A Unique Concept in Projects
The costing process described in item 2 above results in many more projects getting off the ground in Japan. The key factor is that there is what we can call a "low hurdle rate". In the UK and the USA, in particular, accountants increase the hurdle rate by demanding profit premiums of 5-10 per cent, and sometimes even 15 per cent, but the Japanese, as we have said, do not use this criterion at all. They concentrate on high volume and market share, as set out in item 3 above, believing the return on investment will then take care of itself. It seems that a profit premium is not really relevant and with many projects it can even be misleading. The end result is that Japanese management accounting is market driven, the maximum allowable cost being worked back from the known competitive selling price.
Another result of this approach is that the product comes on the market much earlier. It seems that speed in completing a production project, especially in high-tech areas, can make all the difference between success and disaster. It has been calculated that a product, even if produced to budget, that comes on the market six months late earns some 33 per cent less profit over five years. On the other hand, with a project produced on time, but costing some 50 per cent above budget, there is a cut in profit of only four per cent. This makes it very clear that time is of the essence.
Of course some companies are adopting what amounts to the Japanese approach, under the name of "strategic business accounting". This is designed to ensure that accounting is an essential part of strategic management. But in our view the essence of the Japanese approach lies rather in the disregard of standard accounting assessments of the viability of a project, using instead an "entrepreneurial" approach. This is not actually a new approach in the West. Over ten years ago, Shell published details of their Directional Policy Matrix (DPM).
This technique owes some of its features to various practitioners and members in this particular field of management science, such as the Boston Consulting Group (USA) and the PMS program of the Strategic Planning Institute. But computer programs are out! The DPM technique allows a variety of qualitative and quantitative considerations, other than the normal financial yardsticks, to influence the choice of a project. Comparison becomes possible between business sectors and company positions in a way that is largely independent of financial forecasts: and this is the essence of Japanese project assessment.
6. Pearson, G., More projects get off the ground in Japan - why?, Accountancy, February 1987, pp. 84-5.
7. Dumaine, B., How managers can succeed through speed, Fortune, Vol. 119, 13 February 1989, pp. 54-9.
8. Kharbanda, O.P. and Stallworthy, E.A. How to Learn from Project Disasters. See Chapter 14: Picking prospects for better business, Gower, 1983.