumer.
For instance, in the case of Mr. Wallace, the overhead
information may be more difficult to comprehend than
information regarding direct costs. Consequently, the
information system may be more effective if it provides
only information on direct costs initially.
 Selecting overhead as the first cost item to reduce is
likely to be less successful than selecting direct costs.
Furthermore, many of the items that comprise overhead may


50.

a.

Before implementing open-book management in any
department, study should be given to the performance
measurements that will be appropriate for each
department. The performance measurements must be
designed to create the correct incentive for each
departmental manager.
Miltown’s gross profit has declined from $160 to
only $45 within the past year. At the same time, the
industry average gross profit declined at a much slower
rate: from $140 to $75. The decline in the average
gross profit of the industry signals that the industry
has become more price competitive, and the larger
decline for Miltown indicates that Miltown was unable
to achieve cost reductions at the same pace as the
industry achieved cost reductions.
For the first quarter of 2002, Miltown had a
market share of approximately 13 percent (4,200 
32,000). Even though total industry unit sales were
higher in the first quarter of 2003 than in the first
quarter of 2002, Miltown’s unit sales slipped and
Miltown’s market share dropped to about 8.6 percent
(3,450  40,000). This information indicates Miltown’s
selling price did not drop as fast as the industry
average and sales were lost as a result. This is
confirmed by calculating average sales price for

that moved to China obviously did so to obtain a labor
cost advantage. Miltown must find some way to match
its competitors in reducing labor costs.
Another possibility is for Miltown to consider
acquiring more machine-intensive production technology
to reduce the labor content of its transmissions. A
third cost reduction approach is to consider the
application of business process reengineering to
redesign production operations for greater efficiency.
A fourth possibility is to redesign the transmission to
remove costs. A target costing system could be applied
to develop target costs for each major component. The
target costs of components could be used as a basis for
negotiating prices with vendors for outsourced
components. Miltown has less opportunity than other
firms to use value chain analysis to remove costs
because the company presently produces a very high
percentage of all transmission components.
Finally, the company might consider developing
incentives for internal cost reduction. Open-book
management techniques could be applied to create
incentives and generate downward pressure on costs.


214
51.

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Amazon.com and Barnes and Nobles differ from each other in

sales and retail store sales. Further, Barnes and Noble has
the same opportunity as Amazon to have publishers ship lowvolume products directly to consumers for Internet sales and
special orders obtained from its retail stores.
Regarding its Internet storefront, Barnes and Noble’s
operations are similar to Amazon and would likely have
similar information requirements. However, Barnes and
Noble’s retail operations depend on sales in a local
geographical area rather than global sales. Success of the
retail outlets requires management of customer data on a
local level to maximize retail sales and on a corporate
level to manage warehouse inventory. Upstream, the ERP
software must connect the warehouse operations to the retail
outlets and the Internet outlet.


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52.

215

Several recommendations can be made based on the data
given. First, the company can develop a more
environmentally sensitive chart of accounts. This change
would allow the company to improve its understanding of the
level and causes of environmental costs. Second, the
environmental costs should be charged to specific jobs so
that a more accurate cost can be determined for all products
produced.
Next, responsibility for controlling environmental

levels that could have been achieved. Consequently,
the ethical treatment of employees is likely a
prerequisite for a firm to achieve high levels of
performance.

b.

Open-book management is a philosophy that requires a
very high level of trust between employees and
managers. A company’s use of downsizing as an
organizational strategy is inconsistent with the
culture in which open-book management could be
successfully implemented.


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54.

55.

a.

Strategic alliances involve a greater degree of
integration of two or more companies than is obtained
in traditional supplier/customer relationships.
Accordingly, there is greater dependence between the
partners in determining the quality of the output.

Greater flexibility to outsource components should have
a positive impact on quality. Because GM would always
have the choice to make components that can’t be
obtained from a vendor with the appropriate level of
quality, the overall level of quality should only
increase. Particularly, if there are vendors that can
produce at a competitive price, but at higher levels of
quality than GM’s internal operations, outsourcing
would improve the quality of the final product.


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56.

57.

217

c.

GM has an ethical obligation to its existing employees
to be fair in its negotiations. However, if GM is not
given greater flexibility to outsource, eventually its
entire employee base could be in jeopardy as the
inflexibility may lead to a less competitive position
in the industry, especially relative to tough foreign
competitors such as Toyota. Thus, a loss of some jobs
currently because of greater outsourcing may lead to

dealing with environmental protection and environmental 
contamination.

a.

The toxicity of wastes can be depicted as a continuum.  
Some waste is harmless and some represents a threat to 
large populations of people and other organisms.  
Realistically there are some waste materials that should
not be produced regardless of the economic gain that is 
sacrificed.  


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b.

Many examples exist of companies knowingly disposing of 
waste improperly for financial gain.  In many instances 
improper disposal was simply regarded as the least 
expensive way of conducting business.  There are many 
arguments against improperly disposing of waste.  
Ethically, it is difficult to justify the 
endangerment of an innocent population to preserve jobs.
The tacit nature of improperly disposing of waste 
necessarily means that many people endangered by the 
waste are uninformed of the threat.
If the company’s only means of survival is the