Academic journal article Academy of Accounting and Financial Studies Journal

The Dynamics of Firm Competitiveness: Evidence from Cost Behavior of Filipino Firms

Academic journal article Academy of Accounting and Financial Studies Journal

The Dynamics of Firm Competitiveness: Evidence from Cost Behavior of Filipino Firms

Article excerpt

INTRODUCTION

Competitiveness and sustainability have been key aspirations of most firms in this modern industrial age. In their quest to gain competitive advantage and to adopt to fast changing operating environments, firms have embarked on a journey to constantly and continuously reengineer their products, processes and even business models. In monitoring performance as a result of these realignments, companies readily realize the importance of the strategic dimension of traditional accounting and financial constructs such as costs.

From an economic standpoint, costs are associated with optimal firm response. In an ideal situation, optimality occurs and when this happens, firms gain competitive advantage. But the real challenge is whether firms can alter their processes readily with changes in activity levels. This is where studies on company's cost behaviour, whether they are asymmetric or not with changes in volume, become relevant reminders for firms to consciously design their cost structures with flexibility. This becomes more significant during times of crisis where firms usually pursue cost-cutting or right-sizing programs to remain competitive.

While cost cutting programs are popular strategies during times of crisis, businesses in general still aim to develop competitive advantages over their rival firms by maximizing revenues thru differentiation, minimizing costs thru efficiencies, or focusing on a niche market (Agarwal et al, 2009). In pursuing this, decision-makers and managers need to be aware and to understand the nature and factors that individually or collectively affects their competitive position.

Anderson and Lanen (2007, 2009) in their working paper asserts that understanding and describing how firms manage their cost and cost structure is one of the neglected area of study. As such, we see a current influx of researches focusing on costs and its behaviour since it is one of the most quantifiable factors that determine whether a firm is achieving its operational, tactical and strategic objectives in developing competitive advantage.

From an institutional economics perspective, this wave of studies on cost behaviour models particularly the phenomenon of stickiness presents another dimension to understanding how firms behave and cope with uncertainties as well as bring into the limelight the need for firm to be conscious of deliberately design a suitable cost structure to remain competitive.

It is in the light of these developments that this study is pursued. This study aims to confirm whether asymmetric cost behaviour is exhibited by Philippine firms which is similarly observed from firms in the US, UK, Germany, France and Brazil. Furthermore, the study attempts to compare the degree of cost symmetry of firms in different countries and relate it to their competitiveness.

"STICKY" COST BEHAVIOR

Most management and cost accounting textbooks would describe and view cost behaving either as variable or fixed the former changing proportionally to changes in business activity level. This traditional cost behaviour models assume that the direction of change is symmetrical during both economic downturns (i.e. period of economic crisis, cost reduction programs) and upturns (i.e. period of economic growth, expansion). This implies that the magnitude of change of costs depends only on the extent of a change in level of activity, and not on the direction of change.

The question of whether the traditional model of fixed and variable (with volume) cost is a sufficiently accurate representation of production economics as a basis for management decisions has led to an increased interest in the sticky cost behaviour. In the 1980's and 90's, researchers have offered ABC as an alternative model that is allegedly more faithful to the economics of modern management and provides a better support to decision-making in that setting (Cooper and Kaplan, 1998). …

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