Vassili Joannidès de Lautour

Strategic Management Accounting,

Volume I
Aligning Strategy, Operations and Finance
Vassili Joannidès de Lautour
Grenoble École de Management, Grenoble, France

ISBN 978-3-319-92948-4 e-ISBN 978-3-319-92949-1

https://doi.org/10.1007/978-3-319-92949-1

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To Rachael and Rebecca.
Introduction
It is commonly accepted that management accounting serves to control
strategy execution and should therefore produce information pertinent
and useful for managerial decision-making (Anthony et al., 1984). This
principle, though reaffirmed in every managerial accounting textbook
and in every management accounting course, seems to remain an
incantation. Management accounting students and graduates remain
exposed to the sempiternal cost accounting calculations, CVP analysis
and the Master Budget , still deemed central to management control
systems implicitly perceived as the whole of management control
systems. Such is especially vivid in AACSB-accredited institutions
where academic staff is confronted with two series of constraints
(Rouse, Davis, & Friedlob, 1986).
On the one hand, the pressure to publish leads to privilege a certain
form of research over teaching. Often deemed a secondary, necessary
evil, management accounting teaching tends to be repetitive over years
and more and more disconnected from the business world’s actual
concerns. The gap between academe and practitioners’ needs has
dramatically increased, namely because management accounting
teaching has not much evolved since it was first established as a
discipline after World War II. At that time, Europe was to be rebuilt and
the Marshall Plan to be managed: domestic single-product
manufacturing companies were operating in a quasi-monopolistic
situation. Accordingly, their core concern was to reach economies of
scale and keep costs under control (Berland, 1998; Berland & Boyns,
2002; Berland & Chiapello, 2009).
On the other hand, AACSB-accredited institutions have been
confronted with the imperative of measuring students’ progress and
achievements through Assurance of Learning , a.k.a. AoL. Although AoL
recommends various metrics and ways of assessing critical thinking or
reflexivity, these remain difficult to objectively grasp. Unsurprisingly,
tertiary education institutions have privileged those hard skills easier
to assess: computational skills (Retief & Villiers (de), 2013). This
phenomenon is aggravated by the fact that teaching material tends to
be rejected from management accounting journals, as this does not
contribute to theory advancement (Howard & Stout, 2006; Merchant et
al., 2003). And yet, there is a real need for case-based management
accounting teaching reconnecting controls with strategy and
operations.
Owing to overly technical, computational and overly cost -centric
courses, management accounting graduates are far from work-ready,
full of preconceived ideas and most of the time ignorant of non-
accounting concerns. Supposedly at the core of the organisation,
expected to bridge the company’s various functions, our graduates tend
to know little about strategy , operations, corporate finance and capital
markets, marketing or HR. Rather, they tend to be filled with alleged
views of rationality collapsed to cost control (Herath, Wickramasinghe,
& Indriani, 2010). At best, they are briefly introduced to the Balanced
Scorecard as a powerful way of assessing performance (Thompson &
Marthys, 2008).
Most management accounting graduates cannot pretend to be
control-savvy; at best, they can do computations but cannot really put
themselves in the shoes of management controllers, management
accountants, CFOs or consultants in management control. Unless long
periods of internship or apprenticeship within the profession
landmarked their curriculum, they find themselves confronted with a
cultural clash when they discover that their teaching was at odds with
their employer’s concerns (Cho, Roberts, & Roberts, 2008; Gu, 2008;
James & Otsuka, 2009; McGowan & Potter, 2008).
At the other end of the spectrum, academic research tends to have
left strategic management accounting aside its interest. Of course, some
scholars have long been working on the interplay between strategy ,
operations and controls (Anthony, 1965, 1988; Anthony et al., 1984;
Hope, 2006, 2009; Hope & Bunce, 2001; Hope, Bunce, & Röösli, 2011;
Hope & Fraser, 1997, 1999a, 1999b, 1999c, 2001, 2003a, 2003b; Hope,
Fraser, & Röösli, 2006; Hope & Player, 2012; Kaplan, 1984; Kaplan &
Johnson, 1987; Kaplan & Norton, 1996, 2000, 2004, 2006, 2008;
Merchant, 1998; Merchant & Van der Stede, 2011; Simons, 1987a,
1987b, 1990, 1991, 1995, 2000, 2005, 2010). Notwithstanding this
recognition, these authors’ intellectual legacy tends to have been
reduced to one publication or one particular aspect of controls. For
instance, Robert Anthony was reduced to the production of accounting
information pertinent for decision-making (Birnberg, 2011). Robert
Kaplan has been reduced to the Balanced Scorecard , Jeremy Hope to
Beyond Budgeting and Robert Simons to the levers of control.
Apart from these few scholars from Harvard Business School who
have endeavoured to systematically establish links between strategy ,
operations and strategy , management accounting research seems to
have neglected these issues. Pressures on scholars to publish academic
papers, maybe, have likely resulted in highly focused publications;
whence, it has been difficult to draw links with these other disciplines.
Whence the Interdisciplinary Perspectives on Accounting project
(Guthrie & Parker, 2004; Laughlin, 2007; Roslender & Dillard, 2003).
And yet, the interdisciplinary project has attracted academics
interested in noble disciplines borrowed from humanities and social
sciences, but more and more at the expense of business studies per se
(Guthrie, Burritt, & Evans, 2011; Merchant, 2008; Parker & Guthrie,
2005; Parker, Guthrie, & Gray, 1998).
Whence this book project: these three volumes are derived from
Strategic Management Accounting courses taught at master’s level in
numerous business schools in Europe, Australia and New Zealand. The
course whence these three volumes originate was aimed at making
holders of a master’s degree in accounting business-savvy. Rather right
or wrong solutions to computational exercises, the objective was that
they could think like management control professionals do. To this end,
the course bridged various disciplines: managerial accounting ,
strategic management, operations management, organisation theory,
corporate finance and capital market finance. Also, the course has been
grounded in cases and examples borrowed from real life at the same
time as in academic advances.
Whilst academic grounding is strongly associated with academic
work experience and publishing work this project’s grounding in
practitioners’ concerns and examples was made possible through a
personal encounter with Robert Newton Anthony. In 2003, as I was
working as a financial statement analyst working on what is now
known as the subprimes, I was introduced to Robert Newton Anthony.
To be very honest, at that time, I had never heard of him before and had
no clue who he was. It is only years later, when I started a Ph.D., that I
understood who he was and how influential he had been on
management accounting.
 Along with our conversations, I understood that, for him, it was
more than important that a management accounting scholar could
instil into his or her teaching some features from professional, non-
academic experience. The more first-hand material an instructor would
bring, the more sense this would make to students. In turn, a
management accounting scholar could only be certain of his or her
teaching’s relevancy by doing consultancy in his or her field. Anthony
was acting as a role model, since he had launched in Southern France
his own consultancy firm Anthony & Co. For some reason, he liked me
enough to give me a challenge: find a way of measuring the
performance and managing the artworks his clients had entrusted to
him and about which he was pretending to know nothing. I naïvely gave
him my opinion on this and wrote reports for him without referring to
rationality, efficiency or effectiveness. I was engaging in an
understanding of how the art market and related institutions do work.
Apparently, he had not been used to chatting with young people who
would not first engage in computations.
The three volumes here and the course whence they proceed to find
their inspiration in Anthony’s legacy. They cross advances in
management accounting, strategic management and other disciplines
relevant to the understanding of business operations. These three
volumes are addressed to postgraduate management control students
and emerging management accounting scholars defining a topic;
insofar as examples from real life and recent advances in research are
combined.
The three volumes were conceived and are organised as follows.
First of all, the reader is supposed to already have a good command of
management accounting basics. Accordingly, these volumes do not
repeat what other textbooks have done much more brilliantly prior.
Rather, these three volumes deepen areas graduates and emerging
scholars may have superficially apprehended thus far. The first volume
sets the strategic scene of management accounting through five
chapters. Along these chapters, strategic thinking’s main dimensions
are exposed and then transformed into management control and
accounting concerns.
This is how Chapter 1 discusses accounting for what counts in a way
that counts: not everything needs to be accounted for in a uniform
manner. Rather, what needs to be accounted for directly proceeds from
strategic concerns (generic strategy and position on the market ).
Chapter 2 further extends this by addressing product life cycle
accounting and how target costing requires that the whole value
chained be conceived and engineered. Depending on the stage of a
product in its life cycle, different issues appear as strategic and
therefore deserve to be accounted for. But also, the well-known notion
of cost takes on different forms and shapes at each stage, requiring
specific accounting systems each time. Chapter 3, in its discussion of
performance management, abundantly borrows from Kaplan and
Norton’s work beyond the mere Balanced Scorecard . Chapters 4 and 5
significantly depart from habitual management accounting teaching by
ignoring the Master Budget and related CVP analysis . Both borrow
from the recommendations the Beyond Budgeting Round Table and the
Cam-I have been articulating in the past twenty years, and albeit
neglected in most management accounting courses. Accordingly,
Chapter 6 focuses on strategic planning and forecasting presented as
more sophisticated and comprehensive than mere computations.
Chapter 5 deliberately rejects the Master Budget and emphasises
Beyond Budgeting .

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Contents
1 Accounting for What Counts in the Value Chain in a Way That
Counts
1 Accounting for Generic Strategies
2 Accounting for Position on the Market
3 Accounting for Modes of Production
4 Conclusion
Bibliography
2 Product Life Cycle Accounting and Target Costing
1 Product Life Cycle and Strategy
2 What Counts in Product Life Cycle
3 Target Costing
4 Conclusion
Bibliography
3 Performance Management and Measurement
1 Performance Management Systems
2 Issues in Performance Management
3 Conclusion
Bibliography
4 Strategic Planning and Forecasting
1 Forecasting as Anticipating Environmental Changes
2 Forecasts as Business Model Translation Into Numbers
3 Conclusion
Bibliography
5 Beyond Budgeting
1 Critiques of Budgets
 2 Beyond Budgeting as an Alternative
3 Beyond Budgeting at Svenska Handelsbanken
4 Conclusion
Bibliography
Conclusion
Index
List of Figures
Chapter 1

Fig. 1 The value chain

Fig. 2 Bundling cost domination and differentiation

Fig. 3 A management control system tracing profit margin under

bundled strategies

Fig. 4 Generic strategies and controls

Fig. 5 What counts depending on position on the market

Fig. 6 Accounting for quantities in mass production

Fig. 7 The target costing process

Fig. 8 A summary of management accounting concerns in mass

production and lean production

Chapter 2

Fig. 1 Product life cycle

Fig. 2 What counts in product life cycle

Fig. 3 Product life cycle accounting

Fig. 4 Product value chain

Fig. 5 Activity-Based Management

Fig. 6 Target costing as value chain accounting

Chapter 3

Fig. 1 Performance measurement systems

Fig. 2 Performance report

Fig. 3 The Balanced Scorecard

Fig. 4 A customised Tableau de bord

Fig. 5 The Spectacle triangle

Chapter 4
Fig. 1 Market forces

Fig. 2 Strategising and operationalising

Fig. 3 Designing the value chain

Fig. 4 Adapting the value chain to changes in competition

Fig. 5 Adapting the value chain to changes in regulations

Fig. 6 Adapting the value chain to changes in consumer behaviour

Fig. 7 Adapting the value chain to changes in supplier-relations

Fig. 8 Adapting the value chain to economic circumstances

Fig. 9 Adapting the value chain to economic policy

Fig. 10 Adapting the value chain to geography

Fig. 11 Adapting the value chain to geography

Fig. 12 Adapting the value chain to economic infrastructures

Fig. 13 Adapting the value chain to geography

Fig. 14 Four steps towards revenue estimates

Fig. 15 Estimating activity expenses

Fig. 16 Planning investments and disinvestments

Fig. 17 Planning investments and disinvestments

Chapter 5

Fig. 1 Budget as an organisational ritual

Fig. 2 Budget’s disconnection from corporate currents

Table of Cases
Chapter 1

Case 1 Virgin Atlantic vs. British AirWays

Case 2 Apple

Case 3 Boeing vs. Airbus

Case 4 Forecasting model in a utility company

Case 5 Sony and the Walkman

Case 6 Indian-Victory vs. Harley Davidson

Case 7 The Devil wears Prada

Case 8 Tesla Motors

Case 9 Primark

Case 10 The KraftHeinz Company

Case 11 A Michelin-starred restaurant

Case 12 Ikea Kitchen sets

Chapter 2

Case 1 Doc Martens

Case 2 A restaurant chain…

Case 3 Smart City

Case 4 Danone

Case 5 InfoSys and Philips

Chapter 3

Case 1 A food Company

Case 2 A local Government

Case 3 Two separate departments unite

Case 4 An international software company

Case 5 The International Organisation of La Francophonie

Case 6 A construction company

Chapter 4

Case 1 Polaroid

Case 2 The Dieselgate and the automotive industry

Case 3 Teenagers’ consumption behaviours

Case 4 Fisher Body and General Motors

Case 5 Copper and semiconductors

Case 6 The French Research Tax Credit

Case 7 Capital market reactions to The Fed announcements

Case 8 EU tariffs on Chinese Solar panels

Case 9 Earthquake risk in New Zealand

Case 10 Fast Broadband in Australia

Chapter 5

Case 1 CEOs against the Master Budget

Case 2 Sciences-Po Conseil

Case 3 Bat’a in the 1930s

Case 4 The La Rochelle Business School library

© The Author(s) 2018
Vassili Joannidès de Lautour, Strategic Management Accounting, Volume I
https://doi.org/10.1007/978-3-319-92949-1_1

1. Accounting for What Counts in the

Value Chain in a Way That Counts
Vassili Joannidès de Lautour1

(1) Grenoble École de Management, Grenoble, France

Vassili Joannidès de Lautour

Email: vassili.joannides@grenoble-em.com

Keywords Value chain accounting – Generic strategy – Position on the

market – Mode of production

Management accounting is too often reduced to managerial accounting

or cost accounting, as though costing were the sole central issue to
managers. Yet, the usefulness of management accounting reports lies in
data relevancy for management, i.e. the extent of their supporting of
decision-making (Anthony, 1965, 1988). That is, strategic management
accounting consists of accounting for what is especially pertinent for
decision-making: accounting for what counts. In relation with this,
there is no unique way of accounting for what is pertinent, i.e. outwith
mere absorption or variable costing . Thence, strategic management
accounting consists of accounting for what counts in a way that counts.
What counts and how this counts require first that strategy be well
identified, followed by what deserves to be accounted for and
subsequently unlimited options for working units. In order to
understand these issues in strategic management accounting, it is
crucial to understand the notion of the value chain first: the
organisation of activities that relate to the company’s core business,
those coming in support and those peripheral (McGahan & Porter,
2002; Montgomery & Porter, 1991; Porter, 1985). Figure 1 presents the
generic version of the value chain , however, knowing that each
company’s value chain is unique, depending on its strategic issues.

Fig. 1 The value chain

Strategic management accounting consists of identifying at all times

what the optimal value chain would be for the company. This consists of
clearly identifying the generic strategy adopted by the company, as well
as its position on the market and lastly the required mode of
production . Each of these strategic reasoning’s three pillars highlights
specific and different challenges for management accounting. It is
therefore crucial that the management accountant be extremely vigilant
as to what counts as strategy prior to determining what management
control and accounting system is most suitable.

1 Accounting for Generic Strategies

The identification of strategy rests upon the understanding of the
organisation’s business model traditionally revolving around five pillars
(Kaplan & Norton, 2000, 2004): generic strategies, position on the
market , product life cycle , mode of production and products’ or
services’ international exposure. The first three dimensions are quite
well known; they should have been studied in strategic management
courses. The very novelty in this addressing of business models lays in
the fact that mode of production relates to organisation theory, but not
only: also operational management and international products and
services to international management, international branding, etc.

1.1 Generic Strategies

The strategic management literature mainly views two generic
strategies with specific implications in terms of value chain ’s
organising and business model’s developing: cost domination vs.
differentiation (Porter, 1985). As these two generic strategies are often
presented as ideal types, it is more common to see bundle of both,
consisting of differentiation at a reasonable cost .

1.1.1 Cost Domination

A company adopting a cost domination strategy sets out to offer the
same product or service as competitors at a cheaper price. In this case,
the strategic objective is to minimise all possible costs in order to
maintain the same profit margin as other competitors within the
industry. So doing implies that the main three types of costs are
perfectly known and understood and their pertinence reviewed
continually, viz. overhead , labour and materials .
Outwith the mere management of costs per se, a cost domination
strategy implies an adapted business model or value chain . In order to
minimise costs, the pertinence of each link in the value chain is
questioned. Only costs directly enabling financial value creation are
viewed as pertinent and can be retained. Conversely, links and
associated costs perceived as irrelevant or peripheral to value creation
deserve to be cut. Most often, a cost domination strategy is associated
with a value chain focusing on core business activities, those deemed
peripheral being outsourced (McGahan & Porter, 2002; Porter, 2008).
The most common peripheral activities are seen as payroll, IT (Porter,
2001) or other services, such as cleaning or guarding. In other words, a
cost domination strategy can be understood as the strictest application
of Transaction Cost Theory’s canons: if an activity and the costs
associated thither are not central to making profit , these should not be
internalised but left to the market (Williamson, 1979, 1981).
Most of the time, cost domination strategies occur in mature
industries with historical operators whose position on the market has
never or rarely been contested by competitors. Such a strategy is often
seen on growing markets attracting new competitors. New competitors’
joining results in an atomised market where customers have a large
choice of product or service providers and then search for affordable
options (McGahan & Porter, 2002; Montgomery & Porter, 1991).
Airlines are especially concerned with the emergence of new
business models based on pay-for-service, since numerous companies
went bankrupt since the 2000s’ (Alitalia, Swissair, Delta Air Lines, etc.).
The advent of next economy’s companies has also challenged
traditional business models in other activities, such as bookstores with
Amazon (J. Morris, 2017; Stone, 2014).

Case n°1. Virgin Atlantic vs. British AirWays Cost Domination

Strategy
Since the early 2000s, British Airways has been confronted with
major financial challenges, like other national airline companies :
increasing costs and the advent of low fares airlines. Amongst them
is Virgin Atlantic whose strategy is deliberately to beat the
competition on costs. In order to achieve this, the company has
developed an alternative business model to what other airlines
would do:
– an airline’s core business is to fly passengers from one port to
another;
– no or very limited free service onboard (pay for other service:
entertainment, snacking, beverages, etc.);
– limited weight allowance and a surcharge above this limit;
– quick aircraft turnover (45 min when landed vs. 4 hours for a
regular airline);
– polyvalent staff (crew does the cleaning after landing and is ready
to depart again);
– departure and arrival times under constraint (cheaper airport fees
early morning or late evening);
 – no-transportation activities purchased from suppliers (e.g.
snacking and entertainment);
As a result, on similar flights, such as London-Auckland, Virgin
Atlantic can offer tickets c.30% cheaper than British Airways
offering free-of-charge snacking and entertainment and where crew
is only recruited for services onboard (Balmforth, 2009; Gaskell,
1999).

