P5 Advanced Performance Management Chapter 1: Strategic Management Accounting The purpose is to provide relevant and reliable information so that

managers can make well-informed decisions. Its value depends on the quality of the information provided and whether it helps managers make better decisions. The difference between planning strategic and operational levels is shown below: Strategic Management Operational Management Mainly a longer-term focus Short term focus: day to day operational issues Feedback may be occasional Regular feedback about performance Broad higher-level issues such as acquisitions and Control actions based on routine information and disposals, as well as the development of internal concerned with the current use of resources and resources. improving the efficiency and effectiveness of Approach to measuring performance: resources, and with cost control Where are we? Where do we want to be? How do we get there? What are the risks? Largely external in focus Mainly internal focus Forward looking Backward looking Non-routine issues Concerned with detailed plans and controls The Nature of Strategic Management Accounting Strategic management accounting provides managers with information that is relevant to making and monitoring strategic decisions. It provides information: About the longer-term strategic issues, as well as shorter term Of a non-financial nature as well as financial information Obtained from external as well as internal sources About the business environment as well as internal operations That recognizes the significance of change and the need to anticipate major changes in the business environment Where the focus is on being competitive and succeeding in a competitive market environment About strategic objectives Customer satisfaction and adding value Product life cycle Internal and external analysis: SWOT analysis Benchmarking Risk and uncertainty Strategic Management Accounting Techniques Advanced cost accounting: JIT based system Activity based management and activity based costing Backflush accounting Throughput accounting

Strategic management accounting: Life cycle costing Target costing Environmental management accounting(EMA); and Balanced scorecard Quality costing Environmental costing Levels of Strategic Planning Planning is a hierarchical activity. It links planning at the top with detailed operational planning at the bottom. Strategic Planning sets a framework and guidelines within which more detailed plans, and shorter-term planning decisions can be made. R N Anthony Identified three levels of planning within the organization: Strategic Planning. This involved identifying the objectives of the entity, and plans for achieving these objectives, mostly over the long term. It includes corporate strategic plans, business strategy plans and functional strategic pans. Tactical Planning. These are short term plans for achieving medium-term objectives. Includes annual budgets. Budgets and other tactical plans can be seen as steps towards the achievement of longer-term strategic plans. Operational Planning. This is detailed planning of activities, often at a supervisor level or junior management level, for the achievement of short-term goals and targets. Definition of Strategic Planning and Control Strategic Planning and Control within an entity is the continuous process of: Identifying the goals and objectives of the entity Planning strategies that will enable these goals and objectives to be achieved Setting targets for each strategic objectives (performance targets) Converting strategies into shorter-term operational plans Implementing the strategy Monitoring actual performance (performance measurement and review) Taking control measures where appropriate when actual performance is below the target Other aspects of strategic planning and control are: Re-assessing plans and strategies when circumstances in the business environment change Where necessary, changing strategies and plans Advantages of Formal Strategic Planning Clarifies objectives Helps management to make strategic decisions. Strategic planning forces managers to think about the future: companies are unlikely to survive unless they plan ahead Establishes targets for achievement Co-ordinates objectives and targets throughout the organization, from the mission statement and strategic objectives at the top of the hierarchy of objectives down to operational targets Provides a system for checking progress towards the objectives

Strategic planning in practice is often a mixture of: Formal planning; and Developing new strategies and making new plans whenever significant changes occur in its business environment Strategic Planning Process Different methods and approaches may be used to develop strategic plans. A basic approach is shown below. .. insert diagram on pg 6.. Strategic Analysis Environmental Analysis Environmental analysis involves an analysis of developments outside the organization that are already affecting the organization or could affect the organization in the future. They are external factors that might affect the achievements of objectives and strategy selected. An external analysis might consider: The political situation in each country where it has operating subsidiaries Changes in the law, and how these affect the organization Changes in economic conditions Social factors and cultural factors, such as an increasing average age in the population Technology changes The competitive environment such as the entry of a new competitor into the market, or the globalization of the market Models that may be used for environmental analysis: PESTEL analysis Porters 5 forces Risk Analysis Position Audit This involves an internal analysis of the strengths and weaknesses within an organization its products, existing customers, management, employees, technical skills and know-how, its operational systems and procedures, its reputation for quality, the quality of its suppliers, its liquidity and cash flows. Models that may be used for position analysis: 9Ms (Men, Management, Machinery, Money, Methods, Markets, Materials, Management Information, make-up) Financial Analysis Benchmarking Product Life-cycle Boston Consulting Grid Value Chain Analysis Stakeholders Mapping

