Networked Organizations: A Strategic Cost Management Perspective

Abstract

Networked organizations are receiving increasing attention in the management literature because of their perceived success in terms of fast growth, increased flexibility and efficiency of operations, lower overhead costs, and effective competitive positioning. For all firms, the choice of which activities to perform internally and which to outsource is a critical issue. Cost information can play a fundamental role in the decision about how much market and how much hierarchy. Indeed, outsourcing is, basically, a cost and benefits evaluation. Management accounting and strategic management studies have, so far, not addressed this perspective explicitly. Management accounting is too internally focused on the costs of the firm rather than the entire supply chain. The strategic management perspective, on the contrary, focuses its attention on the supply chain, but only deals very generally with those transaction costs which emerge in using the market. Both approaches fall short in providing a well articulated financial rationale for which activities should be outsourced and which should be entrusted to the market. Neither approach does much to help managers understand where value is created in the value chain, the costs of the activities involved or their cost drivers. Strategic cost management (SCM) studies provide a useful cost analysis framework which is too often missing in the strategic decision making process. Competitive analysis, value or supply chain mapping, and cost driver analysis are, in particular, the tools of SCM. The aim of this paper is to apply SMC to the theory of networked organizations. In this paper we will use SCM to explain the Italian motor bike industry where both vertically integrated and network organizations exist. In particular, we will try to interpret different firms performance by comparing their value chains and their positions along the value system. The financial impact of the complexity involved in these different organization models and its impact on profitability and competitive position is our main theme.