BKAM5023: Management Accounting and Control System THE PLACE AND ROLE OF MANAGEMENT ACCOUNTING AND CONTROL SYSTEM

IN AN ORGANIZATION STRIVING FOR COMPETITIVE ADVANTAGES: AN ANALYSIS OF VALUE CHAIN APPROACH Abstract Complex business environment nowadays required business and organization need to be as competitive as much as possible. Barney (1991) cited in Clulow et al (2003) founds that, a firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential player. Passemard and Calatone (2004) in his study stated that successfully implemented strategies will lift a firm to superior performance by facilitating the firm with competitive advantage to outperform current or potential players. Mentioned by Reed and Fillippi which is cited in Rijamampianina (2003), in order to gain competitive advantage a business strategy of a firm manipulates the various resources over which it has direct control and these resources have the ability to generate competitive advantage. Therefore, this paper aimed to analyzed management accounting approach of value chain for assessing the organization competitive advantages. Throughout of this aim, this paper tried to overcome with few objectives of understanding the concept of management accounting control system and the concept of competitive advantages, evaluating the characteristic of well designed management accounting and control system, examining the competitive strategies for organization fourth is analyzing the value chain approach for assessing organizations competitive advantages as well as its limitation and lastly is to examine the successful low cost strategy of AirAsia . As a result, this paper founds that it is important for business or organization to have a better understanding in managing their value chain in order to assess with the competitive advantages. The successful of AirAsia shows how much importance
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BKAM5023: Management Accounting and Control System the organization managing their value chain analysis in order to strive for competitive advantages. And finally this paper concluded that analyzing costs and differentiation through the value chain is an essential in the search for competitive advantages. 1.0 INTRODUCTION

Competitive advantage management is a set of methods and strategies that work to not only position your company or business but also make it stand out in the market. The key to create a dominant position in your market is to understand the competitive advantage of your company over its rival companies. The business plan that you have sketched as an outline of the future progress of your business should incorporate competitive advantage management. Without it, your business plan is incomplete and will be ineffective as well. As todays business environment becomes progressively more competitive, organizations are becoming more aggressive and dynamic in identifying competitive strategies that will ensure profitable existence. Business innovations, advancement in technology and the changing demand of customers may be attributed by competition in businesses. Competition among business organizations may compel the management to develop business techniques and strategies that would guide an organization towards the maximization of profits. This may be achieved through increased sales and reduced cost of production. The optimization of profits and minimization of costs may enable an organization to create a competitive advantage in its industry. Certain management accounting practices provide strategies that can influence a large number of customers to have a lasting preference for a companys products. Thompson, Strickland and Gamble (2009) are of the view that the adoption of management accounting techniques may provide an organization with a sustainable competitive advantage over its rivals.

BKAM5023: Management Accounting and Control System All firms make decisions affecting their competitive position and profitability. This process of decision making is called strategic planning. It is undertaken in an effort to help the firm position itself against its competitors in the pursuit of competitive advantage. According to Porters suggestion, it can be useful to use the value chain analysis as an approach in developing strategy Value chain analysis could also be useful in formulating the competitive strategies, understanding the source(s) of competitive advantage, and identifying and/or developing the linkages and interrelationships between activities that create value.

In order to understand how management accounting and control system play its roles for assessing organizations competitive advantages. Therefore, this study has come out with few objectives which are as follows:

1. To understand the concept of management accounting control system and the concept of competitive advantages; 2. To evaluate the characteristic of well designed management accounting and control system; 3. To examine the competitive strategies for organization; and 4. To analyze the value chain approach for assessing organizations competitive advantages as well as its favorable limitation. 5. To examine the successful low cost strategy of Air Asia 2.0 2.1 DISCUSSION The Concept of Management Accounting

The Chartered Institute of Management Accountants (CIMA) (2005) cited in Nicholas (2011) states that management accounting is an integral part of the core management function that requires the identification, measurement, accumulation, analysis, preparation, interpretation and