Corporate Appraisal SWOT Analysis This is the analysis of the strengths, weaknesses, opportunities and threats in the environment. It is often used as a starting point for strategic planning. GAP Analysis A Strategic Plan should set out the ways in which an organization intends to achieve its objectives. One way of doing this is to prepare a forecast of what is likely to happen if the company carries on with its current plans and policies, and does not take any new strategic initiatives. Gap analysis involves: Identifying the corporate objectives for the organization, and what strategic management wants the organization to achieve each year over the planning period Comparing these strategic targets with the expected actual results, if there are no changes in strategy and no new planning initiatives. GAP Analysis is usually described as an analysis of the difference between where we are and where we want to be. Strategic Choice These are choices to be made in three areas. Basis of strategy Strategic direction Strategic method Basis of strategy This is about how to compete. The work of Michael Porter is influential in this area. He states that a successful competitive strategy must be based on either: Cost leadership, or Differentiation Cost Leadership means becoming the lowest cost producer in the market. A company that can make products or provide services at a lower cost than competitors will succeed by selling at lower prices and winning the biggest share of the market. Differentiation means making products or services that are considered by customers to be different from those of competitors, and because they are different they are better. The company can succeed by offering products or services that customers will pay a higher price to obtain. Strategic Direction This concerns which product should be sold to which markets. A useful model here is Ansoffs Grid. Selling existing products in existing markets Market penetration strategy Sell existing products to new markets Market Development strategy Sell new products in existing markets Product Development strategy Sell new products in new markets Diversification strategy

Existing New Product Development Products Existing Market Penetration

Markets

New Diversification

Market Development

Strategic Method This concerns the question of how to grow? Growth can be achieved through: Internal growth (organic growth) Acquisitions and mergers Joint ventures or strategic alliances Evaluation of strategic options Strategies should be evaluated to decide whether they might be appropriate. Johnson and Scholes have suggested that strategies should be assessed for: Suitability Feasibility Acceptability Suitability Does it exploit companys strengths and distinctive competencies? Does it rectify companys weaknesses? Does it neutralize or deflect environmental threats? Does it help the firm to seize opportunities? Does it satisfy the goals of the organization? Does it fill the gap identified in the GAP analysis? Does it generate/maintain competitive advantages? Feasibility Can we afford it? Will we have the labour skills needed? Can we achieve the necessary product quality? Can we produce at the cost that will be necessary? Do we have the marketing skills needed? Can we obtain the raw materials needed? Acceptability A strategy must be acceptable to the key stakeholders affected by it. It is inappropriate if it is unacceptable to any key stakeholders.

Strategic Implementation The selected strategy should then be implemented. The implementation of strategy should be monitored. Changes and adjustments should be made where they become necessary. Review and Control This is a key area. An entity will have management information systems in place to monitor the progress of the business. These are particular important to the introduction of a new strategy where timing and achievement of progress points might be vital to its success. Performance Management Systems PMS have a key role in many aspects of strategic planning and are concerned with: Setting targets for the achievement of the entitys main strategic objective Setting targets for each strategy that is implemented for achieving the main objective Setting targets at all levels of management within the entity: all planning targets Measuring actual performance Comparing actual performance with the targets Where appropriate, taking control measures Where appropriate, changing the targets Linking Performance Measurement to Strategy The measures of performance used throughout an organization should be linked to the corporate strategy and should be consistent with corporate strategy. This means that there should be consistency between performance measures at all levels in the organization, from operating levels up. The performance measures chosen should do the following: Measure effectiveness the effectiveness of the processes, and the effectiveness of products and services in meeting customer needs Measure efficiency the use of resources within the organization Include external measures from outside the organization a well as internal measures Be a mixture of financial and non-financial measurement, and qualitative and quantitative measurements Focus on the long-term as well as short term Be flexible so that the measures used are continually changed in response to a changing business environment Recognize the motivational effect that performance measurement can have on employee and management behavior Strategic Objectives The purpose of strategic planning and control is to help an entity to achieve its strategic objectives. Planning and Corporate Objectives Performance measurement is an integral part of a system of planning and control. Planning targets clarify the objectives of the organization. Corporate objectives are converted into planning targets. Similarly, the objectives of the strategic plans are converted into planning targets. A target should be a clear statement of what an entity wants to achieve within a specified period of time.

