STRAT MAN TUTORIALS 2017

1 a) Identify and discuss the circumstances that have brought the proposition that
traditional management accounting control systems have lost their ‘relevance’ to
today’s manufacturing and organizational environment. (10 Marks)

During the 1970s and 1980s traditional management accounting practices became widely
criticized. New approaches were advanced that were more in tune with today’s competitive
and changing business environment. In today’s environment companies need to be:
 Flexible to customer demands
 Re-active to competitors’ actions, and
 Pro-active in retaining a competitive and strategic advantage.

• Complexity and diversity of products in modern manufacturing .Most organisations are

now producing a wide range of products. . For example, Cadbury now produces over 20
different chocolate products. Some products, such as the Cadbury Dairy Milk, are
simple to produce. Other products, such as the Cadbury Cream Egg, are a lot more
complicated to produce. As a result, it is no longer appropriate to assume that all
production overheads are driven by the level of production. We need to take account of
the increased complexity and diversity and consider what truly drives our production
overheads……..…………and so, ABC was created

• The increased emphasis on quality contradicts assumptions made by traditional

management accounting, which assumes that products should be made as reliable as is
‘cost effective’. In the long run, an emphasis on total quality, not only of products but of
services to customers and services within the organisation, not only increases sales but
enormously reduces many costs associated with re-working and correcting errors.

• The need to assess profitability of a product throughout its lifecycle.

• Total labour cost has been outweighed by overheads due to the use of machinery.
Therefore, it is important that an accurate estimate is made of the production overhead
per unit

• Many resources are now used in non-volume related support activities unlike traditional
approach which assumed volume as the only cost driver.
 1b) Evaluate strategic cost management initiatives which may be used in order to
restore the ‘relevance’ of management accounting control systems in today’s
manufacturing and organizational environment. (15 marks)

• The needs to improve the sophistication of cost and management control systems have
prompted criticisms of the ability of traditional costing systems to report sufficiently
accurate product costs . In order to restore the relevance of cost and management control
systems, a variety of advanced costing systems include various forms of ABC, target
costing, quality costing, attribute costing, and life-cycle costing have been initiated
(Dunk, 2004).

Activity based costing

• Recognizes that costs are caused by activities rather than by units of output.

• These activities are known as cost drivers and their recognition aids management’s
understanding of cost behavior.

• Leads to identification of value adding and non-value adding activities and performance
management in terms of measuring efficiency through cost driver rates.

• However the effect of ABC system is that it increases the cost of products that make use
of a greater number of high cost activities whilst reducing cost of other products.

Target Costing

• Its a pro-active costing technique that controls costs before the launch of products.

• Costs are controlled without compromising the functions of a product by identifying non
value adding features and processes.

• It helps to increase market share by taking advantage of actual costs lower than target
cost

• It helps to assess the feasibility of a product launch.

• In contrast target costing may limit possible further reduction of costs when desired
levels are reached.
Quality Costing

• It involves total employee participation in value addition.

• Continuously improves operations and processes which helps to reduce

defects(efficiency).

• The effectiveness of production teams is measured by defects or amount of re-work,

rather than basing on output.

• Since it requires total employee participation, Quality Costing requires high employee
motivation.

Lifecycle costing

• By ascertaining upstream and downstream costs, LCC provides more reliable costs
which will help to assess the feasibility of a product launch.

• Unlike convectional costing which record costs as they are incurred, LCC enables control
of costs before there are incurred.

• However the use of LCC costing may inappropriate costs estimates as some of the costs
may vary over time e.g. maintenance of equipment.

Attribute Costing

• The use of feature-costing helps to identify the necessity of a feature on a product .

However the elimination of some features may result in loss of market, hence there is need to
embark on market segmentation which may be costly.

Competitor Cost Assessment

• Competitor cost assessment concentrates uniquely on cost structures of competitors

(Simmonds, 1981). There can be different sources of such information. Ward (1992)
suggests some indirect sources like physical observation, common suppliers or customers
and employees of competitors.

• However the information gathered indirectly may be misleading and subjective

 Value Chain Costing

• Developing the value chain model (Porter, 1985), Shank& Govindarajan (1992b) propose
an approach to accounting that considers all the activities performed from the design to
the distribution of the product. The strategic implications regard the exploiting of the
economies and efficiencies deriving from the external linkages between the company and
both suppliers and customers

• However It needs high level of synchronization of activities which might be difficult to

attain

Zero Based Budgeting

• Due to its nature of “starting from scratch”, It helps controlling service centers' and non-
product (overheads) costs effectively .

• The justification of costs improves scrutiny , thereby reducing costs where possible.

• Efficient allocation of resources.

• On the other hand it is costly in the sense that it requires role data and is also time
consuming.

2) Question: Management accounting practice has traditionally focused on techniques to

assist organizational decision-making and cost control. In concentrating on the internal
environment, the management accounting function has been criticised for not addressing
the needs of senior management to enable effective strategic planning. In particular, the
criticism has focused on inadequate provision of information which analyses the
organisation’s exposure to environmental change and its progress towards the achievement
of corporate objectives.
Explain how Strategic Management Accounting can provide information which meets the
requirements of senior managers in seeking to realise corporate objectives.

Strategic management accounting is the provision and analysis of management accounting data
about a business and its competitors for use in developing and monitoring business strategy. Senior
management is mainly concerned about planning which involves definition of objectives, setting
targets of performance, formulation of strategy and others. Therefore in order to get to know the
type of information which meets the requirements of senior management, the major corporate
objectives that are pursued by them should be first established and deduces how strategic
management accounting can provide the information.

Traditionally, management accounting is presented as a matter of fitting cost systems to particular

business environment. However, strategic management accounting provides strategic choice
where companies can choose which industries and products they want to compete in. Thus market
diversification as a corporate objective is enhanced through strategic management accounting. The
main distinguishing feature of strategic management accounting as opposed to traditional
management accounting is the recognition that managers have the freedom to choose which
industry they operate in rather than adapting to given competitive, technological and organisational
circumstances. Analysis of different product life cycles comes in as one of a strategic management
tool to provide information on this strategic choice. Life cycle costing can apply to products,
services, customers, projects or assets and it costs the cost object over its projected life. The aim
is to adopt a policy which will maximise the return over the cost object’s total life. Therefore it is
evident that whenever companies strive to venture into other markets strategic management
accounting can be a trusted saviour to stick to.

Strategic management accounting provides information for directions for growth through
investigation of capital costs of different options and investment appraisal of possible options.
Traditional management accounting comes up with capital budgeting tools but their analysis now
which involves the ranking projects with their level of net present value, payback period analysis
and internal rate of return will be a strategic management accounting task mainly in the hands of
the financial director. Thus investment decisions which are a priority of senior managers are
greatly enhanced by strategic management accounting through the aforesaid techniques. Growth
of the organisation in the same vein is strategically achievable under the strategic scrutiny of all
the capital budgeting tools.

Strategic management accounting has a strong orientation towards the firm’s environment.
Competition position, upstream relations with suppliers and downward relations with customers
are major components of the environment that are addressed through strategic management
accounting. Market and competitor analysis is thus of great interest in facilitating survival of the
business. Traditional management accounting focuses on internal affairs only while external
relations in terms of competition place in the market is of course a strategic management
accounting task. The competition position does not only depend on price but on market mix. This
means all components, place, promotion and product should be analysed to be a force to reckon in
the competition environment. Price and advertising information should be obtained from the
marketing executives and quantify the effect on sales volumes of different levels of advertising or
different prices cuts. Armed with the data on sales volumes, the management accountants should
now be able to put together a set of options, compare them, estimate cash flows over a period of
time and discounting at a certain rate. Selection of the best option will then be done.

Co-operation with marketing personnel may involve the use of techniques such as attribute costing
that costs product attributes that appeal to customers, using brand value as a basis for managerial
decisions and measuring the costs of quality. The competitive position is monitored through
competitor cost assessment through estimates of competitors costs based on an appraisal of
facilities, technology, economies of scale, market share, volume, unit costs, and return on sales.
This is how information will be provided to senior management through strategic management
accounting.

Strategic management accounting is also useful in providing information to senior management in

cost minimisation. Target costing in conjunction with life cycle costing provides a broader picture
of costs associated with product design, introduction up to maturity. The techniques give
considerable information on how the cost structure can be minimised at a strategic level. Porter
(1980) also suggests that cost leadership strategy can be adopted where a companies aims to be
the lowest cost producer among its competitor’s sphere of influence. While traditional
management accounting focuses on analysis of existing activities, with strategic management
accounting there is concern that performance indicators such as degree of cost minimisation should
be relative with a continuous recognition of rivalry with competitors. Simply put as in any game,
there is need not only to develop your own strategy but also to understand the strategy of the
opponent.
Product differentiation and focus enhances profitability. Product differentiation creates a customer
perception that the product is superior to that of competitors and hence a premium can be charged
on those products. Focus aims at a segment or niche of a particular group of consumers. As these
are strategic management tools their application as alluded for by Porter will immensely boost
profits and help so much with information to senior management.

In conclusion, strategic management accounting indeed adequately provide of information which

analyses the organisation’s exposure to environmental change and its progress towards the
achievement of corporate objectives. This is of course against the traditional management
accounting that is mum on the area.

3 (a) Discuss the ethical issues with reference to the given case above and
their impact on the performance of Plastic Ware PLC (long term as well
as short term) [10 marks]
 In general, ethics is the study of what is right or wrong, good or bad. According
to the Websters Dictionary, ethics is the displine dealing with what is good and
bad and right and wrong or with moral duty and obligation.
 Business ethics relates to the application of ethical values to business behaviour.
It encompasses many areas from board strategies to how companies negotiate with
their stakeholders. It also goes beyond legal requirements and at some time it is
therefore discretionally.

Ethical issues in Plastic Ware PLC

1. Product safety

 Product safety can be used as a core competence and as a basis for

differentiation by companies. However, for Plastic Ware PLC, a substandard
material is used in the production of toys. The material is harmful to the children.

 This have got an adverse effect to the company sales in the long run as people
will not be willing to buy products that are harmful to their children.
2. Woking conditions

 In organisations, good working conditions are used to attract higher calibre of

workers in the long run. Employees have rights and they must not be seen simply
as a means of production, therefore the need good and favourable working
conditions.

 However, in Plastic Ware PLC, workers are required to work beyond normal
working hours and for lower wages, which have got a negative effect to the
employees which leads to demotivation of employees which results to the
production of poor quality goods.

 Even though the employees are willing to work for low wages, it is an unfair
labour practice which may lead to government intervention to enforce labour laws
which are favourable to the employees.

3. Avoiding pollution

 Avoiding pollution helps the organization to serve costs in the long run and
winning in increasingly sophisticated markets where there is now a threshold
competence.

 In Plastic Ware PLC, there is no emission treatment plant and the emissions from
the factory are polluting the environment of Harare. This may affect the going
concern of Plastic Ware as it may be forced to close by the EMA. Also, this
affects the reputation of the company as the pollution has already attracted media
attention and may adversely affect business in the long run.

4) Sponsorship

 Making donations builds the image of the corporate. It also beneficial in that
donations are tax deductible.

 Although Plastic Ware makes donations of $15 000 to a certain political party, it
is not so vital because the party has got an influence to Plastic Ware through its
leader, Carnival. It is unethical to provide donations to it since Plastic Ware seem
as if they are buying for low interest rates loan from Easy-money.
5. Honesty in Approach

 Honesty in approach can lead to the brand strengthening.

 However, Plastic Ware is not disclosing to the customers about the bad effects
their products have. Rather, they are claiming their products as being safe and
improving children’s memory and motor skills at a faster rate which has not been
scientifically proven. This has got a negative effect to the company if customers
prove otherwise.

6. Hygiene

 The work environment should be very hyigienic for the products to be highly
demanded by the customers.

 In Plastic Ware, there is poor hygiene and they are allowing female workers to
bring breast fed children to the company. This has also attracted media attention
and they have published a photographic evidence.

7. Child labour

 In Plastic Ware, they make use of child labour which is very unethical. More to
that, the children are working for more than 100 hours a week which is far above
the maximum working hours prescribed through legislation and this is
overworking.

 This is a short term ethical issue as child labour is not allowed by the law. They
can be held for not abiding by the labour laws.

8. Board Composition and ownership structure

3b) Using Mendolow’s matrix,map the following stakeholders of Plastic Ware Plc:

(i) employees

(ii) customers

(iii) directors of Plastic Ware Plc,

(iv) shareholders (other than directors)

 (v) the government (15marks)

Answer

 Mendelow’s matrix is a business model used to map the corporte stakeholders in

term of their probability of exercising power / level of interest and the stakeholder
power. Below how Plastic Ware maps its stakeholders using the Mendelow’s
matrix

(1) Employees

 Employees of Plastic Ware PLC fall in the Keep Satisfied quadrant of the
Mendelows Matrix.

 They are being kept satisfied by giving them their salaries. However they might
become militant if not satisfied.

 They have low level of interest in the operations of Plastic Ware, and high
stakeholder power if they are unionized.

(ii) Customers

 In Plastic Ware, customers are placed in the Keep Informed quadrant.

 They have high level of interest and low stakeholder power.

  They customers are kept informed . They are very interested in the organisation can
be powerful to influence other groups.

(iii) Directors of Plastic Ware PLC

 Plastic Ware PLC places its directors in the Key Players quadrant of the
Mendelow’s matrix model. They have high level of interest and also high
stakeholder power.

 They are given most of what they want at least in the short term not considering
the long term effects to the business. They are most concerned about profit.

(iv) Shareholders (Other than directors)

 Other shareholders who are not directors constitute 20% of the ownership.

 They fall in the Minimal Effort of the Mendelow’s matrix.

 They have low interest and little power since they are dormant in strategic
decision making.

 They are ignored for all practical purposes

(v) Government

 The government has got a high level of interest in the operations of Plastic Ware
PLC but has low stakeholder power.

 It is their in the Keep Informed quadrant in the Mendelows matrix.

 It is kept informed and although it has little power, it is interested in the

operations of Plastic Ware PLC can influence other groups like customers,
employees, and pressure groups.

4 a) In general, identify and discuss at least three factors that will help an
organization to successfully implement a quality improvement programme.
Solution
 Quality refers to the features of a product that will meet customer’s satisfaction
 A product must be reliable, useable and repairable
  Services should be courteous, efficient and effective
Factors include
I. Developing long term supplier relationships.
II. Customer involvement
III. Empowering employee
IV. Adopting a quality culture
i. Developing long term supplier relationships
 An organization is a system that draws inputs from the environment and transforms them
into outputs to make profit, with the majority of inputs coming from suppliers.
 This factor addresses the entire range of activities including how organizations maintain
close relationship with their suppliers and their contribution to product quality, information
sharing and performance.
 This can involve helping suppliers to implement TQM in their own organisation,
identifying ways of saving money and assisting with training.
 The incentive for the supplier is a long term contract – the incentive for the recipient is
targeted cost reductions as part of the contract.
ii. Customer involvement
 Quality management must ensure customer satisfaction, since quality is defined by the
customer, not by the company therefore organisations must get much closer to its
customers.
 An organization must meet the changing needs and preferences of its customers.
 The customer is the most important part of the production line, quality should be aimed at
the needs of the consumer, present and future hence this factor plays a major role in
implementation of a quality improvement programme.
 Organizations must conduct customer satisfaction surveys to understand the qualities of
the product important to the customer and also conduct surveys with those who are not the
company's customers.
 This will also provide insight into why these businesses use the services of the competitor.
 Customer surveys will be used to target those features of a product or service that needs
improvement.
  The quality management program provides a methodology to use to create the type of
product the customer desires.
iii. Empowering employees
 Empowerment enables everyone in an organization to use the quality improvement models
as a learning methodology in every business activity to keep improving every aspect of
everything the organization does.
 TQM requires a culture change in many Western businesses, where the employees are
given considerable power and authority thereby reliance is placed on employees to be their
own quality controllers and give them the ability to stop production if problems arise and
this requires trust.
 Quality circles are formed, where teams of employees are given the freedom to find
solutions to problems and to come up with their own methods.
 The changes that TQM brings results in amendments to processes and products and how
the factory operates.
 Resource commitments also helps increase employee empowerment, if there are adequate
funds and personnel are committed one can consider empowerment as a principal
ingredient for successful implementation of a quality improvement programme.
iv Adopting a quality culture
 A common set of values, beliefs, attitudes, perceptions, and accepted behaviours shared by
individuals within an organization is called culture.
 Quality improvement programmes must encourage company departments to work as a
team.
 Different areas of the company become reliant upon one another to produce a quality
product that meets and exceeds the customers' expectations.
 A quality programme incorporates measures that affect sales, finance, operations, customer
service and marketing.
b)Define and briefly discuss the following quality related terms :
i) Total quality management
ii) Employee involvement
iii) Competitive benchmarking
i Total quality management (TQM)
 TQM is a management philosophy whereby quality is placed at the heart of the
organization's thinking and activities.
 Total - means that everyone in the value chain is involved in the process, including
employees, customers and suppliers.
 Quality -means products and services must meet the customers’ requirements.
 Management - means that management must be fully committed and encourage everyone
else to become quality conscious.
 The view is that the quality experience of the customer (whether internal or external)
should be one of excellence.
 The organization should strive for continuous improvement in the quality that it delivers
with the ultimate aim of achieving zero defects in this quality.
 It may be necessary to incur expenditure in order to improve quality.
 However, in TQM this expenditure is viewed as an investment that will yield future
benefits, rather than as a cost that should be minimized.
 Total Quality Management has two basic principles: ‘get it right first time’ and
‘continuous improvement’.
 Get it right first time essentially equates to aiming for a zero-defect target. This principle
is based on the premise that prevention costs are less than the cost of correction.
 The principle of continuous improvement is based on the idea that, although the ideal
state may never be achieved, it is the aim. A target of zero defects may not be achievable.
However, the principle of never being satisfied until this is achieved will engender the
correct behavior of continually seeking to improve.
ii. Employee Involvement
 Employees must be given considerable power and authority for total quality
management to be successfully implemented.
 An organization must rely on employees to be their own quality controllers and give
them the ability to stop production if problems arise.
 TQM differentiates between external and internal customers.
 External customers are those that purchase the company’s goods and services and
internal customers are employees of the organization who receive goods or services
from others in the company.
 For example, the packaging department of an organization is an internal customer of
the assembly department.
 The philosophy of TQM is based on the idea of a series of quality chains, which may
be broken at any point by one person or service not meeting the requirements of the
customer( internal or external).
  The key to TQM is for everyone in the organization to have well-defined customers,
beyond the customers of the company, to anyone to whom an individual provides a
service.
 Thus another example is the ‘Paint shop’ staff who would be customers of the
‘Assembly shop’ staff who would themselves be the customers of the ‘Machine shop’
staff.
 The idea is that the supplier-customer relationships would form a chain extending
from the company’s original suppliers through to its ultimate consumers.
 Areas of responsibility would need to be identified and a manager allocated to each,
and then the customer/supplier chain established.
 True to the principle outlined above the quality requirements of each ‘customer’
within the chain would be assessed, and meeting these would then become the
responsibility of the ‘suppliers’ who form the preceding link in the chain.
 Just as a defective item would not be passed to an external customer, a defective item
should not be passed to an internal customer.
 With the old concept of quality, employees were afraid to identify problems for fear
that they would be reprimanded.
 Often poor quality was passed on to someone else, in order to make it “someone
else’s problem”.
 The new concept of quality, TQM, provides incentives for employees to identify
quality problems.
 Employees are rewarded for uncovering quality problems, not punished.
 In TQM, the role of employees is very different from what it was in traditional
systems.
 Workers are empowered to make decisions relative to quality in the production
process.
 They are considered a vital element of the effort to achieve high quality and their
contributions are highly valued, and their suggestions are implemented.
 In order to perform this function, employees are given continual and extensive
training in quality measurement tools.
iii. Competitive benchmarking
 Benchmarking is a process of continuous improvement in the search for competitive
advantage. It measures a company’s products, services and practices against those of
its competitors or other acknowledged leaders in their fields.
 It involves the use of a yardstick to compare performance.
  Competitive Benchmarking is used by companies in the same sector to compare their
positions with respect to the performance characteristics of their key products and
services.
 Competitive benchmarking is another way companies implement continuous
improvementIs the use of a yardstick to compare performance by studying business
practices of companies which are considered as the “best in class”.
 The ability to learn and study how others do things is an important part of continuous
improvement.
 The benchmark company does not have to be in the same business, as long as it
excels at something that the company doing the study wishes to emulate.
 For example, many companies have used American Express to benchmark conflict
resolution.
 There are two methods of carrying out competitive benchmarking;
 Trial Benchmarking and Survey Benchmarking
Trial benchmarking
 Is carried out by trialing and/or testing products and services from other organisations and
comparing them against your own products and services. The following are the steps /
process of trial benchmarking:
1. Determine the objectives of the study
2. Identify potential target organisations
3. Develop list of information and data requirements
4. Carry out comparison
5. Analyse data and produce report
Survey Benchmarking
 It is similar to trial benchmarking and usually carried out by an independent organisation
surveying customers to ascertain customers’ perception of relative strengths and
weaknesses compared to competitors.
 Survey may be carried out by interview, post, phone, emails and in the form of
questionnaire.
 The following are the steps or processes of survey benchmarking
1. Determine the objectives of the study
2. Design, develop and pilot test the survey
 3. Carry out survey
4. Analyse data and produce report
c) Discuss Kato Lan’s concern at GTEL’S company that quality programmes only
increase costs.
Kato Lan’s concern
 Underlying Kato Lan's concern is the assumption that productivity can only be increased
by decreasing quality. Lan's concern is shortsighted as he is only considering the short-
term costs and not the long-term benefits.
 The initial implementation of a quality programme will temporarily result in lost
production time as employees are trained and become more involved in production
problem-solving, but these costs prove to be sound investments in the long term.
 Internal and external failure costs decline and customer satisfaction increases.
 TQM helps managers to reduce external failure costs because it is cheaper to produce a
quality product than producing inferior products which results in excessive expenditure on
waranty repairs and this also impacts heavily on the goodwill of the organisation.
 Experience has shown that quality leads to a decrease in the number of defects, which in
turn leads to a decrease in the resources dedicated to rework and inspection.
 Customer returns, warranty costs, and customer lawsuits all decline.
 Moreover, the cost of future lost sales due to poor quality should decrease substantially.
 However quality programmes also increase costs as they carry start costs , employees need
extensive training and during initial training period productivity can be reduced
 There can be employee resistance as the program requires change in mindset, attitude and
methods for performing their work as a result workers can become fearful and followed by
employee resistance and it lowers their morale and productivity for the business.
 In conclusion, Quality costs should be more distributed towards prevention and appraisal
activities and less towards failures so Kato Lan’s concern at GTEL’S company that quality
programmes only increase costs is not sensible and prudent.