BKAM5023: Management Accounting and Control System communication of information used by management to plan, evaluate and control within an organization and to ensure appropriate use of and accountability for its economic resources. CIMA (2009) also cited in Nicholas (2011) further defines management accounting as the practical science of value creation within organizations in both the private and the public sectors. It combines accounting, finance and management with the leading edge techniques needed to drive successful businesses. Frank (1990) views management accounting as the preparation of financial and non-financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. He outlines management accounting as a practice that covers three areas which are firstly is strategic management; advancing the role of the management accountant as a strategic partner in the organization, secondly is performance management; developing the practice of business decision making and managing the performance of the organization and lastly is risk management; contribute on the framework and practices for indentifying, measuring, managing and reporting risks in order to realize the organizations goal. The integration of these three aspects of management accounting adds value to innovative management accounting practices. These practices provide an organization with strategies that focus on the dynamic business environment. Management accounting skills are driven by the management accountants who constitute the management accounting function in an organization (Shah, 2009). Shah (2009) asserts that management accountants apply their professional knowledge and skill in the preparation and presentation of financial and other decision-oriented information. They do this in order to assist management in the formulation of policies and in the planning and controlling of operations in their organizations. Management accountants may therefore be seen as value-creators which in turn may assist an organization to gain a competitive
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BKAM5023: Management Accounting and Control System advantage. Frank (1990) asserts that management accountants are much more interested in looking forward and making decisions that will affect the future of an organization. This is opposed to the historical recording and compliance (scorekeeping) aspects of the profession. Management accounting knowledge and experience is therefore obtained from various fields and functions within an organization. This includes areas such as information management, treasury, efficient auditing, marketing, valuation, pricing and logistics. These aspects assist the management in the development of strategies for the creation of a competitive advantage in the highlighted fields. 2.2 The Role of Management Accountants in an Organization

Consistent with other roles in today's organizations, management accountants have a dual reporting relationship. Laverty (2004) suggests that as a strategic partner and a provider of decisions based on financial and operational information, management accountants are responsible for managing the business team. Laverty (2004) also notes that management accountants report relationships and responsibilities on the organizations financial situation. This management accounting role is important in the creation of a significant competitive edge for an organization, especially in the banking industry where financial and competitive information is used to build a competitive advantage. Laverty (2004) is also of the view that the activities of management accountants that have dual accountability to both the finance and the business team include forecasting and planning, performing variance analysis, reviewing and monitoring costs. He notes that tasks where accountability may be more meaningful to the business management team versus the organizational finance department is with the development of new product costing, operations research, business driver metrics, sales management score carding and client profitability analysis. Conversely, the preparation of certain financial reports,
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BKAM5023: Management Accounting and Control System reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the organization. Furthermore, Laverty (2004) notes that the progression of the accounting and finance career path is that financial accounting are a stepping stone to management accounting. Therefore, consistent with the notion of value creation, management accountants may drive the success of a business while strict financial accounting is related more to compliance and is a historical endeavor. This information suggests that management accountants may provide important competitive knowledge and skills that may be useful in the creation of a competitive advantage in organizations. Schulz (2001) suggests that management accountants are valued business partners who directly support an organizations strategic goals. He states that, with a renewed emphasis on good internal controls and sounds financial reporting, the role of the management accountants are very important. This may be experienced more in the banking sector where a slight fall in confidence in a banks liquidity management amongst its customers may seriously erode their loyalty to the bank and consequently erode its competitiveness. Drury (2004) states that the role of management accounting has moved from the traditional confines of planning, control, organization, communication and motivation and now focuses more on the external business environment (competition, opportunities, threats and changing circumstances). In addition, he also stated that management accounting is expected to play a bigger role in the formulation, implementation and control of business strategies. Therefore, it may be necessary to investigate how changes in the competitive business environment influence the management accounting function in creating competitive advantage in the banking industry. Horngren et al. (2006) argued that management accountants track performance on the chosen key success factors: cost and efficiency, quality,

BKAM5023: Management Accounting and Control System time and innovation with reference to the performance of competitors on the same factors. These authors argued that tracking the performance of other companies may serve as a benchmark and alert the managers on the changes that customers may be observing and evaluating. Therefore, management accountants in the banking industry may benchmark their organizations activities with those of competitors and use the benchmarking results in creating successful competitive strategies. The management accounting function need to be more concerned with the effects of the changing business environment especially competition in the organization and may need to contribute to the formulation, implementation and control of strategic decisions to create competitiveness for an organization within its industry. Since the banking industry could be an industry where the ever-changing business arena poses strong business threats, management accounting skills could provide strategies that would enhance the creation of a sustainable competitive advantage and hence reduce the threats in the industry. 2.3 The Concept of Competitive Advantage

Abernethy and Brownell (1999) points out that the competitive advantage theory suggests that everyone is better off if decisions are made based on the competitive advantage at all levels: national, organizational, local and individual. They clarify this by noting that it involves asking for optimal utilization of resources and the globalization of manufacturing and services across the world as if we lived in a borderless society. This is because organizations are able to establish and gain success in other countries far from their original base. For instance, the Equity Banks annual financial report (Equity Bank, 2010) cited in Nicholas (2011) records that the bank successfully established branches in Uganda and Southern Sudan. Hence, the bank may have established the competitive practices necessary for both national and regional levels. Furthermore, Chenhall (2005) contends that economic resources will move to where they find
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BKAM5023: Management Accounting and Control System their best employment opportunities. He notes that off-shoring services to the nations and locations which offer a competitive advantage is an irreversible trend. Therefore, organizations will be more successful if they embrace the forces of competition rather than standing in their way. Coulter (2010) outlines three views to competitive advantage. These are: the industrial organization view, the resource based view and the guerrilla view, each of which will be discussed in the following section. 2.4 Characteristics of Well Designed Management Accounting and Control System

