Roles of Management Accounting in Appraising and Managing Major Investment Decisions

Management accounting is a system of providing financial and non-financial information that guides managerial actions, motivates behaviours and supports and creates the cultural values necessary to achieve organization’s strategic objectives - Roles of Management Accounting in Appraising and Managing Major Investment Decisions introduction. Often firms are required to decide on large investment decisions which will span for years. In this regard, management accounting plays a vital role in appraising and managing them through the capital budgeting practices which are meant to enhance its value and supply chain, key success factors and benchmarking with competitors which are all interlinked and customer driven.

In actual practice, however, it is a very complicated measure as it needs to coordinate with the firm’s strategy and its competitive positioning and merely decide upon net present value (NPV) for approval or rejection measure does not provide holistic approach for firms. This essay illustrates on the implications of capital budgeting practices to coincide the firm’s investment strategy as of the cases on Caterpillar Inc and Intel Corporation and how management accounting plays a role in managing them financially and non-financially.

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But first, the essay will start off by defining strategy, operational effectiveness and competitive advantage using Singapore Airlines as an example. Airline industry is regard as one of the worst performing industries in the Fortune Global 500 rankings and its outlook from 2008 onwards remains bleak. [1] Yet, Singapore Airlines (SIA) has consistently performed better than its competitors. [2] The key, lies on its implementation of duel strategy: differentiation through service excellence and innovation, together with simultaneous cost leadership in its peer group. 3] Strategy, according to Porter, means performing different activities from rivals’ or performing similar activities in different ways by imposing fit and trade-offs to achieve sustainability. [4] It means choosing a different set of combined activities to deliver a unique mix of value. [5] But strategy alone is not enough to achieve competitive advantage as operational effectiveness (OE) carries substantial amount of importance. Operational effectiveness means performing similar activities but better than rivals performing them.

It allows firms to utilize its inputs to maximize its value at a given cost, thus, moving towards productivity frontier. [6] Operational effectiveness alone is not sufficient to achieve competitive advantage although it is necessary as it promotes homogeneity, which results in zero-sum competition, static or declining prices and pressures on costs that compromise companies’ ability to invest in the business for the long term. [7] SIA Competitors are hot on SIA’s heels, trying to close gap in both excellence and efficiency but the fit that SIA has created is not easy to outperform.

What more, SIA achieves a differentiation strategy without a cost penalty. [8] Malaysian Airlines’ service quality is high but its efficiency is nowhere near SIA’s. [9]As such, in building its competitive advantage, SIA successfully indentifies opportunities to create superior customer value through its excellence service and invest in mutually-reinforcing activities to ‘position’ the firm which sustain. As for Caterpillar Inc, it has been making progress possible and driving positive and sustainable change on every continent for more than 80 years. With 2008 sales and revenues of $51. 24 billion, Cat is the world’s largest and leading designers and producers of earth moving equipment. [10] This achievement will not be possible without implementation of management accounting systems. During the year 1985 to 1994, Cat had undergone a shift from mass production to synchronous-flow manufacture in all of the firm’s key facilities. [11] The change was due to the fact that Caterpillar has out-dated manufacturing system which put the firm at risk at three major areas: cost, availability and quality which are the essential key success factors.

Caterpillar had 25% cost disadvantage against its main competitor, Komatsu, low velocity of material flow which failed to meet customer demands and declined in reliability indices. Management accounting recognizes the need to improve its key value chain for Caterpillar, for instance, process design, production line and customer service. Hence, the strategy of Caterpillar is to invest in modern manufacturing system to enhance its operational effectiveness in the world markets.

The approach that Caterpillar used, is to invest in ‘bundles’ of diverse but mutually reinforcing assets to achieve value-maximization. Its aim is to ensure that the investment could improve the functionality, cost and competitiveness of key product assemblies by improving its manufacturing processes. [12] As of previous mass production system, it uses multiple assembly lines to mass produce products for inventory according to schedules and move between work stations automatically albeit defections if any.

The new synchronous flow manufacturing system is of total flexibility and specialization that paired with specific customer needs with closely integrated assembly system. It is carefully designed as such that the system would stop without high-velocity and synchronous material flow. [13] Quality is achieved by a team who overseeing the production within a defined area on the factory floor. With the guidance of management accounting, it helps to Caterpillar to indentify and improve operational factors to increases its economic viability to meet customer demands.

The modern manufacturing approach is coordinated by ‘investment bundling’ practices which map capital spending onto specific and critical processes. Each bundle is regarded as an object to manufacture one or more kinds of core-product modules, and its functional layout performance to ensure high-velocity and core-product module-oriented systems can increase competitiveness by being responsive to demand shifts and yield scope of economies by facilitating expansion in the range of products manufactured. [14]The firm has adopted ‘concept reviews’ and ‘bundle monitors’.

Under concept reviews, it recognizes that in order to achieve operational model of complementarity, as of this case of the bundle itself, it requires complex and integrated technology to design and manufacture the modules to yield acceptable return on investment. Where as under bundle monitors, it sees each investment bundle as a responsibility center itself. [15] A bundle monitor compared actual results to external or market based targets to determine the impact on product cost and its external competitiveness. In so doing, it allows continuous improvement and benchmarking to keep trace with its performance.