5) Discuss how a management accountant can assist an organisation to achieve competitive

advantage by measuring the increase in added value from improvement of its product
quality.
A competitive advantage is an edge gained over competitors by offering customers
products/services of greater value that justifies similar, or possibly higher, prices whilst on the
other hand value-added describes what happens when one takes a basic product and increase the
value of that product (and usually also the price) e.g. by tacking on extra products and/or services.
From all of the potential sources of competitive advantage that a management accountant can use,
quality is an underlying factor. Successful ventures offer consistent quality, so an important
consideration for any venture is how quality is going to be perceived and measured. In some cases,
quality may be linked to value-added strategies, such as obtaining third party certification. In other
cases, quality may be related to the fact that the product being offered is of a higher physical quality
than the competitor’s product, or from providing excellent customer service.

Measuring the increase in value added in an organization is a matter of fundamental importance to

companies. Management accountants can make use of Porter’s value chain and it addresses the
following questions;
 How does the organization create value?
 How does the organization change inputs in such a way that they have a greater value than
the original costs of creating those outputs?
By addressing the above mentioned questions management accountants will be able to measure
value added and thus assisting the organization to archive competitive advantage over its
competitors. Coordinating the individual parts of the value chain together creates the conditions to
improve customer satisfaction in terms of cost efficiency, quality and delivery.

The value chain when viewed as a supplier to customer relationship is a useful tool because it
provides useful feedback on assessing the quality of service provided by the suppliers and
opportunities improving through.

Once a management accountant is actively involved in measuring the increase in added value from
improvement in product quality, it entails that he/she will put effort in identifying whether the
organisation is meeting customer requirements. Here, the management accountant should be able
to devise strategies to deduce whether the organisation is providing the services/products that the
customers require. This will assist the organisation to withstand competition or possibly gain an
edge over competitors in that, constant checks on customer requirements will reflect the need to
come up with improvement. This is especially where the organisation is a step behind in terms of
customer satisfaction such that solutions and recommendations are quickly brought forward to
remedy the situation before it results in a reduced customer base.

As a direct result of measurements, the management accountant will therefore be in a better

position to be in control of the whole production process. Through measurements, the management
accountant will ultimately help to reduce variations as well as to reduce expense overruns so that
agreed-to objectives can be achieved thus presenting a platform to the organisation to enjoy a
competitive edge over other players in the same industry.

The management accountant can use the measurements to assess how well a process is doing,
including improvements that have been made. Without measurements, there is no way to be certain
that the organisation is meeting value-added objectives or that it is being effective and efficient
therefore the process of incorporating measurements in self assessment will assist in the effective
appraisal of the performance of the organisation as a whole thus enabling it to stay on top in the
industry. Also, management accountant will be able to adopt the policy of continuous
improvement since measurements can be used to identify defect sources, process trends, and defect
prevention, and to determine process efficiency and effectiveness, as well as opportunities for
improvement thereby the organisation will achieve a competitive advantage.

Measurements of the increase in added value paves way for the management accountant to improve
product quality by adding unique attributes to products to enhance their competitive attractiveness
so as to benefit customers in the final stage. Also, he can ensure that quality is achieved through a
couple of dimensions such as the quality of design which means to adapt product design to its
function and the quality of conformity which stands for the organizational capability to transform
inputs to conformable outputs or outputs in accordance to the specific design characteristics. In
the end, the management accountant’s focus on increments in added value and quality
improvements will be reflected in the competitive advantage of the organization.
The basis for a competitive advantage often lies in the resources and abilities that are already
available, even though the resources may not initially be recognized. It is therefore the task of
management accountant to analyze and measure the actual benefits derived from product quality
improvement by taking a critical look at the existing resources and product/service offerings.
Reading through the potential options for competitive advantage, the management accountant has
to indicate resources which are already available as well as those that the venture need to obtain in
order to come up with an absolute, realistic measure of the increase in added value and maintain a
focus on gaining a competitive advantage.

There is great need on the part of the management accountant to clearly define the customers the
venture is targeting as well as determine the products and services customers want. Once the needs
and wants of the already existing and potential customers have been established, it will be easier
for the management accountant to measure the increase in added value from improvement in
product quality. He or she will be better equipped to analyze the trends before and after engaging
the product improvement process and show if improvements have actually happened.

Competitive advantages do not tend to stay competitive advantages without significant effort. Over
time, the edge may erode as competitors try to duplicate a successful advantage for themselves
and as the market changes. Half the battle of the management accountant is establishing the
competitive edge, while the other half is maintaining it. Continual analysis of the company’s
product offering will help the company to stay on top of the industry, thus the management
accountant has to repeatedly measure the increase in added value such that he or she can come up
with new advanced strategies to improve the company’s products and services. At the end of the
day, the management accountant will then ensure that further decisions are based upon well-
documented data not on intuition.

The management accountant in an organisation has several duties that include ensuring the
sustainability of the organisation. There are several ways in which the management accountant can
assist the organisation to achieve competitive advantage by measuring the increase in added value
from improvement in its product quality. The management accountant can do the value chain
analysis. This is a means of increasing customer satisfaction and managing costs more effectively.
Value chain analysis is the linked set of value creating activities all the way from the basic raw
material sources up to the output end use that is when the product /service is delivered to the
consumer. In the process, the management accountant will help the organization to achieve
competitive advantage.

Benchmarking being the strategy that helps measure the increase in added value to achieve a
competitive advantage by way of comparing key activities with world-class practices. By doing
this the management accountant will be assisting the organization to gain a competitive advantage
since this strategy is cost beneficial and the organisation can save time and money by avoiding
mistakes that other companies have made. Resultantly the organization will improve its product
quality so that it survives in the market. Benchmarking can be the search to:
 Improve activities in which the organisation engages through documentation and
understanding.
 Eliminate activities that are non-value added.
 Improve the efficiency of activities that are value added.

The role of the management accountant has the role to formulate strategies that gives the
organization a competitive advantage and effective competitive strategies need to be adopted for
survival. The management accountant can adopt generic adaptive strategic models (the prospector
strategy, the defender strategy, the analyser strategy, and the reactor strategy).
6 a)

Just in time is a manufacturing philosophy which eliminates waste associated with time, labor and
storage space. The basics of the concept are that the company only produces what is needed, when
it is needed and in the quality that is needed.

Total quality management (TQM) is described as the mutual cooperation of everyone in the
organization and associated business processes in order to produce products and services which
meet and hopefully exceed the need and expectation of customers. Total quality management can
also be described as a comprehensive and structured approach to organizational management that
seeks to improve the quality of products and services through on-going refinements in response to
continuous feedback.
Both cost management techniques are essential in assessing and improving the quality of a
manufacturing organization’s product quality. The data in the diagram below shows the effects of
the implementation of a just in time process in a manufacturing firm over a 4 year time period.

Table 1
Quarter 1 Quarter 2 Quarter 3 Quarter 4
First pass yield 83% 89% 92% 99%
Stock turnover in each quarter 10 times 15 times 20 times 24 times
Cycle time from customer order to delivery 15 days 14 days 13 days 11 days

The above data shows that there is a successful implementation of JIT and TQM cost and quality
management system within the organization. To explain the reason why there is a successful
implementation of the two processes we shall define the key activities of the organization which
are shown in the table above which are, first pass yield, rate of stock turnover and cycle time from
delivery.

First Pass Yield

First pass yield also known as throughput yield or first time yield is defined as the number of units
coming out of a process divided by the number of units going into that process over a specified
period of time. Only units without rework are counted as coming out of an individual process.
Therefore the results show that total quality is being implemented successfully as the percentage
of first pass yield is increasing with time from 83% to 89% form quarter 1 to quarter 2, 89% to
92% from quarter 2 to quarter 3, 92% to 99% from the third quarter to the fourth quarter. This
means that the rates of errors or defects coming out of a process are decreasing as the time period
of implementation of the TQM technique increases. TQM is regarded to have been successfully
implemented if the number of defects that come out of a process are approximately 1 in a million.
Therefore in the fourth quarter the number of defects are only 1% which shows that the process is
approaching the 1 in a million defect benchmark and the data also shows that the company will
continue to reduce its defects as time moves on.

Stock Turnover

It is the number of times we convert stock into cash. Or the number of times inventory is sold or
used in a period of time such as a year. It is an accounting term that describes the measure of how
well a company converts stock into revenue. According to the results in the table above the rate
of stock turnover is increasing form 10 to 15 times between the first and second quarter, 15 to 20
times between the second and third quarter and 20 to 24 times between the third and fourth quarter.
This means that implementing the JIT and TQM process has improved the quality of our product
so much as to please our customers more, this is shown by the improvement in the rate of stock
turnover over the time period which means the product is being bought more because of its
improved quality. Quality products are bought faster and no carrying costs are incurred.

Cycle Time from Delivery

Cycle time from delivery is the time period an organization takes to deliver goods to its customers.
Analysis of the cycle time from delivery in the table above shows that the days of delivery are
improving due to efficiency brought about by the implementation of just in time, hence less time
is spent in meeting customer orders and ultimately less time is taken to deliver. JIT requires that
the raw materials required to make a product required by a customer be delivered straight form the
supplier in the quickest time possible in order for the organization to save on stock storage costs.
Therefore form the table above cycle time form delivery is reducing from 15 to 14 days between
the first and second quarter, 14 to 13 days between the second and third quarter and 13 to 11 days
between the third and fourth quarter. This shows that the cycle time is decreasing over each quarter
meaning that JIT is being successful implemented.

The above activities of the organization may also have been improved by the help of the 5 standard
parts which where being used for production in the fourth quarter. Avoiding using or producing
the four specialized parts for production may have helped improve the TQM process of the firm
on the first pass yield process in that, specialized parts are difficult to produce hence the number
of errors incurred in there production are large therefore cutting the production of those parts meant
that errors would be reduced and therefore leading to an improved first pass yield.

6 b)

The trends described above may lead to greater market success and profitability anticipated by
management in the following ways,

The increase in the stock turnover means that the sales of the organization will also have improved
and improved sales means that the organization will also increase its profitability. As explained in
part (A) above increased stock turnover maybe brought about by favourable perceptions of our
product by our customer due to the improved quality of our product. Therefore customer’s
goodwill towards our product will increase as they would prefer to purchase our product over
competitors because it’s better in terms of quality and thus leading the organization to winning
greater market share and this will lead to improved profitability. Also profitability may be
improved may be improved as the JIT process ensures that costs that are associated with the
holding of stock are reduced. JIT aims at having a zero stock business management process which
means that the costs associated with inventory storage, insurance on stock and wages for stores
personnel will all have been cut thus saving the organization a great deal of costs. Reduced costs
means the organization will become more profitable.

The improvements in the cycle time from customer order to delivery means that the organization
is improving in its service delivery to its customers. This means that customers do not have to wait
for too long of a period from when they place there order until there product is delivered to them.
This improved service delivery will leave customers satisfied and hence they will prefer to trade
with the organization. This customer satisfaction will win the firm more of the market share and
new customers to trade with. If the company gains more customers it means there sales will also
increase and this will lead to the firm attaining greater profitability.

Reducing the number of defects through implementing total quality management will assist in the
firm being more profitable. This is shown in the first pass yield, the first pass yield of the company
is improved and it is fastly approaching the 1 in a million defects benchmark. This means that the
company will save a lot of costs through the reduction in the number of defects. Defects means
that the company may have to incur rework costs which maybe hugely costly to the firm and may
also slow down production. Thus the company is now saving a lot of costs as the production
process is now becoming flawless and with only a few defects, this will improve the profitability
of the firm as it is saving in costs. Also a flawless production process means that customer orders
will be met quickly as the production process is free from defects, this will lead to an improvement
in the cycle time from customer order to delivery leaving customers satisfied and the organization
obtaining greater market share and profitability.

The organization is also saving costs by cutting the manufacturing of the specialized components.
The production process previously required 20 specialized components and now only requires 5
standard parts, this means that the company has reduced its costs significantly by using the 5
standard parts; this reduction in costs will improve the profitability of the organization. Using the
5 standard parts improved the quality of the product as shown by the improvement in the stock
turnover process, thus the firm’s customers are even more satisfied by the organization’s product
despite the components change. This means the components change produced a better quality
product which was accepted by the customers and thus this also increased the firm’s market share.

6 c)

Cost of quality is the cost of not creating a quality product or service. Costs of quality reports are
the aspects of total quality management and are often used as a basis for whether to implement the
approach. Cost quality is also defined as a financial measure of the quality and can also be termed
as cost of bad quality. Cost of quality has four categories which are external failure costs, internal
failure costs, appraisal costs and prevention costs.

External Failure Costs

These costs are associated with the defects found after the customer receives the product or service
e.g. processing customer complaints, customer returns, warranty claims and product recalls.eg
Toyota Company called back Toyota Yaris cars sold because they were of low quality in 2011.

Internal Failure Costs

These are costs associated with defects found internally before a customer receives the product or
service. They are also associated with raw materials and products that fail to meet the quality
standard and usually identified during the appraisal process. Examples of such costs are scrap,
rework, inspection, material review and material downgrades.

Inspection or Appraisal Costs

These are costs incurred to determine the degree of conformance to quality requirements (For
example, measuring, evaluating or auditing) e.g. companies listed on the ZSE periodically incur
cost on auditing of their financial statements to determine their conformance to set standards and
requirements by statutory boards other examples of appraisal costs include, inspecting purchased
parts, products, testing and inspection and work in progress, quality audits and field tests.

Prevention Costs

These are costs incurred to prevent or keep products from failing so as to keep appraisal costs at a
minimum. Generally the most effective way to manage quality costs is to avoid having defects in
the first place. It is much less costly to prevent a problem from ever happening than it is to find
and correct the problem after it has occurred. Prevention costs support activities whose purpose is
to reduce the number of defects. Companies employ many techniques to prevent defects for
example statistical process control, quality engineering, training, and a variety of tools from total
quality management.

Prevention costs include activities relating to quality circles and statistical process control. Quality
circles consist of small groups of employees that meet on a regular basis to discuss ways to improve
quality. Example is when an organization (e.g. CUT sends its employees to training workshops to
prevent or keep its products/ services from failing so as to keep appraisal costs at a minimum.).

7)

The new manufacturing environment is characterised by a more flexible, readiness to meet

customer requirements, smaller batches, continuous improvement and quality emphasis. In
such circumstances, traditional management accounting performance measures are, at best,
irrelevant, at worst, misleading.

a) Discus the above statement, citing specific examples to support or reflate the view
expressed. [12]

b) Explain in what ways management accountants can adopt the services they provide
to the new environment. [8] Solution

Traditional management accounting performance measures have their shortcomings that are
discussed below which shortcomings are being addressed by modern measures like ABC

These are clearly highlighted as it concerns aspects of operation which traditional measures seek
to assess.