Designers of MACS have both behavioral and technical consideration to meet in order to have a well design of MACS. Behavioral Consideration Behavioral consideration include; 1) embedding the organizations ethical code of conduct into MACS design; 2) it used a mix of short and long term qualitative and quantitative performance measures (or Balanced Scorecared approach); 3) empowering employee to be involved in decision making and MACS design and; 4) developing an appropriate incentive system to reward performance Technical Consideration There were two categories fall under this kind of which is as follows: 1. The relevance of information generated The relevance of information is measured by four characteristics which are:

BKAM5023: Management Accounting and Control System Accurate The system should lead to the most accurate information possible, subject to a cost benefit trade-off. For example, more accurate product cost can be obtained by using systems that trace costs more directly from support activities to product Timely Accurate information that is late is also of little use for decision making. The MACS must be designed so that the results of performance measurement are feedback to the appropriate units in the most expedient way possible. Consistent MACS must be able to provide a consistent framework that can be applied globally across the units or divisions of an entity. Consistency means that the language used and the technical method of producing management accounting information do not conflict within various parts of an organization. Flexibles MACS designers must allow employees to use the systems available information in a flexible manner so that they can customize its application for local decisions. If flexibility is not possible, an employees motivation to make the best decisions may be lessened for the decision at hand, especially if different units engage in different types of activities. 2. The scope of the system It must include all activities and comprehensive across the entire value chain of the organization. For example, historically, many measure and assess performance in only one part of the value chain which is the actual production or throughput process. In this case, the performance of suppliers, the design activities and the postproduction activities associated with products and

BKAM5023: Management Accounting and Control System services are ignored. Managers can make only limited decisions without a comprehensive set of information. 2.5 Competitive Strategies for Organization

Micheal Porters proposed two generic competitive strategies for outperforming other corporations in a particular industry: lower cost and differentiation. These strategies are called generic because they can be pursued by any type or size of business firm, even by not-for profit organizations: Lower cost strategy is the ability of company or a business unit to design produce and market a comparable product more efficiently than its competitors. Differentiation strategy is the ability of a company to provide unique and superior value to the buyer in term of product quality, special features or after-sale service. Porter further purposes that a firm competitive advantages in industry is determined by its competitive scope, that is the breadth of the companys or business units target market. Before using one of the two generic competitive strategies (lower cost or differentiation), the firm or unit must choose the range of product varieties it will produce, the distribution channels I will employ, the type of buyers it will serve, the geographic areas in which it will sell and the array of related industries in which it will also compete. This should reflect an understanding of the firms unique resources. Simply put a company or business unit can choose a broad target (that is, aim at the middle of the mass market) or a narrow target (that is, aim at the market niche). Combining these two types of target markets with the two competitive strategies that was result in the four variations of generic strategies are depicted in Figure 1. When the lower-cost and differentiation strategies have a broad mass-market target, they are simply called cost leadership and differentiation focus. Although research does indicated that established firm pursuing broad10

BKAM5023: Management Accounting and Control System scope strategies outperform firms following narrow-scope strategies in term of ROA (Return on Assets), new entrepreneurial firms have a better chance of surviving if the follow a narrow scope rather than a broad scope strategy.

Figure 1: Porters Generic Strategies Cost Leadership This is a lower-cost competitive strategy that aims at the broad mass market and requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts and cost minimization in area like R&D, service, sales force, advertising and so on. Because of its lower costs, the cost leader is able to charge a lower price of its products than its competitors and still make a satisfactory profit. Although it may not necessarily have the lower cost in the industry, it has lower cost than its competitors. Some companies successfully following this strategy are Wall Mart (discount retailing), McDonalds (fast food restaurant), Dell (computers), Alamo (rental car), Southwest Airlines, and Timex (watches). Having a lower-cost position also gives a
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BKAM5023: Management Accounting and Control System company or business unit a defense against rivals. Its lower cost allows it to continue to earn profits during times of heavy competition. Its high market share means that it will have high bargaining power relative to its supplier (because it buys it large quantities). Its low price will also serve as a barrier to entry because few new entrants will be able to match the leaders cost advantage. As a result, cost leader are likely to earn above-average returns on investment. Differentiation This strategy is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product. This specialty can be associated with design or brand image, technology, features, a dealer network, or customer service. Differentiation is a viable strategy for earning above- average returns in a specific business because the resulting brand royalty lowers consumers sensitivity to price. Increased costs can usually be passed on the buyers. Buyers loyalty also served as an entry barrier; new firm must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. Examples of companies that successfully use a differentiation strategy are Walt Disney Production (entertainment), BMW(automobiles),Nike (Athletic shoes), Apple Computer (computer and cell phone), and Pacar (truck). Pacar Inc., for examples, charges 10% more for its Kenwoth and Peterbilt 10-wheel diesel truck than does market- leader Chryslers Freightliner because of its focus on the product quality and a superior dealer experience. Research does suggest that a differentiation strategy is more likely to generate higher profits than does low-cost strategy because differentiation creates a better entry barrier. A low-cost strategy is more likely, however, to create increases in market share.