1.1.2 Differentiation
A company adopting a differentiation strategy seeks to provide the
market with a product different than the competitors’. The driver for
this strategy is to offer a different service associated with the product
or a product with different characteristics, and this is almost regardless
of price. The assumption made is that this differentiated product or
service attracts customers inclined to paying a high price. Very often,
differentiation strategy is associated with a market positioning
addressing more solvent customers and relatively premium products or
services (Porter, 2008).
A differentiation strategy is often associated with a value chain
integrating any link likely to contribute to a different product or service.
Foremost, activities aimed at protecting, securing or promoting this
differentiation strategy are highly valued. They are often integrated and
well-funded, perceived as investment centres (Montgomery & Porter,
1991; Porter, 1998b). This can include law departments for protecting
patents and marketing departments for promoting the different
product or service.
The profitability of such a differentiation strategy can be easily
coveted by competitors or newcomers to the market , prone to mimic
the product or service. And this occurs often at a cheaper rate,
following a cost domination strategy . Once other competitors engage in
commercialising a similar product or service, the initial differentiation
strategy is no longer tenable as such. Therefore, a differentiation
strategy requires constant and steady differentiation , which implies a
series of possible actions:
– a portfolio or new products aimed at replacing that replicated by
competitors;
– recurrent upgrades on the initial product so as to always be ahead of
competitors;
– innovations aimed at patenting and protecting future differentiated
products.

Case n°2. Apple Differentiation Strategy

On the market for personal computers, Apple’s strategy has
always consisted of commercialising a product different from others.
Historically, the first difference was to have a computer run with an
operating system simpler to use than MS DOS and the MS Windows,
which implied initially a different processor and hardware
architecture. This led to software fully integrated in the operating
system that itself was designed to fit perfectly with hardware. This
perfect integration of machine, hardware and software resulted in
Apple computers never crashing down or never being hacked. These
characteristics had a price: 30% dearer than other computers.
This has enabled Apple to create an entire ecosystem where
every single function has its home-branded and manufactured
device – iPod, iPhone, iPad, Apple TV, iWatch, etc. Whilst Apple’s
position on the computer market has never been challenged it has
been on other devices with the emergence of new competitors (e.g.
Samsung) mimicking their product (music players, tablets,
connected watches, etc.) Apple has managed to resist this
competition by upgrading its ecosystem through improvements on
its computers presented as its core and the recurrent launch of new
versions of its other devices for which new technologies are
patented. This is how, in 2017, ten years after the launch of the first
generation iPhone, Apple launches its iPhone X (Isaacson, 2015;
Kahney, 2004). Its products remain perceived as different from
others and are still sold at a higher price than competitors’.

1.1.3 Bundle of Cost Domination and Differentiation

As cost domination and differentiation strategies are closer to ideal
types than most common strategies, most companies adopt one
bundling both. Within this context, strategy rests upon the objective of
commercialising a different product or service but at a reasonable
price, i.e. at a price similar to what other competitors would apply.
There are unlimited options for bundling these two generic strategies.
Figure 2 shows the two generic strategies as extreme options. In
between these two extremities, the amount of possibilities is infinite:
any strategy which does not fully embrace either thereof is de facto a
bundle (Montgomery & Porter, 1991; Porter, 1985).

Fig. 2 Bundling cost domination and differentiation

Bundled strategies occur when the market is not too much

atomised, i.e. when the amount of competitors is not too high and when
it is possible know each of them, thereby making competition analysis
possible (Porter, 1980). Such is especially possible in case of
oligopolistic competition where a relatively limited number of
competitors operate, thereby enabling them to know each other’s
activities. This allows each competitor to commercialise a relatively
different product within a price range similar to others’. In the
meantime, such bundled strategies are especially visible on markets
where the product or service is however characterised by a certain
standardisation. That is, differentiation can apply to minor
characteristics more than intrinsic properties (Porter, 2008).
With bundled strategies, companies oscillate between
differentiating and keeping costs within market standards. This has a
certain amount of implications for value chain structure and
management (Porter, 1985, 2008): on the one hand, a bundled strategy
imposes that some links in the value chain be internalised because they
enable or facilitate differentiation ; on the other, the costs incurred by
these activities central to differentiation remain under scrutiny, in
order to ensure at all times that product or service cost is consistent
with the industry’s. Such arbitrages are often associated with a
structure based upon joint ventures and other exclusive partnerships
with other companies , allowing to partly internalising some activities
by being the partner’s exclusive client. Thence, costs and risk are borne
by this partner. As with cost domination strategies, the fabrication of
components, assemblage and distribution can be transferred to
partners. As with differentiation strategies, marketing is central to
promote these differentiated features. Given the relative
standardisation operating on the market , patents and intellectual
property are not as central as in companies adopting a full
differentiation strategy .
Within this context, bundled strategies can then characterise
companies operating in industries such as automotive (Cowton &
Dopson, 2002), textile and fashion (Wickramasinghe & Hopper, 2005),
hi-fi, train or aircraft manufacturing (Rouse, Putterill, & Ryan, 2002).
But this is also the case in service industries such as legal services,
auditing (Arthurs, Weisman, & Zemans, 1986; Gibbins, McCracken, &
Salterio, 2010; Rueschemeyer, 1986; Schepel, 2007; Windsor &
Warming-Rasmussen, 2009), consultancy (Arnaboldi, 2013;
Christensen & Skærbæk, 2010; Saravanamuthu, 2004) or even smaller
businesses (Berger & Udell, 1998; Davila, 2005; van der Heijden, 2013)
such as hairdressers’ salons or bakeries. These latter can offer a specific
service or product associated with their haircut or bread and for this
cooperate with other companies providing them with a specific type of
flour, chocolate, shampoo or gel.

Case n°3. Boeing vs. Airbus Bundled Strategies

Until the decision made in November 2017 by Airbus to engage
in a joint-venture with its Canadian competitor Bombardier, the
world counts mainly two aircraft manufacturers: Airbus and Boeing.
On either side of the Atlantic Ocean, both companies manufacture
the same types of aircrafts (from small apparels to Superjumbos)
which they sell to the same airlines. Ultimately, aircrafts are
subjected to international regulations and standards in terms of
security and comfort, but also to those issues by client companies
themselves. Thence, Boeing and Airbus sell very similar products
(e.g. Dreamliner vs. A380) with very similar characteristics. Airbus’s
A380 differs from Boeing’s Dreamliner on its capability of retaining
the noise made by engines whilst the American manufacturers’
 aircraft is slightly faster than its European counterpart. As both
airlines address the same clientele, they cannot sell aircrafts at too
different rates. Differentiation can occur on small things, such as
aircraft delivery time, assemblage specificities, payment
practicalities, etc.
Both companies emphasise their capability of fulfilling specific
client requirements on their standard product . In order to maintain
prices at a reasonable and competitive level, both manufacturers
cooperate a number of subcontractors supplying them with engines
(Rolls’ Royce for Airbus and GM for Boeing), seats, wheels,
entertainment screens (Thales for Airbus and GE for Boeing), etc.
Ultimately, their respective value chain emphasises such exclusive
partnerships as well as marketing and sales (Newhouse, 2008).

1.2 What Counts in Generic Strategies

Depending on the strategy adopted, it is not the same things that are
central to business performance and sustainability. Each generic
strategy , including bundled strategies, emphasises different
management control and accounting issues. What counts differs.

1.2.1 What Counts in Cost Domination

Cost domination strategies are certainly those most understood in
management accounting insofar as they are associated with everything
known as managerial accounting or cost accounting. In a cost
domination strategy , what is perceived as central is to maintain costs
at their lowest possible level; hence, the product or service—generic on
its market —can be sold at a lower rate than what competitors do
(Montgomery & Porter, 1991; Porter, 1985).
Under the purview of maintaining low costs, companies adopting
this strategy account for their costs. Anything we know about cost -
volume-profit analysis and variance analysis perfectly applies (Brierley,
Cowton, & Drury, 2001; McGahan & Porter, 2002). What deserves to be
accounted for is:
– labour cost ;
– overhead cost ;
– cost of materials ;
 The unitary cost of the product manufactured and sold matters: as
each unit is similar to another and to that of competitors, it is then its
unitary cost that matters, following models well explained in
managerial accounting textbooks, viz. absorption costing . All variable
costs associated with the product or service need accounted for, but
also overhead allocated to each unit manufactured. As always in
absorption costing , the very challenge consists of finding a working
model enabling the allocation of overhead to every single unit of a
product (Anthony, 1965). When the company only has one product ,
there is no real problem: the amount of overhead is divided by the
number of units. The allocation of overheard to multiple products starts
being problematic: cost drivers need to be identified and then
associated with each product ; hence, a realistic allocation rate can be
constructed (Fig. 3).
Fig. 3 A management control system tracing profit margin under bundled strategies
(Source Berland, 1999)

Case n°4. Forecasting model in a utility company Bundled

Strategies
In 1959, EDF, the French utility company’s management
accountant, a civil engineer, articulates a sophisticated management
accounting system enabling to anticipate electricity production costs
and profit margin depending on possible variations of assumptions.
Being a public sector company, EDF was confronted with the
imperative of producing affordable electricity for households and
businesses. At the same time, in order to secure France’s energy
independence, the company was to operate differently from other
countries’ utility companies . This led namely to the spread of civil
atomic energy, also sold overseas because it was already deemed
“cleaner” and cheaper. The management accounting system was
looking as in the figure hereafter (Berland, 1999).
On diagram axis were articulated the assumptions made in terms
of operational costs and revenue. For any position on the ruler (on
the left), profit margin variation corresponds to the impact of the
variation of one single assumption taken separately. Hence, if several
assumptions were to vary, variation impact on profit margin would
be computed in addition.

Unsurprisingly, in a cost domination strategy , unit cost diminishes as

quantities grow, since overheads are allocated to a larger amount of
units. As a result, a cost domination strategy is also often associated
with search for economies of scales as evidenced through high volumes.
This implies that management control and accounting should also focus
on quantities manufactured and sold and ultimately at profit margin,
viz. traditional CVP analyses (McGahan & Porter, 2002):
– quantities of materials ;
– quantities manufactured;
– quantities sold;
– quantities inventoried.
 This centrality of costs and volumes naturally leads to strongly
relying on budgeting and budgetary control (Armstrong, Marginson,
Edwards, & Purcell, 1996; Berland & Boyns, 2002; Berland & Chiapello,
2009), a.k.a variance analysis . In this case of a cost domination strategy
, the Master Budget commits managers to a standard cost for their
product . As a consequence, their performance is assessed mainly on
this basis: meeting the cost objective.
All told, domination strategies are associated with the most
traditional and best-known management control and accounting
technologies focused on costs.

1.2.2 What Counts in Differentiation

In contradistinction to cost domination , differentiation strategies are
not focusing on costs per se but on value creation and profitability
(Bourguignon, 2005). What deserves to be accounted for is the value
generated from this different product . As this product is different and
often addressed to premium, solvent customers, its cost is not a real
constraint. Thence, what is central to management accounting is:
– product or service quality control as possibly evidenced through an
accounting for defect and complaints received by customer services
(Black, Briggs, & Keogh, 2001; Hoque, 2003; Ittner & Larcker, 1997;
Johnson, 1994);
– total profit from sales and value creation (Bourguignon, 2005);
– technology and patent protection (Resnik, 2003);
Unlike cost domination strategies tracing the unit cost of large
quantities, differentiation strategies are more associated with
aggregated amounts and especially those revealing where value is
created for the company. Therefore, in contradistinction to cost
domination strategies, management accounting is less concerned with
the allocation of overheads to each unit than bottom-line figures.
Thence, such strategies are more likely to be associated with variable
costing technologies (McGahan & Porter, 2002).
As there is no pressure for sticking to a standard cost , even though
the Master Budget remains important to most organisations regardless
of their strategy , it does not play exactly the same role as in cost
dominating companies . Rather than committing managers to a
standard cost or value generated, the budget (Abernethy & Brownell,
1999; Abernethy & Stoelwinder, 1991; Barrett & Fraser, 1977; Collins,
Holzmann, & Mendoza, 1997; Covaleski & Dirsmith, 1983; Dunk, 1989).
The budget is then more likely to be used as a direction landmarked
with estimates of what is feasible if economic circumstances are those
expected. Within this strategic context, the budget can be more flexible
and adaptive than in a cost dominating company. Zero-base budgeting
(Pyhrr, 1973), flexible budgeting or rolling forecasting (Molridge &
Player, 2010) can be undertaken.
It proceeds from these observations that performance management
in a company adopting a differentiated strategy is by no means based
on the budget. Rather, performance can be assessed on managers’
capability of creating value and maintaining this differentiation . That
is, performance is assessed on the basis of today’s value creation but
also probable future value generating through a portfolio of new
products or upgrades to the existing product and a schedule of
launches involving both R&D and sales and marketing . This requires
that these three links in the value chain be perfectly coordinated.
Otherwise, in a differentiation strategy , performance rests upon the
coordinating of activities and all links in the value chain . Lack of
coordination could result in undermining the sustainability of activities,
especially if R&D or marketing and sales do not have plans for when the
current lead product is mimicked by competitors and therefore loses
those specificities that make it different from others (Bruns, 2013;
Cäker, 2008; Dekker, 2004; Håkansson & Lind, 2004; van de Ven &
Walker, 1984).

1.2.3 What Counts in Bundled Strategies

By definition, bundled strategies lead to controls appearing as a
mélange of what upholds cost domination and differentiation . This
mélange of known controls cannot be the mere addition of these two
generic strategies’ controls, since some may find themselves
inconsistent or incompatible with one another. Rather, the conflation of
various management control and accounting technologies should result
in a comprehensive management control system specific to this
company (Abernethy & Brownell, 1997; Anthony, Dearden, & Bedford,
1984; Chenhall, 2003; Henri, 2006; Kober, Ng, & Paul, 2003; Merchant &
Van der Stede, 2011).
As a management control system is supposedly designed to fit a
specific strategy , when this latter is a bundle of cost domination and
differentiation , it is impossible to predict what exactly is monitored.
This impossibility of devising a generic management control system
proceeds from the infinity of combinations in bundled strategies. It is
the management accountant’s role to identify what is pertinent to the
company from either generic strategy or control (Anthony, 1988;
Lawrence & Lorsch, 1967) (Fig. 4).

Fig. 4 Generic strategies and controls

2 Accounting for Position on the Market

The second pillar enabling to understand a company’s strategy is its
position on the market (Porter, 1980, 2008). The underlying
assumption is that the influence a company can exert on the market
impacts on its strategy . It is somewhat different to be in a capacity of
shaping the market or to accept its structure and constraints. In other
words, being an incumbent , a challenger or a follower on a market
shall result in different strategic concerns and therefore controls.

2.1 Position on the Market

Position on the market is, strategically speaking, critical to the
understanding of a company’s strategic concerns and therefore suitable
management control systems. These three positions are incumbent ,
challenger and follower . Whilst the generic strategy is generally the
offshoot of a choice made by company directorship position on the
market is not and imposes itself to the organisation.

2.1.1 Incumbent
The incumbent on a market is usually the first organisation that
entered the market and to some extent made and shaped it. In this
capacity, the incumbent benefits from the privilege of precedence on
this market and de facto imposes its own product at its own conditions.
A company can be considered an incumbent on its market when its
product or service is perceived as the reference and leads competitors
to mimic it. On its market , the incumbent has full control of:
– product characteristics;
– technology;
– selling price;
– quantities.
It also happens that the incumbent is a company that entered the
market at the same time as other competitors and succeeded to take
the leadership therein. The incumbent ’s successful entry onto the
market can be explained by a product presenting characteristics
different from other competitors’. Or, if products are similar from one
competitor to another, the incumbent ’s success can be explained by a
certain talent at marketing and selling its own. In this case, this
company’s strategic concern is to maintain this competitive advantage
enabling it to occupy this privileged position on the market
(Montgomery & Porter, 1991; Porter, 1998b).
Whatever the reason for success is, the incumbent ’s position on this
market is always threatened and can be contested by other
competitors. In order to maintain its position over time, the incumbent
needs not just to anticipate technological changes or customer
preferences but forge them. When the product or service sold is
contingent upon technology, the incumbent ’s status is associated with
constant R&D and patenting in order to retain its position. If the
product or service is associated with customer preferences at a certain
time, marketing and sales are central to shape these expectations. If the
incumbent misses a technological turn or is no longer appreciated by
customers, it may lose its status and either disappear or just become an
actor amongst others, following market evolutions.

Case n°5. Sony and the Walkman From an Incumbent to a

Follower
In 1970, Sony launched the first portable tape player branded as
the Walkman. Until the vanishing of tapes from the music market ,
Sony was the leader on its market , perceived by other competitors
as the incumbent . This acknowledgement of Sony’s incumbent
position was such that its lead product ’s trade name was used as a
generic everyday word. Other manufacturers, such as Philips,
Pioneer, Thomson or Samsung replicated the Walkman sold under a
different name. Sony’s incumbent position started to be threatened
in the early 1990s with the generalisation of a new technology: the
compact disc. A Discman had been launched in anticipation of this
technological turn, as well as the MiniDisc. Anticipating the advent of
the CD, other manufacturers launched concomitantly to Sony their
own portable CD players; hence the Discman or CD-Walkman would
not be in a capacity of occupying the whole market . Sony became a
competitor amongst others until the mid-1990s when the mp3
technology appeared and 2001 when the first portable player was
launched by Apple (iPod). At Sony, management seemed not to
believe in the mp3 technology and did not join this market ,
privileging their CD-Walkman. From then on, Sony has remained on
the hi-fi and electronics market qua an actor amongst others (du Gay,
Hall, Janes, Mackay, & Negus, 1996).

2.1.2 Challenger
The next position known on the market is that of a challenger , usually a
company ranking below the incumbent and seeking to contest its
leadership. The challenger is often the second company that has joined
the market or a younger one. By contesting the incumbent ’s ascendant
on the market , they can pursue two objectives.
 The first one consists of taking its place and being leader on the
market . If the incumbent ’s product is technology-contingent, the
challenger massively invests in R&D to create the next technology that
will replace the current one developed and controlled by the incumbent
. If its product or service merely depends on customer preferences, the
challenger may launch one with marketing presenting it as especially
fashionable and making the incumbent ’s look old or outdated. In that
particular case, the strategy adopted by the challenger resembles
Porter’s differentiation generic strategy : making or marketing a
different—better—product or service.
The second possible objective consists not of occupying the
incumbent ’s place but of so weakening its position as to making it just
an actor amongst others. This objective can be pursued when a major
technological change is taking place and to which the incumbent has
not been associated. In the twenty-first century, such situations can be
seen in the advances in numerous technologies orchestrated by
Alphabet, Facebook or Amazon. These four companies massively invest
in research and development in numerous areas where traditional
companies may find their leadership contested. Such investments are
namely in pharmacy and chemicals, thereby challenging historical
players like Pfizer, Bayer, Roche or Novartis. The automotive industry is
also challenged by investments in autonomous and smart cars made by
Alphabet. Even though these newcomers do not engage themselves in
these markets, historical incumbents are no longer making these
technological changes happen.