Measurement of performance (target and actual) help to improve managements understanding of process and systems Planning targets are set at strategic, tactical and operational management levels In a well-designed performance management system, all planning targets are consistent with each other, at the sa well structuredtrategic, tactical and operational levels When a business environment is changing, a performance measurement system should provide for the continual re-assessment of planning targets, so that target can be altered as necessary to meet the changing circumstances Actual performance, at the strategic, tactical and operational levels should be measured and monitored. Comparing actual with target performances provides useful information. Differences can be analyzed to establish causes. Where appropriate actions can be taken to improve performance by dealing with the causes of the poor performance. Performance measures also make it possible to compare the performance of different organisations or different divisions Performance measurement systems promote accountability of the organization to its stakeholders A performance management system may be linked to a system of rewarding individuals for the successful achievement of planning targets

The Need for Performance Measurement Every managed organization needs a system of performance measurement Managers need to understand what they should be trying to achieve. A sense of purpose and direction is provided by plans (strategies, budgets, operational plans etc.) Managers also need to know whether they are successful. The information they need is provided by comparing: - Their actual results or performance with the performance target, and - The performance target with the current forecast of what performance will be. The Benefits of Performance Measurement Systems The advantages of having a formal system of performance measurement can be: A well-structured system of performance measurement clarifies the objectives of the organization, and show how departments, work groups and individuals within the organization contribute to the achievement of those objectives. It establishes agreed measures of activity, based on key success factors. It helps to provide a better understanding of the processes within the organization, and what each should be trying to achieve. It provides a system for comparing the performance of different organisations or departments The system establishes performance targets for the organisations managers, over a suitable time period for achievement Levels of Management and Management Information A common approach to analyse levels of management and management decision making is to identify three levels: Strategic Management Tactical management Operational Management

Strategic Management Strategis management is concerned with: Deciding on the objectives and strategies for the organization Making or approving long-term plans for the achievement of strategic targets Monitoring actual results to check whether these are in line with strategic targets Where appropriate, taking control action to bring actual performance back into line with strategic targets Reviewing and amending strategies Tactical Management Tactical management is associated with the efficient and effective use of an organisations resources, and control over expenditure. In a large organization, tactical managers are the middle managers. Operational Management Operational management is the management of day-to-day operating activities. It is usually associated with operational managers and supervisors. Potential Conflict between a

Strategic plans and short-term decisions Problems may occur in organisations (especially large ones) with a large number of managers, when local managers take decisions that are inconsistent with the long term strategic objectives. Reasons why this happens: Local managers might be rewarded for achieving short-term planning targets. These may have short term benefits but harmful in the long term. These managers will only seek what is presently beneficial to them. Local managers may fail to buy into the plan because they believe it to be unfair Local managers might be unaware of the strategic plans and objectives due to poor communication within the entity Strategic Management Accounting and Multi-Nationals Global Competition Many entities have expanded beyond their national markets and operate in foreign markets. The reasons may be: Cost reduction opportunities due to economies of scale Few growth opportunities in domestic markets Extension of product life by selling into new markets Convergence of markets so that a standard product can be sold in many countries Emergence of new markets Avoidance of currency risk by setting up operations in other countries to supply those countries Multi-national Organisations and Global Organisations

An International Company is a company with all or most of its production operations in a single country. Most of its senior managers are nationals of the country. The company sells its products in different companies through local sales agents or local sales office in each country, or using international sales representatives. A Global Company is a company with operations in a large number of different countries, making a similar range of products or providing a similar range of services. Its senior managers are nationals of a variety of different countries. Multi-national Companies Management makes strategic decisions for each foreign market individually Products are adapted and designed to the requirements of the local market Marketing (e.g. advertising) is adapted in each country to suit the local culture Countries are selected as a target for production and sales entirely on the basis of their potential for profitability The aim is to optimize the value chain in each country of operation A multinational company often has the culture of the country where its head office is based Global Companies Management develop worldwide strategies for all their markets The company produces core products. These are standardized for all markets, with only minimal design changes for individual national markets This is a uniform approach to marketing in al countries, with only small variations Countries are selected for their ability to contribute to the integrated global strategy The value chain is broken up, and the different parts of the value chain are in different countries. The aim is to optimize the value chain globally A global company develops a global culture. Its senior managers are likely to come from different countries

Barlett and Ghosal suggested that the way in which an international company is organized and structured depends on two factors: The benefits obtainable from global organization, and The need for local (national) operations to respond to the demands of the local market, and so the need for local independence. Benefits from global co-ordination Low High