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BKAM5023: Management Accounting and Control System Cost focus Cost focus is a low cost competitive strategy that focuses on a particular buyer group or geographic market and attempt to serve only this niche, to the exclusion of others. In using cost focus, the company or businesses seeks a cost advantage in its target segment. A good example of this strategy is Potlach Corporation, a manufacturer of toilet tissue. Rather than compete directly against Procter & Gambles Charmin, Potlach makes the house brands for Albertsons, Safeway, Jewel, and many other grocery chains. It matches the quality of the well-known brands, but keeps cost low by eliminating advertising and promotion expenses. As a result, Spokanebased Potlach make 92% of the private-label bathroom tissue and one-third of all bathroom tissue sold in Western U.S grocerys store. Differentiation focus Differentiation focus, like cost focus, concentrates on a particular buyer group, product line segment, or geographic market. This is the strategy successfully followed by Midamar Corporation (distributer of halal foods), Morgan Motor Car Company ( a manufacturer of classic British sport cars), Nickelodeon ( a cable channel for children), Orphagenix (pharmaceuticals), and, local ethnic grocery stores. In using differentiation focus, a company or business unit seeks differentiation in targeted market segment. This strategy is valued by those who believe that focuses its effort is better able to serve the special needs of a narrow strategic target more effectively than can its competition. For examples, Orphagenix is a small biotech pharmaceutical company that avoids head-to-head competition with big companies like Astra Zenica and Merck by developing orphan drugs to target diseases that affect fewer than 200,000 people- diseases such as sickle cell anemia and spinal muscular atrophy that big drug makers are overlooking.

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BKAM5023: Management Accounting and Control System However, Porter labels "stuck in the middle" for the firms that follow each generic strategy, but do not achieve any of them. Porter asserted that the three strategies were distinct mutually exclusive alternatives. He also argued that firms may be able to successfully pursue more than one of these strategies simultaneously, but "this is rarely possible." A firm which failed to follow one of the strategies was "stuck in the middle," which guaranteed the firm low profitability. 2.6 Value Chain Analysis for Assessing Competitive Advantages

2.6.1 Porters value chain A value chain is a linked set of value-creating activities that begin with basic raw materials coming from suppliers, moving on to series of value-added activities involved in producing and marketing a product or services, and ending with distributers getting the final goods into hands of the ultimate consumers. See Figure 2 for an example of a typical value chain for a manufactured product. The focus of value-chain analysis is to examine the corporation in the context the overall chain of value-creating activities, of which the firm may be only a small part. Very few corporations include a products entire value chain. Ford motor company did when it was managed by its founders, Henry Ford I. during the 1920s and 1930s, the company owned its own iron mines, ore-carrying ships, and a small rail line to bring ore to its mile-long river Rouge plant in Detroit. Visitors to the plant would walk along an elevated walkway, where they could watch iron ore being dumped from the rail cars into huge furnaces. The resulting steel was poured and rolled out onto a moving belt to be fabricated into auto frames and parts while the visitors watched in awe. As visitors walked along the walkway, the observed an automobile being built piece by piece. Reaching the end of the moving line, the finished automobile was driven out of the plant into a vast adjoining parking lot. Ford trucks would then load the cars for delivery to dealers. Although the ford dealers were not the employees of the company, they had
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BKAM5023: Management Accounting and Control System almost no power in the arrangement. Dealerships were awarded by the company and taken away if a dealer was at all disloyal. Ford motor company at that time was completely vertically integrated, that is, it controlled (usually by ownership). Every stage of the value-chain, from the iron mines to the retailers.

Raw Materials

Primary Manufacturing

Fabrication

Distributor

Retailer

Figure 2: Typical Value Chain for a Manufactured Product 2.6.2 Corporate Value-Chain Analysis Each corporation has its own internal value-chain of activities. See figure 3 for an example of corporate value-chain. Porter proposes that a manufacturing firms primary activities usually begins with inbound logistics (raw material handling and warehousing), go through operations process in which a product is manufactured, and continue on to outbound logistics (warehousing and distribution), to marketing and sell, and finally to service (installation, repair, and sell of parts). Several support activities, such as procurement (purchasing), technology development (R&D), human resource management, and firm infrastructure (accounting, finance, strategic planning), ensure that the primary value-chain activities operates effectively and efficiently. Each of companys product line has its own distinctive value-chain. Because most corporations makes several different products or services, and internal analysis of the firm involves analyzing a series of different value-chain. The systematic examination of individual value activities can lead to a better understanding of a corporations strengths and weaknesses. According to potter, Differences among competitor