Case n°6. Indian-Victory vs. Harley Davidson Challenging the

Incumbent
Since 1901, Harley Davidson has been the prominent motorbike
manufacturer, starting in the United States and then spreading all
over the world. On the particular market of motorcycles addressed
to those known as bikers, Harley Davidson has designed the most
popular types of bikes: choppers, bobbers and customs. Until World
War I, Harley-Davidson was the incumbent on this market ,
supplying police and armed forces. In the inter war period, Indian
Motorcycles started producing its own choppers. In order to
dethrone Harley-Davidson, Indian Motorcycles emphasised
 reliability where the incumbent ’s bikes were known for easily
breaking down. Also, where Harley Davidson was presented as
rough, Indian Motorcycles massively invested in comfort, especially
aimed at reducing vibrations. This bitter competition between the
two manufacturers lasted until Indian Motorbikes, in financial
hardship, found itself in 2011 taken over by another actor making
premium bikes addressed to highly solvent customers: Victory. With
the new rise of Indian and the threat under which Harley Davidson
was placed, the company launched new models, developed and
patented 21 new technologies aimed at improving quality and
preserving the original sound of the engine, characteristic to this
company. Since 2011, Harley-Davidson is still the incumbent on this
market under constant threat from Indian-Victory (Holmstrom,
2016; Siegal, 2014).

2.1.3 Follower
The third type of position on the market is that of followers. A follower
benefits from the market created by the incumbent and delivers a
similar product , oftentimes cheaper than the leader. Cheaper selling
prices can be explained by the fact that followers benefit from the R&D ,
technology and marketing done by the incumbent on the product and
only incur logistics and production costs. In other words, whilst the
incumbent incurs all the fixed and variable costs induced by the
product followers only bare variable costs.
Followers are companies entering a relatively mature market where
the product still sells and enables some profit making. Given that
followers cannot count on the reputation and brand built by the
incumbent , they can join the market just by selling a similar product at
a cheaper rate. In so doing, they de facto follow the canons of a cost
domination strategy . Just building on the incumbent ’s market ,
followers rarely seek to challenge and replace this company. Very often,
these are relatively unknown brands and can easily quit the market
when the product is declining and no longer enables substantial profit .
Strategically, followers observe on what markets an incumbent ’s
product can relatively easily be mimicked without major risks of legal
prosecution. They are very attentive to the momentum in product life
cycle (see Sect. 3) so as to only produce and commercialise products
whose life expectancy is not too brief (Porter, 1986, 2008). Contrary to
the incumbent who is first affected by product decline and is to reduce
selling price, followers can still sell it at the same price, provided this
latter is lower than the incumbent ’s. Before this product is obsolete on
the market , followers, to perpetuate their existence, look for a different
product they could mimic in any market . In sum, followers do enter
markets where there is a share to take, almost whatever the industry is,
provided they can produce easily and sell cheaper than the incumbent .

Case n°7. The Devil wears Prada Following the Incumbent

Andy Sachs was recruited to work as Miranda Priestly’s PA in the
fashion magazine she manages. When she arrived, she held all these
people in fashion in hard contempt, considering they were
superficial. To show them her contempt she would on purpose come
to work dressed in cheap rags. One day Miranda Priestly said to her
“you think you’re superior to us because you do not follow fashion.
But in fact the cheap jumper you are wearing now was first designed
by a world incumbent in clothing and worn by one of these models
you contempt. Once everybody had seen this jumper on the cover of
magazines and on catwalks, all other low cost companies with no
proper designers decided to manufacture it. They knew it would sell.
You probably bought your rag for less than 10 dollars from such-
and-such” (Weisberger, 2003).
In so saying, Miranda Pristly was meaning that fashion designers
were incumbents in this industry, scrutinised by other
manufacturers just following the trends they would launch . Such
other manufacturers are e.g. Zara, H&M, Primark, C&A, etc. These are
followers viewing and engaging in this market and doing the same as
the incumbent at a lower price but never launching any trend or
fashion. Because original costs have been incurred by the incumbent
(design and modelling), these followers only have to manufacture
the product ; they do not even need to market it, since it is already
well known. Regardless of name, it is the product itself that counts.

2.2 What Counts in the Position on the Market

As with generic strategies calling for different, specific management
control and accounting focuses, strategic position on the market does
emphasise different issues central to the company. As result,
management control and accounting scrutinise and follow up different
items, management control systems being strategy -specific. What
counts for an incumbent differs from what counts for a challenger or a
follower .

2.2.1 What Counts for the Incumbent

When the incumbent ’s position is not threatened, as the product is the
leader on its market , it is not the sole available, cost is not a central
concern for the company. This does not mean that the incumbent can
afford high costs or wastage, but at least does not perceive cost as a
major constraint. This position of incumbent on the market usually
means intense R&D , making the company an industrial research
organisation (Anthony, 1952). Such an organisation finds itself future-
oriented, considering most expenses relating to a product an
investment. This implies, Anthony (1952) details, that management
accounting and control splits the company into investment centres and
therefore relies on financial models measuring value creation through
investment profitability . Under this purview, what is followed carefully
are bottom-line financial measures, such as ROI, ROE and net profit .
In the meantime, management control and accounting sets out to
trace product protection from competitors. Together with the legal
department, management controllers and accountants scrutinise
technology patents and other forms of intellectual property. They also
model the profit that can be made from possible court cases against
competitors who would mimic patented technologies (Anthony, 1988).
Lastly, their role consists of issuing warnings when the product moves
from one momentum in its life cycle to another, especially the decline
phase, hence R&D and marketing can work on the next product that
shall secure the position as incumbent .
The incumbent ’s position can be threatened because the
technology is about to fall within the public domain and can therefore
be replicated by others or because the product or service is no longer
appreciated by customers. In this situation where the incumbent is
threatened, management control and accounting scrutinise not costs,
against which little can be done, but the value which is still generated
from the product itself. Company management accounting system also
enables forecasting and planning the product ’s future prospects as well
as an industrial agenda to follow to secure this position on the market .
All told, what counts for an incumbent on a market are measures of
value created and to be generated in future. As production and logistics
are at the service of R&D and marketing and sales in such an
organisation, management control’s role consists of ensuring the
coordinating of all these activities (Anthony, 1952, 1965, 1988).

Case n°8. Tesla Motors R& D , Legal Affairs and Management

Control
Since its launch in 2003, Tesla Motors has been the incumbent on
the market of premium electric cars. Whilst other automakers have
been struggling to manufacture electric cars with sufficient
autonomy and affordable to the public, Tesla has opted for premium
cars addressed to a solvent clientele. On this market , being the
incumbent , its management accountants’ role consists of tracing the
profitability of the cars produced, as evidenced in their management
reports (Tesla-Motors, 2016). The main metrics produced relate to
revenue and gross margin as well as battery improvement
capabilities (R&D achievements and technologies patented).
Company management reports specify that selling price and
therefore costs are not a major concern, their clientele being solvent,
incurring high production costs does not appear as an issue.
Together with the legal department, management control ensures
that the Tesla battery technology be lastingly protected from other
automakers. As of December 2017, there have been no records of
legal prosecutions owing to a breach of Tesla’s patented technology
(C. Morris, 2017).

2.2.2 What Counts for the Challenger

Pursuant to the objective of dethroning the incumbent , a challenger ’s
operations and controls must have the same characteristics as the
leader’s. Like the incumbent , the challenger is a research industrial
organisation massively investing in R&D . As Anthony (1952) suggests,
this non-leader finds itself devoting a higher weight of its financial
resources to R&D so as to catch up on the leader’s advance. Yet,
contradistinctively to the incumbent , most of the R&D costs incurred
by the challenger are not an investment but sunk costs: costs incurred
even if the final investment is not made. In order to catch up on its
lateness, the challenger tends to over-invest in technology.
In terms of controls, this leads the challenger to pay particular
attention to profit and value created. Whilst the incumbent ’s controls
mostly focus on the bottom line of a product the incumbent tends to
account for market share evolution. For the incumbent ’s management
accountants, the metrics that matter the most are relative performance
measures enabling to identify how well the company is doing against
the incumbent (BBRT , 2009c, 2009e, 2009f, 2009h, 2009i).
In addition to this focus, a challenger ’s management accounting
system scrutinises costs. The proportion of sunk costs against total
costs and value is followed up. But also, as the challenger cannot count
on the same reputation as the incumbent , the costs of dethroning it are
especially scrutinised. If the challenger seeks to replace the incumbent
’s technology with a new one, the costs of this latter is traced in order to
ensure that these can be absorbed through an effective new technology
and sales. When the challenger sets out to replace the incumbent ’s
product disliked by customers, what is followed up by management
accounting is the cost of marketing and sales and revenues they can
generate.
In sum, management control’s emphasis for a challenger comprises
of the same items as for the incumbent to which relative performance
measures and cost accounting are added. Such is the case because the
incumbent cannot count on the same brand and reputation as the
incumbent ; it plays a dual role and therefore does bare the dual
constraints this implies.

2.2.3 What Counts for the Follower

Entering a market where the technology and lead product are mature
and therefore almost fallen into public domain, followers adopt a
strategy similar to that of cost domination . The translation of these
concerns into management control and accounting are that a particular
emphasis is placed on costs and quantities. In fact, conventional
managerial accounting applies, exactly as for a cost dominating
company.
Whilst a cost domination strategy is often associated with a
relatively growing market , the maturity of the one entered by a
follower leads its management control system to also focus on market
or product sustainability (Porter, 1985, 1998b). Such a company’s
capability of stepping out of a finishing market rests upon management
control’s capacity to identify next mature technologies and products or
services about to fall into public domain. That is, the role of
management accounting consists of tracing and minimising costs, and
hence, market share can be secured, but also of planning and
forecasting the life cycle of competitor’s existing technologies, products
and services. Follower ’s management control systems require, as for
challengers, thorough benchmarking of what other actors do on this
market and on others whose technology could be adopted and
replicated at the lowest possible cost .
Management accountants’ concern in such companies is to ensure
that current costs are minimised and to identify next activities
perceived as profitable because mature and requiring minimal
investment. R&D but also marketing and sales are minimal, followers
counting on the incumbent ’s reputation. They may not need to be
reallocated to product unit cost within an absorption costing system,
whilst other infrastructure costs are allocated. Under this purview, a
follower would develop a semi-absorption costing system whereby only
pertinent overheads are allocated to each unit commercialised
(Anthony, 1965; Anthony et al., 1984).
Pursuant to the objective of minimising costs, management
accounting systems seek to optimise costs of the value chain
worldwide, splitting it in such a way that each link is placed in a
country or region where costs are at the lowest. It is mainly followers
that relocate a number of their activities to countries where the cost of
materials overhead and foremost labour is low. In sum, followers’
management control systems trace and benefit from the competitive
advantage of nations (Porter, 1998a).
All this is upheld by a standard costing system associated with
budgeting and budgetary control , a.k.a CVP analysis . Traditional
costing techniques and performance measurement against the budget,
as with cost domination strategies, apply to followers (McGahan &
Porter, 2002).

Case n°9. Primark Optimising the Value Chain

As evidenced in the case devoted to Miranda Priestly, Primark is
perceived by haute couture companies and fashion designers a
follower . This position as a follower on the market is evidenced in
the fact that they are known for fashionable and trendy garments
imitating what haute couture has already developed and for low
prices, i.e. a cost domination strategy vis-à-vis other followers. This is
manifested in their management control system aimed at tracing and
minimising costs and optimising the value chain . Primark
commercialises clothes initially designed in haute couture companies
, its designers replicating the most successful models of the time.
Also, fabrics are purchased from low cost suppliers, only rough
textiles being utilised (cotton, polyester, etc.), even for garments
supposedly refined or chic. Fabrication started in Chinese factories
in the 1970s and after the first strikes and claims for better work
conditions and salaries, fabrication was outsourced to cheaper
labour countries, such as Bangladesh; management accounting was
highlighting countries with a competitive advantage relating to
labour …. The company is headquartered in Ireland where it was
founded. As this country is known for low corporate taxation, the
company utilises international transfer pricing to locate all its profit
to the headquarters and therefore minimise tax . At the same time,
together with marketing , management accounting follows trends in
fashion in order to determine which items from haute couture shall
be replicated and successfully sold, thereby constantly anticipating
future trends. In stores, IT is used to determine in real-time what
garments sell or do not sell, which products need to be reinforced
and which ones need to abandoned. Management accounting then
produces information relating to costs, volumes, sales, national
competitive advantages and trends in fashion. Management
accounting issues standard costs and budgets and controls their
execution, issuing warnings when a cost increase could be absorbed
through the relocation of a certain activity to a country with a
specific competitive advantage (Fischer, 2011; Pitz, 2016).
In sum, depending on the position on the market , management control
and accounting emphasises different items and therefore utilises
different tools or technologies. Cost or managerial accounting ,
budgeting and budgetary control are not equally relevant, since each
thereof has a specific function. Figure 5 summarises what counts for
each type of position on the market .

Fig. 5 What counts depending on position on the market

3 Accounting for Modes of Production

In manufacturing companies more than in any other type of
organisation, strategy choices are determinant for the mode of
production and thereby influences what counts. This particular
emphasis on the main two modes of production —mass and lean—
leads to different management control and accounting issues (Anthony,
1988; Anthony et al., 1984).

3.1 Modes of Production

The mode of production adopted by a manufacturing company appears
as the practical execution of strategy choices. Accordingly, a company
does not decide on a mode of production over another, just like none is
superior to the other. It is therefore crucial to understand the economic
origins and current strategic contexts of mass and lean production .
3.1.1 Mass Production
The principle of mass production is pretty intuitive as it consists of a
manufacturing company producing a large number of similar units of a
standard product . Mass production implies mass consumption of this
product . Even on this particular account, two profiles of mass-
producing companies arise: those manufacturing a standard final
product purchased by the end user—customers—and those being
other companies ’ subcontractors and manufacturing bits and pieces
for corporate clients.
The Industrial Revolution and Mass Production
The first profile is the best known since it explicitly incarnates two
facets of contemporary capitalism: technology and the industrial
revolution on the one hand and consumerism on the other (Berland &
Chiapello, 2009; Boltanski & Chiapello, 2006; Chiapello, 2003). The
development and spread of mass production is impersonated by two
complementary models: Taylorism and Fordism (Edwards & Boyns,
2012). After the discovery of the steam machine, factories have started
to spread since the mid-nineteenth century across Europe. Machinery
allowed the manufacturing of large quantities of standard items. Over
years, a blue-collar class started to emerge so as to be structured
between 1824 and 1848 in the UK through the launch of trade unions.
From then on, the increasing size of companies was instrumental in the
push for them to adopt new organisational forms such as the M-Form
and to implement appropriate management technologies such as
budgeting . Although such practices are well known in accounting
research, alternative explanations for these actions are presented as
follows.
The slump of the 1930s led to increased turmoil in the running of
business, squeezing profit margins causing bankruptcies and forcing
businessmen to reconsider their management methods. More generally,
and from the French political standpoint, businessmen of that period
were looking for a “third way”—a conduit between capitalism, which
appeared to be collapsing across the Atlantic, and communism, which
ruled in the Soviet Union. In this way, budgetary control arose from the
corresponding acute need to respond to the industrial and political
crises which developed during this period (Berland & Chiapello, 2009).
More generally, managerial technologies, such as budgeting , developed
as the result of political programmes and reasoning upheld by certain
committed actors. This formed the entrepreneurial logic of that time,
corresponding to the manufacturing conception of control (Fligstein,
1990).
This phenomenon was amplified after World War II with the
conjunction of two phenomena. On the one hand, Europe was to be
entirely rebuilt; this was expected to be achieved rapidly enough to
enable the effective return of democracy and peace. On the other hand,
owing to the Marshall Plan providing European countries with massive
investments, households’ purchase power significantly improved. From
then on, they would be in a capacity of being equipped with everything:
whiteware, automobiles, cameras, industrial food, etc. This was the
commencement of mass consumption. In response to this growing need
from households and governmental authorities , manufacturing
companies mechanically grew and structured more and more their
production . The Fordist and Taylorist models found their utmost
expression at that time: the proletariat developed, working in larger
and larger factories where households’ equipment was manufactured
(Parker, 2016).
Assumptions and Implications for Contemporary Management
In developing as a necessary response to the increasing demand from
households and governments, mass production has appeared as the
most efficient way of manufacturing. The implicit assumption
underlying mass production was inherited from marginalist
microeconomics and more specifically prescriptions from the Theory of
the Producer. As machinery and manufacturing equipment required
massive investments, these overheads were to be absorbed through a
sufficiently high level of sales. Under the purview of absorbing these
fixed costs, the first challenge was to develop the highest possible
production , thereby realising economies of scale. The well-known
assumption was that unit cost would decrease as the quantities
manufactured grow. This logic was applicable as long as returns were
increasing or at least remained constant.
In World War II’s aftermath onwards, the commencement of mass
consumption was associated with the beginnings of marketing ,
whereby households were informed of existing products and
encouraged to mimic each other by purchasing these. The product itself
was relatively standard , offering little if not no variation. This absence
of variation on a theme facilitated mass production , since no specific
demands could be articulated by customers (Berland, 1998; Berland &
Boyns, 2002; Berland & Chiapello, 2009). This phenomenon was also
simplified by the fact that most manufacturing companies were mono-
product and would operate merely on their domestic market : little
competition and no risk of self-cannibalising (Anthony, 1965, 1988;
Anthony et al., 1984).
Manufacturing one product exposed to limited competition
facilitated the spread of scientific management whereby the utmost
form of efficiency would be sought for. Ford’s and Taylor’s management
model could reach its climax at that time, whereby workers’ operations
on the shop floor would be optimised, internal organisation would be
optimised to reduce time waste and compress costs. In European
countries, management models associated with post-war mass
production was engineers’ heyday: Managing Directors of most
companies were civil engineers applying their dream of an efficient
production model (Berland, 1998; Berland & Chiapello, 2009; Berland,
Levant, & Joannidès, 2010). This ultra-efficient model was suggestive of
a fully integrated value chain whereby each link would be directly and
entirely controlled by the manufacturing company. This would enable
to compress logistic costs and time, leading to greater and greater
productivity.
With consumption changes occurring in the 1990s and the major
technological turn seen in the 2000s with the spread of information
technologies, the computerisation, the nature and scope of mass
production have changed (Bunce & Fraser, 2001; Chiapello, 2003, 2007;
Chiapello & Fairclough, 2002).
With technological progress and advances, value chain optimisation
has been more and more resting on task automation. On shop floor,
fewer and fewer blue collars are needed, since machines can
accomplish the same tasks with greater precision and lesser risks of
defect products. Nowadays, mass production still exists but less and
less concerns companies manufacturing products directly sold to the
public. Even though traditional mass production has not fully vanished
but has been fading, it seems that this mode of production nowadays
characterises more manufacturing companies operating as contractors
to corporate clients. In particular, in the twenty-first century, three
types of goods require more and more mass production : electronic
goods, fashion garments and prepared meals. Accordingly, it is not the
final product that is directly mass-produced but some of its core
components, such as chips, fabrics or fruits, veggies and meat (Bryer,
2006; Thénot, 2013; Toms, 2005). These B2B-based new business
models have led to the emergence of not just technology start-ups but
also large and influential companies operating (Chamassian, 2016).