 In the traditional system, purchase of raw materials is to build large stocks based on
material resource planning.
 This system considers standard product specification, provide lead times in supplier
deliveries and production usage rates are estimated.
 It involves the purchase of large volumes of stock to take advantage of discounts that are
linked to bulk buying.
 The system requires pricing of issues from stores and inventory balance valuation in
calculating production material costs.
 This will involve many irregularities and assumptions that are involved in inventory
valuation methods such as FIFO, AVCO and LIFO, meaning accurate cost assignment to
products is compromised.
 The fact above clearly show how traditional management accounting performance
measures can be misleading.
 Their irrelevance is also shown by the modern measures that promotes smaller batches
which are seen to be of importance in this new manufacturing environment.
 Modern manufacturing environments incorporate a “pull through” production environment
to meet customer demand with minimum resources.
 An example is the JIT system which discourages building up of stocks at every production
stage but production be based on market demand.
 Traditional measures can be proven also to be irrelevant and misleading by the complexity
and diversity of products in modern manufacturing environment.
 The environment now involves wide range of products due to competitive pressures.
 There is now the need to apply flexible manufacturing technologies. An example is of
Japan which is using these technologies to produce a greater diversity of high quality,
reasonably priced products such as cars, more quickly.
 This radically differs from traditional system on the production systems
  Irrelevance of traditional management accounting performance measures was highlighted
again above.
 A good example is that of ABC which gives a far better way of treating production
overheads.
 The traditional measures are based on the notion that production overheads are driven by
the production level. It uses one rate in allocating overheads.
 This results in over-costing and under-costing as complex products are not allocated
adequate amount of overhead costs and simple products getting too much.
 An example is of electrical gadgets manufacturer with more service support departments
in different degrees as there is a need for safe and quality products that meets customer
requirements.
 With this, traditional measures’ cost allocation bases can be questioned
 In today’s manufacturing environment, total labor cost are outweighed by overheads.
 Traditional methods based overhead allocation rate based on direct labor dollars or direct
labor hours.
 At that time direct labor was the major cost driver and it made sense, but now the
manufacturing sector is automated and the use of director labor is misleading.
 The sector now uses smaller amount of direct labor making direct labor a poor allocation
base for factory overhead.
 So it can be seen that traditional system is not flexible in issues concerning overheads and
it ignores resource planning which is one of the critical aspects found in new technologies.
 Traditional management accounting performance measures have their advantages of
simplicity, quicker and easy allocation of costs, production is based on production plan
conceived beforehand and volumes not sold are kept as inventory.
 Their limitations makes these, to a larger extent, less attractive.
 This can be summed up again by the fact that modern environment needs management
accounting systems that extend from product costing to a more comprehensive
management tool that focuses on reducing costs, improving quality, decision making and
way of doing things
 An example being the use of activity based management (ABM) on automotive industry in
Japan which classifies value adding and non-value adding activities.
 An example of Value adding activities involve activities such as adding a sun roof on a
vehicle and non-value adding being storing the car for long periods prior to sale

Part b)

 Since the time of Industrialisation, management accountants have obtained the

responsibility to report on cost and management.
 Through the (1900s), allocation and absorption of expenses over cost centers up to their
absorption on finished products continued to be the responsibility of the costing
professionals.
 The new manufacturing environment now calls for the management accountants to adapt
their services to this environment which require more flexibility, a readiness to meet
customer requirements, smaller batches, continuous improvement and quality emphasis.
 They can do that through the following techniques that are discussed below.
 The fundamental objective of strategic management accounting (SMA) is to use
management accounting information in formulating, implementing and controlling
organizational strategies.
 Its main focus remain on the organizational relationship with its external business
environment (suppliers, customers and competitive rivals), long-term process, forward
looking and holistic approach.
 These issues are addressed in the techniques mentioned earlier.
 Value chain analysis is a strategic tool that can be used by the management accountants in
meeting the mentioned characteristics of the new manufacturing environment.
 Value chain analysis focuses on measuring the importance of the customer’s perceived
value by enabling the companies to determine the strategic advantages and disadvantages
of their activities and value creating processes in the market place.
 This is also more than matching and surpassing competitors but
 Discovering what customers want and then satisfy them and exceed their expectations in a
profitable way.
 It starts from value-creating processes of suppliers, (where raw materials and components
are acquired), continues to value creating processes of different classes of buyers and
culminates in material disposal and recycling
 These aspects of value chain analysis are addressed to management accountants who may
lead their efforts to effective implementation of value chain analysis in their organisations.
 Above, the external environment has been addressed from a value chain perspective.
 Looking on the long term process aspect, managers will use both qualitative and
quantitative information in strategy formulation.
 Quality costing is therefore of importance. It is not a once off process or activity but
requires total employee participation from the management accountants to the factory
workers in promoting continuous improvement on operations.
 Performance of the production team will be measured by management team in terms of
rework or defects not output. This will result in less defects, quality products and company
meeting and exceeding customer requirements.
 As highlighted earlier, the company should be forward looking, that is, management
accountants must seek information on potential changes in the market, competition,
consumer preference and supplier profile to effectively participate in the modern
environment.
  This can be addressed by the use of attribute costing. It involves the costing of each and
every component or feature of a product.
 This involves the identification of the necessity of a feature on a product in relation to what
the market is demanding and what the competitor is providing.
 This will help in preparation to meet customer requirements and flexibility. This may
extend the management duties to market segmentation process.
 The responsibility of the management accountants also involve the need to take a holistic
approach as it promotes flexibility and continuous improvement.
 This involves not looking only on external information but looking on all relevant
information that may impact on the organisation from all spheres of the business including
the internal sources of the organisation.
 So now there is a need to look on one of the major aspects in the internal environment of
the organisation being price which is accompanied by cost and profit levels required.
 Target costing becomes a useful tool in addressing such issues.
 This is proactive control of costs without compromising the quality or function of the
product by removing non value adding features.
 It also enhances the assessment on product launch feasibility. So resource planning is also
enhanced which results in smaller batches that are targeted in meeting customer demand.


8 (a) State the main stakeholders with whom relationships need to be established and
maintained by the management of Rain Bow Towers. Explain why it is important that
relationships are developed and maintained with each of these stakeholders. (10)

Solution

The term stakeholder refers to groups, individuals, and organisations who can affect the firms’
vision and mission and are affected by the strategic outcomes achieved, and have enforceable
claims on the firms’ performance. These claims are enforced through the stakeholder ability to
withheld participation essential to the organisations’ survival, competitiveness and profitability.
The company’s’ stakeholders can be classified into three groups which are capital market
stakeholders (e.g. shareholders and banks), product market stakeholders (e.g. primary customers,
suppliers and unions) and organisational stakeholders (e.g. employees).

Media
The media both print and electronic, private and public, can be a key ally of Rainbow Towers in
informing the public about its operations in the form of advertisements. People who read
newspapers, watch television, and listen to the radio regularly tend to inform others about what
they have read, heard or seen. It is important for the company to have a media strategy that
promotes regular positive contact with the media and that the media have access to company
information such as upcoming events or promotions. If the company fails to promote a transparent
relationship with the media, there is a greater risk that incorrect or misleading information can be
published and that can negatively undermine the company’s operations.

Pressure groups or Unions

A pressure group is an organised collection of people who seek to influence political decisions and
policy, without seeking a public office. They lobby government and may have significant influence
in government policy crafting, examples include the Affirmative Association of Zimbabwe and
the Zimbabwe congress of trade unions. Given the influence they have and the nature of the
business of Rainbow Towers, it is important for the company to maintain good relations to create
an operating environment which is free from demonstrations and lawsuits.

Shareholders

Shareholder interest is represented by the number of shares they hold in the hotel. Dissatisfied
shareholders may reflect their concerns through several means, including selling their stock, which
might lead to the closure of the hotel.Shareholders with small amount of shares collaborate they
become a big threat to the continuation of the hotel operations. It is very important to make the
shareholders understand the ways the company uses to increase their wealth because they might
be interested in their dividends whilst management are interested in business expansion thus giving
rise to agency cost. Therefor it is important for the relationship between rainbow and their
shareholders to be established and maintained so as to guarantee expansion or growth of Rainbow
Towers.

Customers

Customers are generally the people who consumes the services of the company and a hotel primary
exists to render services such as accommodation, conference rooms and etc. Given the competitive
environment the company operates in and that customers are the source of revenue for the
company, it is important for Rainbow Towers to maintain a lasting long term relationship with its
customers. This creates brand loyalty and in turn can give a company a competitive position and
also make the company a viable and profitable business. It is important for the hotel to establish
and maintain relationships with the customers as they have a direct and vital impact on the hotel
operations, the customers’ needs and desires are a major factor in the hotel’s decision making
processes. If the hotel has good relationships with the customers they are able to know the current
taste and preferences of their customers and they will be able to produce goods and services of
good quality thereby resulting in customer satisfaction thus creating customer loyalty and retention
both of which drive up shareholder value.

Financial institutions

Financial institutions are providers of secure and profitable capital investment that can be used by
the company to fund operations, expansions and new products. Examples of such institutions
include banks and micro finance houses. Financial institutions provide the funds for operations
and business expansions. Financial institutions also provide information such as market trends,
consumer spending and etc. which can be used by the company for strategic planning. Given the
role played by this institution it is necessary to maintain relations with financial institutions.
Furthermore it is important to establish and maintain relationships with these financial institutions
so that they may understand the risk attached to the reason why you are borrowing money from
them e.g. financial institutions wants companies to borrow money and invest in investments that
guarantee return than in risky investments where return is not guaranteed as they want some
guarantee that you are able to repay in time.

Employees

Employees are critical to organisational success. The knowledge and skills of the employees are
competitive weapons that affect strategy implementation and the hotels’ performance. A good
relationship can have significant effects over time on the firm’s ability to compete in global
markets. The employees as organisational stakeholders expect the firm to provide a dynamic,
stimulating and rewarding work environment. For the hotel to be able to provide quality services
the input of employees is crucial. For example if the waiters are not motivated they might serve
food in a way that would make our customers not to return again thus reducing the profitability of
the organisation thus it is crucial to develop and maintain their relationship with the employees.
Local Authority

The local authority and its regulations could impose conditions on hotel’s operations or close it
down for example the Municipality of Harare. It is therefore important that Rainbow Towers
maintain good relationships with the local authority and abide by all its regulations.

Local Tourist Board

The city attracts many visitors in summer, many of which will ask the tourist board for advice and
recommendations on where to stay. A good relationship with the board could therefore pay
dividends in having its hotel recommended to visitors. In turn, the tourist board will only
recommend the hotel if it is confident that visitors will receive good service.

(b) Explain how the management of Rain Bow Towers should carry out a benchmarking
exercise on its services, and recommend ways in which the outcomes should be evaluated. (15
marks)

Solution

Benchmarking is the process of improving performance by continuously identifying, and adapting

outstanding practises and process found inside and outside an organisation. It focuses on
improvement of any given business process by exploiting “best practices” rather than merely
measuring the best performance. The benchmarking process involves comparing one’s firm
performance on a set of measurable parameters of strategic importance against that of firm’s
known to have achieved best performance on those indicators. Development of benchmarks is an
ongoing process that is to involve sharing information with other organisation working with them
towards an agreeable metrology.

There are generally several types of benchmarking the hotel can adopt to benchmark its services
and implement the process using the five phases, planning, analysis, integration, action and
maturity phase.

Internal benchmarking

Internal benchmarking is a comparison between hotels departments, units or subsidiaries within

the same company. The advantages are that it is often easy to define comparable processes, data
and information is easily accessible and often on a standard format. Targets are set for each
department and evaluated after a specified period. There is also need for continuous of
performance on the performance of the departments to see if improvements are made.

Competitive benchmarking

This involves comparing the services being offered by the hotel versus competitors and data
analysis is done as to what causes the superior performance of the competitor. Competitive
benchmarking is an extension of competitor analysis where instead of focusing on the industry
average, focus is on the best competitors. Due to problems regarding sharing of sensitive
information between competitors and the legal and ethical limitations connected to this type of
benchmarking, competitive benchmarking is often seen as superficial and too focused on key
figures.

Functional benchmarking

Functional benchmarking is a comparison of processes or functions against non-competitor

companies within the same hotel industry. In functional benchmarking, benchmarking partners can
be customers, suppliers or other companies within the same industry. It is often easy to get in touch
with such companies and the problems facing these companies are often similar.

Generic benchmarking or benchmarking with performance of previous years

It is common for organisations to consider their performance in relation to previous years in order
to identify any significant changes. Historical comparison alone may lead to complacency if the
organisation shows a growing trend since not only growth but also the rate of improvement
compared to that of competitors is important for the evaluation of performance.

The five phases in which the hotel can implement the benchmarking process, planning ( during
this phase the hotel determines which process to benchmark and what type of organisation), the
second phase is the analysis phase ( following data acquisition analysis is performed for the
performance gap between the source organisation and the recipient organisation, an indication of
the best practice is then evident, thirdly there is the integration stage ( this involves the preparation
of the recipient for implementation of actions, fourthly the action phase ( this is where the actions
are implemented within the recipient organisation), the phase is the maturity phase ( this involves
continuous monitoring of the process and enable continuous learning and provides input for
continuous improvement with the recipient company).

After carrying out the benchmarking process there is need to measure the results obtained and
establish mechanisms to improve on the hotels operations. Evaluation can be conducted either by
each participating administration individually but ideally, if they agree by all the benchmarking
partners working together to conduct a joint implementation report.

The exercise is initiated and overseen by the leading benchmarking coordinator with all relevant
stakeholders. Furthermore comparing of quality performance in hotel industry can be conducted
for example Rainbow towers comparing itself with Jameson or Meikles in terms of quality of
accommodation.

Evaluation of results can be in the context of the original strategic objectives of the benchmark
exercise. This can be to undertake a sense-check of the results that is are the results plausible and
credible. Expect assessment at this stage is useful in ensuring that the benchmarking results
represent a well-founded and reliable basis for decision making.

Comparing the working methods used is also another way in which the outcomes can be evaluated.
This involves studying the procedures used by either Rainbow or Jameson hotel for example
whether the process was done with machines or carried out manually like if the swimming pool is
cleaned with machines or manually.

Sites visits: visits the relevant expert

Lastly results are presented in a report and the analysis must then be reported in a clear, concise,
and easily understood format.

10)
a) Business process reengineering (BPR)
 It incorporates the ideas of Porter’s value chain by viewing a business as a set of value
adding processes rather than as a segmented structure of departments and divisions.
 It follows that value chain is used as a tool in BPR to identify and analyze processes that
are of strategic significance to the business.
  BPR helps to help companies radically restructure their organizations by focusing on the
grounded up design of their business processes. Reengineering emphasizes a holistic focus
on the business objectives and how processes relate to them, encouraging full scale
recreation of processes rather than iterative optimization of sub processes.
 BPR refers to the fundamental rethinking of an existing system into a new form to realize
quality improvement in operation, system capability, and functionality, performance at a
low cost, schedule or risk to the customer. It involves the fundamental rethinking and
radical redesign of business processes to achieve dramatic and sustainable improvements
in critical measures of performance such as cost, quality, service and speed.
 Reengineering recognizes that an organization’s business processes are usually fragmented
into sub processes and tasks that carried out by several specialized functional areas within
the organization. Often no one is responsible for the overall performance and the entire
process. Reengineering maintains that optimizing the performance of sub processes can
result in some benefits, but cannot yield dramatic improvements if the process itself is
fundamentally inefficient and outmoded.
 BPR project includes four phases encompassing a side scope of activities;
 Process identification - this entails breaking down of each task performed in an
organisation into a series of processes. We use value chain analysis to find out whether
processes are of strategic value to the organisation.
 Process rationalization – involves discarding processes that are not of any significant
value to the organisation.
 Process redesign – remaining processes are redesigned so that the work in the most
efficient way possible
 Process reassembly – reengineered processes are implemented.
How BPR helps improve performance?
 NB performance can be improved internally, that is, from within the organisation or
externally.
 Internal business performance improvement (case of Interfresh Limited)
 All branch accounts were linked to one server. Subsequently, less time was spent on
intercompany accounts as they are now done automatically by pastel.
  Before BPR, Interfresh Limited needed four accounts clerks for intercompany accounts.
These were replaced by only one individual after BPR thus cutting on labour costs.
 A huge part of the organization’s labour costs came from overtime. By implementing BPR,
Interfresh removed all the insignificant processes which were consuming time without
adding value to the organisation reducing costs insignificantly. Labour costs are a
significant part of the organisation’s total costs, reducing them may entail improved
performance
External business performance improvement (Case of CUT)

 CUT discarded the cumbersome manual registration process for a more efficient
electronic registration processes which takes only a matter of minutes. This improves the
quality of the service offered. Consumer satisfaction is a sure way of improving
performance of an organisation.

b) Problems in the implementation of BPR

Resistance to change

 There will certainly be some resistance to the change necessary for reengineering because
employees will be most concerned about their job status after a reengineering; they will
often show this by promoting opposition to the plan. Employers must expect this
resistance and develop ways to confront it; then deal with the employees’ concerns and
not their arguments.

Higher Demands to the Workers

 BPR requires a team of innovative, flexible and highly adaptable workers who have a
unit of purpose. It is no longer enough merely to look at prospective employees'
education, training, and skills; their character becomes an issue as well. Therefore the
companies which hire new workers have to consider additional qualities in their hiring.
Examples include; are they self-starting? Do they have self-discipline? Are they
motivated to do what it takes to please the customer? This might be more complicated to
find the right people for one specific job.

Increases stress on staff

  Reduction in staff numbers at middle and line management levels can impose a work
overload on the remaining staff, resulting in reduced effectiveness.

Imposing blinkers on strategists

 BPR focuses too much on improving existing business rather than developing new and
better lines of business.

Lack of proper guideline

 At the moment, BPR approaches lack detailed guidance and support for the actual
implementation of reengineering. Many publications and texts describe the situation
before and after BPR but do not discuss the path to reach the final situation.

BPR Trend of failure

 Reengineering has become a word that stands for restructuring, layoffs, and too often,
failed change programs. Most companies that have implemented BPR have set an
example of failure and this makes the concept of BPR prone to distrust. In other words
BPR has been often used as the pretext for staff reductions

Delegation problems

 Delegation of decision making to lower levels of management may affect employee

attitudes and behavior. Employees may feel exalted and lose loyalty to senior
management once all the duties are cast into their hands

Weakening of internal controls

 BPR may destroy existing controls within the organization. The combining of processes
to form a single procedure means all the channels of authorization and approval are
dissolved. In other words it takes an individual to pass a decision. Reduced internal
controls, quality of staff and accounting procedures, combining procedures, reduced
segregation of duties;

c) Benefits of implementing BPR

Cost advantages
  BPR reduces cost in terms of labor. The number of people who do a certain task can be
reduced to one person who operates a computer. Numerous signatories are eliminated and
costs are also reduced through reduction of paper work.

Improved customer service

 Reduced paper work and cumbersome processes result in reduced time of service. This
adds convenience to the customer and the company will earn a reputation. For instance,
the student registration manual process which used to take more than three hours now
only takes a click online. Students find more convenience in this.

Satisfaction

 A big advantage of BPR is that the work becomes more satisfying because the workers
get a better sense of completion, closure and accomplishment from their jobs. The
employee performs the whole job, a process or a sub process, that by definition produces
a result that somebody cares about.

Authority

 In a traditional oriented company the management expects from the employee that they
follow some specific rules. In contrast to that, reengineered companies don’t want
employees who can follow rules. They want people who can make their own rules. As
management invests teams with the responsibility of completing the entire process, it
must also give them the authority to make the decisions needed to get it done.