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BKAM5023: Management Accounting and Control System value-chain are a key source of competitive advantages. Corporate value-chain analysis involves the following three steps: 1. Examine each product lines value-chain in term of various value-chain activities involve in producing that product or service: which activities can be considered strengths (core competencies) or weaknesses (core deficiencies)? Do any of the strength provides competitive advantage and can they thus be labeled distinctive competencies? 2. Examine the linkages within a product lines value-chain linkages are the connection between the way one value activity ( for example marketing) is perform and the cost or performance of another activity (for example quality control). In seeking ways for a corporation to gain competitive advantage in the market place, the same function can be performed in different ways in different result. For example, quality inspection of 100% of output by the workers themselves instead of the usual 10% by quality control inspectors might increase production costs, but the increase could be more than offset by the saving obtained from reducing the number of repair people needed to fix defective products and increasing the amount of sell peoples time devoted to selling instead of exchanging already-sold but defective products. 3. Examine the potential synergies among the value-chain of different product lines or business unit: each value element, such as advertising or manufacturing, has an inherent economy of scale in which activities are conducted at their lowest possible cost of output. If their particular product is not being produced at a high enough economist of scale distribution, another product could be used to shared the same distribution channel. This is an example of economist of scope, which result when the value chain of two separate products or services share activities, such as the same

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BKAM5023: Management Accounting and Control System marketing channels or manufacturing facilities. The cost of join production of multiple products can be lower than the cost of separate production.

Firm Infrastructure (general management, accounting, finance, strategic planning)

Support Activities

Human Resource Management ( development) (recruiting, training, Technology Development (R&D, product and process improvement)

Profit
Procurement (purchasing of raw materials, machines and supplies) Inbound Logistics
(raw material handlings and warehousing

Margin
Service
(installation, repair, parts)

Operations
(machining, assembling, testing)

Outbound Logistics
(warehousing and distribution of finished products)

Marketing and Sales

(advertising, promotion, pricing channel relations)

Primary Activities Figure 3: A Corporations Value Chain 2.6.3 Assessing competitive advantages through the value chain The core element for determining the failure and success of any business is competition. The overall town-turn in the world economies has wiped out many businesses and even many are at the point of extinction. Maintaining a competitive advantage over the industry in which a business plays has become crucial for businesses. Competitive advantage is the heart of businesss performance for coping up with the crisis. But this matter is not to be discussed only when businesses face problem, it should be discussed over and over again through the life of a business.

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BKAM5023: Management Accounting and Control System The businesses after prolonged leadership or successfulness loose the track to competitive advantage and become a victim of wave of depression. The businesses in order to survive and keep themselves in the rat race need to understand the concept of value chain. Value chain concept should not be limited to the production process or during the development of a new product. It should be taken care of from the beginning (procurement of material) to the end (reaching buyer and service). Businesses should integrate all its elements in a value chain and then determine the cost drivers. Cost drivers can be identified after understanding the activities involved in the suppliers value chain, firms value chain and ultimately buyers value chain. A business firstly needs to do a structural analysis of the industry. By doing so, it can understand the various threats arising thereof i.e. rivalry among existing businesses, threat from potential entrants, bargaining power of the suppliers and customers and of course the threats arising from the substitute products and services. A complete structural analysis will help a business determine its position and the growth opportunities. These five forces may differ from industry to industry based on the technical aspects in an industry. These five forces determine the cost, prices and the investment to be made in a particular industry. It determines the profitability of a business on the whole. After the structural analysis the business needs to develop the generic competitive strategies. The strategies developed are a result of a businesss underlying motivation of profitability i.e. either through cost leadership or differentiation. It is important for a business to understand the need for developing strategies based on this categorization because all things to all people does not help a business but creates a black hole for it. The notion underlying the generic strategy is that competitive advantage is the heart of every successful business. These strategies should be sustainable enough and not aimed at arising flanking or guerilla war among the businesses.
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BKAM5023: Management Accounting and Control System How to make generic strategies with a sustainable competitive advantage remains as the questions. For that purpose the business must identify its primary and supporting activities. The primary activities are those which a business performs in order to create value for its customers and aiming at customer satisfaction. A business must critically analyze the value chains integrated in these activities through which they can achieve cost leadership or differentiation. The primary activities namely inbound logistics, operations, outbound logistics, marketing and sales along with customer service should not be confused with the supporting activities like procurement, technology development, human resource management and infrastructure. Each activity may be vital if a business is aiming at competitive advantage. A business always considers that performing the primary activities efficiently is their duty and ignores the supporting activities or considers them as overheads. Why dont businesses understand the managing both of these activities simultaneously are more important if they really are willing to create value for their customers? The sub value chains hidden in these activities can be the source of attractiveness for a customer and can even act as competitive advantages for the business. The drivers generating costs in these activities can exploited by a business for creating a value that is different from the value created by a competitor. Thus, an analysis of the value chain rather than the value added is the appropriate way to examine competitive advantage. The value chain is the discrete building block for competitive advantage thereby determining whether the business is a cost leader or a differentiator. Within the each segment of primary and support activities, there are direct, indirect and quality assurance activities which play different role in competitive advantage. Direct activities are those which help in generating value for the buyers and indirect are those which help these direct
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BKAM5023: Management Accounting and Control System activities to generate value. Quality assurance means those activities determining the quality of work done and monitoring the direct and indirect activities. Every business has these three types of activities not only in primary but also in supporting activities. Every business must understand the need to allocate proper resources to these activities, so that it could be of competitive advantage to it. Diagnosing the value chain after segregating all these activities is necessary for understanding the scope of competitive advantage and how a business can use these activities for cost leadership or differentiating. 2.6.4 Limitation of Value Chain Analysis Value chain analysis is neither an exact science nor it is easy. It is more art than preparing precise accounting reports. There are several limitations to the implementation and the interpretation of value chain analysis. Firstly is non-availability of data which the internal data on costs, revenues and assets used for value chain analysis are derived from single period of financial information. For long term strategic decision making, changes in cost structures, market prices and capital investments etc, it may not be readily available. Secondly is identification of stages. The ability to locate at least one firm that participates in a specific stage becomes a limitation of identifying stages in an industrys value chain. Breaking a value stage into two or more stages when an outside firm does not complete in these stages is strictly judgment. Third limitation is ascertainment of cost, revenues and assets, finding the costs revenues and assets for each value chain activity sometimes present serious difficulties. There is no scientific approach and much depends upon trial and error and experimentation methods. Next is on identifying cost drivers. Isolating cost drivers for each value-creating activity, identifying value chain linkages across activities and computing supplier and customer profit margins present serious challenges. The fifth limitation is resistance from employees. It is not easy to ensure all employees
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BKAM5023: Management Accounting and Control System understand with the value chain analysis thus may face conflict from employees as well as managers. 3.0 3.1 A CASE STUDY OF AIRASIA Company Background