Investment bundling practices made firm-wide modernization program manageable, by focusing investment on systems on assets. Intel Corporation, on the other hand, is more complex. It is the world largest designer and producer of microprocessors and related system infrastructure and networking products. To date it has held over 70% of the market for PC microprocessors and it is heavily invested on cash flow to out sourced competitors in bringing more powerful processors. Management accounting system allows Intel to evaluate and constantly upgrade its value chain particularly in the area of research and development and product esigns, and its supply chain and put great emphasize on quality, cost, timing and innovation as its key success factor.

Its strategy lies on its investment of ‘being different’ among rivals by improving fabrication process (‘process generation’), launching new products every 2. 5 years interval and enhancing manufacturing practices. A process generation is of refining of product architecture to improve yield level. [16]Timing is important for Intel. It is willing to implement any incremental costs if necessary to synchronize process generation and new products to be ahead at all time with technology acts as the preventer. 17]Intel realizes that each new process generation involves finer tolerances across the high-volume Intel’s factories, to keep the pace of learning and ramping, Intel seeks to engineer and standardized the generation of high-volume factories so that the network would work as a whole like a single manufacturing entity. [18] Intel corporation exists under an ecosystem through with upstream (eg: Nikon), alongside (eg: Samsung) and downstream firms (eg: Microsoft) with their combined individual offerings to create value for customers that no single firm could create alone[19].

In such, it creates a ‘rippling’ investment whereby each major decision will have significant impact between its capital investment processes and of other firms and organizations. In order to coordinate such complex, interrelated investments, Intel along side with other microprocessor firms is of under the auspices of SEMATECH consortium in reinforcing and supporting the coordination of firm-level investments and expectations and employs the ‘technology roadmap’ mechanism. 20] Technology roadmap sets the shared expectations among semiconductor firms and suppliers as to when the components will be available and how they ‘inter-operate’ technically and economically to achieve system-wide innovation. The roadmap allows the coordination with supplier’s innovations, within the firm, and with customers’ and complementors’ designs. [21]

In compliance with the suppliers, set expectations can guide capital expenditure; encourage suppliers to develop alternatives to protect firm’s synergies and held frequent meetings among consortium to reassess the feasibility of projections. 22]For intra-firm coordination, it matches future fabrication processes to availability of more advanced equipments being developed in the ecosystem by planning investment timelines, thus it justifies irreversible capital spending. [23] Besides, it allows shifts in expectations if there are indications of insufficient demand for the end-user products. To coordinate with customers, Intel willing to share its technology roadmap with downstream firms with its technical analysts to provide expert appraisals which aids its supply chain to extend information to firms in the industry and stock analysts. 24]

As such, it allows Intel to exercise operational flexibility in interrelated investment programs to be managed at an overall system of assets to achieve optimal results. In linking investment to its strategy, Caterpillar and Intel show a very different approach as both strategy is to invest in enhancing operational effectiveness and being ‘distinctive’ respectively. But nevertheless, its fundamental capital budgeting practices share a common ground of discouraging the use of NPV alone to appraise major capital investments because a positive NPV does not provide desired competitive outcome.

It fails to ‘document’ the external competitiveness among rivals. A positive NPV of an asset or project does not necessarily position a firm strategically if it does not compliance with its strategy to create fit or sustainability or gain efficiency in operational effectiveness to increase its competitiveness. Similarly, a negative NPV project should not be immediately rejected because sometimes without executing it might create more destructive value or that when coupling with a strategy, it might add value in the long run.

In the case of Caterpillar, its capital budgeting approach has shifted from previously used incremental asset purchase proposals, which stalls the transition process and fails to incorporate the benefits and costs of integrating diverse assets, [25]to a new mechanism that provide strategic corporate direction by appraising the investments within its bundle as one project to pick up the potential ‘complements’ or ‘synergies’ between projects.

A new capital budgeting mechanism is implemented to support its strategy. As for Intel, its coordination activity is more complex as it co-exists in an ecosystem as opposed to Cat which relevant investments are undertaken by the firm itself. Intel’s capital budgeting system restricts independent investment evaluation due to its extensive complementarities between capital spending. Thus, purely approving NPV is not enough as it must align with its technology roadmap to coordinate the interrelated investments.

As a conclusion, management accounting allows firms to manage its investment decisions by seeking the management accounting system which is pivotal around customer demands which interlinked with value and supply chain, key successes factors and benchmarking as what Caterpillar and Intel are trying to improve. The nature of management-oriented accounting alters with change in environment practices, for instance, the definitions of quality, cost and time are different across businesses.

In appraising the investment decisions, capital budgeting processes, particularly the conventional DCF-NPV approach, evaluating a single asset or project is not enough as it needs to consider the strategy implied and how it helps the firm to be ‘externally’ competitiveness. As most firms are moving towards the modern, complementary approach in investments, new capital budgeting mechanisms are needed.



• Adner, R.(2006) ‘Innovation Ecosystem.’ Harvard Business Review April 98-107

• Miller, P. and O‟Leary, T.(1997) ‘Capital Budgeting Practices and Complementarity Relations in the Transition to Modern Manufacture: A Field-Based Analysis.’ Journal of Accounting Research 35(2) 257-271Michael Nicholson, “International relations” (NY, Palgrave Macmillan 2002)

• Miller, P. and O‟Leary, T.(2005) ‘Managing Operational Flexibility in Investment Decisions: The case of Intel.’ Harvard Business Review 17(2), 18-24

• Porter, M.E.(1996) ‘What is Strategy?’ Harvard Business Review Nov-Dec 61-78

Sources from www:


• Heracleous,L and Wirtz,J (2008) ‘Strategy and organization at Singapore Airlines: Achieving Sustainable advantage through deal strategy’. [online] p1. Available from:

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