Reduction in organizational complexity

 None value adding activities (which are unnecessary, time consuming and uneconomic)
are eliminated. The organization only focuses on core activities which add value on the
quality of goods or services provided, for example reduction in stages of completion.
.

11&26 a) Critically appraise the value of Porter’s generic strategy model for strategic
planning purposes. (10)

“Strategy is the direction and scope of an organisation over the long term, which achieves
advantage for the organisation through its configuration of resources within a changing
environment and to fulfil stakeholder expectations”

Competition has always been the greatest fear of every businessman. Trying to think ahead of the
competitors is the only option a successful business owner has. Developing a strategy, adapting
and improving it and ensuring that employees are aware of the business‟ mission are only a few
criteria, which help to gain competitive advantage.

Professor Michael Porter developed the “generic competitive strategies”, He called the strategies
generic as they can be undertaken by businesses of any size or type, even if they are non-profit
making organisations. He argued that companies only have three strategies to choose from:

1. Cost leadership 2. Differentiation 3. Focus

Porter also believed that before a company decides which strategy to adopt, it must know its
competitive scope: “the breadth of its target market, the range of products it wishes to produce, the
distribution channels, the type of buyers and geographic areas it wants to serve and the related
industries it will be competing in”

Porter’s model of generic competitive strategies is an important synthesis of Porter’s research and
teaching experience within strategy and industrial economics. Since the publication of this model
in 1980, Porter (1998 and 2004) has confirmed his belief that firms should pursue one of his
recommended strategies in order to succeed. From the firm’s point of view, the most relevant and
important aspect of the competitive environment is the industry in which the firm competes. In
Porter’s wording, the industry is the “arena” where competition takes place.

In light of Porter’s analysis, industries are comprised of firms that produce close substitutes; but
the firms’ competitive environment has a common structure, consisting of five competitive forces.
These forces, which are viewed as the determinants of the industry’s overall competitiveness and
profitability, are:

• Threat of new entry,

• Intensity of rivalry among existing firms,
• Pressure from substitute products,
• bargaining power of buyers, and
• bargaining power of suppliers.
According to Porter, it is the joint influence of these forces that determines the intensity of
competition of each industry, where the strength of each competitive force is industry-specific.

In Porter’s work, analyzing an industry in terms of the five competitive forces would help the firm
identify its strengths and weaknesses relative to the actual state of competition. Porter’s main
argument to support this is that if the firm knows the effect of each competitive force, it can take
defensive or offensive actions in order to place itself in a suitable position against the pressure
exerted by these five forces. Although the first consideration for a firm is to place itself against the
competitive forces in a “defendable” position, Porter thinks that firms can affect the competitive
forces by their own actions. This view of competition holds that not only the existing firms in the
industry are actual or potential competitors. Additional competitors may arise from what Porter
calls “extended rivalry”—customers, suppliers, substitutes, and potential new entrants.

Porter [1985] has suggested that any business firm has a choice of three generic strategies to obtain
a sustainable competitive advantage.

Source: Porter M (1980)

Cost Leadership

The cost leadership is obtained when a firm is able to produce its products at the lowest cost as
compared to its competitors. This will help the firm to offer its products at lower price as compared
to its competitors. A firm can achieve this aim through reducing the input costs by obtaining
advantage of scale, procurement of raw materials at favourable prices and use of advanced
technology. In India, the prominent examples of this strategy are the producers of ‘Nirma’ washing
powder, who entered the market by launching their product at 1/4th of the price, charged by their
competitors and thus captured a large market share in the competitive market. The latest example
of this strategy is that of TATA Motors who have announced the launching of their car ‘Nano’ at
a price of Rs.1 lakh, which is the lowest as compared to the prices of other models in the small car
segment. Lower costs and cost advantages result from process innovations, learning curve benefits,
economies of scale, reductions, product designs that reduce manufacturing time and costs, and
reengineering activities. A low-cost or cost leadership strategy is effectively implemented when
the business designs, produces, and markets a comparable product more efficiently than its
competitors. The firm may have access to raw materials or superior proprietary technology to
lower costs.

Objective

Open up a sustainable cost advantage over rivals, using lower-cost edge as a basis either to

- under price rivals and reap market share gains OR

- earn higher profit margin selling at going price

Key to success

• make achievement of low-cost relative to rivals the THEME of firm’s business strategy

• Find ways to drive costs out of business year after year

• Low cost leadership means low OVERALL costs, not just low manufacturing or production costs

The competitive strengths of low-cost leadership

 Better position than rival competitors to compete offensively on basis of price

  Low-cost provides some protection from bargaining leverage of powerful buyers
 Low-cost provides some protection from bargaining leverage of powerful suppliers
 Low-cost provider’s pricing power acts as a significant barrier for potential entrants
 Low-cost puts a company in position to use low price as a defence against substitutes
 Business can earn higher profits by charging the same price or even moving to undercut
where demand is elastic.
 Enables Company to build defence against price wars.
 Allows price penetration entry strategy into new markets.
 It enhances barrier to entry
 Allows development of new market segments.
A low-cost strategy works best when:

• Price competition is vigorous

• Product is standardized or readily available from many suppliers

• There are few ways to achieve differentiation that have value

• Most buyers use product in same ways

• Buyers incur low switching costs

• Buyers are large and have significant bargaining power

Product Differentiation

This strategy involves a differentiation in the product or service offered by a firm. A firm can
create differentiation by offering products or services that are unique and superior in quality as
compared to other products. Thus the competitive advantage is obtained by differentiating in the
products or services. Price may be not an important factor in this strategy; in fact a firm may charge
higher prices as compared to its competitors by differentiating in its products or services. Product
differentiation fulfils a unique customer need by tailoring the product or the service, allowing
organizations to charge a premium price to capture market share. The differentiation strategy is
effectively implemented when the business provides unique or superior value to the customer
through product quality, features, or after-sale support. The quality may be real or perceived based
on fashion, brand name, or image. Firms following a differentiation strategy can charge a higher
price for their products based on the product characteristics, the delivery system, the quality of
service, or the distribution channels. The differentiation strategy appeals to a sophisticated or
knowledgeable consumer who wants a unique, quality product and is willing to pay the higher
price.

Objective

• incorporate differentiating features that cause buyers to prefer firm’s product or service over
rivals’ brand

Key to success

• find ways to differentiate that create value for buyers and that are not easily matched or cheaply
copied by rivals not spending more to differentiate than price premium to be charged

The appeal of differentiation strategies

• A powerful competitive approach when uniqueness can be achieved in ways that

- Buyers perceive as valuable

- Rivals find hard to match

- Can be incorporated at a cost well below the price premium that buyers will pay

Benefits of successful differentiation strategies

 increase unit sales and/or

 build brand loyalty
 Products command a premium price so higher margins
 Demand becomes less price elastic and so avoids costly competitor price wars.
 Life cycle extends as branding becomes possible hence strengthening the barriers to entry.
Focus

It is based on adopting a narrow competitive scope within the industry. Focus strategies grow
market share through operating in a niche market or markets not attractive to, or overlooked by,
larger competitors. These niches arise from a number of factors including geography, buyer
characteristics, product specifications, or requirements. A successful focus strategy (Porter, 1980)
depends upon an industry segment large enough to have good growth potential but not of key
importance to major competitors. Market penetration or market development can be an important
focus strategy. This strategy involves gaining competitive advantage by focusing on a narrow
segment of a market, which is poorly served by competitors. In this strategy sustainable
competitive advantage can be obtained either by following the strategy of cost leadership or
product differentiation.

Objective

• do a better job of serving buyers in target market niche than rivals

Key to success

• choose a market niche where buyers have distinctive preferences, special requirements, or unique
needs

• develop unique capabilities to serve needs of target buyer segment

The competitive strength of focus/niche strategies

 Rival competitors do not have matching capabilities to meet specialised needs of niche
members
 Focuser’s competencies/capabilities act as a barrier to potential entrants
 Focuser’s competencies/capabilities pose obstacles to sellers of substitutes
 Focuser’s unique ability to meet niche buyers’ needs can blunt bargaining leverage of
powerful buyer
 Smaller segments and so smaller investments in marketing operations:
 Allow specialization.
 Less competition
 Entry is cheaper and easier
Requires

 Reliable segment identification

  Consumer/customer needs to be reliably identified- research becomes even more crucial.
 Segment to be sufficiently large to enable a return to be earned in the long run.
 Competition analysis- given to small market, the competition, if any, needs to be fully
understood
 Direct focus of product to consumer needs
The attractiveness of the market niche is influenced by the following

 The niche must be large enough in terms of potential buyers.

 The niche must have growth potential and predictability.
 The niche must be of negligible interest to major competitors.
 The firm must have strategic capability to enable effective service of the niche.
Problems with Porter’s Generic Competitive Strategies

Like any other model Porter’s strategies show risks and problems. The main issue identified by
Professor Porter is the problem of “being stuck in the middle”. He argues that every company must
adopt one of his strategies; otherwise it will be left with no competitive advantage. However,
Lynch (2000, pp570-571) explains that examples have shown companies that were able to adopt
more than one strategy to achieve the desired result.

Part (b)

Explain how the theoretical principles of the experience curve may be applied to determine a
generic strategy for a company (10).

The theory of the experience curve holds that the cost of an industrially manufactured product
decreases by one or less constant each time cumulative volume of the product is doubled
(Anderson 2003).

Michael Porter presented three generic strategies that a firm can apply or use to achieve
competitive advantage. These are

a) Overall Cost leadership b) Differentiation c) Focus

The theory of the experience curve can be used to determine a generic strategy in several ways
discussed below.
 a) The main reason behind the learning curve is to reduce operational costs by cutting down
operational expenses and improving operational efficiency. Once operational costs have
been reduced it means that a firm can supply products in the market at low prices in the
market as compared to its competitors. Supplying products at lowest prices possible helps
a firm to become the overall cost leader in the market and hence by so doing, the learning
curve effect would have contributed towards establishing an overall cost leadership
approach (O’Sullivan 2012)
b) Using the concept of the learning curve effect, workers become more familiar with their
tasks and this result in the production of high quality goods with unique features. A
continuous application of the learning curve also contributes to better customer response,
superior performance and rapid product innovation. Such an approach is consistent with a
company which seeks to adopt a differentiation strategy ,because the strategy seeks to
develop products that offer unique attributes that are valued by customers such that a
company can charge a premium for the extra quality.
c) Through application of the experience curve effect, a firm can also adopt a focus generic
strategy to become competitive in the market. Focus implies that a firm narrows down its
activities by either serving a particular market segment by offering unique product or
services (niche marketing) or by offering a narrow range of specialized products. One
prerequisite condition for the experience curve .to take effect is that the nature of work
should be repetitive. Adopting a focus approach means that a firm will manufacture goods
in repetitive way and by so doing the learning curve experience would have influenced
choice of the strategy focus.
d) Theory of the experience curve notes that if the production process continuous for a
prolonged time, the learning effect is eroded gradually until it disappears. This means that
for the firm to continue gaining benefits from the learning curve it has to be innovative in
terms of developing new products. New product development resulting from
implementation of learning curve leads to the adoption of product differentiation as a
generic strategy because differentiation requires that a firm must be progressive in terms
of product development.
22) Magondo Ltd manufactures and distributes generic paper-based products and currently has an
annual turnover of $90 000. At present, the management of magondo ltd is uncertain whether the
purchasing department is maximising its potential in terms of purchasing efficiency and
effectiveness. The management is currently considering the introduction of a system of
benchmarking to measure the performance of the purchasing department.

Required:

a) Explain the term ‘benchmarking’ and briefly discuss the potential benefits that can be obtained
as a result of undertaking a successful programme of benchmarking. (7 marks)

(b) Describe how a system of benchmarking could be introduced to measure the performance of
the purchasing department. (8 marks)

(c) Discuss the problems that the management of Magondo Ltd might encounter in implementing
a system of benchmarking and recommend how such problems should be successfully addressed.
(10marks)

SOLUTION-Part a)

 Benchmarking is the process of identifying the highest standards of excellence for

products, services, or processes, and then making the improvements necessary to reach
those standards, commonly called “best practices”.
 It involves regular comparisons of different aspects of performance with the best practices,
identifying gaps and finding out innovative methods to both reduce the gap and to improve
the situation.
 Benchmarking is not confined to organizations in the same industry (Allan, 1997).
 Methods of benchmarking that can be used by Magondo Ltd
 Internal benchmarking, External benchmarking, Competitive benchmarking, Functional /
Process benchmarking, Strategic benchmarking, Generic benchmarking, Review
benchmarking and Public domain benchmarking
Advantages of Benchmarking
 Benchmarking highlights Weaknesses in the Department
There may be weaknesses in the purchasing department of Magondo Ltd but seemingly right to
them. However, by benchmarking such weaknesses are clearly revealed and thus solutions sought.
 Helps in Increasing productivity
Benchmarking can identify scope for improvement in terms of elimination of waste, cost reduction
and enhancing quality thus improving a company’s productivity (Allan, 1997).
 Improvement in Performance
Some organizations use internal benchmarking to improve performance in different departments.
Department managers may study and emulate the best practices of one particular department.
These changes may spark improvements among all departments. However, the company's top
department may not be functioning as efficiently as others in the industry. This means the other
departments were not truly benchmarking against the best departments out there.
 Increased Sales and Profits
By using benchmarking to improve its functions, operations, products and services , Makondo Ltd
may enjoy increases in sales and profits. Customers are likely to notice these improvements.
Makondo Ltd may also promote its improvements through company brochures, its sales
representativess, magazine and television advertisements. These efforts are likely to increase sales,
especially among core customers. Companies that operate more efficiently due to benchmarking
can drastically lower their expenses. These savings can be lead to greater profits.
 Improved Product Quality
Makondo Ltd’s product quality may also improve due to the use of benchmarking. Engineers
sometimes purchase leading competitors' products. They may then take them apart, study them
and determine how the competitors' products outlast or outperform others in the industry.
Subsequently, improvements can be made to product quality.
 Reduction of Labor Costs
Benchmarking may lower labor costs. For example, Makondo Ltd may study how a top competitor
uses robots for several basic plant functions. The management of that company share the
information with Makondo Ltd. These robots may help the competitor save a significant amount
of money on labor costs due to improved technology.
 Provides Basis for Establishing Targets
Benchmarking also considers innovative idea from employees for improving the efficiency and
effectiveness of the purchasing department. This employee participation is a good basis for setting
targets which are quantitative and justifiable for the department.
 Helps in the Designing of a Reward System
After considering the measurable and realistic targets set using benchmarking, a reward system
may be set. This will also motivate the purchasing department staff as there is worker involvement.
 Enhance learning
Another reason to benchmark is overcoming disbelief and enhancing learning. For example,
selling or hearing about another organisation’s processes and how they are doing will help
Makondo Ltd to believe that there may be a better way to compete (Brookhart, 1997).
 Growth potential
Benchmarking may cause a necessary change in the culture of an organization if done correctly.
Makondo Ltd can end up operating exceptionally good by benchmarking resulting in growth
opportunities being opened. Generally, an outward looking company tends to be a future oriented
company. This often leads to a more enhanced organization and increased profits because a similar
process used in a different way can shed light on new opportunities to use the original process
(Muschter, 1997)
 Assessment of Performance Tool
Benchmarking is defined as “the process of identifying and learning from best practices anywhere
in the world” (Allan, 1997). By identifying the “best” practices, organizations know where they
stand in relation to other companies. The other companies can be used as evidence of problem
areas, and provide possible solutions for each area. When companies benchmark, they use partners
to share information with and learn from each other.

b. Stages in conducting a benchmarking exercise in the context of Magondo Ltd group

There is no standard procedure for implementing benchmarking.

For the successful implementation of benchmarking, the involvement and support of management
as well as the staff of the purchasing department and the co-operation of the pear are necessary.
The following steps are generally followed and thus Makondo Ltd can just use them as follows:
(1) Identification of the need to benchmark and defining of objectives.
This step involves identifying the strategic intent of the Makondo Ltd in terms of its purchasing
department. Existing practices and polices in the purchasing department are then reviewed and
assessed. Such existing practices are mapped and the need for benchmarking, the type of
benchmarking as well as the objectives of benchmarking established.
2)Establishing targets and performance measures
This involves setting performance measures and quantifiable and realistic targets for the
purchasing department. Taking into account the terms and conditions of supply, annual
expenditure and the number of orders.
(3) Formation of the benchmarking teams
These members should be chosen from various areas of the organization because whatever
decision the department of purchasing makes, affects the whole organization.
All members should co-operate and communicate with one another in order to get the best results
out of the benchmarking process. There are three main teams comprising the overall group.
 The lead team is responsible for maintaining commitment to the process throughout the
organization.
 The preparation team is responsible for carrying out detailed analysis .
 The visit team must carry out the benchmarking visits.
(4) Identifying best practices and selecting peer
The selected teams then decide on what are considered the best practices of a typical purchasing
department that will make it efficient and effective.
These best practices may be within or outside Magondo Ltd, or from a different industry altogether.
If a certain organization is finally chosen as the benchmark, it should be ensured that it is willing
to participate in the process as well as to share information.
5) Comparing practices with those of peers (Data collection)
The performance of the purchasing department is then compared with the performance of the peer.
Differences are examined and the practices which are performed better by one organization
compared to the other are identified.
Site visits are also an important factor in collecting data because they allow for a more in-depth
understanding of the processes.
(6) Designing and Implementation
After comparisons, the best practices of Makondo’s purchasing department as well as those of its
chosen peer are combined considering innovations where possible.
The steps needed to implement that are designed and finally carried out.
(7) Evaluation
After all the steps have been carried out, it is necessary to evaluate the results of the benchmarking
process in terms of improvements versus the objectives as well as other criteria set for the purpose.
In addition, periodical evaluation and changes in benchmarks may be required in light of changes
in the conditions that affect performance.
c. Problems Faced by Management In Implementing Benchmarking System
 Magondo Ltd may not be able to negotiate with the organizations to be benchmarked
with that is best practice companies may be unwilling to share data.
Recommendation: The Company during the initial stages of the process should the peer’s
consent to the benchmarking. This organization should be prepared to share its critical
information with Magondo Ltd. It should be understood that the sharing of such information is
beneficial to both companies.
 Lack of commitment by the purchasing department staff due to fear of the unknown may
be faced as well as behavioral problems.
Recommendation : The training sessions can be organized so that the employees are informed
of the benefits to the company and to them as well of such benchmarking. Employee
involvement in the whole process also reduces this.
 When benchmarking it can be difficult for Magondo Ltd to identify a company that it
considers to have best practices?
Recommendation : The company can look at other companies both in the industry or outside
that are ISO certified or have won different awards or which have financial statements that are
seemingly resulting in profits.
 The whole process of benchmarking may be costly to Makondo Ltd in terms of time and
money resulting in opportunity costs.
Recommendation: The management should bear in mind that the benefits of a successful
benchmarking process outweigh all those costs.
 What is best today may not be so tomorrow.
Recommendation: The company will have to continuously improve in the search for a
competitive advantage.
 If not careful, Makondo Ltd’s benchmarking process may end up being a catching – up
exercise rather and an imitation process of the peer’s practices.
Recommendation: The management of Magondo Ltd should always remember that for the
successful implementation of benchmarking, catching up shld be avoided but rather improve far
above what peers have. In addition to adoption of peer practices, Magondo Ltd should come up
with innovative ideas.