Asia's leading airline was established with the dream of making flying possible for everyone. Since 2001, AirAsia has swiftly broken travel norms around the globe and has risen to become the world's best. With a route network that spans through to over 20 countries, AirAsia continues to pave the way for low-cost aviation through our innovative solutions, efficient processes and a passionate approach to business. Together with our associate companies, AirAsia X, Thai AirAsia, Indonesia AirAsia, Philippines' AirAsia Inc and AirAsia Japan , AirAsia is set to take low-cost flying to an all new high with our belief, "Now Everyone Can Fly".

3.2

Value Chain Analysis

Legend CRS FSS YMS DBM IS CC : Computer Reservation System : Flight Scheduling System : Yield Management System : Database Marketing : Internet Sales : Call Center

Figure 4: AirAsias Value Chain analysis based on Porters Value Chain.

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BKAM5023: Management Accounting and Control System Figure 4 shows the significant activities of AirAsia in order to drive business continuity as a market leader of low cost carrier. AirAsia reduces cost of maintain the plane reducing flight delay and turnaround time by using single fleet of aircraft. Ground crew are well equipped, air crews are trained to multitask and AirAsia has its own academy to train pilots. With its current marketing and promotions, AirAsia will succeed by introducing more products and routes. And Finally AirAsia has to improve on its lead time to reach to customer in the event of complaints and inquiry. 3.3 AirAsia Business Model

Figure 5 shows the business model used by AirAsia. The key to delivering low fares is to consistently keeping cost low. Attaining low cost requires high efficiency in every part of the business and maintaining simplicity. Therefore every system process must incorporate the best industry practices. The key components of the LCC business model are the following; 1. High aircraft utilization

Aircraft is kept flying as much as possible, the first flight starts as early in the morning commercially possible and the final flight typically ends at midnight. A fast turnaround is critical to ensure time spent on the ground is minimal; an airline makes money when the aircraft is flying, not when the aircraft is parked. AirAsia's turnaround time is 25 minutes; compare that against 1 hour for a FSC. On average, AirAsia's utilization per aircraft is 12 block hours per day, a FSC might do about 8 block hours per day.

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BKAM5023: Management Accounting and Control System 2. No frills

The underlying business for a LCC is to get a person from point A to point B. Everything else is considered to be luxury item or "frill", of which can be acquired for a small fee. Among many of the frills that AirAsia has do away are;

No free food & beverages. Why give away something that you don't appreciate? Guests are most welcome to purchase food & drinks at an affordable price from the cabin crew.

Free seating. There is no assigned seating. Guests receive a generic boarding pass and they will have to take any of the available seats.