Case n°10. The KraftHeinz Company Twenty-First-Century Mass

Production
The H. J. Heinz company was initially launched by two brothers
in 1869. The company’s lead product was launched in 1976,
nowadays still known as Tomato Ketchup. Over decades, the
company has broadened the scope of its products around a tomato-
base sauce, including canned food. In 2015, the company merged
with Kraft operating on complementary market segments.
Immediately after the merger, the KraftHeinz Company was valued
USD46 billions on the stock exchange, being the fourth largest food
company in the world. In 2017, KraftHeinz engages in a deal aimed
at acquiring Unilever for USD143 billions, which would make the
new venture become the world’s largest food company. According to
the company’s 2016 annual report, 650 million bottles of Tomato
Ketchup, the lead product , were sold worldwide. On average, a
bottle of ketchup uses 5 through to 15 tomatoes, depending on their
size. Resultantly, this product is mass-produced in factories located
all over the world (Heinz Company, 2017).
Not just this transformed product is mass-produced but also its
basis’ raw material: tomato. According to data from the Food and
Agricultural Organization of the United Nations, 120 millions tonnes
of tomatoes are grown and produced each year in the world, making
it the most-consumed product in the world. This massive
consumption results in its production being also mass-based, with
very large farms and greenhouses in regions to which tomatoes are
 not native (http://​www.​fao.​org/​land-water/​databases-and-
software/​crop-information/​tomato/​en/​).
The same observations can apply to the other 57,000 products
manufactured by KraftHeinz, including coffee: a gigantic company
and a full industry have turned to mass production . The company
appears as one of the most productive and efficient in the world
(Petrick, 2009).

3.1.2 Lean Production

Lean production appears as the opposite to mass production , as it
consists of launching production when an order is placed so as to avoid
waste. This can be understood as waste of resources, such as
unproductive costs of finished goods’ inventories, costs of defect owing
to mass production , opportunity cost on materials whose cost
decreases over time, etc. In sum, the lean production model is another
model of process and cost optimisation. It is known for being
associated with Toyota and its historical just-in-time production model
(Abrahamsson, Oza, & Bunce, 2010; Rathnasiri, 2011; Suzuki, 2007a,
2007b; Wickramasinghe, Hopper, & Rathnasiri, 2004).
Lean production implies an agile and responsive organisational
structure based upon fluid processes. Once the order is placed, its
technical specificities are immediately set and transmitted to
production . This department can instantly determine the type and
quantity of materials needed as well as the workforce required to
responding to the order. As lean production is tightly associated with
just-in-time, the duration of the entire process needs to be known and
controlled (Selto, Renner, & Young, 1995). This raises a dilemma
pertaining to the value chain structure: a fully integrated value chain
would allow time and quality optimisation but leads to incur high fixed
costs. Process optimisation would to some extent be at the expense of
cost optimisation. Conversely, fully outsourcing the value chain would
result in cost minimisation at the possible expense of process
optimisation. This dilemma highlights the traditional question
pertaining to transaction costs and the choice between market and
hierarchy (Williamson, 1979, 1981). With Toyota, a third way seems to
have arisen: a full integration of the value chain with its loaning to
partners in joint ventures (Tsang, 1999). Those links in the value chain
that can find themselves under-exploited or important without being
strategic could be placed in shared service centres having several
partners as clients (Lindvall & Iveroth, 2011; Triplett & Scheuman,
2000; Wang & Wang, 2007). This form would allow these non-strategic
activities’ optimisation at the same time as processes and costs.
Lean production seems to be especially appropriate when
production cannot be planned or organised in advance. This applies for
activities characterised by relatively unpredictable orders or cycles.
This also applies particularly well for industries in which products can
either perish or become obsolete very quickly. The utmost form of lean
production for products becoming obsolete can be found in high-
technology products and more particularly IT, as long instanced by the
Dell Company (Fields, 2003). Likewise, re perishable products, the
utmost form of lean production , can be found in restaurants where
produces cannot be inventoried for more than a day (Ahrens &
Chapman, 2002).

Case n°11. A Michelin-starred restaurant Lean Production at

Three Levels
In a restaurant, even with a regular menu served at every shift
and every day, lean production occurs at three levels. Firstly, raw
materials being perishables par excellence, the chef does the
groceries on a day-to-day basis, selecting the freshest produce for
the recipes. In Michelin-starred restaurants in particular, the chef
visits suppliers in person to select produce: fruits, vegetables, meat,
poultry, fish and seafood. Produce traceability is also central to
estimate their quality, only those whose grower is known and
approved being purchased. The groceries are done on the basis of
estimates as to what dishes are likely to be ordered, as management
accounting enables to know which ones sell better and which ones
do not sell equally well. Even though the menu comprises of different
dishes, these oftentimes have a common basis, so that the same raw
materials are utilised for whichever recipe.
Secondly, dishes are prepared only when ordered by customers:
fruits, vegetables, meat, poultry, fish and seafood are peeled, cut,
cooked and assembled upon order. This job-order preparation of
 dishes allows the chef to adapt these to customers’ needs (blue, well
cooked, dressing on the side, etc.). This has two series of
consequences. On one hand, as meals are prepared on order only,
there is no risk of having meals unserved and thereby wasted, which
could happen if they were prepared in advance. The resources
utilised perfectly match the resources needed to serve the customer .
On the other hand, the final dish served to the customer always
matches the order placed.
Thirdly, in Michelin-starred restaurants in particular, it is not
unusual that the chef exits the kitchen to ask guests if they enjoyed
their meal experience. This visit from the chef to customers operates
as quality management or control (Lane, 2013; Noguerol, 2018).

Lean production has not just appeared as an efficient way of

manufacturing but has been enabled because of new consumption
trends observed since the 1990s. Until roughly the mid-1980s, as
households were equipping themselves with everything, marketing was
just aimed at giving them the willingness to buy these needed products.
Resultantly, mass consumption has dominated until households were
effectively equipped. Once fully equipped, it seems that customers no
longer wanted to have exactly the same products as their neighbours
bur rather wanted customised products (Nasution, Mavondo,
Jekanyika-Matanda, & Oly-Ndubisi, 2011; Pratt, Rockmann, &
Kaufmann, 2006; Vaivio, 1999). This new consumption mode resulted
in increasingly specific demands from customers that only a job order
production would fulfil, thereby arriving at the lean production model.
Through this model, when customers place an order, they can choose
the characteristics of the product they are buying. The implicit
assumption is that, regardless of possible product obsolescence, there
are not two identical orders. Accordingly, the generic product serves as
a common basis for highly customised final products and ultimately
increased customer satisfaction (Bass & Lawton, 2009).
This phenomenon has certainly been amplified by the advent of e-
commerce in its most advanced form, and thus for the following main
reasons (J. Morris, 2017). Firstly, e-commerce has amplified the
possibility of placing an order from the producer with a limited number
of intermediaries. Thence, customisation does result neither in longer
delivery time nor in more expensive products for the end customer .
Secondly, 2.0-web-associated technologies have enabled more and
more accurate simulations of a product ’s final design after the
customer has selected all its characteristics. For instance, when
purchasing a computer, the customer can select RAM, hard drive,
motherboard and even shell shape and colour. When buying a car, seat
fabric and colour as well as shell colour can be chosen, as well as other
options, such as on-board Wi-Fi, Bluetooth, type of starter, etc.

Case n°12. Ikea Kitchen sets Lean Production

Ikea has become over years the leading company for home
furniture and has also colonised the area of kitchens through the
most advanced form of lean production . Traditionally, its main
competitors would sell have a catalogue of fully serviced kitchens,
these being sold as a whole. Owing to a certain oligopoly of these
kitchen-makers, purchasing a kitchen set was always very expensive
for a relatively standard product with limited possibilities of any
variation on the theme. In the twenty-first century, Ikea advertises
itself as the company where your kitchen is made for you and by you,
in comparison to others. The lean process follows three steps:
– using the Ikea app, customers can design their kitchen online,
choosing every single characteristic thereof amongst possible
16,000 combinations;
– in store, they can refine their design with help from professionals,
taking account of their home’s specificities and dimensions;
– Ikea professionals come to the customers to take measures and
confirm kitchen characteristics.
Once these three steps have been followed, an entirely
customised kitchen (serviced or not) is manufactured in Ikea
workshops. When it is produced, Ikea delivers it. In contradistinction
to traditional Ikea furniture kits, the kitchen set is installed by
professionals, verifying the effective compatibility of product
characteristics with the premises. From order confirmation to
installation, customers count on average 4 to 6 weeks, time for
production . Moreover, Ikea kitchens are under a 25-year warranty.
Resultantly, since the early 2000s, Ikea has become one of the main
 kitchen-makers (Baraldi & Waluszewski, 2005; Blurt, Johansson, &
Thelander, 2017).

3.2 What Counts in Modes of Production

Either mode of production —mass or lean—holds its own management
accounting and control concerns. These differ because of the
incommensurable philosophies underlying each of these two modes of
production : large quantities vs. smaller series and quality. Manifestly,
whilst traditional managerial accounting technologies were historically
designed for mass-producing companies , lean production rather tends
to be associated with new trends in management control.

3.2.1 What Counts in Mass Production

As mass production revolves around a standard product manufactured
in large quantities, the main management accounting concern consists
of cost control. Mass production is generally the case of a
manufacturing business unit producing a relatively mature single
product . Even though the company itself commercialises more than
one product , each product is generally associated with a specific
business unit.
Inventory Accounting and Management
On the business unit’s side, conventional managerial accounting
wonderfully applies, and this for the following reasons.
First of all, conventional management accounting technologies,
ranging from budgeting to standard costing and budgetary control ,
were initiated in such companies between the 1920s and the 1950s
(Berland, 1998; Berland & Boyns, 2002; Berland & Chiapello, 2009;
Berland et al., 2010). In other words, these management control
technologies have long been proofed and proven useful in such
contexts. As they were designed after World War I and World War II in
European companies when Europe was to be rebuilt, they have proven
their potency.
Secondly, conventional managerial accounting is especially
applicable to these contexts, for these technologies do relate to actual
mass production concerns. When a company produces in mass, the first
managerial accounting concern relates to cost and quantities. All other
managerial accounting technologies in use proceed from this initial
concern.
What counts is not just the cost -quantity accounting usually
emphasised in most management accounting courses, textbooks and
public discourses (Ferguson, Collison, Power, & Stevenson, 2009;
Parker, 2002). More than just quantities per se, what is central is the
capability of producing large quantities on an ongoing basis, which gave
birth to the Taylorist and Fordist production models (Fleischman, 2000;
Parker, 2016). Central to mass production is the capability of receiving
and inventorying large quantities of raw materials , transforming them
into (large quantities of) final products, inventorying these products
and emptying inventories so as to accommodate the next load of
materials . The figure hereafter summarises this management control
cycle relating to quantities, where the grey circles represent where
management accounting orders start (Fig. 6).

Fig. 6 Accounting for quantities in mass production

Cost Accounting and Management

Given the large quantities of materials utilised and product units
manufactured, the Taylorist and Fordist models recommend that
economies of scale should be expected. These can be traced through
thorough accounts of costs and productivity. Cost accounting
unsurprisingly relates to accounting for the costs of labour , overhead
and materials . Supposedly, the cost of materials per unit should
decrease as production increases, since suppliers should also be in a
capacity of realising economies of scale. The cost of overhead per unit
manufactured would mechanically decrease, as the total cost is
allocated to an increasing volume of units. Lastly, the cost of labour
allegedly remains unchanged. However, through organisational learning
mechanisms, the way of doing things can be improved over time
(Argyris & Schön, 1978, 1996), leading to greater productivity: fewer
units of labour for the same outcome (Chenhall, 2005).
In other words, the three variables that can be actioned are
overhead , materials and labour (Anthony, 1965, 1988; Anthony et al.,
1984). When management accounting figures reveal “abnormally”
costly or under-productive overhead , this can have two explanations,
management accountants’ role being to highlight the most plausible
one. The first explanation, too often given in the way of a startle
response, is that infrastructures are too expensive and the factory must
be relocated to a different, cheaper place. The second explanation can
be, on the contrary, that these infrastructures are under-utilised and to
some extent idle; production should be increased.
Re-cost of materials , there is not much a company can do, as it
varies. There are mainly three options available amongst which
management accountants are expected to articulate the one especially
pertinent to the company. The first option would consist of buying
these materials from a different supplier , provided the contracts
binding the two companies allow an exit clause, and provided excessive
cost results from the supplier ’s processes. The second option consists
of revising the product and replacing some of its “expensive”
components with cheaper ones, thereby altering its characteristics.
This is only possible if product characteristics have been not been
contracted between the company and its clients. The third option has
arisen since the mid-1990s, slightly broadening management
accountants’ roles by adding thither a cash management dimension.
Management accountants can suggest cash managers some strategies
to hedge the risk of increase in raw materials ’ prices, e.g. derivatives
and options on commodity markets (Salas-Molina, Martin, Rodríguez-
Aguilar, Serrà, & Arcos, 2017). Thereby, current and provisional cash
flow statements’ preparing becomes more and more central to
management accounting in mass production .
Lastly, accounting for cost of labour may reveal either “expensive”
hours or under-productive workers. Again, it is management
accountants’ forgotten role to identify a possible cause for such a
situation. Mainly, three explanations do exist. The first that comes to
the inexperienced, lay-management accountant is that labour is too
expensive and that downsizing should be engaged through redundancy
plans (Nègre, Verdier, Cho, & Patten, 2017). The second possible
explanation is that activity level is too low to enable workers to be fully
productive, in which case production may need to be increased. This
explanation cannot apply if production decreases because of a decrease
in the number of orders placed by clients, but can apply if under-
productivity can be ascribed to internal business processes. The third
possible explanation proceeds from the second, insofar as it explicitly
emphasises default internal business processes.
Standards, Budgeting and Budgetary Control
Because mass production involves significant amounts of money, any
defect in the manufacturing process can be irreversible and undermine
the company’s survival. Therefore, the Fordist and Taylorist models,
having their heyday after World War I and World War II, have
recommended that every single process should be thoroughly and
accurately designed, decomposed and metred (Berland, 1998; Berland
& Boyns, 2002; Berland et al., 2010; Parker, 2016). This somehow has
emerged the scientific organisation of labour , whereby every single
action workers must do was detailed, documented and prescribed
under a certain format and for a certain time. Such was done in order to
ensure that no worker’s time is left under-productive and is therefore
wasted, leading to undue costs.
Through the scientific organisation of labour , standards have
developed, which are to be strictly followed. Mass production is
necessarily associated with clearly assigned tasks to people. This
implies a strict hierarchy, enabling to know who is exactly in charge of
what (blue collars, foremen, managers, executives, etc.) and thereby
bureaucracy through strict procedures that must be followed (McKinlay
& Wilson, 2006; Ouchi, 1980; Wickramasinghe et al., 2004).
Management accountants are tasked with the tracking of these
standards’ honouring and with the articulating of recommendations in
case of deviation thence. Standard -setting-and-control in mass-
producing companies has numerous consequences outwith procedures.
As the way of doing things is standardised to arrive at a standard
product , all its constituencies are also standardised, including
characteristics (materials ) and cost . Alongside the scientific
organisation or labour , standard costing develops and becomes a
central activity of management accounting. As with cost accounting and
inventory accounting, standard costing is the utmost expression of
conventional managerial accounting (Fleischman & Boyns, 2008; Oakes
& Miranti, 1996). The standard cost eventually corresponds to product
target cost . This naturally implies budgeting as a prospective and
provisional standard schedule of standard costs and quantities
(Berland, 1998; Berland & Boyns, 2002; Berland & Chiapello, 2009;
Berland et al., 2010).
More than just a projection of what should ideally be achieved and
accounted for, standard costing implied by mass production necessarily
leads to do ex post controls of standard actualisation. In other words,
standard costing naturally implies budgetary control , a.k.a. variance
analysis or CVP analysis . Mass production qualifies for these, insofar as
they rest upon the need for controlling and accounting for the
honouring of a standard applying to large quantities and mobilising
significant amount of money. A mistake or an unexpected deviation
from standards can undermine the company. The figure hereafter
summarises the intertwining of these management accounting
technologies. The grey circles represent standard -setting by
management, joined through managerial accounting : budgeting , cost
accounting and budgetary control (Fig. 7).
Fig. 7 The target costing process