Question 25(a)

JIT is an approach that requires that there is zero inventory level and zero defects on production.

JIT is not merely an inventory management technique. Rather, it is a management philosophy

that ensures;

 The elimination of non-value added activities

 Improved plant layout
 Zero defects
 Flexible workforce
It is a way of working that reduces traditional practices which do not add value to the product. In
a JIT environment, all inventories are a 'bad thing' and the ideal inventory level is zero. However,
JIT is not just about running a production facility with fewer inventories. Products should not be
made unless a customer has ordered them. When goods are made, the factory effectively operates
at the rate of the slowest process, and there will be unavoidable idle capacity in other operations.

Plant machinery is put in one place in a sequential layout to save transfer time and cost.

The benefits of JIT are gained by a revolutionary change in work practices, company culture and
external relationships. ‘Non-value-adding’ practices include warehousing and inventory
movement within the factory, testing for quality control, running machinery merely to accumulate
a large inventory of WIP at a bottleneck down the line and setting-up machinery to run a batch of
different specification or product

In a JIT system, workers are given the power to manage the production process by moving to
where they are needed on the production line or by solving their own problems (quality circles).
This requires co-operation between workers and a new approach to management. Furthermore, the
workers self-test their work (to ensure quality assurance) and must feel free to halt production if
there is a problem.

Workers need to be multi-skilled, i.e. there can be no demarcation across traditional skill
boundaries, so that set-up times and maintenance down-time may be minimized.
These new working practices coupled with new technology reduce inefficiencies in the production
process and result in new working patterns.

New external relationships must be developed, especially with the suppliers of materials and
components. The supplies must be defect-free, on time and delivered more frequently in smaller
lots. There should be no inspection of goods received. Therefore, new standards need to be
established with tighter tolerances, warranties and changed packaging requirements. In return, the
supplier will become the sole supplier, but will take on board the responsibility for R & D for the
items supplied.

The benefits therefore are be categorized in summary below;

30% increase in labour productivity

 Producing only what is needed makes workers speed up to meet the time frame/target
 Production machinery stationed at one place
 capability to do non complicated repairs by workers saves time that is spent waiting for
repair personnel to repair machinery
 multi skilled workers who are not affected by absenteeism of other workers
 Material supplied for a specific number of units to be produced meaning efficiency
 The learning curve makes workers more efficient with time.
60% reduction in inventory
 unnecessary materials not bought
 bought raw materials are quickly put into production
 producing only what is needed
 goods produced are delivered instantly/ produced goods have ready markets

90% reduction in quality rejection rates

 no obsolete raw materials are kept in inventory
 Everyone is responsible for quality

15% reduction in plant space

 Rearrangement of machinery in one place
 No abundant work in progress since the workers operate at the rate of the slowest process

Why it takes so long for JIT to manifest.

The changes discussed above are quite radical and involve everyone concerned with the production
process. The JIT philosophy will work only when workers are empowered, that is, free to make
decisions and own up to mistakes. This cultural change for both workers and management requires
much training, much practice and acceptance. The benefits of JIT therefore need time to manifest.

Some of the factors that might cause that include;

 Resistance to change
 Finding reliable suppliers
 Capital and time requirements needed to change the production processes

Question 25 (b)

JIT production process will result in smaller batch sizes, that is, smaller production runs and more
changeovers, lower inventory levels and more frequent deliveries, fewer direct labour and machine
hours, but more indirect labour for quality assurance, software development, R & D, etc. these
need to be managed, monitored and controlled effectively. As a result there is need for
management and accounting information system.

Management information system is a system that involves the use of information technology to
gather process and report information for management purposes. Accounting information system
on the other hand is management information that specializes on the accounting aspect of
information www.wikipedia/org/wiki/mis

There is need for a faster data gathering, grouping and analysis of performance for control
purposes. The use of computer-controlled processes capture much of the information required,
such as what was done, when it was done, how long it took and what was produced. This enables
traceable costs to be collected and monitored for each cost centre. Set-ups, orders, inspections,
labour and machine time and many others must be built into the product cost-control exercise. This
needs effective management and accounting information systems.

Electronic data interchange will enable the system to match the pace of frequent deliveries on to
the shop floor, and as a Kanban system will be used the day-to-day variation in inventory will be
small. A complete production scheduling system will be required such as Management Resource
Planning 2 (MRP2). The bin, or container, that is passed to the previous workstation to give the
‘pull’ signal, is known in Japanese as the ‘Kanban.’ When management resource planning is
extended beyond the planning of raw materials, components and sub-assemblies to encompass
other input resources, such as machine capacity and labour, so that the system provides a fully
integrated planning approach to the management of all the company’s manufacturing resources, it
is known as manufacturing resources planning 2 (MRP2). This will allow for management
accounting exercises such as capacity utilization to be carried out.

The empowered workers will not require variance analysis, but motivational control will be more
important and will use physical performance indicators, such as average set-up time or number of
defects. Standard costing will still be required, but mainly as a foundation in preparing the financial
accounting reports. To control the rising indirect costs, budget control will become more
important. Cost planning will need to cater for blueprints for new products or production methods
and for cost reduction as an ongoing process.

Thus, the development in management information systems is more of evolution and change in
emphasis, as opposed to the revolution on the shop floor when JIT is introduced.

29) The new manufacturing environment is characterised by a more flexible, readiness

to meet customer requirements, smaller batches, continuous improvement and quality
emphasis. In such circumstances, traditional management accounting performance
measures are, at best, irrelevant, at worst, misleading. You are required to:

a) Discus the above statement, citing specific examples to support or reflate the view
expressed. [12]
 Traditional management accounting performance measures have their shortcomings that
are discussed below which shortcomings are being addressed by modern measures like
ABC
 These are clearly highlighted as it concerns aspects of operation which traditional
measures seek to assess
 In the traditional system, purchase of raw materials is to build large stocks based on
material resource planning.
 This system considers standard product specification, provide lead times in supplier
deliveries and production usage rates are estimated.
 It involves the purchase of large volumes of stock to take advantage of discounts that are
linked to bulk buying.
 The system requires pricing of issues from stores and inventory balance valuation in
calculating production material costs.
 This will involve many irregularities and assumptions that are involved in inventory
valuation methods such as FIFO, AVCO and LIFO, meaning accurate cost assignment to
products is compromised.
 The fact above clearly show how traditional management accounting performance
measures can be misleading.
 Their irrelevance is also shown by the modern measures that promotes smaller batches
which are seen to be of importance in this new manufacturing environment.
 Modern manufacturing environments incorporate a “pull through” production
environment to meet customer demand with minimum resources.
 An example is the JIT system which discourages building up of stocks at every
production stage but production be based on market demand.
 Traditional measures can be proven also to be irrelevant and misleading by the
complexity and diversity of products in modern manufacturing environment.
 The environment now involves wide range of products due to competitive pressures.
 There is now the need to apply flexible manufacturing technologies. An example is of
Japan which is using these technologies to produce a greater diversity of high quality,
reasonably priced products such as cars, more quickly.
 This radically differs from traditional system on the production systems
 Irrelevance of traditional management accounting performance measures was highlighted
again above.
 A good example is that of ABC which gives a far better way of treating production
overheads.
 The traditional measures are based on the notion that production overheads are driven by
the production level. It uses one rate in allocating overheads.
 This results in over-costing and under-costing as complex products are not allocated
adequate amount of overhead costs and simple products getting too much.
 An example is of electrical gadgets manufacturer with more service support departments
in different degrees as there is a need for safe and quality products that meets customer
requirements.
 With this, traditional measures’ cost allocation bases can be questioned
 In today’s manufacturing environment, total labor cost are outweighed by overheads.
 Traditional methods based overhead allocation rate based on direct labor dollars or direct
labor hours.
 At that time direct labor was the major cost driver and it made sense, but now the
manufacturing sector is automated and the use of director labor is misleading.
 The sector now uses smaller amount of direct labor making direct labor a poor allocation
base for factory overhead.
 So it can be seen that traditional system is not flexible in issues concerning overheads
and it ignores resource planning which is one of the critical aspects found in new
technologies.
 Traditional management accounting performance measures have their advantages of
simplicity, quicker and easy allocation of costs, production is based on production plan
conceived beforehand and volumes not sold are kept as inventory.
 Their limitations makes these, to a larger extent, less attractive.
 This can be summed up again by the fact that modern environment needs management
accounting systems that extend from product costing to a more comprehensive
management tool that focuses on reducing costs, improving quality, decision making and
way of doing things
 An example being the use of activity based management (ABM) on automotive industry
in Japan which classifies value adding and non-value adding activities.
 An example of Value adding activities involve activities such as adding a sun roof on a
vehicle and non-value adding being storing the car for long periods prior to sale

b) Explain in what ways management accountants can adopt the services they provide
to the new environment. [8]
 Since the time of Industrialisation, management accountants have obtained the
responsibility to report on cost and management.
 Through the (1900s), allocation and absorption of expenses over cost centers up to their
absorption on finished products continued to be the responsibility of the costing
professionals.
 The new manufacturing environment now calls for the management accountants to adapt
their services to this environment which require more flexibility, a readiness to meet
customer requirements, smaller batches, continuous improvement and quality emphasis.
 They can do that through the following techniques that are discussed below.
 The fundamental objective of strategic management accounting (SMA) is to use
management accounting information in formulating, implementing and controlling
organizational strategies.
 Its main focus remain on the organizational relationship with its external business
environment (suppliers, customers and competitive rivals), long-term process, forward
looking and holistic approach.
 These issues are addressed in the techniques mentioned earlier.
 Value chain analysis is a strategic tool that can be used by the management accountants
in meeting the mentioned characteristics of the new manufacturing environment.
 Value chain analysis focuses on measuring the importance of the customer’s perceived
value by enabling the companies to determine the strategic advantages and disadvantages
of their activities and value creating processes in the market place.
 This is also more than matching and surpassing competitors but
 Discovering what customers want and then satisfy them and exceed their expectations in
a profitable way.
 It starts from value-creating processes of suppliers, (where raw materials and components
are acquired), continues to value creating processes of different classes of buyers and
culminates in material disposal and recycling
 These aspects of value chain analysis are addressed to management accountants who may
lead their efforts to effective implementation of value chain analysis in their
organisations.
 Above, the external environment has been addressed from a value chain perspective.
 Looking on the long term process aspect, managers will use both qualitative and
quantitative information in strategy formulation.
 Quality costing is therefore of importance. It is not a once off process or activity but
requires total employee participation from the management accountants to the factory
workers in promoting continuous improvement on operations.
 Performance of the production team will be measured by management team in terms of
rework or defects not output. This will result in less defects, quality products and
company meeting and exceeding customer requirements.
  As highlighted earlier, the company should be forward looking, that is, management
accountants must seek information on potential changes in the market, competition,
consumer preference and supplier profile to effectively participate in the modern
environment.
 This can be addressed by the use of attribute costing. It involves the costing of each and
every component or feature of a product.
 This involves the identification of the necessity of a feature on a product in relation to
what the market is demanding and what the competitor is providing.
 This will help in preparation to meet customer requirements and flexibility. This may
extend the management duties to market segmentation process.
 The responsibility of the management accountants also involve the need to take a holistic
approach as it promotes flexibility and continuous improvement.
 This involves not looking only on external information but looking on all relevant
information that may impact on the organisation from all spheres of the business
including the internal sources of the organisation.
 So now there is a need to look on one of the major aspects in the internal environment of
the organisation being price which is accompanied by cost and profit levels required.
 Target costing becomes a useful tool in addressing such issues.
 This is proactive control of costs without compromising the quality or function of the
product by removing non value adding features.
 It also enhances the assessment on product launch feasibility. So resource planning is also
enhanced which results in smaller batches that are targeted in meeting customer demand.
Question 30
Thomas Sheridan ,writing in management accounting in February 1989,pointed out that
Japanese companies have a different approach to cost information with ‘the emphasis-
based on physical measures ‘and ‘the use of non-financial indices ,particularly at shop floor
level’. He argues that their approach is much more relevant to modern conditions than
traditional cost and management accounting practices. You are required:
a) Explain what is meant by physical measures and non-financial indices [4]

Financial goals drive higher profits, but non-financial company objectives also aid in improving
the company as a whole. The non-financial improvements help round out the company's strengths
in areas like customer service, production quality and employee satisfaction. These areas create a
stronger company as a whole that is able to perform better in the market, increasing profits. Non-
financial indices as defined by business skills are ratios which neither figure is expressed in
monetary terms. These non-financial indices focus on factors such as quality, reliability, flexibility
and delivery performance. Non-financial indices can indicate what will happen to a company and
its products or services in the future because they analyse both outside and inside factors which
affect a firm.

b) Give three examples of non-financial indices that maybe prepared with a brief note of
what information each index would provide.[6]

Employee Engagement and Satisfaction

Focusing on employee satisfaction allows you to create a workforce of engaged, loyal employees.
With increased employee morale often comes better attendance and effort. By aiming to improve
the workplace for your employees, you show them that you care about more them than simply
making money. Specific objectives related to employee satisfaction include giving staff greater
responsibility, rewarding exceptional work, creating a positive work environment, promoting
teamwork and communicating openly with your employees. Information that can be included
includes:

 Staff turnover rate.

 Days absence per week,
 Number of new qualifications completed by staff,
 Number of staff complaints about their work,
 Qualification levels of newly recruited staff

Quality

The quality of work produced by your company affects your reputation and amount of business
you receive. Whether you sell a product or a service, you want every sale from your company to
be top-notch. Consistency is another key factor in the quality of a company. When you offer
consistently high-quality products or services, your company gains a positive reputation that
potentially leads to more business and repeat customers. Create standards for the items you
produce or sell. Establish guidelines for the services you provide, particularly if you have
multiple employees providing the service. Information that can be included includes:
  Number of units rejected in manufacturing.
 Number of units failing in service.
 Number of complaints received,
 Number of returns of defective products.
 Number of repeat orders received

Customer Service

Along with a quality product or service, aim to provide your customers with a positive experience
every time they interact with your business. Making your customers feel valued encourages them
to give your company additional business in the future. Improved customer service is possible
through employee training and high expectations. Monitor your employees' interactions with
customers. Surveys and informal conversations with employees help you assess the level of
customer service you currently provide and areas in need of improvement.

Public Relations

Another non-financial area for goals is your company's public image. Improving the way the
general public views your company can mean increased business and stronger relationships with
the community. Potential objectives include to maintain a professional image, establish a positive
social media presence and give back to the community. Donating time and money to charitable
organizations helps establish your company as a fixture in the community.

Non-Financial Goals can be also to:

• Improve Customer Satisfaction Levels to 9.8 from 9.5 (10point scale)
• Improve On-Time Delivery to 99.7% from 98.5%
• Reduce Obsolete Inventory from 3% of Sales to 1% of Sales
• Reduce the number of stock keeping units by 10%
• Reduce employee turnover by 25%

c) What existing cost and management accounting practices do you consider

inappropriate in modern conditions.
1. ABSORPTION COSTING

Traditionally cost accountants had arbitrarily added a broad percentage of analysis into the indirect
cost. In addition, activities include actions that are performed both by people and machine.
However, as the percentages of indirect or overhead costs rose, this technique became increasingly
inaccurate, because indirect costs were not caused equally by all products. For example, one
product might take more time in one expensive machine than another product—but since the
amount of direct labor and materials might be the same, additional cost for use of the machine is
not being recognized when the same broad 'on-cost' percentage is added to all products.
Consequently, when multiple products share common costs, there is a danger of one product
subsidizing another.

These traditional costing systems are often unable to determine accurately the actual costs of
production and of the costs of related services. Consequently managers were making decisions
based on inaccurate data especially where there are multiple products.

Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and
effect relationships to objectively assign costs. Once costs of the activities have been identified,
the cost of each activity is attributed to each product to the extent that the product uses the activity.
In this way ABC often identifies areas of high overhead costs per unit and so directs attention to
finding ways to reduce the costs or to charge more for costly products.

2. COST PLUS PRICING

Pricing is the manual or automatic process of applying prices to purchase and sales orders, based
on factors such as: a fixed amount, quantity break, promotion or sales campaign, specific vendor
quote, price prevailing on entry, shipment or invoice date, combination of multiple orders or lines,
and many others. Automated systems require more setup and maintenance but may prevent pricing
errors.

The traditional cost approach, i.e.' cost plus pricing' is inappropriate for today's liberalized
environment. In traditional cost system, material, labour and overhead costs are measured and a
desired profit is added to determine the selling price. The need has arisen to apply the technique
named as target costing which has been widely used by Japanese firms since 1970s and which has
recently received a considerable attention in the U.S.A. and European accounting literature. Target
Costing is defined as "a cost management tool for reducing the overall cost of a product over its
entire life-cycle with the help of production, engineering, research and design." A target cost is the
maximum amount of cost that can be incurred on a product and with it the firm can still earn the
required profit margin from that product. It is that estimated cost which enables a firm to remain
and compete in the market in the very long-run.

3. JOB ORDER COSTING

In a job costing system, costs may be accumulated either by job or by batch. For a typical job,
direct material, labor, subcontract costs, equipment, and other direct costs are tracked at their actual
values. These are accrued until the job or batch is completed. Overhead or "burden" may be applied
either by using a rate based on direct labor hours. Once overhead/burden is added, the total cost
for the job can be determined. If the accountant is using a general ledger accounting system, which
lacks true job costing functionality, the costs must be manually transferred out of Work in Process.

Costing systems in job order production require excessive tracing of costs to individual
jobs which could be cumbersome and time consuming

4) PROCESS COSTING

Process is an accounting methodology that traces and accumulates direct costs, and allocates
indirect costs of a manufacturing process. Costs are assigned to products, usually in a large batch,
which might include an entire month's production. Eventually, costs have to be allocated to
individual units of product. It assigns average costs to each unit, and is the opposite extreme of
Job costing which attempts to measure individual costs of production of each unit. Process costing
is usually a significant chapter.

Process costing can create cost errors in the production system. Production cost errors often
represent a significant disadvantage for cost accounting systems. Process costing does not use
direct allocation to apply business costs to individual goods. Direct allocation costing applies a
specific amount of raw materials, production labor and manufacturing overhead to goods or
services. Process costing may allow non-production costs to be included in the total process cost.
Including non-production costs will arbitrarily increase each item’s cost; this also increases the
consumer product price. Management accountants may also leave out production costs and create
under-costed products. Under-costed products usually result in lower business profits because
goods are actually more expensive than actually reported.