Ticketless airlines. Less hassle for the customer, who doesn't have to worry about collecting tickets before travelling, and cost-effective for the airlines (paper, printing, distributing).

No refund. Airlines waste a lot of money when guests do not show up for a flight due to refunds and rescheduling. Whether a guest shows up or not, the cost of flight to the airline is the same. LCC are unforgiving to no show guests and do not offer refunds for missed flights.

No loyalty programme. We believe our customers are loyal to our low fares, so who needs frequent flyer miles programme then.

3.

Streamline Operations

Making the process as simple as possible is the key of a successful LCC.

Single type of aircraft. Pilots, flight attendants, mechanics and operations personnel are specialized in a single type of aircraft, which means, among others, that there is no need for costly re-training of staff, for maintaining a stock with parts for different types of aircraft, for knowledge and skills in order to operate and maintain different types of aircraft with their own characteristics, or for new work requirements.

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BKAM5023: Management Accounting and Control System

Single class seating. There is only one class seating, i.e first class, and guests are free to sit where they choose. Should you want to have the privilege to choose your seats, you can by purchasing Xpress boarding.

Standard Operating Procedures. SOPs are important to ensure same level of competence among all the staff. This way we can ensure the homogeneity of service throughout the company.

4.

Basic Amenities

Secondary airports; Low cost carriers mostly fly to and from airports that are not necessarily the busiest, for example, London - Stanstead rather than London - Heathrow. These are often referred to as secondary airports. Operating from so called secondary airports is cheaper than from the bigger major airports and they are also a lot less congested and "turnaround times" for aircraft are a lot shorter. For instance, to minimise fees AirAsia fly into Clark Airbase which is 70km away from Manila as appose to flying into Manila Ninoy Aquino airport. 5. Point to point network

Point to point network. LCC shuns the hub-and-spoke system and embraces the simple point-topoint network. Almost all AirAsia flights are short-haul (3 hour flight or less). No arrangements have been made with other airline companies on connecting flights, on possibilities of flight transfers, nor on having the luggage labeled and passed through from one flight to another. 6. Lean Distribution System

Distribution costs are something that FSC most often ignore. Very often, FSC relies on travel agents and from their posh sales office. Furthermore, FSC always blows the budget by complicating their distribution channels by integrating their systems with multiple Global Distribution Systems. LCC will keep their distribution channel as simple as possible and will

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BKAM5023: Management Accounting and Control System cover the whole spectrum of the clientele profile. For example, AirAsia can cater to the most sophisticated European traveler via internet and credit card sales. And at the same time, AirAsia has an established system to sell our tickets to the most remote and technology deprived locations, such as in Myanmar. Internet Sales; The bulk of sales (65%) are done via the airline's website, whereby the fares are paid using a credit card. This is the most cost effective distribution channel.

Sales office. AirAsia only has a few sales offices. We only establish a call centre if we are confident the sales derived from the centre will be worth it. Furthermore, we are not fixated with having our sales office in the posh side of town.

Travel agents. LCC avoids reliance for sales via travel agent as much as possible. This means that the airlines do not pay any commission to a travel agent, which would otherwise have been reflected in the fares. Also, as they do not use travel agents, they do not use, nor participate in the world wide reservation systems and thus save costs, which again are reflected in their pricing.

Call centers. Ticket sales can be done via telephonically; this is a simple and cost effective method.

Figure 5: Low Cost Carrier Business Model

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BKAM5023: Management Accounting and Control System 3.4 Strategy Analysis of Air Asia Low Cost Carrier

In accordance with the philosophy of AirAsias CEO, Datuk Tony Fernandez which said that before a business can grow; it needs to have its costs under control. It must be cost-efficient and profitable, and it must create value. Costs that do not add value must be contained, reduced and even eliminated. However, the issue of How much lower can your cost reduce? has always been arrived accordance with his business philosophy and normally will respond it with the answer of if we do not strive to be more efficient and choose to be complacent, our days are numbered. This is a continuous task we have to face head on year on year; it is the critical ingredient to operate a successful business Datuk Tony Fernandez against said that AirAsia can be growing in the airline business if they can control their cost. The cost that they have to running there must be efficient and reliable. Everything that can make inefficiencies must be reduced and possibly to eliminate. What his means is very strong opinion about their company to running their business. AirAsia can be possibly competing with other airplane industry if they can make efficiencies to reduce cost and make the low possible fare than other airplane industry. Furthermore, based on the environmental scanning performed, the demand for low cost carrier (LCC) industry will keep growing rapidly. The LCC industry attractiveness and profitability will attract many full services airlines to launch its version adding the degree of rivalry in this industry. As the implication, AirAsia, current market leader of LCC in Malaysia, Thailand, and Indonesia, will face competition from both existing and new players. In order to sustain its competitive advantage, AirAsia needs to leverage its competency in creating cost advantages across multiple value chains. Based on that statement, AirAsia need to make a consideration and more stressed to be lowest cost carrier in the airline industry. The demand for lowest cost carrier
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BKAM5023: Management Accounting and Control System is will be growing rapidly; it can be the great opportunity for AirAsia Company to run their business. In addition, AirAsia business strategy also centered on cost leadership. According to Porters generic strategies (1985), one of the generic strategies is the cost leadership. The cost leadership in AirAsia Company is already approving because AirAsia more focused and concentrated in the lowest cost carrier in airplane industries. AirAsia wanted to be a leader in the lowest cost for run their business. AirAsia builds and sustains its competitive advantage by providing services at a price that simply lower than competitors price. Operation effectiveness and outstanding efficiency are the two main characteristics of low cost business including in AirAsia. Moreover, AirAsia believes in the no-frills, hassle-free, low fare business concept and feels that keeping costs low requires high efficiency in every part of the business. Efficiency creates savings that are then passed on to guests so that affordable air travel can become a reality. Through AirAsia philosophy of Now Everyone Can Fly, Air Asia has sparked a revolution in air travel with more and more people around the region choosing AirAsia as their preferred choice of transport. As Air Asia continuously strives to promote air travel, AirAsia also seek to create excitement amongst their guests with the range of innovative and personalized service. 4.0 CONCLUSION