High Need for Local Independence And Responsiveness

International Subsidiaries

Transnational corporations

International Divisions Low

Global product companies

International Divisions are headed by senior management (mainly from home country) located in head office in the home country International Subsidiaries are locally established subsidiaries that respond more to the needs of the local market. Each subsidiary develops its product variation and local strategies. This type of organization is vulnerable to competition as global competition intensifies. Global product companies sell a standard product globally, with benefits from economies of scale. Differences in customer needs between local markets are ignored. This type of company is vulnerable to competition from companies that respond more successfully to the needs of local markets. Transnational corporations are companies that are organized as an integrated network of interdependent resources, on a global scale. As international business develops, more companies are becoming transnational. The Effect of IT on Management Accounting IT systems and management accounting Management accounting systems are information systems and the development of information technology continues to have a significant impact on management accounting and on: Collecting data Storing date and information The ability to process data into valuable information Communication of information IT systems for providers of services IT systems can improve the quality of service in a number of different ways The service provider has instant access to the customers files or to other key information. Instant access means that a customers request can be dealt with immediately. In some cases the customer is given the opportunity to take control IT systems also provide for access to external sources of data and information. External data can be obtained from the internet either: Free of charge e.g. from websites Through subscription IT systems and Competitive Advantages It systems may be able to give one business a strategic advantage over its rivals. The efficiency of IT systems can improve the quality of administration, production and services to customers and so provide better value for customers, e.g. by reducing costs or providing a faster service Bespoke IT system, written for the specific requirements of a particular entity, may provide competitive advantage because of their uniqueness Purchased software (off-the-shelf) is unlikely to provide competitive advantage because it is available to anyone. Management should keep the IT systems under continual review, and: Be aware of new developments in IT systems and new opportunities for exploiting IT Review existing systems to ensure that they are of a high quality and are operating effectively and efficiently

Monitor the use of IT systems to competitors, and be prepared to respond to any initiatives in IT that competitors introduce

Quality in Software The entity should seek to have good quality in its IT systems and system software. The following factors may be used by management to assess the quality of new bespoke software systems Ideally, new software systems that have been written and developed for an entity should be error-free. It is difficult to avoid all errors in new systems, in spite of testing, but errors can be major or minor. Quality software should be free from major errors and the number of minor errors should be very low The software itself and also the procedures and processes used for its development and testing (and documentation) should meet international quality standards (ISO) for IT The software must meet the specification agreed with the customer The software should be delivered on time The software should be capable of being updated, and not necessarily by the original developers of the software. This is one of the reasons why using ISO standards is so important

Stakeholders and Ethical Considerations Stakeholder groups include: Employees Suppliers Customers Government Pressure Groups Although the main objective of a company might be to increase the wealth of shareholders, strategy might also be influenced by the demand and expectations of other stakeholders. Senior managers might agree to improve pay and working conditions for employees, even though this will affect profitability A company might chose to develop long-term strategic relationships with key suppliers, even though this might result in higher material costs in the shorter term Companies might sometimes be forced to agree to the demands of pressure groups, in order to avoid damage to their reputation and a loss of customer loyalty

Ethics and Ethical Codes Companies should comply with the law. Many companies go further and state that they will act in an ethical way. In practice there are limits to ethical behavior by companies Companies exist to create wealth for the shareholders. Their main purpose in spite of the corporate mission is not a social or moral purpose The ethics of doing business are different from the ethics of normal social behavior. Businesses compete with each other, and many decisions are taken for commercial reasons, regardless of their effect. For example, companies will close down loss-making operations, regardless of the impact on the employees who are made redundant.

Acting ethically, for a business entity, probably means: Acting fairly towards employees Dealing honestly with suppliers and customers Avoiding lies in communications with employees, customers, suppliers and government Acting within the law Ethical behavior might also cover issues such as: Sexual harassment Bribery Codes of ethics The New York Stock Exchange rules require companies whose shares it trades to have a publiclydisplayed code of business conduct and ethics In the UK, 90% of the top UK companies have a code of ethics The problems with ethical codes The main problems with ethical codes is that they are often not observed Enron, the collapsed US corporation, had an ethical code but the board of directors chose to over-rule it Many companies do not give their employees training in the code of ethics, so that employees are not even aware that it exists To have an effective ethical code: Senior management must believe in it Senior management must give the lead in acting ethically; and Employees must be aware of the code and its provisions