CONCLUSION
Kaplan (1984) stated that measurement systems for today’s manufacturing operations must
consider quality, inventory, productivity, innovation and work force. In summary, the financial
measures generated by traditional cost accounting systems provide an inadequate summary of a
company’s manufacturing operations. Today’s global competition requires that non financial
measures such as mentioned before to be used in the evaluation of a company are
manufacturing performance. Companies that achieve satisfactory financial performance but show
stagnant or deteriorating performance on nonfinancial indicators are unlikely to become or long
remain world-class competitors.
Question 31

The ‘Balanced Scorecard” approach aims to provide information to management to assist strategic
policy formulation and achievement. It emphasizes the need to provide the user with a set of
information which addresses all relevant areas of performance in an objective and unbiased fashion.

Requirements :

a) Discuss in general terms the main types of information which would be required by a manager
to implement this approach to measuring performance.(5marks)

Main types of information which would be required by a manager to implement a balanced

scorecard approach include:

 Profitability-financial perspective- how does the company look to the shareholder?

 Customer satisfaction-customer perspective-how does the company look to the customer?
 Innovation-innovation and learning perspective-can the company continue to improve and
create value?
 Internal efficiency-what must the company excel at? This is information on core
competencies and internal business perspective.
b) Comment on the three specific examples of performance measures which could be used in a
company in a service industry , for example a transport organisation or a firm of chartered
accountants.(15marks)

Examples of performance measures in a transport organisation

(i) on time delivery as defined by customers.
In a transport industry the responsive supply goal would look at how much time it takes to deliver
a service to a customer from the ordering time. In this instance it would look at how reliable the
transport service is in terms of being on time. It therefore implies that the lead time to attend to
customers may be measured probably for the operations department. A shorter cycle time would
be indicative of good performance whilst a longer cycle time would be indicative of poor
performance.
Such a measure looks at how the customer defines it and not how the organisation perceives it. A
good perception by the customer of the delivery cycle time will therefore ensure market success
for the company’s products since customers will view it as reliable and as such will choose to have
its service requirements provided for by the company.

(ii) new product introduction vs. competition

This focuses on the time to market the product when it is introduced on the market. This is done
whilst comparing the company’s performance to the competition that will be prevalent on the
market. In a transport company, this could be focusing on the services that are introduced to the
market and how fast the customers are adopting it. An example would be how a company
introduces state of the art buses and transport vehicles as compared to its competitors. A fast
adaptation by customers to such a new service would be indicative of good performance and a
slow adaptation would imply that the company is underperforming. This however is in comparison
competitors’ rate of introducing new products. If the transport company is not offering new
services as often as the competitors are doing, it is a cause for concern and it is indicative of poor
performance on part of the transport company.

(iii) quarterly sales growth and operating income by division

This measure generally focuses on the financial success of a company. Divisions will be measured
in terms of how much revenue has been generated as well as how much the sales have grown over
a period for instance, quarterly. Divisional managers are empowered therefore to employ strategies
that ensure a high sales growth as well as an increase in income. Increase in income will also imply
that the division will operate at a low cost. An example would be that a division may employ
transport fee discounts to its customers and as such sales may grow due to such a discount and this
also attracts potential customers. Another example would be that the division may employ cost
cutting strategies for instance, making bulk deliveries rather than delivering small quantities
frequently but this would have to be done cautiously as it may compromise the delivery lead time
and as such, orders placed on the same date or close days may be grouped together to cut on fuel
and transportation costs. A division that has high operating income and high revenues is indicative
of good performance and a division that has a low operating income is indicative of poor
performance. A quarterly measure ensures that performance can be analysed over a short period
of time.
 (a) Justify the use of PEST framework to assist your teams’ environmental analysis for
Republic of Borderland. (8)

Generally, a business unit has to monitor key macro-environmental forces that affects its ability to
earn profits. PEST (Political, Economic, Social and Technological factors) analysis can be used to
help the management to make decisions on the entry of Innscor in Chinhoyi. These issues affect
business in the following ways:

Political Factors
Political factors refers to the degree to which the government intervenes in the economy. This can
include – government policy, political stability or instability in overseas markets, legal factors,
foreign trade policy, labour laws, composition of government, environmental laws, trade
restrictions, and global political moves.

Political factors often have an impact on organisations and how they do business. Organisations
need to be able to respond to the current and anticipated future legislation, and adjust their strategic
plans accordingly.

Economic Factors
Economic factors have a significant impact on how an organisation does business and also how
profitable they are. The factors include economic growth, interest rates, exchange rates, inflation,
tax policy, disposable income of consumers and businesses. These factors can be further broken
down into macro-economic and micro-economic factors. Macro-economic factors deal with the
management of demand in any given economy. Governments use interest rate control, taxation
policy and government expenditure as their main mechanisms they use for this. Micro-economic
factors are all about the way people spend their incomes.

Social Factors.
Social factors are also known as socio-cultural factors. These are the areas that involve the shared
belief and attitudes of the population. The social factors include population growth, age
distribution, health consciousness, beliefs and customs in the society. These factors are of
particular interest as they have a direct effect on how marketers understand customers and what
drives them.

Technological Factors
These are the technological landscape changes and their impacts on the way we market and
produce our products. Technological factors affect production, marketing and the management
thereof in three distinct ways:
(i) New ways of producing goods and services.
(ii) New ways of distributing goods and services.
(iii)New ways of communicating with target markets.

(b) Discuss the main issues arising from applying this framework, and highlight what further
information is needed by Inscor in Chinhoyi. (17).

The main issues arising and the information needed is as follows;

Political factors
The political issues arising include indigenisation policy and community share ownership
schemes. The current government welcomes the foreign direct investment, however the
indigenisation policy states that for a foreign company to operate in Zimbabwe it has to cede 51%
shareholding to local community. The impact of government environmental regulations such as
waste management laws and carbon tax laws should be considered. Government pricing
regulations such as price ceiling should be considered during product development and cost
management.

There is need to check whether there are legal restrictions on operating a company in Chinhoyi, or
on controlling it from its head office abroad. It is important to also consider the political stability
of the country and intentions of any likely future government. It will also be sensible to assess the
political feelings with regards African fast foods outlets and the possible africanisation of the local
culture.
Economic factors
One major economic issue would be the likely level of disposable income of consumers as a fast
is likely to be viewed as a necessity. The level of sale will also be affected by the level of
unemployment (although this will reduce wage costs, however, wage levels will impact on the
number of expatriates from Africa used to run the operation as opposed to local managers being
employed (as Inscor have ruled out franchising). The economy will also impact on the exchange
rates against the dollar which will affect the remittances of funds to the mother country. It is
therefore important to assess the economic circle and its likely trend over the next few years.
Social, cultural and demographic factors
The cultural attitude and social norms will be crucial to Inscor future plan. The life style in
Chinhoyi may not lend itself to fast food outlets and attitudes to education and health may have an
impact, as well as researching this values. Other issues that need to be investigated include
Chinhoyi society attitude to food safety and health awareness as well as the enthusiasm or
otherwise African products. Lastly there is growing concern around the world about environment
issues such as packaging and energy efficiency; Inscor needs to check the level of such concerns
in Chinhoyi so that it can design products and marketing accordingly.

The PEST analysis on its own will not give the appropriate understanding of the organisational
position. There is need to also do a SWOT analysis

SWOT analysis is a useful technique for understanding the organisation’s Strengths, Weaknesses,
and for identifying both the Opportunities opens to the organisation and Threats it faces. If used in
a business context, a SWOT analysis helps to carve a sustainable niche in the market.

Strengths we look at
 What advantages does the organisation have?
 Are we doing better than anyone else?
 What unique or lowest- cost resources can you draw upon that others can’t?
 What do our competitors see as our strengths?
 What is our organisation’s unique selling proposition?
There is need to consider our strengths from both an internal perspective, and from the point of
view of our customers and other people on the market. We also need to consider competitors. For
example, if all our competitors provide high quality products, then high quality production process
becomes a necessity rather than strength.

Weaknesses:

What can we improve?

What should we avoid?

What are people in our market likely to see as weaknesses?
What factors make us lose sales?
Again there it is wise to consider this from an internal and external basis. Its best to be realistic
now, and face any unpleasant truths as soon as possible.

Opportunities

 What good opportunities can we spot?

 What interesting trends are we aware of?

Opportunities can come from things like changes in technology and markets on both a broad and
narrow scale, changes in government policy related to the organisation’s field, changes in social
patterns, population profiles, lifestyle changes, and so on and local events.

Threats

 What obstacles do we face?

 What are our competitors doing?
 Are quality standards or specifications for our products or services changing?
 Is changing technology threatening our position?
 Could any of our weaknesses seriously threaten our business?

Taking all these into perspective, it will be safe to venture into the new environment and existence
will be guaranteed to some extent.

Question 4 Benchmarking
Batsirai AIDS Group is a charity concerned with AIDS disease. Its mission statement is;
To fund world class research into the biology and the causes of AIDS disease.
To develop effective treatments and improve the quality of life for patients.
To reduce the number of people suffering from AIDS disease.
To provide authoritative information on AIDS disease.
Batsirai obtains funding from voluntary donations from both private individuals and companies,
together with government grants. Much of the work it does, in all departments, could not be achieved
without the large number of voluntary workers who give their time to the organisation and who make
up approximately 80% of the workforce.
Batsirai does not employ any scientific researchers directly, but funds research by making grants to
individual medical experts employed within universities and hospitals. In addition to providing policy
advice to government departments, the charity’s advisors give health educational talks to employers
and other groups.
The Board recognises the need to become more professional in the management of the organisation.
It feels that this can be best achieved by conducting a benchmarking exercise.
However, it recognises that the introduction of this process may make some members of the
organisation, particularly the volunteers, unhappy.
Required:
As Financial Controller;
(a) Discuss the advantages and disadvantages of benchmarking for Batsirai AIDS Group. (8marks)
(b) Provide advice on the stages in conducting a benchmarking exercise in the context of
(12marks
(c) Provide advice on how those implementing the exercise should deal with the concerns of the staff,
particularly the volunteers.
(5 marks)
The essence of benchmarking is the process of identifying the highest standards of excellence for
products, services, or processes, and then making the improvements necessary to reach those
standards, commonly called “best practices”. The justification lies partly in the question: “Why
re-invent the wheel if I can learn from someone who has already done it?” Jackson Grayson Jr,
chairman of the Houston-based American Productivity and Quality Center, which offers training
in benchmarking and consulting services, reports an incredible amount of interest in
benchmarking (Ross, 1995).

Benchmarking is the process by which companies look at the “best” in the industry and try to
imitate their styles and processes. This helps companies to determine what they could be doing
better. The decision to begin benchmarking is valuable to companies by opening up many
different ideas to processes, approaches, and concerns (Allan, 1997).

Advantages of Benchmarking

• Increasing productivity and individual design

Companies are benchmarking for a variety of reasons. The reasons can be broad, such as
increasing productivity, or they can be specific, such as improving an individual design. By
simply looking outside itself, a company can identify breakthroughs in thinking. A similar
process used in a different way can shed light on new opportunities to use the original process
(Muschter, 1997)

• Strategic tool

Leapfrogging competition is another reason to use benchmarking as a strategic tool. For example
Batsirai group’s competitors may be stuck in the same rut as the charity decide to benchmark the
activities of its competitors. It would be possible to get a jump on competitors by using new-
found strategies such as that voluntary aspect by independent members offering services to
charity so as to enable it to maintain its operations. This opens up an opportunity for growth that
the competitors may not be aware of .

• Enhance learning

Another reason to benchmark is overcoming disbelief and enhancing learning. For example,
selling or hearing about another organisation’s processes such as those of world vision and how
they are doing will help Batsirai Group to believe that there may be a better way to compete
(Brookhart, 1997).

• Growth potential

Benchmarking may cause a necessary change in the culture of an organization. Batsirai group
can end up maintaining its existing ways of operating by encouraging those offering voluntary
services to the research process instead of doing it professionally that is by employing
individuals to carry out specific duties in an organisation. After a period of time in the industry,
an organization may become too practised at searching inside the company for growth. The
company would be better off looking outside its walls for potential areas of growth. An outward
looking company tends also to be a future oriented company. This often leads to a more
enhanced organization and increased profits

• Assessment of performance tool

Benchmarking is defined as “the process of identifying and learning from best practices
anywhere in the world” (Allan, 1997). By identifying the “best” practices, organizations know
where they stand in relation to other companies. The other companies can be used as evidence of
problem areas, and provide possible solutions for each area. When companies benchmark, they
use partners to share information with and learn from each other.

Benchmarking allows organizations to understand their own administrative operations better, and
marks target areas for improvement. It is an ideal way to learn from other companies who are
more successful in certain areas. Additionally, benchmarking can eliminate waste and help to
improve a company’s market share (Allan, 1997). Performance in relation to Batsirai group can
be assessed by the quality services which can be as a result of funding which the organisation
will make to the research process.

• Continuous improvement tool

Benchmarking is increasing in popularity as a tool for continuous improvement. Organizations

that faithfully use benchmarking strategies achieve a cost savings of 30 to 40 per cent or more.
Benchmarking establishes methods of measuring each area in terms of units of output as well as
cost. In addition, benchmarking can support the process of budgeting, strategic planning, and
capital planning (Lyonnais, 1997).

In the early 1980s, Ford Motor Company needed to change many aspects of its operations to cut
costs due to the suffering automotive market. For example, management came to understand that
it could improve processes in the accounts payable department. After gathering data on Mazda’s
accounts payable operations, Ford analysed and compared its own accounts payable operations.
As a result, Ford reduced costs by 5 per cent. In case of Batsirai group, it can have its focus on
what other NGOs are doing to remain successful. In this case, benchmarking organisations like
World vision and Concern maybe its target.

• Vehicle to improve performance

Benchmarking also allows companies to learn new and innovative approaches to issues facing
management which, in turn, provides the basis for training. For example, Batsirai group can
through benchmarking become aware of advantages which it would enjoy by employing
professional management. Benchmarking acts as vehicle to improve performance by assisting in
setting achievable goals that have already been proven successful. It overcomes disbelief that
there are, by example, other ways of achieving and creating overall enhancement of an
organization (Fuller, 1997).

Perceived limitations and costs of benchmarking

The main problem with benchmarking is the focus on data as opposed to the processes used to
result in that data. Benchmarking should be used as a guide, not for statistical precision
(Muschter, 1997) and in this case, the issue of achieving quality service delivery in Batsirai
charity group demands another basis to assess performance rather than relying on statistical
measures.

• Losing focus on the customers and employees

Benchmarking can cause some organizations to lose their focus on customers and employees.
For example, Batsirai group is a charity organisation focusing on providing aid on biology
which is a non profit oriented business. In this case, Batsirai group can lose its focus if it
benchmarks itself with other profit oriented companies.

Companies that try to produce better numbers quickly can cause employee burnout, errors, and
the need for rework. A company may also try to quicken receivables and delay payables to meet
a certain numeric goal. This may have large adverse effects on customers as well as suppliers
(McNair 1992).

• On going process-not-one-time project

Some organizations also have difficulty in treating benchmarking as an on going process. It

should not be viewed as a one-time project. Additionally, some companies feel that if the tactic is
not invented by them, it may be inferior. Furthermore, some companies do not look to
benchmark because it exposes their weaknesses. For example, Batsirai group can be unwilling to
unravel its operational activities to the outside world fearing that it
may at the end viewed as un organised by considering the fact that all its operations are being
done voluntarily and that the company has no concern for achieving long term national goals of
reducing unemployment. Another common problem with benchmarking is the failure to expand
the scope of companies studied. Potential companies to benchmark should include companies in
all industries, even those outside of the user company’s industry ( Ross, 1994).

 Best practice companies are unwilling to share data.

Some companies are just unwilling to share their ideas as a result of a number of reasons such as
competition. In such a scenario, benchmarking may not be effective especially to the
benchmarking firm. A very good example is that CUT may not be willing to share what it has
with other Universities as a result of that fear for competition. Batsirai AIDS group can not
review to the outside world how its processes are being funded to make them effective and more
attractive as compared to other groups offering similar services. Benchmarked Organisations can
just respond by sharing non value adding information and ideas and of no relevancy to the
benchmarking Organisation

 Lack of commitment by management and staff.

Lack of commitment by management is a hindrance to a successful benchmarking process. Lack

of competition can be from a benchmarked organization and in this case, it can be viewed as an
in ability to share effective best practices, processes and procedures involved in achieving certain
goals of an Organization. For example, management from Batsirai group may be reluctant when
it comes to copy other outside better funding and operational duties better for its growth and
survival. Management from a benchmarking Organizations can be incompetent to look for other
better practices from outside the organization which at the end may leave the Organization
incompetent to outdo competition. Lack of commitment may emanate from lack of resources to
fund benchmarking requirements.

b) Stages in conducting a benchmarking exercise in the context of Batsirai group

According to The Nuts and Bolts of Benchmarking, written by Margaret Matters and Anne
Evans (1997), there are five stages included in the benchmarking process which are discussed
below:
 (1) Planning the exercise:

This step involves identifying the strategic intent of the business or processes to be
benchmarked. Many times this information can be obtained by looking at the company’s mission
statement which summarizes its main purposes. Then selection of the actual processes to be
benchmarked must be chosen. This consists of identifying various services being offered by
similar charity Organisations and asking Batsirai charity group if using this process will create
positive results in the organization. Then the customer’s expectations must be identified. Finally,
the critical success factors have to be determined in order to benchmark. These factors are links
to successful business results.

(2) Form the benchmarking team involving the selection of overall team members.

These members should be chosen from various areas of the organization. All members should
cooperate and communicate with one another in order to get the best results out of the
benchmarking process. There are three main teams comprising the overall group. The lead team
is responsible for maintaining commitment to the process throughout the organization. The
preparation team is responsible for carrying out detailed analysis, and the visit team must carry
out the benchmarking visit

(3) Collect the data:

This step involves gathering information on best practice charity Organisations and their
performances. Before an Organisation identifies best practice Organisations, they should first
identify their own processes, products, and services. This step will allow a company to fully
realize the extent of improvements available. Site visits are also an important factor in collecting
data because they allow for a more in-depth understanding of the processes.

(4) Analyse data for gaps:

This step involves determining how Batsirai charity group relates to the benchmarked
Organisations such as World vision Zimbabwe. It allows identification of performance gaps in
terms of service delivery and their possible causes.

(5) Take action:

This step involves determining what needs to be done in order to match the best practice for the
processes to be benchmarked by Batsirai charity from other NGOs. Not only should
determination of changes be made, but they also should be implemented (Matters and Evans,
1997).

However, Different Organisations have their own benchmarking methods, but no matter which
method is used, the major steps involved are as follows: first, measure the performance of the
best-in-class relative to critical performance variables such as cost, productivity, and quality;
second, determine how the levels of performance are achieved; and third, use the information to
develop and implement a plan for improvement ( Ross, 1994) .

c) Provide advice on how those implementing the exercise should deal with the concerns of
the staff, particularly the volunteers.