A successful of AirAsia could be taken as prove of how importance to the organization to have a better strategy in competing the competitive business environment nowadays. The successful of AirAsia managing their value chain activities has also become one of the reasons of their successful.

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BKAM5023: Management Accounting and Control System As a unifying theme, value chain analysis presents organizations with an overarching tool for improving their strategic planning and resource allocation. The goal is to provide management with sufficient option to sustain its competitive advantages in an ever-changing business environment. Analyzing costs and differentiation through the value chain is an essential in the search for competitive advantages. The data problems are not insignificant and the answers will not always precise. Nevertheless, there will be considerable benefit in the debates that result from the process and in the enhanced quantitative awareness of external competitive arena and of the firms part in it. As so often strategic planning, the process is often as valuable as the outcome.

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BKAM5023: Management Accounting and Control System References Abernethy, M., & Brownell, P. (1999). The role of budget in organizations facing strategyc change: An exploratory Study. Accounting, Organizations & Society , 24(3), 189-204. AirAsia. (2013, April 15). Retrieved April 15, 2013, from http://www.airasia.com/ Chenhall, R. (2005). Intergrative strategic performance measurement systems, strategic alignment of manufacturing, learning and strategic outcomes: An Exploratory Study. Acounting, Organizations & Society , 30(5), 395-422. Coulter, M. (2010). Stategic management in action. New Jersey: 5th edition, Prentice Hall. Drury, C. (2004). Management and cost accounting. London: 6th edition, Thompson Learning. Frank, W. (1990). Back to the future: A retrospective view of J. Maurice Clark Studies in the economics of overhead costs. Journal of Management Accounting Research , (2), 155166. Horngren, C. T., Datar, S. M., & Foster, G. (2006). Cost accounting: A managerial emphasis. New Delhi: 13th edition, Prentice Hall. Kho, C. A. (2005). AirAsia-strategy IT initiative. Economic and Commerce , 8. Laverty, K. (2004). Manegerial myopia or systematic short-termism? The importance of managerial systems in valuing the long term. Management Decision , 42(8), 949-962. Nicholas, M. N. (2011). The role of management accounting in creating and sustaining competitive advantages: A case study of Equity Bank, Kenya. University of South Africa .

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BKAM5023: Management Accounting and Control System Passemard, C. (2000). Competitive advantages: Creating and sustaining supperior performance by Michael E. Porter. 18. Rijamampianina, R., Abratt, Rusell, February, & Yumiko. (2003). A framework for concerntric diversification through sustainable competitive advantaged. Management Decision , 41.4:362. Schulz, M. (2001). The uncertain relevance of newness: Organizational learning and knowledge flows. Academy of Management Journal , 44(4), 661-681. Shah, P. (2009). Management Accounting. Oxford University Press. New Delhi. Singh, S., & Singh, Y. (2008). Risk management in banks: Concepts and application. New Delhi: Excel Books. Thomas, L., Wheelen, J., & David, H. (2012). Strategic management and business policy toward global sustainability. New Jersey: 13th edition, Pearson Education, Inc. Thompson, A., Strickland, A., & Gamble, J. (2009). Crafting and executing strategy: Concept and cases. New York: McGraw-Hill Higher Education. unknown. Management accounting control system. Val, C., Gertsman, J., & Barry, C. (2003). The resourced-basedview and sustainable competitive advantages: The case of a financial services firm. Journal of Europen Industrial training , 220-232. William, E., & Fruhan, J. (n.d.). "The NPV model of strategy-the shareholder value model," in Financial strategy: Studies in creation, transfer and destruction of sharegolder value.

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