3.2.2 What Counts in Lean Production

The first feature of management control in lean production lies in a
strict honouring of product characteristics as specified when the order
was placed (Abrahamsson et al., 2010; Bass & Lawton, 2009).
Nowadays, IT has facilitated lean production , management and control,
by enabling the accurate storing of order characteristics. Be an order
placed online or physically, its characteristics are computerised. It
proceeds from this a limited risk of mismatches between the
characteristics of the order placed by the client and the order
transmitted to production . Management control’s first task consists of
verifying this match before production starts, and once the product is
eventually manufactured. A company engaged in lean production
cannot afford to deliver the wrong product to its clients, since this
would be totally inconsistent with the lean-based business model itself.
Engineers’ Control: TQM , SPC and SCM
Not only the product ’s technical characteristics are controlled but also
quality. As production is launched only when an order is placed and is
supposed to fulfil this order, it is quasi-contractual that the product
should not have any default. Therefore, lean production is often
associated with quality control. Historically, lean production and
management have been associated with Total Quality Management or
Six Sigma prescriptions (Ahmad, Zakuan, Jusoh, & Takala, 2012; Anvari,
Ismail, & Hojjati, 2011; Anvari, Sorooshian, & Moghimi, 2011). In order
to ensure that the final product perfectly matches the order and is of
the quality customers are expecting, internal business processes need
to be perfectly controlled. This implies that the suppliers whence raw
materials are purchased be kept under a form of control, no defect in
raw materials being allowed. It would be dramatic for an automaker
that a chip in the car’s motherboard malfunctions. This would make
dissatisfied customers and create negative sentiment undermining
company performance , if other potential customers do boycott this
product . Also, if safety is at stake, this default would affect company
brand or image by associating it with the idea that its product is unsafe
(Singh, Gohil, Shah, & Desai, 2013). Accordingly, TQM appears as the
most suitable ways of ensuring ultimate customer satisfaction (Hoque,
2003; Ittner & Larcker, 1997).
Depending on the materials purchased from external suppliers,
quality control can be associated with inter-organisational controls
whereby a leader coordinates other actors in this business network or
venture (Carlsson-Wall, Kraus, & Lind, 2011; Dekker, 2004; Kraus,
2012; Mouritsen, Hansen, & Hansen, 2001; Mouritsen & Thrane, 2006;
Thrane, 2007). This can take on two forms, depending on the type of
materials purchased. If these materials are tailor-produced to respond
to a specific order, viz. materials subjected to lean production
themselves, engineers from the ordering company can verify their
intrinsic properties even prior to their dispatching. It may also happen
that the ordering company has their own engineers supervising the
manufacturing process on supplier premises (Dekker, 2004; Mouritsen
& Thrane, 2006). Their role is similar to that of expats in international
companies .
If these purchased by the lean-led company are manufactured in
large quantities, direct quality control is not possible. Not every unit
can be tested and verified. Accordingly, two sets of controls can be
exerted from the buying company. The best-known control consists of
open-book accounting, whereby the client can verify materials ’
characteristics on the basis of management accounting reports and
figures. If these reflect a deviation from what was contracted between
the two parties, there can appear a suspicion on materials ’ quality
appear (Mouritsen et al., 2001).
When, for whatever reasons, open-book accounting is not possible,
materials ’ quality can be verified through Statistical Process Control
(Ahmad, Rasi, Zakuan, & Hisyamudin, 2015). Through Statistical
Process Control , the production process is split into micro-actions
whereof each can be transformed into figures. To some extent, the
control exerted on the supplier borrows from the Taylorist or Fordist
scientific organisation of labour : actions are strictly metred; amounts
of all sorts of resources are stringently measured. The assumption
underlying Statistical Process Control is that strictly abiding by the
standards set for the production process shall lead to the expected
outcome, viz. the right product with the required quality. Accordingly,
actual processes are metred and compared against standards. Any
deviation from these can appear as a potential source of default
products. This risk is estimated in accordance with the stats resulting
from this metred process control. It is known to the client company that
there is a probability of having a certain amount of default material
items. Although lean production and TQM supposedly allow zero
default, when defect products proceed from suppliers, it is inevitable
that a certain risk margin be defined and accepted (Emsley, 2008;
Hoque, 2003; Ittner & Larcker, 1997; Johnson, 1994; Modell, 2009). All
told, lean production is necessarily associated with a strict control of
the whole supply chain and management of customer relations. All told,
it is no real surprise that lean production has been historically
associated with the rise of Supply Chain Management systems (Free,
2008; Seal, Berry, & Cullen, 2004) and Customer Relations Management
systems (Fodness, Pitegoff, & Sautter, 1993; Strack & Villus, 2002;
Vaivio, 1999).
Internal Business Process Control and Time-Driven ABC
As a risk is taken on raw materials , Total Quality Management in the
lean-managed company implies that internal business processes be
stringently controlled. Although the lean-manufactured product ’s
characteristics are specific to an order placed, its intrinsic properties
remain standard . From one order to another, core characteristics are
the same, which is the reason why clients do purchase a variation on
this specific product . Accordingly, internal business processes need to
be perfectly known, designed and controlled (Hope, Fraser, & Röösli,
2006; Kaplan & Norton, 1996, 2006; Roberts, 2001; Thompson &
Marthys, 2008; Wickramasinghe, Gooneratne, Jayakody, & Cheryl, 2007;
Wiersma, 2009). Whilst this is managed through a hierarchic and
bureaucratic scientific organisation of labour in mass production , the
assumption underlying lean production is that grass-roots people are
the most qualified to know and review their processes (see Chapter 7
for further details).
As intuited by Toyota since the 1960s’, this implies that every
employee , whatever their rank in the company is, exert a specific
review and control of the tasks falling under their responsibility and
associated outputs. In order to avoid conflicts of interests where some
employees would assess their own work, peers often to control each
other’s work, thereby leading to a lateral accountability (Roberts, 1996,
2001). Individual metred actions are compared against company
standard . In case of mismatch, there may be a suspicion of default in
the process. The individualising and metring of tasks enables to identify
where a possible default occurs and take corrective actions in the right
place. Management controllers find themselves tasked with the
comparing of actual actions against standard and seeking causes for
possible deviations.
Internal business processes’ standardising and metring is made
especially necessary, given the imperative of honouring time
constraints (Gersick, 1989). Time-to-market or time-to-customer is
lean production ’s second raison d’être. Accordingly, in order to honour
the promise made to the client as to when the product shall be
delivered, lean production tends to be associated with a time-driven
Activity -Based Accounting system (Hoozée & Bruggeman, 2010; Jones
& Dugdale, 2002; Mouritsen & Bekke, 1999; Nandhakumar & Jones,
2001; Selto et al., 1995). As with conventional Activity -Based
Accounting systems, the whole process is subsumed into several micro-
activities. In time-driven management accounting, these micro-
activities consume not just resources but also and foremost time.
Accordingly, cost and time serve as a dual working unit to account for
the just-in-time imperative. This Activity -Based Costing system is
usually combined with job order costing , conceived specifically for
lean-managed companies (Selto et al., 1995). Lean production is
necessarily associated with target costing , since product final selling
price is set in advance with the client on the basis of its characteristics,
as though a new product were launched with each order (Cooper &
Slagmulder, 1999; Everaert, Loosveld, van Acker, Schollier, & Sarens,
2006; Mouritsen et al., 2001).
Management accounting and control mostly operate ex post facto
and therefore only highlight actual achievements. It is only possible to
follow up that time constraints are well honoured and that the product
can be delivered as stipulated in the contract. In lean production and
management, processes’ optimising is a constant imperative, since
there are no two identical orders. It becomes therefore crucial to
identify a way of responding to any order placed as fast as possible.
Through drive-driven Activity -Based Accounting, it becomes
possible to identify areas for improvement in response to future orders.
Pursuant to this, grass-roots employees are trusted for their local and
practical knowledge of business processes and operations. Historically,
Toyota has developed quality circles where employees could exchange
on how processes could be improved. Over years, these reflection
circles and think tanks gathering employees and managers have
become central to what the Cam-I and the Beyond Budgeting Round
Table have been promoting: optimisation through return on experience
and best practices’ sharing (BBRT , 2009a, 2009b, 2009d, 2009f, 2009g,
2009h). More specifically, lean production has traditionally been
associated with Six Sigma (Bass & Lawton, 2009) whereby processes
are constantly called into question and optimisation steadily sought for.
Figure 8 hereafter summarises the management accounting and
control issues associated with both mass production and lean
production .
Fig. 8 A summary of management accounting concerns in mass production and lean
production

4 Conclusion
As shown in this chapter’s three sections, a management control system
cannot be transferred from a setting where it works to a different one
without paying attention to core strategic issues. It is manifest that a
management control and accounting system is tailored for a company’s
specific strategic and operational needs. Prior to deciding on a
management control system, it is therefore crucial to understand the
generic strategy adopted, since this can affect product and process
specificities, and by extension what needs to be controlled and
accounted for. Next, depending on company position on its market ,
management accounting and control concerns shall vary. It usually
proceeds from company strategic choices and position on its market
how the product or service shall be manufactured and delivered.
Ultimately, a management accounting and control system is dictated by
how operations are conducted.
All told, not every management accounting technology is pertinent
for every organisation. Rather, their appropriateness and suitability are
contingent upon strategy and operations. In particular, conventional
managerial accounting technologies taught in most management
accounting courses would not be applicable to every setting. At best,
they can apply to a mono-product manufacturing company operating
on a mature domestic market (Anthony, 1965, 1988; Anthony et al.,
1984). A suitable management accounting and control system appears
as the offshoot of a wise selection of relevant technologies, i.e. those
enabling to account for what counts in the value chain in a way that
counts.

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© The Author(s) 2018
Vassili Joannidès de Lautour, Strategic Management Accounting, Volume I
https://doi.org/10.1007/978-3-319-92949-1_2

2. Product Life Cycle Accounting and Target

Costing
Vassili Joannidès de Lautour1

(1) Grenoble École de Management, Grenoble, France

Vassili Joannidès de Lautour

Email: vassili.joannides@grenoble-em.com

Keywords Value chain accounting – Target costing – Product life cycle –

Research & development accounting – Marketing accounting – Inventory
accounting

It is too often neglected that management accounting is at the service of the

company and its business operations. Pursuant to this, what lies at the core of
these business operations is too often overlooked: the product or service. In
order to fully understand how management accounting can produce
pertinent and useful information for decision-making, it is crucial to
understand what lies behind the product . This rough understanding can lie
in the first place in its life cycle. It is important to be clear with the product ’s
journey from birth (launch ) unto death (decline and withdrawal from the
market ). This understanding is especially crucial nowadays, as most of the
technologies learnt in managerial and cost accounting courses are
undoubtedly applicable to manufacturing companies commercialising a
single product addressed to a mature and domestic market (Anthony, 1988;
Anthony, Dearden, & Bedford, 1984). Such companies were characterising
twentieth century’s industrialisation where mass consumption and
production were predominant. Everything was to be built, households were
to be equipped with everything—whiteware, hi-fi, vehicles, etc. (Berland &
Chiapello, 2009; Chiapello, 2007). With toughening competition , constant
technological advances, customers’ infidelity to a company or a brand, these
traditional management accounting models are not always and systematically
applicable.
Under the purview of clarifying what confronts the product and how this
may affect business operations and controls, the first section discusses
product life cycle , explicating each of its four stages. The second section
discusses what counts from an operations and management accounting
viewpoint at each stage in product life cycle . This discussion around product
life cycle and associated accounting concerns leads to placing a special
emphasis on target costing , which directly proceeds from pressures exerted
on the product selling price by market forces over time. This section on target
costing engages in the implications target costing has on a product cost
structure, the associated value chain and its management, as well as the
controls ultimately required.

1 Product Life Cycle and Strategy

This section develops the strategic concerns associated with product life
cycle : from conception unto death, detailing each stage separately. Product
life cycle can be seen through four stages. As per the diagram below, the four
stages do not have the same length (Auzair & Langfield-Smith, 2005;
Granlund & Taipaleenmki, 2005).

1.1 The Life Cycle

On purpose, as each product has a different life cycle, the figure below does
not specify the unit used for time. On purpose too, the figure reveals a
negative profit after the decline stage, thereby meaning that the product ends
up sold at a loss. It is important to have in mind that this figure assumes R&D
and the preliminary work on the product has been done and that sunk costs
have already been incurred. In this model, product life cycle therefore only
commences once the product has been launched on the market . Prior to
launch , R&D is central in order to identify what product will be launched,
when and how. At the pre-launch stage, R&D and marketing and sales seek to
answer the following questions: what possibilities? What exists on the
market ? What gap could the product fill? (Fig. 1).
Fig. 1 Product life cycle

1.2 Launch
The very first step of a product life cycle is that of the launch when it is
introduced for the first time on the market . During this stage, the product is
new to the market and needs to be known. A need for this product from
customers must be fostered. Therefore, during the launch period, the
company starts manufacturing the product and does some marketing on it
for the first time.
On the one hand, in order to preserve its technology and other patents,
the company tends to manufacture its product on its own premises without
having recourse to any joint ventures of business partners, unless long-term
partnerships with other companies have been developed and proved
satisfactory. The main strategic risk for the company is to see its technology
or product mimicked by competitors before it is even associated with its
home brand. Preserving one’s technology through home manufacturing may
result in higher production costs than when this activity is outsourced. At this
stage of product life cycle , the company cannot at yet count on economies of
scales and has to incur massive overhead costs, such as R&D and
infrastructure (e.g. factory and logistics ).
As a consequence, apart from rare exceptions where expecting a new
product and queuing for hours or days is part of the experience (see the
launch of the first generation iPhone, iPad, iWatch or the latest issue of Call of
Duty©), production needs to be done in sufficient quantities and delivered on
time. Otherwise, the risk with approximate logistics is that of frustrating or
deceiving customers.
On the other hand, in order to make this new product known to its
clientele, the company incurs significant marketing expenses. This first-stage
marketing is aimed at informing the customers about the existence of this
product . Its properties and its technological contents are advertised in
various channels. If this product is aimed at being the leader in its market or
if it is the first of its kind at all, marketing may well borrow all possible
channels so as to announce this novelty.

1.3 Growth
Once the product is known on the market , its sales grow. The specificity of
the growth stage is that, if the product is well received on the market , sales
grow rapidly. The first customers from the launch period, by a fashion chain
effect, encourage others to purchase this new product . At this stage, selling
price usually remains high, since sunk costs and launch costs are to be
absorbed and the product remains exclusive. Yet, premium solvent customers
purchase it regardless of high price. During this growth stage, most costs
previously incurred are being absorbed: R&D , manufacture overheads and
marketing . During the growth stage, whose duration is unpredictable and
depends upon product and technology, the company continues
manufacturing it, fills large inventories and markets the product to reinforce
its popularity to the public.
This growth stage is characterised by increasing sales at a selling price
just below the launch price, and this latter being merely transitory and
cannot last long. Its duration is conditioned by the existence of possible
substitutes on the market , possible new competitors, suppliers’ capability of
following the pace and delivering the expected quantities on time and
customer preferences (Porter, 2002). If possible substitutes to the product
exist or competitors are active, the threat on the company results in a brief
growth stage. If suppliers are in a capacity of following the growth pace and
delivering, this stage can last until the product is known to customers or
competitors. Lastly, if attracting customers is a difficult task and slow, the
growth stage may last relatively long and characterised by low or moderate
rates. However long the growth stage lasts, it ends when the product is
known to the public and the competition , as the market commences to be
flooded.

1.4 Maturity
The growth stage arrives at an end when revenues from sales increase at a
slower and more stable pace. At the maturity stage, it takes some time until
sales reach a peak. This stage is usually the longest in product life cycle . It is
the stage where the product is sufficiently known to its market to be
perceived as the reference product and aspires to be the leader. The company
can count on its technological advance and intellectual property protection to
avert mimicry from competitors. Provided customers still like the product
and no challenger succeeds to develop an alternative technology and product
, the maturity stage can last as long as technology is protected (Resnik, 2003;
Simburg et al., 2009).
During this stage, most fixed costs and investments incurred by the
company have been absorbed and the break-even point reached. Thence, the
company can afford to so reduce its selling price as to absorbing its variable
costs and secure the desired margin. Whilst the initial two stages were
addressing the product to a premium and solvent clientele growth , this stage
opens to a larger audience. This imposes that selling price be reduced. In
most cases, selling price can be reduced by the amount of investment costs
and overhead costs incurred prior to launch and during growth . As a result,
during this stage, the product operates as a cash cow for the company
(Granlund & Taipaleenmki, 2005).
Given that the product still sells, company operations emphasise large
production , the constitution of inventories to ensure the constant providing
of the desired product , marketing to remind the clientele of this product ’s
capacities and R&D to develop the next product (Anderson & Zeithaml, 1984;
Lewitt, 1965; Westkämper, 2000). The growth stage can be prolonged
through technological upgrades to the product or new, limited editions aimed
at attracting new customers or retaining current ones (Anderson & Zeithaml,
1984; Westkämper, 2000).
At product maturity , it is important for the company to anticipate future
prospects; this stage is not meant to last eternally. Technology protection
shall terminate; challengers may be preparing themselves to dethrone the
company with an alternative and up-to-date technology and product ; and
customers may start losing interest in the product . Therefore, at that stage,
the company needs to prepare this product ’s aftermath by investing in R&D
and next product ’s pre-launch stage (Westkämper, 2000).

1.5 Decline
After a certain time, the product loses its leadership in the market , which is
manifested in decreasing sales. This loss of influence can be explained by
changes in customer preferences and an aspiration for a new product or
service. Such is often the case within the automotive industry where new
models are launched periodically after one has lost its popularity on the
market . In this case, product change is not as technological as design-related:
once a model is perceived as outdated or too old for customers, a new one
can be launched, offering similar functionalities but presenting a different
design (Schöggl, Baumgartner, & Hofer, 2017; Wochner, Grunow, Staeblein, &
Stolletz, 2016; Yang, Nasr, ong, & Nee, 2017).
Regardless of customer preferences, product sales start decreasing when
the technology employed for this product starts being replicated by
competitors offering a similar product at lower rate or arrives at a new
technology and product . Such is generally the case with high-tech products
(Prasad, 1993; Weijters, Goedertier, & Verstrecken, 2013), chemicals or
pharmaceuticals (Hoffman, 1999; van den Bogaard & Spekle, 2003) where
technological advance rarely lasts.
When the product starts its decline , the main operational challenge for
the company consists of terminating production and decreasing inventories
at the fastest possible pace. Terminating production should make the
production line and shop floor capable of accommodating the upcoming new
product whilst emptying inventories is aimed at freeing storage space for this
new product . In order to ensure that inventories will decrease, selling prices
is usually reduced; hence, new customers can still purchase it until it is
definitely withdrawn from the market (Anderson & Zeithaml, 1984;
Westkämper, 2000).

Case n°1. Doc Martens From Growth to Decline

In 1991, Doc Martens launched a model of shoes inspired from security
shoes worn by tradespeople. The sole was made in a special rubber with
numerous virtues for the security of people wearing them. Compressed air
inspired from Nike was to absorb any shocks when stepping on sharp
items. A secret gel borrowed from Reebok was to shape the sole for the
person’s foot. An anti-twist technology borrowed from Adidas Torsion was
to prevent any muscle or bone injury. Those shoes were strengthened on
the top with a round metal hull capable of supporting a heavy load. Since
after launch , Doc Martens shoes have become very popular amongst
youths and young adults. Notwithstanding a high selling cost , for three
consecutive years, sales increase dramatically, these new shoes becoming
more popular than the historical Converse All Stars®. In 1993, other
manufacturers started mimicking their original shape, selling at a lower
rate. By the time, Doc Martens’ sales were not too much affected by these
new competitors. Suddenly, in September 1994, customers no longer had
any interest in these shoes, preferring the new fashionable, lighter and
colourful product from Palladium®. Taking the sudden decline of their
lead product seriously, in December 1995, the company endeavoured to
overcome this situation by launching new models with different shapes
and colours. It was almost too late, customers were disinterested in this
 brand and its products, leading the company almost to bankruptcy. A
revival occurred in 2007 when the original models with new shapes and
colours became fashionable again (Escalas & Bettman, 2005; Skott-Myrhe,
2009).

2 What Counts in Product Life Cycle

As strategic concerns and operational issues vary along product life cycle ,
what counts and deserves to be accounted for is not definitely set. Rather, in
its capacity of producing figures pertinent for decision-making, management
accounting evolves pursuant to the momenta of product life cycle . This
section reveals what the main strategic concerns for management accounting
are at each stage.

2.1 What Counts During the Launch Stage

When the product is being launched, high costs have already been incurred to
develop and market it. Thence, two issues are well accepted. Firstly, the
product cannot be profitable, since it is just starting on the market . Secondly,
it is premature to envisage the optimisation of its value chain (managing
costs). Rather, what is central to management accounting during this launch
stage are as follows:
– production processes and capability of producing;
– logistics and capability of delivering the product ;
– return on marketing .
During this stage, the product can still be considered an investment and
therefore any expense appears as outflows associated with this investment.
Any expense , including manufacturing expenses, should be perceived as
lagged investments and therefore not as costs (Anthony, 1952; Anthony, et al.,
1984). Also, during this stage in product life cycle , the company is unlikely to
be broken even; hence, following costs is not the most relevant management
accounting concern. Rather, what management accounting emphasises when
the product is just launched is the pace at which it sells, which can be
manifested in periodical reporting on revenues from sales. This shall allow to
determine the return on current marketing expenses: management
accountants should be in a capacity of deciding whether the product is
known to its target customers.
In the meantime, management control and accounting system need to
trace the processes by which the company is supplied with materials ,
manufactures the product and delivers it to clients. At this very stage, what is
central to the following up of operations conduct and corporate performance
lies in the value chain itself. Management accounting ensures that the
provisional and planned value chain is inline with strategic objectives and
consistent to facilitate product admission on the market (Bhimani, Gosselin,
& Ncube, 2005).