 Volunteers should be empowered through training especially in making them able to

teach the society on how to prevent themselves from conducting HIV and AIDS

 Those implementing the exercise should account properly contributions made to the
charity through providing reports on how those contributions have been used for the
operations of the charity

 Invest excess contributions made so as to stabilise the availability of funds for use in the
charity

 Staff members volunteered to participate, should be offered permanent employment so

that they continue to offer their quality services to the charity without complaints

 Communication to volunteers on what the company seeks to achieve in having its

operations done voluntarily and the benefits which the Organisation may benefit

4) Although most of Mazongoro Stationery’s operations are concerned with the production of customized
letterhead stationery, a small section of its business is concerned with the mass-production of standardized
items such as calendars and charts. Because of intense competition, quality management is very important
in this part of the business. One of the performance management mechanisms in this area is a monthly cost
of quality (COQ) report in which quality-related costs are classified under four headings (prevention,
appraisal, internal failure, and external failure) and each amount is expressed as a percentage of the month’s
sales revenues.
The following data relates to production and sales of charts in the last four months of 2010:
September October November December
Production (units) 2500 2800 3200 3400
Sales (units) 2500 2300 2100 1900
Internal failure (units) 190 200 220 230
External failure (units) 128 110 85 65

There was no change in selling price during the four-month period. The seasonal trend in production and
sales was in accordance with expectations; the company deliberately increases its stocks in the early part
of each year to cope with a surge in demand which can be expected in early summer.

Paul Coleman has expressed serious concern about these figures. “External failures fell over the months,
but that is only to be expected because sales also fell sharply. Internal failures grew steadily despite the
reduction in sales.

This part of the organisation is going backwards, not forwards, in terms of quality management”.
REQUIRED:
(a) Present calculations to indicate the effect of this data on the monthly COQ reports, insofar as is possible
from the data provided. (6 marks)
(b) Do you agree with Paul Coleman’s assessment? Explain your answer and show relevant calculations.
(9 marks)
c) Evaluate the principal stakeholders in the organisation and analyse the nature of the influence and
importance that they hold in their relationship with the [Total: 25 marks]
SOLUTION
a) Monthly C.O.Q REPORT for Mazongoro

Sept Oct Nov Dec

unit % unit % unit % unit %
internal 190 7.60% 200 8.70% 220 10.50% 230 12.11%
external 128 5.12% 110 4.78% 85 4.05% 65 3.42%

Total 12.72% 13.48% 14.55% 15.53%

sales 2500 2300 2100 1900
 COQ 318 310 306 295
b) Do you agree with Paul Coleman’s assessment? Explain your answer and show relevant
calculations. [9 marks]

Failure costs: are incurred when a product fails to conform to its design specifications.

 Internal failure costs: result from identification of defects before they are shipped to
customers.

 These costs include scrap, rejected products, reworking of defective units, and downtime
caused by quality problem.

 They are mainly incurred during production.

Relationship between internal failures and external failures

 The more effective a company’s appraisal activities the greater the chance of catching
defects internally and the greater the level of internal failure costs. This is the price that is
paid to avoid incurring external failure costs, which can be devastating.

Part B

Paul attributed the decrease in external failure costs only to the fall in sales:

This is partially true as shown below:

Other factors may cause a reduction in external failure costs.

 Thus a calculated increase in internal failure costs will will result in a reduction in
external failure costs.

The steady increase in Internal failure cost highlighted by Paul can be attributed to
production rather than sales:
 percentage changes
30

25
10

20
5.3
15 internal failure costs
14.3
production increase
12
10 4.5

6.3
5

0 0
1 2 3 4

“the organisation is going backward and not forward in terms of quality management”

1) There is a decrease in external failures,

sep oct nov dec

external failure cost 128 110 85 65

percentage 5.12% 4.78% 4.05% 3.42%
c) Evaluate the principal stakeholders in an organization and analyze the nature of
influence and importance that the hold in their relationship with the organisation

 A stakeholder is anybody who has an interest in the entity’s operations. The stakeholders
including owners of the entity should define the entity’s objectives. These guide the
directors in conducting the affairs of the company – Appointing the first directors to conduct
the affairs of the company, Attend stakeholder meetings. All stakeholders have one common
interest with regard to the business operation of the company that is, its sustainability.

 Organisations have different stakeholders (shareholders, customers, employees, financiers,

perhaps the government etc) who have varying expectations of the organisation and may
 exercise considerable influence and power over the strategy to be followed. The different
stakeholders will potentially seek to look after their own interest in the organisation and
make decisions that will ultimately be to their own benefit. This is because they depend on
the organisation to achieve their set out goals.

 Nonetheless, a stakeholder is any individual or group which can affect or is affected by an

organisation’s activities, whether they are a local community who want to know that a
factory will not be releasing harmful pollutants, consumers who want product information or
investors who wish to see a company prosper

 Broadly, stakeholders can be categorised into four groups:

1. Those with high influence, high interest.

This group of stakeholders should be given the most attention regarding the business and their
relevant objections to business projects or operations must be investigated. These include
Institutional Investors, Local Planning Authority

2. Those with low influence, high interest.

These groups are useful resource tools as they can give information as to how the business or a
project should roll even though they have little influence over it. These include: Employees,
Environmental Groups, Local Community

3. Those with high influence, low interest.

These groups of stakeholders are not really interested in your projects or in the business because
they do not feel they are affected by the operations of the business. However, they are a group to
be pleased because they can be potential obstacles to your business plans. It is therefore
important that they get as much information as possible about the business/project and
understand why the business/project should go ahead. These include Major Customers (those
who want customized letterhead), Central Govt, and Media.

4. Those with low influence, low interest.

It is best to spend as little time as possible with this group of stakeholders because they do not
have anything to offer the business and are not in a position to help the business either. These
include Small customers (the small section the business were mass production of standardized
items are produced), Small Shareholders

1. Employees:
 Employees are a key group. Individually, they can enhance sustainability at the company
they work for by bringing their personal convictions and experiences to bear, and
contributing to change and innovation within the organisation.
 They will also be interested in whether not the business has developmental opportunities
for career progression, and if the company operations meet safety working practices.
 Welfare benefits, insurance, holidays etc are some other considerations employees will be
interested in regarding the business.
 They will also want to be sure there is job security in the business, and that the business
is not experiencing going concern problems.
 rates of pay, job security, compensation, respect, truthful communication
2. Customers:
 The impact of consumer activism has sometimes been considerable in driving
sustainability. Consumers often do not always have the luxury of putting pressure on
companies through their purchasing.
 However, some surveys have shown that there is a genuine concern among consumers
about the sustainability of a company’s performance, particularly in terms of their ability
to continue to provide quality products
3. Investors:

 Investors are a very broad and diverse group comprised of individuals or organisations
that are very influential.
 They range from the local financial community to international private investors and
financial institutions. If investors feel that a company’s activities are sustainable and its
financial performance is acceptable, then they will be increasingly likely to favour more
companies in sustaining their wealth by contributing positively to their investment
decisions.
 Their primary focus will be to reduce or hedge their investment risks and ensure that the
resources invested in the various businesses yield a return on investment
4. Governments:
 It is Governments who usually push for sustainable development, and economic and
business growth.
 Governments that are weak have to deal with major issues such as unsuitable economic
policies, corruption, general policy instability and inconsistent regulations.
 This definitely affects their ability to start, implement and sustain programs that will be
of benefit to the overall economy.
 A good governance however, imbibes regulations, certainty and an appropriate mix of
policy tools - including clear and enforceable regulatory standards, economic instruments
and voluntary initiatives - each of which has a key role to play in promoting the business
case for sustainability.
 A good government will also seek to ensure that businesses comply with the relevant
regulations pertaining to their businesses.
 Other things which the government is interested in taxation, VAT, employment, truthful
reporting, diversity, legalities, externalities
5. Media:
 The media can be a significant player in driving a business case forward, by providing
information on sustainability, and highlighting the cause and effects of the business
activities of a company
6. Non Governmental Organisations (NGOs):

 Local NGOs and community groups grant responsible companies the local license to
operate, while exposing those companies with poor performance. Their influence is much
greater in some countries than others. Their main interest will be to ensure that businesses
carry out their operations transparently and in the good interest of the public
7. International Bodies:

 International organisations can play a catalytic role in stimulating awareness.

 Their main goal will be to unite businesses on the global front and ensure competitiveness
in international trade.
 They will also look into the legality of the businesses being transacted and seek to protect
the interest of their various countries or establishment according to the relevant regulation.
8. Local Communities:

 They expect the company situated within their community to provide socio-economic
development.
 This may include the provision of local amenities in some cases repairing bad roads,
building development projects for schools, jobs, involvement, environmental protection,
shares, truthful communication.
9. Shareholders:

 These are the group of people who actually have shares in the business.
 This means they have paid a price to buy a part of the businesses and ultimately with a
view to increasing shareholder wealth.
 Their main interest will be to ensure that a business is actually using the resources
available to it optimally and that they in return will yield returns in the value invested in
the business in the form of dividends.
 They will also be looking to ensure that the company is not experiencing going concern
problems and that it is not highly geared
10. Trade Unions

 Unions are organizations that negotiate with corporations, businesses and other
organizations on behalf of union members. There are trade unions, which represent
workers who do a particular type of job, and industrial unions, which represent workers
in a particular industry.
 The power of labor unions rests in their two main tools of influence: restricting labor
supply and increasing labor demand.
 Through collective bargaining, unions negotiate the wages that employers will pay.
Unions ask for a higher wage than the equilibrium wage (found at the intersect of the
labor supply and labor demand curves), but this can lower the hours demanded by
employers. Since a higher wage rate equates to less work per dollar, unions often face
 problems when negotiating higher wages and instead will often focus on increasing the
demand for labor.
 Unions have a unique legal position and in some sense, they operate like a monopoly as
they are immune to antitrust laws. Because unions control, or can exert a good deal of
influence on, the labor supply for a particular company or industry, unions can restrict non-
union workers from depressing the wage rate. They are able to do this because legal
guidelines provide a certain level of protection to union activities.

 They are interested in securing improvements in working conditions and wages quality,
worker protection, jobs.

11. Business Partners:

 The company’s business partners will want to ensure that the business is being run legally
and the operations of the business meet the set out guidelines and the business is run with
a view to achieving the set out objectives according to the best practice possible
12. Environmentalists:

 They will be interested in the effects the business operations will have on its natural
environment.
 They will therefore want to ensure that the business continually strives for cleaner and
safer working processes, and that the working practices meet health and safety rules.
Practice question 1

Application of the value chain to university process

A university which derives most of its funds from the government provides undergraduate
courses (leading to bachelors’ degrees) and post-graduate courses (leading to masters degrees).
Some of its funds come from contributions from student fees, consultancy work and research.
In recent years, the university has placed emphasis on recruiting lecturers who have achieved
success in delivering good academic research. This has led to the university improving its
reputation within its national academic community, and applications from prospective students
for its courses have increased.

The university has good student support facilities in respect of a library which is well-stocked
with books and journals and up-to-date IT equipment. It also has a gymnasium and
comprehensive sports facilities. Courses at the university are administered by well-qualified
and trained non-teaching staff who provide non-academic (that is, not learning-related) support
to the lecturers and students.

The university has had no difficulty in filling its courses to the level permitted by the
government, but has experienced an increase in the numbers of students who have withdrawn
from the first year of their courses after only a few months. An increasing number of students
are also transferring from their three-year undergraduate courses to other courses within the
university but many have left and gone to different universities. This increasing trend of student
withdrawal is having a detrimental effect on the university’s income as the government pays
only for students who complete a full year of their study.

You are the university’s management accountant and have been asked by the Vice-Chancellor

(who is the Chief Executive of the university) to review the withdrawal rate of students from
the University's courses.)

(Candidates do not require any knowledge of university admission and withdrawal processes to
answer this question.)

Required:

Apply Value Chain Analysis to the university's activities, and advise the Vice-Chancellor how
this analysis will help to determine why the rate of student withdrawal is increasing. (25 mark)

 “Value chain represents the internal activities a firm engages in when transforming inputs into
outputs.”
 “Value chain analysis (VCA) is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce costs or
increase differentiation.”
 VCA is a strategy tool used to analyze internal firm activities. Its goal is to recognize, which
activities are the most valuable (i.e. are the source of cost or differentiation advantage) to the
firm and which ones could be improved to provide competitive advantage. In other words, by
looking into internal activities, the analysis reveals where a firm’s competitive advantages or
disadvantages are
 The value chain analysis is divided into primary activities and support activities which
collectively contributes to the attainment of the organisaton ‘s goals

Value chain model according to M. PORTER(1985): primary activities

Industrial value chain model

But CUT is a service delivery organisation!!!!

 The BIG question is :HOW CAN THE VALUE CHAIN ANALYSIS BE APPLIED
TO CHINHOYI UNIVERSITY OF TECHNOLOGY’s ACTIVIETIES
  so as to identify ways on how we can determine the reasons why the student
withdrawal continues to increase

Applying the value chain model to cut

•INVOVES
•Preparation for courses development:
•Curriculum planning
•Acquiring/preparing for learning specific hardware
•Learning management system
•Learning content management system
INBOUND •Hiring of authors
•Ordering reference materials including textbooks and formation internal
course teams
LOGISTISTICS

•INVOLVES
•Process of course development
•Include writing
•Multimedia creation
•Editing
•Formatting
•Graphic designing
OPERATIONS •Printing
•Web publishing
 • Major concern is on packaging and storage of courses
• Process of mailing/delivery of material to students
• Providing registered student with access to their courses
through an integrated portal
• Where they can retrieve customised and relevant
information bout their account
• (student portal form the most important platform which
help build a virtual campus community)
• through the portal a student can:
• Can register a course
Outbound • Order transcript(not currently being offered by cut)
• Ask for student financial aid
logistics • Access the library and book store
• Benefit from a variety of student orientation tools
including:
• Advising
• Support
• Counselling and other resources
 • MARKETING
• Traditional methods
• Preparation of brochures
• Advertising materials (news paper, television etc…)
• University calendar
• The university should craft a branding strategy
communicating the:
• Benefits
• Attributes
• culture
• Competitive advantage of the institution in its tunic online
offerings
• Should establish strategic partnerships and alliances able to
give institution a hunic position in the minds of stakeholders

• SALES
• A contract for tuition and other services is formed the
moment a student register for a particular course between
Marketing the student and the university
• A REGISTRATION IS CONSIDERED A SALE, as funds
& sales change hands for access to the course and for purchase to the
learning materials
• Tuition is considered the main source of revenue for CUT
• Other sources being the
• Government
• Sales of in-house development products

• Other services to the students are

• Admission
• Contract extension
• Transcripts
• Challenge fees
• Fother fines
 •Provide online support
•Technical and academic to learners
•Tutoring
•counselling
•Marking of assignments and examinations
service •Delivery and invigilation of examinations
•Maintenance of student records
•Lerner self service through websites and web portals

The support activities of the value chain model

Firm • This includes planning and control systems,

such as finance, accounting, and corporate

structure strategy etc. (Lynch, 2003).

• It is concerned with
• Recruiting
Human • training,
resources • motivating
• and rewarding the workforce of the university.
management • Human resources are increasingly becoming an
important way of attaining sustainable
competitive advantage.
 • it is responsible for purchasing the materials necessary
for the university’s operations.
• An efficient procurement department should be able
to obtain the highest quality goods at the lowest
prices.
procurement • This involve learning material like textbooks or lab
instruments among others
• VEHICLES OR COMPUTERS ETC

•is concerned with:

•technological
•innovation,
• training
•and knowledge
TECHNOLOGICAL •that is crucial for a university today in order to survive.
DEPARTMENT •they function from designing to hosting of the
university website
•Running the e-learning platform and striving to move
to a paperless learning environment…(going green)

Advice to the Vice chancellor

 Value chain is a powerful tool for managers to identify the key activities within the firm
which form the value chain for that organization and have the potential of a sustainable
competitive advantage of a company

 Therein competitive advantage of an organization lives in its ability to perform crucial

activities along the value chain better than its competitors.

 When this system is managed carefully, the value chain links the value of the
organization's activities with its main functional parts. This enables the assessment of the
contribution of each part in the overall added value of the business.

Benefits of value chain analysis to the university.

 A big advantage is that the value chain is a very flexible strategy tool for looking at your
business, your competitors and the respective places in the university’s value system.
 The value chain can be used to diagnose and create competitive advantages on both cost
and differentiation.

 It helps you to understand the organisation issues involved with the promise of making
customer value commitments and promises because it focuses attention on the activities
needed to deliver the value proposition.
.
 Comparing your business model with your competitors using the value chain can give
you a much deeper understanding of your strengths and weaknesses to be included in
your SWOT analysis.
 It’s very strengths of flexibility mean that it has to be adapted to a particular business
situation and that can be a disadvantage since, to get the best from the value chain, it’s
not “plug and play”.
.
 The format of the value chain laid out in Porter’s book Competitive Advantage, is heavily
oriented to a manufacturing business and the language can be off-putting for the service
industry like the university
 The scale and scope of a value chain analysis can be intimidating. It can take a lot of
work to finish a full value chain analysis for your company and for your main
competitors so that you can identify and understand the key differences and strategy
drivers.
.
 Many people are familiar with the value chain but few are experts in its use.
 Surprisingly research is not mentioned explicitly as a sector in the value chain especially
as research has traditionaly been considered a primary function of universities, 1
perceived by academics and the public as a value adding activity
 It helps the university to make significant contribution to society
 It is an essential element in all world class universities (benchmarking)
 Ensure a vibrant academic environment
 Enable the university to attract and retain good facaulting while building a strong
academic reputation and contributing to the continual improvement of
carriculum,learning system and programmes
 Question 2

Benchmarking in a public sector organisation

 A local government runs a hospital that provides healthcare services to the general public.
The hospital provides services related to paediatrics, gynecology, cancer and other general
ailments. It has state-of-the-art facilities for the patients and well-equipped diagnostic
laboratories and operation theatres.
 The hospital is funded by grants that are allocated by the Federal government every year,
which cover all the operating expenses of the hospital. There are special allocations
 provided for purchase of new equipment and creation of any new facilities. It employs a
total staff of 150, comprising professional doctors and nurses.
 The hospital was founded about ten years ago and has been, since then, operating
successfully. However, the entral grants committee of the central government has recently
raised concerns over the increasing amount of grants being allocated to this hospital. They
feel that the hospital could do with lesser grants. They also suspect that there is a lot of
wastage of money that can be avoided through proper performance evaluation. The
management of the hospital has taken the comments of the committee very seriously and
has taken up the matter to assess their existing performance management system.
Currently, the performance of the hospital is measured using both financial and non-
financial performance measures. The Dean of the hospital recently attended a training
programme, where he learned about the tool of benchmarking. He would like to know if it
can be used effectively for the hospital to enhance the performance and reduce wastage.

Required:

(a) Explain the concept of benchmarking and its usefulness for a public sector organisation
like this hospital. (7 marks)

 Benchmarking began in the late 1970s by Xerox corporation (inventors of the photocopier).
At the time the company was losing market share (market had shrunk by 38%) to its
competitors (Kodak and canon).

 In an attempt to get back into the game they decided to compare their operations to those
of its competitors by finding quality standard with which to compare itself to.