2.2 What Counts During the Growth Stage

When the product reaches the second stage of its life cycle, it commences to
be popularised and well known to the market . The imperative of being in a
capacity of delivering the product on the market confronting the company at
the launch stage is amplified during growth . An ever-growing number of
units are expected on the market , thereby implying an acceleration of
production and logistics . But also, the newly launched product is expected to
be of sufficient quality to be popular on the market . A new product which
would be defective may not last on its market . In order to ensure that the
company is eventually in a capacity of flooding the market , the management
control system developed and implemented during the launch stage needs to
remain in place and certainly be enriched with more accurate metrics. These
may attend to:
– total production time;
– unit production time;
– time-to-market ;
It is the stage at which the company can absorb the fixed costs incurred
with this new product :
– initial investment,
– launch costs,
– production costs,
– marketing costs.
At this stage, more than just cost , what is central to management
accounting is when the company is broken even, i.e. when the product starts
being profitable. Therefore, cost accounting during the growth stage needs to
comprehend previous costs relating to the initial investment (including sunk
costs) and current costs. It is implicitly assumed that inflows from sales
during the launch period are to be deducted from the initial investment and
appear as marketing revenues. Profitability can be accounted for only when
the product starts selling on its market , whereby absorption costing is
necessary. All these initial expenses incurred in the previous stage can now
be accounted for and ascribed to unit costs. This is the main condition under
which break-even can be noticed and measured (Anthony, 1952; Anthony et
al., 1984; Hutaibat, Alberti-Alhtaybat (von), & Al-Htaybat, 2011; Jørgensen &
Messner, 2010).
Therefore, alongside costs, management accounting’s emphasis is on
revenue from sales, especially as these are expected to be rapidly and
substantially increasing. The management accounting system in place needs
to trace on a periodical basis how much money has been generated from
product sales. Through these periodicals accounts of sales, what can be
followed up is the turnover generated from this product (Yan & Dooley,
2013). At that stage of product development, the marketing department is
transformed from a pure investment centre into a profit centre : its expenses
must result in product popularity on the market and measured through
revenue from sales (Anthony, 1952; Anthony et al., 1984).
Depending on the industry and type of product , periodicity can vary:
from daily to monthly. The assumption underlying this difference in reporting
time orientation is that the sooner a technology is likely to be threatened the
more frequent reporting on revenues from sales is necessary. As indicated
above, this is especially vivid in the case of high-tech products, those
including chemicals (Laine, 2009; van den Bogaard & Spekle, 2003),
pharmacy (Sabatier, Mangematin, & Rousselle, 2010; Schweizer, 2005) or
energy, not just telecoms (Smith, Collins, & Clark, 2005).

2.3 What Counts During the Maturity Stage

A product is mature from a strategic viewpoint when it operates as a
reference on its market and attracts competitors and possible substitutes
(Porter, 2002). Seemingly, product popularity is such that, notwithstanding
technology patenting and intellectual property protection, competitors can
arrive at a similar product without incurring the same pre-launch costs. At
this stage of product life cycle , pre-launch costs have supposedly been
already absorbed (McGahan & Porter, 2002). This commencing competition
raises major management accounting issues and challenges.
The first issue confronting management accounting when the product is
mature consists of an imperative to optimise the value chain so as to meet
competitors’ standard selling price and thereby costs. When its product is
mature, the company no longer fully controls its selling price on the market .
Therefore, management accounting sets out to apply a form of target costing .
Management accounting reports emphasise unit cost under the purview of
maintaining only those relevant costs, viz. costs directly relating to activities
perceived as central to company core business in the value chain . Those
other costs seen as peripheral or manageable are under management
accounting’s scrutiny, warnings on those being issued to advise on the
possibility of reducing them, e.g. by outsourcing or locating to a region or
country where such costs are lesser (Mouritsen, Hansen, & Hansen, 2001). In
other words, the nature of any activity pertaining to this particular product
changes from a profit centre to a cost centre (Anthony, 1952, 1965; Anthony
et al., 1984).
Selling prices shifts from being a control lever to a lever of organisational
design and architecture (Simons, 1987a, 2000). This implies that companies
operating on a market where the product is mature implement
benchmarking policies and technologies and conduct economic intelligence.
Without such benchmarks coming from management accounting, knowing
what the market ’s cost structure appears as a difficult, if not an impossible,
task (BBRT , 2009a; Wouters, Kokke, Theeuwes, & van Donselaar, 1999). As
the implementing of benchmarks is in its essence a comparison against a
market standard and competitors, associated relative measures are added to
the existing management accounting system. Standard costs are market and
competitors costs; the value chain progressively aligns itself with market
standards and competitors’ practices. In order to enable this aligning and
adapting to market circumstances, management accountants develop relative
accounting costs and performance measures (Hartman, 2000; Kattan, Pike, &
Tayles, 2007; Otley & Fakiolas, 2000).
Even though selling price progressively imposes itself to a mature product
, the company can count on its reputation on the market to sell at a relatively
higher rate than competitors, thereby emphasising a difference owing to
know-how, tradition and quality (Chalmers & Godfrey, 2004; Jönsson, 1996).
Under this purview, at the same time as value chain optimisation is
accounted for, value creation and profit generation from sales are thoroughly
followed up by management accounting. This responds to a dual imperative
confronting the company whose product has become mature. Firstly,
although the break-even point has supposedly already been reached, the
product is expected to operate as a cash cow for the company: it must sell
well. Secondly, this product is supposed to be profitable for a sufficiently long
period of time; hence, revenues from its selling can subsidise the R&D on
next products. Thence, revenues from sales are continually scrutinised and
reported to management. Given that cost and selling price decrease, profit
comes not from sales expressed in value but in volume, which implies an
increase in production and an additional focus on processes and inventory
rotation for management accounting.
 It is within this context that budgeting and budgetary control appear as a
necessity to a number of companies , managers viewing them historically as
technologies enabling them to cope with environment uncertainty (Berland
& Chiapello, 2009; Berland, Joannidès, & Levant, 2015). Standard costs
imposed by the market or competitors almost force companies to account for
the compatibility of their operations with these through the Master Budget
and CVP-and-variance analysis (Budde, 2009; Emsley, 2000, 2001; McGahan
& Porter, 2002).
Paradoxically, because the product can operate as a cash cow, it generates
an unstable and unpredictable environment by fostering competitors’
appetite. All told, when the product reaches maturity , company management
control and accounting system becomes more and more sophisticated and
comprehensive, focusing on costs, quantities, profit , processes and quality.

2.4 What Counts During the Decline Stage

After a certain time, product sales start decreasing: it is the decline stage in
its life cycle. Decline cannot be predicted but anticipated through the
development of new technologies or substitutes to the product on its market .
Such can be the case when appetite for this product leads numerous
companies to act as followers, manufacturing a similar, cheaper and less
qualitative product . When that momentum commences, customers seem to
know less and less the difference between the original product and that from
these followers. Complaints re product quality can start arising on the market
and severity vis-à-vis the original product be sharper (Maguire & Hardy,
2009). Being flooded with a growing number of cheap substitutes, the market
seems to accept far less the original product and its high selling price,
especially as compared to followers’ cost domination strategy (Anderson &
Zeithaml, 1984; Westkämper, 2000). Such generally happens with high-tech
products. Or, regardless of competitors, the product can just be less and less
popular or fashionable and no longer attract customer interest.
In either case, when management understands decline is engaged,
management accounting’s concerns change. It is time to terminate this
product and transition to the next, which is supposedly ready to start and
replace it. During this whole stage, the main concern is to stop production
and any new investments on this product (e.g. marketing ) and sell it out
quickly. As the product has long been broken even, cost is no longer an issue
per se. What could accelerate product ’s selling out is a decrease in its selling
price, even if this leads to incurring losses on the final sales. Management
accounting’s focus remains profit with a special emphasis on the
identification and anticipation of future losses; hence, remaining units can be
destroyed and accounted for as losses measured as its variable costs only
(Westkämper, 2000).
At the same time, as management accounting follows up time to losses on
the product , inventory accounting becomes a central concern, since
warehouses supposedly need to be emptied in order to accommodate the
next product . This new emphasis on inventory accounting results in an
additional focus on logistics and their capabilities of freeing warehouse
space. The figure hereafter summarises product life cycle and accounting
issues (Fig. 2).

Fig. 2 What counts in product life cycle

In the aforementioned figure, the X point in the middle of the growth

stage pinpoints when the product is broken even and can start being
profitable. The ellipse between the dotted curve representing costs and the
continuous curve left to the break-even reveals the investment made by the
company during the launch stage. The ellipse right to the break-even point
conveys the profit margin generated from the product . This profit is at its
highest during the maturity stage and diminishes until the “stop” point is
reached: when selling the product is at a loss. It is time to terminate this
product and allow the next one to replace it. It is important to notice that,
even though the product is declining and profit decreases, losses do not occur
at the beginning of this stage. The decline stage can be characterised by the
law of diminishing returns: every additional unit sold is less profitable than
that preceding it. The figure below summarises management accounting’s
concerns and evolution at each stage in product life cycle (Fig. 3).
Fig. 3 Product life cycle accounting

3 Target Costing
Owing to a product life cycle over which the company has no control, selling
price, and thereby cost , appears as externally imposed. Total cost and selling
price find themselves driven by the five forces operating on the market :
competitors, customers, substitutes on the market , suppliers and the
possibility of new entrants (McGahan & Porter, 2002; Porter, 2002). This
externality of cost and selling price results in an imperative to apply target
costing so as to fit with market requirements. Whilst target costing principles
are well known and understood, its implications for value chain management
are less. This section therefore reconstructs all this, by first reminding of the
principle itself, followed by insights into strategy ’s influences on cost and
selling price, which leads to discussing the implications on value chain
management and operations.

3.1 The Target Costing Principle

The principle of target costing is well known and comprises of three steps
and a formula. The first step consists of determining a selling price that
should apply to the product . This is usually done by a joint work between
management accounting and the marketing department. This target selling
price results from market studies and appears as the selling price at which
the product can be purchased (Gagne & Discenza, 1995; Niedrich, Sharma, &
Wedell, 2001; Rajendran & Tellis, 2001). Whilst this principle is clear, it is
much less how this target selling price is set. The marketing department
supposedly identifies at what price the product can be sold and in what
quantities given market structure. This first step whose conclusions—selling
price—are usually taken for granted is the offshoot of a joint operation from
R&D developing a new product , marketing and management accounting
(Jørgensen & Messner, 2010).
Once the target selling price is set, the second stage of target costing can
occur: defining a target margin. That is, for whatever reason, the company
rests its business operations upon a standard margin which should apply to
its products. The margin rate is set in advance and is to be honoured. It is
then on the basis of this standard margin that standard costing , budgeting ,
budgetary control and performance management are applied (Cooper, 2017;
Cooper & Slagmulder, 1999; Everaert, Loosveld, van Acker, Schollier, &
Sarens, 2006). The second question left unanswered is that of how this target
margin is set. There are usually two options to a target margin. When the
company is one competitor amongst others on its market , the standard
margin is usually the same as the industry’s: a ratio of costs against turnover
expressed as a percentage.
The second option, if the company is in a position of not following the
market , because it is a leader or because it rests upon a differentiation
strategy , management can set the target margin of their own. Again, this
target margin appears as a ratio of costs against turnover. In this particular
case, where the company is not so much under market constraints, the target
margin can differ from what other competitors being price takers would
incur and be higher (Cooper, 2017). In this specific case of the company not
being price taker, this higher target margin can serve for multiple purposes
but remains as a standard margin to be met: total costs should not exceed
this margin. The first aim of such a target margin can be the absorption of
fixed costs, especially R&D and marketing costs incurred at product life cycle
earliest stage. Such is the case when the product is a leader on its market or
expected to become so; this can occur during the growth stage or the
maturity stage in its life cycle, until other competitors impose lower selling
prices and therefore margins (Westkämper, 2000).
Depending on the stage in product life cycle , either target margin or
target costs vary. During the growth stage, in order to follow up the break-
even point, the target cost should comprehend all costs incurred, including
fixed costs, investments and possible sunk costs. That is, the target cost is
defined as an absorption target cost . At product maturity , the company is
broken-even; hence, the target cost no longer needs to include initial
investments and fixed costs. This is where, depending on company position
on the market , either the target is cost or margin. When the mature product
attracts many competitors endeavouring to dominate by costs, the target
imposed on the company is cost . Conversely, when new competitors join this
mature market because they can have a share therein, the leading company
can set a target margin increasing over time, as fixed costs no longer need to
be accounted for and allocated to the product itself.
In sum, what is usually understood as target costing is more complex than
it appears, insofar as it is not just cost itself that counts. And even the
boundaries of this cost are not perfectly clear: total, fixed, variable? The
inclusion of which costs need to be accounted for is contingent upon
corporate strategy and stage in product life cycle . In other words, the target
cost itself varies over time and requires a strategic reflection on target selling
price and target margin as well as an accounting reflection as to what needs
to be accounted for and how. As always with strategic management
accounting, what matters is to identify what counts as strategic in target
costing . Thence, what is known of target costing is the following formula:

Case n°2. A restaurant chain… On Target Margin Imposed

In a famous UK restaurant chain, the dishes served do not differentiate
themselves significantly from those served by competitors. Clientele is the
 same from one competitor to another, resulting in product and prices
being perfectly aligned. Also, in the restaurant industry, profit margin is
more or less observed as 30% standard . Consequently, costs are imposed
by the profession. To this end, in this restaurant chain, for each dish,
management attentively controls all material, labour and overhead costs
and efficiency. When a dish is no longer profitable, it finds itself removed
from the menu and is replaced with a new one, expected to generate more
revenue. When this new dish starts being profitable in one chain, other
competing chains tend to mimic and serve it, progressively imposing a
standard selling price and cost that the launcher is to follow. This is how in
restaurant chains there is a regular turnover of dishes. The dish target cost
operates as management accounting’s working unit (Ahrens & Chapman,
2002).

3.2 Identifying the Cost Structure

The target cost set for a product is the maximum total cost the company can
incur and usually comprehends the cost of materials , cost of labour cost of
overheads. Having said that, it is unclear at this stage to what to each of these
costs corresponds and implies. Therefore, target costing needs, as part of
corporate strategic positioning, must be accompanied with a strategic
reflection called strategizing (Chua, 2007; Jørgensen & Messner, 2010; Parker,
2013; Wright, 2008).
Within this reflection, rather than the total cost , what counts are all its
components. In this case, the usual classification of costs whereof the product
comprises is not very insightful and does not really allow for any decision-
making (Anthony et al., 1984), because it is characterised by a certain
amount of vagueness (Colwyn Jones & Dugdale, 2001; Jones & Dugdale,
2002). Instead of relying on such a vague and not operational classification of
costs, the product cost structure must be understood.
In order to identify product cost structure, its own value chain , different
from company value chain needs to be designed. That is, target costing is
necessarily associated with the organisational design implied by this product
(Simons, 2005, 2010). Designing the product value chain is aimed at
identifying those costs that are relevant to the product itself but also those
costs that are considered strategic and must be internalised. Conversely, costs
deemed irrelevant to the product or not strategic can be taken off the value
chain . This leads to management accounting’s usual question of make or buy
(BBRT , 2009b; Lamminmaki, 2008; Nicholson, Jones, & Espenlaub, 2006;
Sartorius & Kirsten, 2005). Whilst this traditional question of make or buy
usually relates to company performance and know-how target costing poses
the question of which links in the value chain are strategic enough to be
maintained within on corporate premises and which ones are not and can
therefore be outsourced (Simons, 1987b, 1990, 1991; Simons & Davila,
1998).
Identifying the product value chain consists of determining which cost
drivers are critical to the organisation and deserve to be maintained on
corporate premises. Depending on the company’s core business and strategic
concerns, these critical cost drivers vary. In other words, as Transaction Cost
Economics claims, what deserves internalising is any activity specific to the
company, viewed as a specific asset inevitable for value creation (Williamson,
1979, 1981, 1985).
For instance, IT costs in most organisations can be outsourced to supplier
companies with various forms of contracts (paying for a consultant, paying
for an external service, paying for an IT system and a permanent consultant,
renting an IT installation and maintenance services, etc.) Such is possible in
companies where IT is not critical and does not relate to core business
activities. Thence, a company whose core business activity relates to IT
cannot afford to outsource it (Lacity & Hirschheim, 1993). Microsoft, Apple or
any technology start-up is less than likely to outsource this cost driver on its
products. The same logic applies to every single link in the value chain . When
related to a specific product , strategic cost drivers and links in the value
chain vary from one item to another, and this depending namely of each stage
in its life cycle as well as its strategic positioning.
When the product is being launched and grows, the company has not
absorbed yet its initial investment and fixed costs and is concerned about
protecting its technology and know-how. Therefore, anything relating to
manufacturing is likely to be maintained on corporate premises, so that no
competitor be likely to prematurely have access to the core of this specific
knowledge.
Outsourcing this puts the company at risk of losing its competitive
advantage (Montgomery & Porter, 1991; Porter, 2008, 1986).
This implies the accepting of a cost structure in which manufacturing
costs would represent a fairly high amount of the target cost . Still, when the
product is growing, the company’s main strategic challenge consists of its
capacity to supply the market and deliver the expected quantities on time.
Thence, in order to avoid any risk of losing control of the supply chain, the
company is more than likely to internalise logistics . Outbound logistics in its
capacity of delivering the final product to the market needs to be
internalised. Likewise, inbound logistics in its capacity of supplying the
company with expected materials needs also to be internalised. For
management accounting, internalising a link results in it becoming a fixed
cost operating like an overhead cost . Conversely, outsourcing a link in the
value chain is similar to taking it as a full variable cost . When the cost of a
link in the value chain is variable, as any other cost , it remains fully
manageable; it is possible to call on competition to optimise it. Conversely,
when the cost of a link in the value chain operates like a fixed or overhead
cost , it loses its manageability and is then borne or undergone by the
company (Lamminmaki, 2008; Langfield-Smith & Smith, 2003; Nicholson et
al., 2006; Sartorius & Kirsten, 2005; Shy & Stenbacka, 2003).
Noticeably, not every cost can be outsourced in the view of optimisation,
namely when there is a risk of losing control of corporate competitive
advantage. In suggesting a maximum cost that the product can bare, target
costing does by no means suggest that any cost must be compressed. To some
extent, target costing can be summarised through a formula slightly different
to the one usually taught in textbooks:

The manageability or unmanageability of these strategic costs can lead

one to rewrite this formula, using different concepts having however the
same signification.

3.3 Designing the Product Value Chain

It proceeds from the cost structure aimed at reaching the target cost the
product value chain . What is strategic to this product , given the strategic
concerns and constraints of the time, shall be included into the product and
its total cost . In this case, two situations may arise, where management
accounting plays a central role .
The first possibility occurs if the integration of every single strategic link
in product value chain falls within the scope of the target cost . In this
situation, management accountant’s role embraces a new dimension, viz.
following up the costs of the product ’s own value chain . In addition to
management accounting concerns implied by corporate strategy and product
life cycle , cost accounting systems need to be implemented. Within such
costing systems, the target total cost operates as a standard cost and means
of falling within its scope drives the product ’s budgetary process as well as
budgetary control (Berland, 1998; Berland & Boyns, 2002; Berland &
Chiapello, 2009).
 Case n°3. Smart City On Value Chain Integration
When the first Smart car was launched and for the first couple of years
of its growth on urban markets, the company was producing one product
only. Thence, product and corporate value chain could conflate. Given
design originality and technological secret enabling to reduce vibrations
on such a small and light car, every single link in the value chain appeared
as strategic and would therefore be fully integrated. This resulted in the
construction of Smart City, a precinct dedicated to Smart activities. This
village’s originality consisted of its designing pursuant to the value chain .
At the precinct, entrance was headquartered the logistics department
placing orders and receiving materials . Once received and unwrapped,
these were placed on a trail leading to warehouses where they would be
stored until production calls them. Another trail would then lead materials
to the factory house where they were assembled and cars fabricated. Then,
the end product was placed on a different trail leading to the quality
department for testing. At the exit of Smart City was the outbound logistics
receiving orders and dispatching cars to clients. With this model, Smart
was securing its technology and aiming at compressing costs relating to
quality management . By controlling the entire process, Smart would not
allow for defect cars damaging their brand image. As the audience
targeted was that of solvent urban yuppies, a Smart car could be perceived
as a fashionable object deserving a high selling price. On the urban car
market , selling price was c.20% higher than that of competitors, which
enabled the incurring of higher costs at the beginning. Smart City was
made possible because customers could afford a more expensive car
(Lewin, 2004).

The second possible situation, which is most likely to occur, is that where
integrating every single strategic link into the product ’s value chain results in
a total cost exceeding the target cost , now operating as a standard cost .
What then confronts management accounting is an imperative to optimise
the product value chain worldwide. In this case, management accountants
need to review every single process and link in this value chain and trace
target costs, efficiency and profitability for each of them. In the meantime,
countries with a competitive advantage for each link in this product ’s value
chain can be selected to host it (Porter, 1998a, 2008). Management
accountant’s role embraces a new dimension, viz. reviewing processes, doing
international benchmark and accounting for a global competitive advantage
(Bowman & Toms, 2010; Lehman, 2009). This notion of product value chain
can be summarised in Fig. 4.

Fig. 4 Product value chain

In the product value chain ’s designing, not all links need to be located in
low-cost countries but in countries where the company can build a
competitive advantage for a certain activity . This ability is contingent upon
corporate strategy and stage in product life cycle . As the target cost only
applies at the soonest during the growth stage but more often at product
maturity , the implications for the company and its product value chain vary.
When a target cost appears as constraint during the growth stage, most links
in the value chain are strategic (from R&D to logistics , including production )
and must be integrated. This said, locating some of these for-now-still-
strategic links to a country with a competitive advantage may put the
company or the product itself at risk of losing its own competitive advantage.
The risk consists of local partners or units not necessarily abiding by
corporate procedures or policies. Such loss of control over local partners may
undermine company positioning, especially if quality does not meet
corporate standards or affect brand reputation if logistics cannot deliver
rapidly growing quantities of the product . Or, even worse would be the
situation where the local partner or subsidiary takes its autonomy and
decides to use the technology specific to its parent company’s product to
manufacture and sell it on its own, thereby illegally using patents and
fabrication secrets for their own benefit (Chang & Hwang, 2002; Joseph,
2006).
 Case n°4. Danone Product Value Chain and Loss of Control
In the early 2000s, Danone was locating in China the assemblage of
milk and fruits in its lead yoghourt, known under different names from
one country to another. This was aimed at selling a new product with
some health-oriented merits at a price acceptable to the market . R&D was
maintained on headquarters’ premises in France, considered too strategic
to be shared. After a few months, it appeared that this growing product ,
selling extremely well. Suddenly, the product stopped selling in most
countries where it was positioned. Danone’s management discovered that
the subsidiary was eventually selling the product for its own benefit at the
same time and at a lower rate than the parent company would. The
technology found itself accidentally stolen and illegally utilised the
subsidiary operating in the country where production was located without
Danone being able to really react. After this incident, Danone and a series
of other leading companies decided to relocate to headquarters’ premises
the manufacturing or assembling of their growing or leading products so
as to avoid lose control over their own technology perceived as strategic.
Since then, Danone and most companies have located outwith
headquarters’ premises the production of elder generation products
whose maturity has been proofed, hence the possible loss of this
technology would not be as endangering as for a lead product (Meschi,
2004).

3.4 Designing the Adequate Management Control System

The revised cost structure and value chain implied by the conjunction of
target costing and the management of product life cycle results in a different
way of conceiving the company from a management accounting viewpoint.

3.4.1 The End of Responsibility Centres

Traditionally, a company is organised around responsibility centres
characterised by their own value drivers (Anthony et al., 1984). Traditionally,
operating departments, defined as responsibility centres, have unique inputs
and outputs measured in monetary terms. These centres are managed by
responsible managers commissioned to manage and measure their
performance based on monetary terms. Inputs are resources needed and
used measured by costs (such as material, labour hours and related services)
to produce a desired output that could be tangible, such as finished goods, or
intangible, such as services in order to generate revenue or provide internal
services. Therefore, inputs in responsibility centres are usually expressed as
costs. Outputs can most of the time be expressed as revenue or value
creation. What has traditionally been at management accounting’s core is the
measurement of various outputs to inputs ratios, i.e. what costs should be
incurred for the amount of measured output.
Anthony et al. (1984) notes four types of responsibility centres around
which management accounting has traditionally been organised: expense
centres, revenue centres, profit centres and investment centres. In an
expense centre, management is responsible primarily for expense control,
which has led to the most-known form of cost and managerial accounting . In
a revenue centre, where management is responsible for output management
and measure : revenue generated (e.g. sales force). In a revenue centre, as
costs do not matter so much, management accounting focuses on revenue
generation. In a profit centre , management is responsible for the profit
margin, i.e. the bottom line after expenses have been subtracted from
revenue. There, management accounting has the dual focus of the other two
types of responsibility centres and certainly offers the most comprehensive
view. In addition to this, profitability measurement rests upon a tracing of
management performance and economic performance . To Anthony et al.
(1984), this dual performance is central to profit centres, inasmuch as
management’s personal performance measurements (hence personal
interest in the business) drives how a company views costs and expenses.
Since profitability is a major measure of management performance ,
reduction, control, and optimisation of costs and expenses become a priority,
and eventually firm strategy . Lastly, in an investment centre , the same logic
as in a profit centre applies to capital expenses. Management accounting’s
role consists of modelling and controlling the return of this capital expense ,
understood as an investment. Basically, two types of measures appear as
central: return on investments and residual income.
Since the value chain has applied to the company as a whole, each
responsibility centre would relate more or less to functional departments.
Some departments are allegedly spending whilst others are known for
generating revenue. Traditionally, spending departments are those
considered less useful when the product finds itself no longer growing but
either being mature or declining. Such is often the case of marketing or R&D
(Anthony, 1952). The management accounting treatment of a production
department has been ambiguous, and this activity being often perceived as a
source of expenses in labour , material and overhead , at the same time as it is
the main source of revenue. Without production , no revenue driver.
With the advent of product value chain implied by life cycle accounting
and target costing , the notion of responsibility centres has changed entirely
and led to Activity -Based Accounting and Activity -Based Management too
often collapsed to Activity -Based Costing (Alcouffe, Berland, & Levant, 2008;
Armstrong, 2002; Evans & Ashworth, 1995; Hixon, 1995; Lukka & Granlund,
2002).

3.4.2 Product -as-Activity -Based Management Accounting

Given product life cycle and the progressive imposition of its target cost , the
product finds itself at the core of management accounting. From then on, it is
its cost , its revenue and its profitability that are measured. But also, as a new
product is being launched when the current lead product is mature or is
about to decline , at least two product value chains shall coexist, one for each.
Within this context, it becomes difficult to envisage a mere overarching
management control system organised around departments functioning in
silos. It is not the cost of marketing or the revenue from general sales that are
central. Rather, what counts can be marketing cost and returns on a specific
product and at a specific stage in its life cycle. Thence, the product itself
becomes the value driver, thereby including investment, cost and revenue, all
this ultimately leading to profit . The product consumes resources from
existing departments, and it is this consumption that is accounted for by
management accounting.
The product counts on its own value chain and possibly consuming some
overhead costs incurred by the headquarters (e.g. IT, HR and maintenance).
The figure below summarises this first option. In this option, depending on
the stage in its life cycle, the product operates as an investment centre
(launch ), a revenue centre (growth ), a profit centre (maturity ) or a cost
centre (decline ). The value chain is organised worldwide pursuant to the
target selling price imposed to it by market forces and competition (Porter,
2002, 2008). Some links in one product ’s value chain may be absent from
another’s where it is not or no longer strategic. For instance, production or
logistics on a mature product is not as strategic on corporate premises as for
a growing product . But also, this product consumes overhead services from
the company’s own value chain .
In either case, value chain optimisation and the progressive
transformation of the product -as-responsibility centre into a profit centre
results in this activity purchasing services from the company itself.
Supporting departments change in nature from functional towards service
departments charging for their own activity , which is known as transfer
pricing (Cools, Emmanuel, & Jorissen, 2008; Dikolli & Vaysman, 2006; Meer-
Kooistra, 1994; Rossing & Rohde, 2010) (Fig. 5).
Fig. 5 Activity -Based Management

3.4.3 Product -as-Responsibility-Centre and Shared Service

Centres
It can occur that the product -as-responsibility-centre is integrated into the
company’s value chain and thereby consumes corporate resources.
Depending on which stage in product life cycle , the product itself can be an
investment centre , a profit centre or a cost centre . In this context, the
product does not have a full independent value chain and purchases services
from other departments in the company. It is then corporate management
accountants’ role to determine the amount the product shall be charged. This
is a major change as compared to conventional management accounting
where each department-as-responsibility centre’s costs are allocated to
products, utilising an allocation rate always subject to discussion and
contesting. With arbitrary allocation rates, the computation of a product ’s
total cost is always an estimate and does not give a fair glimpse of its financial
situation (Chandler & Deams, 1979; Rossing & Rohde, 2010).
An implication of target costing and related Activity -Based Management
is that infrastructure and overhead costs appear as drivers of product activity
and charged accordingly. As with utility bills, it is the amount of resources
needed that is charged. Corporate infrastructures and support departments
operate as shared service centres. These centres would charge the product
pursuant to their own financial needs to operate. That is, depending on their
own activity , they may or not charge for the consumption of their overhead
costs (Davenport, 2000; MAl-Subhi Al-Harbi, 1998). Here, the difference as
compared to transfer pricing is that each department operates like a service
provider and the product itself as a client. The internal client is charged as
would any other external client, so that management could theoretically also
call on external providers for the same service. The notion of target cost
would consequently apply to each shared service centre, as though they were
subject to an imperative of aligning their rates and therefore practices and
internal costs with those of external competitors (Bergeron, 2002).
The literature generally emphasises the merits of shared service centres
in relation to efficiency gains and savings enabled through mutualisation
(Farndale, Paauwe, & Hoeksema, 2009; Triplett & Scheuman, 2000). Although
this merit is not to be disputed, this emerging practice can be directly and
tightly associated with the implications of target costing and product life
cycle accounting. Given the imperative of controlling target cost ’s
components, the model of shared service centres can be presented as one
enabling cost optimisation. Outwith pressures from external competitors that
should lead these in-site departments to review their own costs, shared
service centres are useful for mutualising some expenses (Wang & Wang,
2007). Their internal profitability lies in the volume and value of their
operations: either high value -added activities or high amount of orders
received and processed. In the first case, profitability results from economies
of scales that can be achieved internally whilst the second case reveals a
competitive advantage the company creates and sustains (Porter, 1998b).
Where target costing , product life cycle and share service centres
intersect is mostly in case of multi-product companies where different
products are at different stages in their life cycle. Given differentiated
profitabilities at different stages in life cycle, shared service centres may
allow for cross-subsidising products being launched or growing but not
broken-even yet. In this case, the rationale for having recourse to shared
service centres is that some activities cannot strategically be outsourced and
are not necessarily in a capacity of being profit centres per se. In return , as
yet non-profitable products could not afford external services. Through
shared service centres, a mature product operates like a cash cow for the
company, thereby absorbing part of other products’ costs until these become
broken-even.

Case n°5. InfoSys and Philips Shared Service Centres

 In 2008, Philips is confronted with products being unequally profitable
and the imperative of reducing costs. In order to achieve this cost
reduction and improve on its products’ efficiency, Philips launched in 2009
a Shared Service Centre with InfoSys, a former external service provider.
The Shared Service Centre called SBSF provides both companies with HR,
IT and administration, so that Philips and InfoSys’s internal value chain
only comprises of those of their respective products. Large economies of
scales have been enabled.

Source Author adapted from InfoSys partners with Philips in the

journey to transform their Shared Service Centers. 2011.

4 Conclusion
In management accounting, the strategic reflection pertaining to the product
itself is overlooked, as though this product were an abstraction or a reality
external to the company. Yet, the product is central to it, since it is the main
source of revenue and profit , even before being a cause for costs. When
considering the product as the core of business concerns and operations, it
appears that its life cycle needs to be understood and the way its selling price
and associated standard cost are set. This necessarily raises the question of
target costing , far beyond the well-known formula taught in managerial
accounting courses. This formula has major implications for organisational
design and management accounting. Far from being a mere abstraction or
speculation, this is vivid, the target cost proceeds from corporate strategic
positioning, itself being collapsed to each stage in product life cycle . It also
proceeds thence most operational and financial decisions made by
management. Target costing necessarily leads to identifying the relevant cost
structure for this product by determining which costs are strategic and which
ones are not, thereby leading to the design of the ideal value chain for this
product . This ad hoc value chain leads to the adoption of specific controls
and management accounting systems especially suitable for this product at
that particular time. As target costing takes different meanings and forms at
each stage in product life cycle , both its contents and shape vary over time.
Controls cannot be rigid over time but do evolve concomitantly to the core
product . It is the product that drives strategy , operations and controls (Fig.
6).

Fig. 6 Target costing as value chain accounting

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© The Author(s) 2018
Vassili Joannidès de Lautour, Strategic Management Accounting, Volume I
https://doi.org/10.1007/978-3-319-92949-1_3

3. Performance Management and

Measurement
Vassili Joannidès de Lautour1

(1) Grenoble École de Management, Grenoble, France

Vassili Joannidès de Lautour

Email: vassili.joannides@grenoble-em.com

In its discussion of performance management, this chapter abundantly

borrows from Kaplan and Norton’s work beyond the mere Balanced
Scorecard . This chapter highlights the main challenges confronting
performance management and the way these have enabled the advent
of the Balanced Scorecard and other tableaux de bord. In so doing, this
chapter also discusses hidden or neglected issues associated with these
performance management technologies, such as ideology and
managerial rhetoric and management theatricalisation. This second-
level discussion rests upon Guy Debord’s work on the spectacle society
and exposes performance management as a stage with its scenario and
actors.
Performance has traditionally been part of management
accounting’s remit, since this represents the utmost form of
transforming strategy and operations into numbers. Through this
performance management and measurement task, management
accounting’s position finds itself confirmed at the crossroads of
strategy , operations and finance (Kaplan & Norton, 1996, 2006, 2008).
For most people confronted with performance management, what
needs to be measured is not always clear, as though performance were
a synonym for achievements. Admittedly, it is common to consider that
someone achieving high results has performed well. However, the
notion of performance and associated metrics is broader, embracing the
means by which achievements have been met (Kaplan & Norton, 1996,
2000).
Etymologically, the word performance comes from Latin Performare,
meaning to do, to act, to make. Linguistically, performare is an action
verb; whence, the noun performance too represents an action. The
utmost manifestation of this notion’s active dimension can be found in
the World of the Arts (Badiou, 2009), where those that are not passive
are called Performing Arts (stage acting, dancing, etc.) Likewise, when
passive arts are made active, this is called a performance . Over time, the
word has been transformed into Parformer in Old French around 1200,
meaning to form through. Still in the Middle Ages, ways and means
remain central to the doing, making and acting. It is then only around
1570 that a noun was derived from this verb, as though it had thus far
been impossible to conceive of a snapshot view. The word has
seemingly been set until the nineteenth century, where the word
Performance was utilised to express a horse’s behaviour on the
paddock.
From horse races, the word performance has been so extensively
utilised as to embracing numerous meanings. Outwith horse races, in
the early twentieth century, an athlete’s performance has revealed his
or her behaviour in his or her discipline. By extension, this behaviour
has been progressively summarised as athletes’ results or
achievements. Once the notion of performance was set in reports on
sports, it has been more widely employed to determine someone’s
achievements in any other field. This commenced in the mid-twentieth
century, after World War II when productivity started to be a concern
for management (Berland & Boyns, 2002; Edwards & Boyns, 2012;
Fleischman & Boyns, 2008). This meaning has remained the dominant
usage of the word until the nineties where it has been employed to
determine technological characteristics and capabilities. Whilst it had
been employed in the singular in the past, the plural seemed to
generalise: a computer’s performances have then highlighted what this
device is capable of achieving owing to its intrinsic characteristics
(Bauman, 1986).
 Under the patronage of the Public Choice and the New Public
Management , the public sector’s legitimacy has been contested, its
incapability of completing its mission highlighted an alleged poorer
performance than the private sector (Arnaboldi & Azzone, 2005;
Broadbent & Laughlin, 1998). That is, the notion of performance has
progressively drifted towards the capability of achieving a mission and
meeting an objective (Drucker, 1973, 1999).
Whichever definition of performance is retained, it appears that it is
more than just a result or an achievement. This notion embraces two
other dimensions: the intrinsic capability of achieving on the one hand
and the process by which this is enabled. Performance is not so
important per se, unless it is a basis to which one relates and upon
which one relies for a judgement or decision. In sports, it is on the basis
of an athlete’s performance (current behaviour and past results) that
people can wager money. Pursuant to this, the notion of performance is
necessarily colligated with the notions of a standard or benchmark
against which actions and achievements can be compared. Comparison
itself implicitly leads to measures and the setting of objectives. By
extension, performance can be assessed through metrics to which one
can relate and on which one can rely. Accordingly, performance
management necessarily finds itself associated with measurement.
This chapter is organised into two sections. Firstly, performance
management systems are so defined as to develop the best-known
technology, i.e. the Balanced Scorecard . Secondly, once the Balanced
Scorecard ’s functioning and logic are understood, the main issues
relating to this performance management system are presented. These
consist of some bitter critiques on its essence but also a more societal
critique on its contribution to the spectacle society.

1 Performance Management Systems

Since Peter Drucker’s seminal insights into managerial work and
performance management, this latter has become management
accounting’s main remit. In organisations and in corporate life,
performance management systems nowadays tend to be colligated with
management accounting, thereby leading to a form of Reliance on
Accounting Performance Measures that are most widely known, with
their merits but also their flaws (Chenhall, 1997; Harrison, 1993; Lau,
Low, & Eggleton, 1995; Otley & Fakiolas, 2000). The two types of
corporate management systems are undoubtedly the Balanced
Scorecard and the French Tableau de Bord (Bessire & Baker, 2005;
Bourguignon & Chiapello, 2005; Bourguignon, Malleret, & Nørreklit,
2004).

1.1 Performance Management

Performance management is undoubtedly one of managers’ day-to-day
duties, since this is tightly associated with management per se.
Managers’ main role has historically consisted of placing the right
person at the right place and ensuring this person does the right thing
(Anthony, 1988; Merchant, 1985, 1998; Merchant & Van der Stede,
2011). It is therefore part of managerial work to assign duties and tasks
to people pursing a common organisational goal. Neoclassical
microeconomics would argue that this goal consists of maximising the
corporate profit function and thereby value for stockholders (Jensen,
2001). With the rise of the third sector and consciousness of corporate
social responsibility, common objectives have been understood more
broadly (Gray, 2002; O’Dwyer & Unerman, 2007).