 Benchmarking is a measurement of the quality of an organisation’s policy, products and

strategies. It is the comparison with standard measurements as to achieve excellence and
the setting out to match or even surpass the standards (Berrington and Kelesessidis, 2001).

 It is the continuous improvement in the search for competitive advantage. Against

acknowledged leaders in the field.

 It can be said to be ‘looking at the best” in the industry and to try imitate their styles and
processes.

 The justification for using benchmarking is given in the quotation by Jackson Grayson
Deblo, the chairman of the Houston-based American productivity and quality centre;

Objectives of benchmarking

1. To determine what and where improvements are called for

2. To analyse how other organisations achieve their high performance levels

 3.To use this information to improve performance

He argues that; “WHY RE-INVENT THE WHEEL IF I CAN LEARN FROM SOMEONE
WHO HAS ALREADY DONE IT”…..

HOWEVER BENCHMARKING IS NOT:

 just a means of gathering data on how well a company performs but is a method of
identifying new ideas and new ways of improving processes therefore being better able to
meet the expectations of customers.
 Public sector organisations have to look into how they can use their resources so as to cut
on grants or use them effectively so as to still meet up the expectations of patients.

Types of Benchmarking

1.COMPETITIVE BENCHMARKING

Benchmarking is performed versus competitors and data analysis is done as to what causes the
superior performance of the competitor.

2. INTERNAL BENCHMARKING

This process is applicable in organizations having multiple units (for e.g. multinationals,
companies with sale offices around the country, with multiple factory locations within the same
country).

3. PROCESS BENCHMARKING

Here we look at processes, which may be similar, but in different organizations, producing
different products, for e.g. airline industry & hospital industry looking at the process of catering
their ‘clients’.

4. GENERIC BENCHMARKING

We would look here at the technological aspects, the implementation and deployment of
technology. How else other organizations do it? Hence the source organizations may be of same
industry or from another industry

Benchmarking types relevant to a hospital

Benchmarking for a hospital can be classified under process and generic benchmarking. To assess
and rank hospital performance a composite indicator that ranks hospital performance relative to
other hospitals and provide insights into hospital performance across key areas should be used.

The review of hospital performance indicators provide hospital managers and clinicians with a
range of options for the selection of key performance indicators for hospital benchmarking
Usefulness to a public sector- case of hospital

Performance improvement tool

Benchmarking allows organisations to learn new and innovative approaches that assist them
in setting achievable goals that already have been proved useful

In this case the hospital will be able to set goals that are aligned to the financial and non-
financial performance measures that will help curb wastage of grants upon effectively
evaluating performance. It highlights areas of practice and performance requiring attention and
improvement.

Continuous improvement

The use of benchmarking can be used as a cost saving measure to establish methods of
measuring each area in terms of units output as well as cost.

As the hospital committee has raised concerns over the increasing amounts of grants allocated
to the hospital and the wastage of money, benchmarking can be used to support the process of
budgeting, strategic planning and capital planning. It can be used to convince public sector
organisations that there are other organisations who know the job and have actually done it.

Human resources training

Benchmarking provides a basis for training. Employees begin to see the gap between what they
are doing and what the best in-class are doing

Generally the Public sector is characterised of high absenteeism and lack of efficiency hence
benchmarking points the need of personnel to be trained to learn techniques of problem solving
and process improvement. Benchmarking thus identifies strengths and weaknesses of our own
entity.

Resource management

The hospital in the case study is said to be wasting the money provided hence the increase in the
grants provided. Benchmarking can help it in comparing itself with other hospitals which are also
provided with grants and possibly adopt the methods of budgeting and funds use ( spending) that
are used by the best in the industry.

Assessment of performance tool

 One of the objectives of benchmarking is to determine where improvements are called for
upon analysing our own performance against that of high performers.
  Accuracy and reliability, responsiveness and sensitivity are considered lacking from public
organisations and their performance ought to be assessed hence benchmarking acts as a
tool for performance assessment.

 (b) Discuss how benchmarking can be implemented in the hospital to achieve the objective
of performance improvement. Also, briefly enumerate the performance parameters that can
be benchmarked and the use of league tables. (13 marks)

There are phases of implementation of benchmarking namely; 1.Planning 2.Analysis

3.Intergration 4.Action 5.Maturity

 Planning- during the planning phase the organisation determines which process to
benchmark and what type of organisation

 Analysis- Following Data acquisition, analysis is performed for the performance gap
between the source organisation and the recipient organisation

 Integration- It involves the preparation by the recipient for the implementation of the
action

 Actions- This is the phase where the actions are implemented within the recipient
organisation.

 Maturity- This involves continuous monitoring of the process and enables continuous
learning and provides input for continued improvement within the recipient organisation.

Phases to the implementation of benchmarking

The steps taken for the Benchmarking process are described below:

1. Identify what is to be benchmarked; it can be a service, process, or practice.

2. Create the benchmarking team in the organization

3. Identify the organization(s) you want to benchmark against. It can be other operating units
within the company, competitors or unrelated companies. However, they should be a leader or
"best in class" in the area being benchmarked.

4. Determine current performance levels; this includes identifying gaps between your organization
and your benchmarking partners.

5. Determine future performance levels; forecast the expected improvements of benchmarking

partners so that goals set for the improvement program will not become quickly out-dated.
6.Communicate the benchmark findings and gain acceptance from senior management and
employees who will be asked to make improvements; present the methodology, findings and
strategy for improvements.

7. Develop an action / improvement plan based on the strategy developed

8. Implement specific actions and monitor process; this includes collecting data on new levels of
performance; using problem-solving teams to investigate problems; and adjusting the
improvement process if goals are not being met.

9. Recalibrate benchmarks; benchmarks are re-evaluated and updated, based on the most recent
performance data.

However ;

 If Benchmarking is to be implemented in the public sector it has to be done between public

agencies with very similar goals so that those affected actually perceive differences and
qualitative improvements in delivering similar services for instance benchmarking between
hospital and hospital with performance measures that are related.
Parameter category Proposed indicators
1.Staff (volumes)
Hospital
infrastructure and 2.Staff (training)
resources 3.Medical equipment(availability)
4.Medical facilities (availability)
1.Patient (volumes)
2.Selected procedures (volumes)
Hospital volumes 3.Surgery (wait times)
and wait times
4.Emergency department (wait times to see the doctor)

5.Diagnostic tests (wait time from time requested to performance of test)

1.Outcome of care measures

•Hospital wide survival/mortality rates

Hospital clinical •Infection rates
effectiveness and
best practices •Length of stay (risk-adjusted-all discharge)
•Readmission rates
2.Process of care measures
1.Hospital patient rights law
Hospital policies
and patient 2.Patient access to own medical record
experience
3.Patient satisfaction survey (overall satisfaction rating)

Use of league tables

 The purpose of league tables is the benchmarking of institutions, so that a wider public
can assess where there are inefficiencies within the system, and so that managers can use
the information within institutions to improve their performance.
 The league tables have no official status, the notion that a wider public should be able to
make judgements about the relative merits of hospitals on the basis of published
information does. The official notion, upheld publicly, is that such open comparison will
act as a spur to those hospitals that fall below standards achieved within the health sector.

 League tables can therefore be seen as a benchmarking practice in which competitiveness

between units is promoted while allowing all institutions to compare themselves with
“the best of the best.
  A league table approach to benchmarking is excessively simplistic. Producing a league
table involves producing a single measure which allows all institutions to be ranked along
a single dimension. The results of performance measures are depicted on league tables to
rank the performance of hospitals in the public sector using a single measure for instance
hospital infrastructure and resources

a) Identify and discuss the circumstances that have brought the proposition that traditional
management accounting control systems have lost their ‘relevance’ to today’s
manufacturing and organizational environment. (10 Marks)
b) Evaluate strategic cost management initiatives which may be used in order to restore
the ‘relevance’ of management accounting control systems in today’s manufacturing
and organizational environment. (15 marks)

Traditionally, organizations developed by achieving larger economies of scale through mass

production of items at low cost, which was possible through increasing the level of automation
in the manufacturing facility according to Viola E et al (2010). . This was fine in periods of
high constant demand as it allowed recovering high capital investment costs. Traditional
management accounting used approaches that were most driven by perspective from
demanding outside, short term performance horizon, extrinsic rewards and sanctions, explicit
coordination and control, problem solving attention sphere, explicit (push) managerial qualities
and seeing tangible and intangible assets as the organizations core resources.

Collin Drury (2006) alluded that during period 1970s and 1980s traditional management
accounting practices became widely criticized. New approaches were advanced that were more
in tune with today’s competitive and changing business environment. The modern world,
however, is one of continuous change. The world has shrunk; there is more competition, not
just locally but globally, and the lives of products tend to be much shorter. Cost remains
important, but so is the organization’s ability to provide a range of products that are reliable,
and to be flexible enough to deal with customer wants. A philosophy of continuous
improvements now exists, both in terms of product quality and customer service, whilst still
striving to reduce costs .In today’s environment companies need to be:

 Flexible to customer demands

 Re-active to competitors’ actions, and

 Pro-active in retaining a competitive and strategic advantage.

The main reasons why traditional accounting have lost relevance to today’s manufacturing
and organizational environment are as follows;

Complexity and diversity of products in modern manufacturing industries

Most organisations are now producing a wide range of products. For example, Nestle now
produces different products. Some products, such as the powdered milk, are simple to produce.
Other products, such as the condensed milk, are a lot more complicated to produce. As a result,
it is no longer appropriate to assume that all production overheads are driven by the level of
production. We need to take account of the increased complexity and diversity and consider what
truly drives our production overheads and so, ABC was created.

Introduction of new technologies and competitive pressures.

The need to increase flexibility and quality of products at the same time seeking to reduce cost has
led to significant changes in the production processes that are used. Flexible manufacturing
systems (FMS) and Computer Integrated Manufacturing (CIM) led to production process to
operate automatically according to Kaplan. Materials Requirements Planning (MRP) and
JustInTime(JIT) are respectively a scheduling programmed, and a management system, for
controlling production. JIT is more usually associated with continuous systems making a much
narrower range of output. This has led, to reduced costs and improved quality products.

The most significant flexible manufacturing technologies by Japanese JIT approach also led to
production of variety of products at low prices there by more competitive has been seen to differ
from those used traditionally.

Treatment of Overheads in traditional management has lost relevance

Over heads were driven by production and were simple and smaller and in relation to other costs.
These have lost relevance in that because of increased diversification and complexity of
products application of OAR calculations based on either units, labour hours or machine hours
is no longer appropriate today as all increase as the level of production increases and so
Activity based costing was created

In addition, production overheads, such as machine depreciation, will be having b a small

proportion of overall costs. This is because production was more labour intensive and, as a
result, direct costs would have been much higher than indirect costs. A rough estimate of the
production overhead per unit was therefore fine.

Manufacturing has become more machine intensive and, as a result, the proportion of production
overheads, compared to direct costs, has increased. According to Kaplan’s relevance lost thesis,
today’s manufacturing is totally different. Instead of direct labour intensive, standard products with
long life cycles, it features sophisticated, overhead intensive, module-designed and tailor-made
product with short life cycles. Instead of utilizing machinery, which had only a single purpose,
there are flexible manufacturing stations and the use of computers. Therefore, it is important that
an accurate estimate is made of the production overhead per unit.

Dominance of financial accounting

Traditional Management accounting has been seen ceasing from the post- First World War period
according to Collin Drury (2006).This has been brought about by the need to report to external
stakeholders or external reporting priorities that is the publication of financial statements. Some
critics of traditional management have asserted that traditional management accounting has been
subordinated to the requirements of financial statements to cater for the needs of various external
stakeholders

(b) A strategic plan of an organization is the bridge which tries to connect the available resources
with the corporate objectives. It shows how the organization will allocate resources to attain its
objectives. Strategic management accounting is a set of tools which provides the planners with all
important inputs, facts, figures and documents on which to base their plans. It mainly focuses on
the organization’s external environment and long-term process. It adds value to strategic decisions
by linking strategic objectives of the firm at corporate and business unit levels by use of financial
information systems and performance measures. Thus it focuses attention on suppliers, customers
and competitive rivals.

The fundamental objective of strategic management accounting is to use management accounting

information for strategy implementation, management planning and control in organizations. The
distinguishing feature of strategic management accounting (SMA) is that it considers the
relationship of the organization with its external business environment.

Features of SMA

The needs to improve the sophistication of cost and management control systems have prompted
criticisms of the ability of traditional costing systems to report sufficiently accurate product costs.
In order to restore the relevance of cost and management control systems, Strategic Management
Accounting (SMA) has been initiated. Strategic Management Accounting has the following
features aimed at restoring relevance which are;

(i) External orientation

This involves competitor information like market share, cost prices in developing a strategy as
well as supplier and customer information

(ii) Long term process

  Focuses on utilizing qualitative and quantitative information both internal and external in
the strategy formulation of a business.

(iii) Forward looking

SMA provides information about potential changes in the market, customer preferences and
competition

(iv) Holistic .This approach does not confine itself to collecting information from external parties
to come up with a strategy rather it involves collecting information internally and makes uses of
the major techniques in strategic management of which include various forms of ABC, target
costing, quality costing, attribute costing, and life-cycle costing according to (Dunk, 2004).The
techniques are explained below;

Activity based costing

Activity based costing recognizes the significance of overhead costs in the modern manufacturing
environment. The direct labour cost content has been significantly reduced and thus it is no longer
appropriate to use this as the basis of attributing overhead costs to produce units. Activity based
costing identifies the activities that cause costs to be incurred and links these activities to product
units. These activities are known as cost drivers and their recognition aids management in
understanding of cost behavior

 Leads to identification of value adding and non-value adding activities and performance
management in terms of measuring efficiency through cost driver rates.

 However the effect of ABC system is that it increases the cost of products that make use of a
greater number of high cost activities whilst reducing cost of other products.

Target costing

 It’s a pro-active costing technique that controls costs before the launch of products.

 Costs are controlled without compromising the functions of a product by identifying non value
adding features and processes.

 It helps to increase market share by taking advantage of actual costs lower than target cost

 It helps to assess the feasibility of a product launch.

 In contrast target costing may limit possible further reduction of costs when desired levels are
reached.

Quality costing
 It involves total employee participation in value addition.

 Continuously improves operations and processes which helps to reduce defects (efficiency).

 The effectiveness of production teams is measured by defects or amount of re-work, rather

than basing on output.

 Since it requires total employee participation, Quality Costing requires high employee
motivation.

Life cycle costing

 By ascertaining upstream and downstream costs, LCC provides more reliable costs which will
help to assess the feasibility of a product launch.

 Unlike conventional costing which record costs as they are incurred, LCC enables control of
costs before there are incurred.

 However the use of LCC costing may inappropriate costs estimates as some of the costs may
vary over time e.g. maintenance of equipment.

Attribute costing

 The use of feature-costing helps to identify the necessity of a feature on a product.

However the elimination of some features may result in loss of market, hence there is need to
embark on market segmentation which may be costly.

Competitor Cost Assessment

 According to Simmonds(1981) competitor cost assessment concentrates uniquely on cost

structures of competitors There can be different sources of such information. Ward (1992)
suggests some indirect sources like physical observation, common suppliers or customers and
employees of competitors.

 However the information gathered indirectly may be misleading and subjective.

Value Chain Costing

 Developing the value chain model (Porter, 1985), Shank& Govindarajan (1992b) proposed an
approach to accounting that considers all the activities performed from the design to the
distribution of the product. The strategic implications regard the exploiting of the economies
and efficiencies deriving from the external linkages between the company and both suppliers
and customers

 However it needs high level of synchronization of activities which might be difficult to attain.
Zero Based Budgeting

 Due to its nature of “starting from scratch”, It helps controlling service centers' and non-
product (overheads) costs effectively.

 The justification of costs improves scrutiny, thereby reducing costs where possible.

 Efficient allocation of resources.

 On the other hand it is costly in the sense that it requires role data and is also time consuming.

Kaizen costing
 Kaizen costing is a critical means of ensuring continuous improvement activities used by
Japanese auto makers supports the cost reduction process in the manufacturing phase according
to Yasuhiro and John (1993. This approach employed together with target costing and kaizen
costing helps Japanese manufacturers achieve their goal of cost reduction in the entire product
design development production cycle. It calls for establishment of a cost reduction target
amount, and its accomplishment through kaizen activities such as continuous improvement in
operations.. The strength of Kaizen costing comes from its close link with the profit planning
process of the whole company. This consistent connection with the overall planning and
budgeting process ensures that the company can monitor its progress toward the long-term
goals without being confined to the tasks of meeting cost standards and investigating variances
in conventional cost control systems

In conclusion it is critical that all aspects of business are monitored so that a holistic approach is
taken when strategic plans are being developed the development of strategic management
accounting initiatives can be viewed as management accounting’s attempt to regain relevance and
maintain focus on upon matters of strategic importance and long-term effectiveness

ADDITIONAL QUESTION
Required:
(a) (i) Discuss the purpose, potential benefits and potential problems of mission statements;
(8 marks)
A ‘mission’ is the purpose of an entity and its reason for existence, i.e what is it attempting to
accomplish? Henry Mintzberg has stated that ‘a mission describes the organisation’s basic
function in society, in terms of the products and services it produces for its customers’. A large
number of organisations provide a formal statement of their mission in a mission statement. Even
though an entity might not have a clearly defi ned mission it may nevertheless have a mission
statement!
A mission statement should be both memorable and succinct. It should also be ‘enduring’, i.e.
the statement should not change unless an entity’s mission changes otherwise the mission
statement would serve to confuse the business community.
The mission statement should guide all employees throughout an organisation to work
collectively towards the accomplishment of the corporate mission and may contain references to
many stakeholder groups such as, for example, shareholders, customers, employees and the
general public.
Potential benefi ts of mission statements include:
– providing strategic direction to the organisation thereby assisting in the formulation of
acceptable strategies
– assisting in the resolution of potential conflict among different stakeholder groups
– providing a framework within which managerial decisions can be made
– assisting in the communication of key cultural values to employees
– assisting in the presentation of a clear image of the organisation for the benefit of customers
and other interested parties
– helping to prevent potential misinterpretations of the organisation’s ‘reason for being’.
Potential problems of mission statements include the following:
– They may be unclear
– They may be vague and therefore valueless
– They may contain ‘motherhood statements’
– They may be unrealistic and not reflect reality
– There may be inconsistency between different elements
– They may be inconsistent with management action
– They may lack sufficient external focus

(ii) Advise the directors of CFD regarding the appropriateness of its mission statement.
(3)

Up until now it would appear that the mission statement of CFD was relevant to its central
mission ‘….thereby providing very high value for money to all our clients’.
However, the proposed opening of the Dog Sanctuary might be considered to have changed
the mission of CDC. The Dog Sanctuary is a good example of the concern of the directors of
CFD for Corporate Social Responsibility. The concern is obviously not one solely based on
profi tability or continued ‘value for money’ for its customers. Therefore one might conclude
that the mission statement no longer communicates to the business world what CFD is all
about and that a change in mission can necessitate a revised mission statement.