1.1.1 The Performance Management Cycle

Pursuant to these wider objectives, not just profit and value
maximisation, performance management raises a number of questions
prior to devising any control technology. The first question relates to
corporate goals and objectives, which leads to ask oneself what are this
organisation’s ultimate purpose and raison d’être. This leads to
question what society and organisational stakeholders, stockholders
included, expect of the organisation. Far from being trivial, these
questions are the grounds upon which an organisation rests, since the
answer thither determines strategic directions and the operations that
proceed thereafter. The second question raised is that of how things
shall be organised and done in order to meet this objective. From a
managerial and operational viewpoint, this leads to asking what value
chain is required for this purpose and what actions are needed. The
third question proceeds from the first two and consists of asking
oneself what people are needed for these various actions.
 Once these three questions have found an operational answer,
performance management raises a series of more technical questions.
The first question relates to what exactly is expected of these people
assigned with duties: what their individual actions are aimed at
achieving in order to enable the completion of the common objective.
This raises another question pertaining to the resources these
employees need to complete the mission and meet these objectives.
More broadly, these questions re performance revolve around day-to-
day operations and people’s day-to-day role within the organisation
and their duties.
Owing to etymology, performance rests upon three pillars, whereof
two have thus far raised questions: capabilities and processes. The
third pillar being achievements and results, a third series of questions
relates to what needs to be assessed exactly and how. As assessment is
intrinsically a judgmental appreciation—good, poor, sufficient,
insufficient, better, worse, etc.—a question arises as to the assessment
criteria to adopt (Bourguignon, 2005; Bourguignon & Chiapello, 2005).
These are usually presented and known as Key Performance Indicators
, each of them supposedly highlighting what strategically counts (Otley,
1999, 2001, 2003).
The triple questioning around which performance management
revolves sheds light on what etymology revealed: not just achievements
need to be assessed. These latter are the final stage of performance
management practices’ three steps (Anthony, 1965, 1988; Anthony,
Dearden, & Bedford, 1984). Firstly, through strategic planning and
forecasting, organisation members can determine the strategic
objectives that need to be assessed. Secondly, through day-to-day
operations management, execution control enables to determine
operational objectives that need to be set for every action. Thirdly,
through ex post control, manages can assess that objectives have been
met and how this has occurred.
Performance management is not pertinent per se but needs to be
repositioned within a strategic and managerial context. Obviously,
various measures are produced but should support decision-making;
otherwise, they will appear as useless (Anthony, 1965, 1988; Anthony
et al., 1984; Drucker, 1973, 1999). Performance measures are pertinent
in comparison with other metrics, depending on the organisational
context (Fig. 1).

Fig. 1 Performance measurement systems

Whatever the comparison reveals, satisfactory or insufficient

performance , managers are to find explanations for these results.
Usually, when performance is considered satisfactory, managers do not
seek for reasons. Albeit, high achievements can be owed to
management or employee quality but also to external favourable
circumstances. In this latter case, a favourable environment may also
hide structural poor performance . Such can be the case of a
manufacturing company when raw materials are extraordinarily
inexpensive, because their price has dropped. This can be the case of an
airline if the price of kerosene has dropped. In either case, operations
may be far from optimal, this sub-optimality being hidden by these
favourable circumstances. Conversely, it is more frequent to seek for
explanations when results are below expectations. In general, the first
reaction to disappointing performance consists of blaming poor
performers. As poor performers are not always responsible for their
insufficient achievements, management needs to find convincing
explanations. These can relate to deficient management and
instructions, defect equipment or raw materials , or unfavourable
external circumstances.
Once an explanation for the observed results is found, management
must ascertain its overall credibility and plausibility. That is, based
upon this tentative explanation, it is management’s role to trace the
cause-effect relationship between the observed performance level and
the proposed reasons. For instance, it is admissible that natural
disasters such as an earthquake would affect the conduct of operations
and undermine performance . Notwithstanding the butterfly effect, it is
not quite plausible that an earthquake in Haiti or California would
affect the performance of employees located in Australia. It would be
more plausible that this earthquake could affect the performance of
employees based in New Mexico. Conversely, the performance of people
based in Australia might be affected by an earthquake in New Zealand
or Japan. Again, in both situations, even though the effect is plausible,
there is no obvious cause-effect relationship. Therefore, management is
tasked with the identifying of the most accurate and convincing reason
for the observed performance level.
Finding the explanation is already a step towards a solution to the
problem, if any. In case of disappointing performance levels not caused
by unfavourable external circumstances, or of apparently satisfactory
performance induced by favourable external circumstances,
management can take corrective actions. A performance report is then
prepared and submitted to the headquarters for approval. This report
summarises objectives, results, cause for these and suggested
corrective actions for the future. The report below produced by the
French supplier of a large engineering company can give a glimpse of
what a performance report can look like. In this figure, the fact that the
report is in French should not be a real problem, since its purpose is
merely to show what shape it can take (Fig. 2).
Fig. 2 Performance report

1.1.2 Performance Management as Practice

Regardless of the tools and technologies employed, it is important to
understand the main components of a performance management
practice. This implies that, as with any other management control
practice, the notion of practice itself should be clarified. A practice is
usually defined as a bundle of common understandings, routines, rules
and teleoaffective structures (Ahrens & Chapman, 2007; Ahrens &
Mollona, 2007; Barnes, 2000; Bourdieu, 1977; Certeau (de), 1984,
1988; Chotiyanon & Joannidès de Lautour, 2018a, 2018b; Coulter, 2000;
Jørgensen & Messner, 2010; Lounsbury & Crumbley, 2007; Schatzki,
2000a, 2000b, 2005).
Common understandings of how to do things are first the knowledge
that individuals have a way of performing actions. This knowledge can
be explicit or implicit. Common understandings also encompass the
interpretation people can make of knowledge and the way they can
translate it into actions. However, owing to particularities of the
context, practices may be altered, as common understandings might
change from one actor to another (consciously or non-consciously),
different rules might be issued, whilst ends might be emphasised
differently (Schatzki, 2005, p. 475). Therefore, rules are issued to
impose a normative way of doing things within the practice. Doctrines,
guidelines and other norms are intentionally developed and enforced to
make individuals comply with the structure’s overall views through a
normalised array of understandings, desires, beliefs, expectations,
emotions and ultimately actions (Schatzki, 2005, p. 481). Daily
application of these rules rests upon a habitus consisting of the
exteriorisation of interiorised knowledge through routines. Rules and
routines specify correct or at least acceptable behaviour for the practice
to be perpetuated. This normative scheme is supplemented by
teleoaffective structures encompassing ends and projects whither the
practice is addressed, and combined with the emotions usually
expressed in the pursuit of that practice. Actually, as appropriations
may vary, arrangements are necessary to constitute a practice: people
may confront their understandings with those of others and readjust
themselves accordingly until their behaviour is acceptable (Schatzki,
2000a, 2005).
Common understandings in performance management can be found
in a sort of agreement re the organisation’s mission and the direction
taken. Such understandings need to be acquired by each employee
through formal and informal socialisation. Routines appear in rituals
developed and followed to assess performance , such as annual
performance calendar (self-assessment, assessment through peers,
annual performance meeting, etc.) Rules can be found in the formalism
associated with each step (e.g. a certain form to fill). Lastly,
teleoaffective structures relate to the emotions serving as the
organisational cement and by which employees are grouped together.
These teleoaffective structures consist of beliefs in the organisation’s
purpose and raison d’être outwith the mere pursuing of a corporate
objective. These teleoaffective structures can rest upon the
organisational myths aimed at binding people together.
It appears that performance management as practice involves a
number of organisational actors, if not all of them. At least, every
employee , including management, is supposedly subjected to
performance appraisal; however, rules and routines change from a
category of employee to another. The closer to the grass-roots
employees are, the more focused performance indicators are.
Conversely, the higher in the hierarchy employees are, the more macro-
oriented performance indicators are (Kaplan & Norton, 2000). Also,
whilst subordinates’ performance can be assessed through meetings
with their supervisors, top executives’ can only be appraised on the
occasion of the Annual General Meeting attended by stockholders
(Roberts, Sanderson, Barker, & Hendry, 2006).
At each stage of this performance management practice, different
actors are involved. At the earlier stage, with the first series of
questions pertaining to organisational raison d’être, strategic and social
objectives resort to senior management including the CEO , the CFO and
the COO (Hope, 2006). At the second stage, as the necessary value chain
is questioned, the COO , functional managers and management
accountants are involved in the design of more operational indicators
(Argyris, 1990; Hope, Bunce, & Röösli, 2011). At the third stage, middle
managers are explicitly in charge of devising specific and focused
performance indicators for their direct subordinates (BBRT , 2009f;
Johnson, 1994).

1.2 The Balanced Scorecard and Tableaux de Bord

The idea that management control should be aligned with strategy is
central to organisational actors’ day-to-day life (Mintzberg, 2006)
under the purview of giving sense to their own work activities (Weick &
Sutcliffe, 2007). This is the context form which it was noticeable that
controls too often tend to be disconnected from strategy , thereby being
perceived by employees as having little relevance (Kaplan & Johnson,
1987). Once this observation was first made, Robert Kaplan extended
his own investigation so as to offer a management control solution
enabling to re-align controls with strategy . This effort led him to
develop what is nowadays known as the Balanced Scorecard , where
key success factors are perfectly aligned with one another and where
cause-effect relationships are sought to explain performance -as-results
(Kaplan & Norton, 1996).

1.2.1 Strategy and Alignment

Even though a Balanced Scorecard approach was supposed to enable
the alignment of management control with strategy , Kaplan and
Norton’s (1996) book was very abstract and incantatory, almost
appearing like as profession of faith. In this book, as the authors are
known for advances in management accounting more than in strategy ,
this latter notion could appear as very elementary, if not simplistic. This
was especially manifested through the case studies presented, where
strategy was defined in a very explicit manner and proceeded from a
consensus. Albeit, in most organisational settings, defining strategy is
much more problematic, loose and ambiguous (Hope et al., 2011).
Therefore, Kaplan had the intuition that the company should be
conceived of through strategy maps, whereby managers would
constantly be urged to serve organisational strategy (Kaplan & Norton,
2000). This was the condition under which their performance could be
assessed, the developed control technology being consistent with a
clearly defined strategy (Kaplan & Norton, 2006, 2008).
This idea that controls and strategy must be aligned is central to the
rhetoric borne by the Balanced Scorecard promoters, and whatever
solutions they recommend. This probably dates back to the 1987 book
on relevance lost (Kaplan & Johnson, 1987), very much echoed within
academe and experts’ circles. In 1987, the management control
technologies in place are grounded in the logic of the large
manufacturing company operating on a domestic market inherited
from the industrial revolution. It is no surprise that these technologies
no longer respond to the new needs and demands articulated by
twentieth-century companies . The main manifestation of this
disjointing between strategy and controls lies in that what is eventually
measured no longer matches organisational strategic objectives. The
need for aligning controls with strategy appeared as an explicit
intention to fill this gap by actualising an explicit green line between
strategic decisions and field operations. The Balanced Scorecard
constantly and repeatedly insists on this alignment through its four
perspectives (customer , internal business processes, learning and
growth , finance) and shape (objective, target, measure and initiatives).
The Balanced Scorecard all revolves around a strategic vision
instilled by management and supposedly diffused towards all
employees. This strategic vision entails the overall corporate mission ,
relationships with suppliers, customers, competitors, public authorities
as well as expected position on the market and international reach
(Montgomery & Porter, 1991; Porter, 1980, 1985, 1986, 1998, 2002,
2008). Strategy is central to the Balanced Scorecard , insofar as this is
what formalises the value the organisation can create and for whom. It
naturally proceeds from the devised strategy critical success factors,
viz. those items central to mission achievement.
Prior to engaging in the technicalities characterising the Balanced
Scorecard , it is necessary to understand that this performance
management system is not a technique per se but a management
philosophy. Not just is the Balanced Scorecard concerned about
aligning strategy , operations and controls but also and foremost about
finding cause-effect explanations for performance . This central concern
relates to the idea that performance management should serve
continuous improvement, as evidenced in the past with Six Sigma or
the Deming wheel (Bass & Lawton, 2009).
Therefore, critical success factors must lead to key performance
indicators to which a measure must be associated, the explicit
assumption underlying the Balanced Scorecard being that only what
can be measured can be managed. It is no surprise that these measures
are only pertinent if they point to results or achievements and enable a
comparison against objectives or targets. For each key performance
indicator, a strategic objective is set acting as the operational
declension of corporate strategy . Objectives-setting enables to identify
the direct contribution of an action to corporate strategy and critical
success factors. It is implicitly assumed that any action disconnected
from corporate strategy should be abandoned and preferably
outsourced (BBRT , 2009d; Duan, Grover, & Balakrishnan, 2009; Shy &
Stenbacka, 2003). For each objective, a numerical target is set to
determine expected achievement. As the Balanced Scorecard
philosophy insists on the imperative to find cause-effect explanations
for performance levels, for each indicator, a cell is devoted to this
explanation. Lastly, pursuant to the constant improvement concern,
another field is devoted to initiatives that could be taken to enhance
performance for the next period. This philosophy associated with the
Balanced Scorecard is translated into four perspectives: financial,
customer , internal business processes, and learning and growth .
 The financial perspective relates to performance that can be
expressed in financial terms (e.g. turnover, sales and profit margin) or
directly relates to financial matters (e.g. ROI, ROE and ROA). This
financial perspective focuses on financial value creation. In listed
companies , this comprises of value creation for stockholders. In other
contexts, value creation consists of a value -for-money approach (BBRT
, 2009c, 2009e, 2009f).
The customer perspective is the Balanced Scorecard ’s second
perspective and relates to customer satisfaction. The assumption
underlying this perspective is that value can be created only through
customers. Without customers, no income can be generated and
therefore no value can be created. This to some extent relates to an
expression in French business that “the customer is king” and therefore
articulates demands that must be fulfilled. This perspective is especially
important for people working in marketing and sales, quality
management , production or customer services (Strack & Villus, 2002;
Vaivio, 1999).
The third dimension is probably the least intuitive at this stage,
since it emphasises internal business processes. It is not intuitive,
insofar as internal business processes relate to day-to-day operations
and management, thereby appearing as corporate techniques. However,
this perspective is central to the Balanced Scorecard , since the notion
of performance is not limited to achievements and results but also
encompasses behaviour on the field as well as actions undertaken. This
third perspective traces corporate actions’ suitability and
appropriateness to create value for customers and stockholders. With
this perspective, what is followed is not a series of achievements but
the whole performing (BBRT , 2009a, 2009b, 2009d, 2009g).
The fourth perspective, by focusing on learning and growth , sets
out to follow corporate economic development. This perspective rests
upon the assumption that any business pursues the objective of
growing and spreading, by opening new branches, shops or factories.
This implies that growth capabilities should be traced and controlled: a
company that grows is a company allegedly performing well.
Conversely, a company that does not grow is a company either
performing low or a company where management has limited
ambitions. This perspective’s second dimension, learning , focuses on
what can be retained from benchmarking activities and from previous
actions to facilitate growth (Argyris & Schön, 1978, 1996).
Figure 3 exposes the Balanced Scorecard in its most common and
best-known form (Busco & Quattrone, 2014, 2018). The figure however
differs from most common approaches by making explicit a column
usually absent from most representations of a Balanced Scorecard , and
albeit central: explanations. The figure also insists on four perspectives’
intertwining, each of them leading to the other three. It is important to
bear this in mind at all times to be clear with the fact that the alignment
of controls with operations and strategy should operate all the time and
at all levels. Objectives and measures for one perspective must remain
consistent with those from the other three perspectives.
Fig. 3 The Balanced Scorecard

1.2.2 Six Lessons Learnt from Practice

This section introduces six stories of how the notion of alignment can
be presented and appropriated by people in different organisational
settings. Even though Kaplan and Norton’s book is suggestive of
alignment being uniform across organisations, our six stories show that
such is not always the case. Alignment is multifaceted and contingent
upon organisational actors’ willingness and personal involvement in
the design and implementation of a Balanced Scorecard .
 Case n°1. A food Company From a Balanced Scorecard to
Confidential KPIs
In a large international food company, the board of directors
decides in 2000 to implement a Balanced Scorecard . This decision
was made in mimicry of other companies , the Balanced Scorecard
appearing at that time as a fashionable innovation (Alcouffe,
Berland, & Levant, 2008; Craig & Amernic, 2004; Jones & Dugdale,
2002). This technology was aimed at managing performance and
supporting investor relations. Preparation work involved the CFO as
well as the CIO advised by external consultants and helped by
interns. As the project was progressing, it was asked what key
performance indicators should be followed in this Balanced
Scorecard . Understanding how sensitive some indicators could be,
the MD suggested that access to the Balanced Scorecard should be
restricted to some allowed users only: from then on, scores were
considered confidential material; it proceeded thence that indicators
should also be confidential. It became obvious to management that it
would not be appropriate to communicate to markets certain
sensitive indicators, such as litigations relating to trading activities,
health or accidents on the workplace, even though these were
directly proceeding from corporate strategy . Fearing leaks from
within the company, management decided that only some allowed
users should be informed of these indicators.

This experience reveals a mismatch between willingness to convey a

certain level of performance and a inclination to hide strategic
information (Gumb, 2007). Since the latter appears as more important
that the former, reluctance averts alignment from happening. This case
also reveals that alignment can be impossible, owing to insufficient
identification of Tone at the top prior to engaging in this project:
sufficiently resilient discretion and confidentiality re what is strategic,
preventing from following a management fashion.

Case n°2. A local Government From Polity Control Towards

Effective Communication of Achievements
 A local government in France implemented a Balanced Scorecard
to manage polity’s performance . Concerned about social cohesion
and the efficiency of its social policy , elected members of this local
government suggested how the Balanced Scorecard should be fed. It
is hoped that this impulse from elected members with political
authority would influence civil servants’ behaviour and contribute to
polity’s efficiency. Five key performance indicators were defined by
the board:
– Improve people’s employability and economic development;
– Enhance people’s access to health services;
– Enhance school pupils’ success;
– Enhance citizens’ membership feeling and prevent criminality;
– Enhance transport network and people’s mobility.
In total, 164 people were invited to participate in the definition
of these key performance indicators. All actors involved, elected
members of this local government and civil servants, were
enthusiastic about this Balanced Scorecard , because it gave visibility
to their achievements and enabled them to give sense to their day-
to-day work.

This case reveals two phenomena conditioning the possibility of

success for a Balanced Scorecard . Firstly, even though it was initiated
by senior directors and political leaders, the Balanced Scorecard was
appropriated by field actors because it enabled them to make sense of
their work and promote their collective achievements. That is, the
Balanced Scorecard was perceived as a communication channel for
polity. Secondly, the Balanced Scorecard was appropriated by field
actors because its contents were negotiated, revealing a participatory
process. In sum, even if the Balanced Scorecard is initiated by the top of
the hierarchy, if its field actors can contribute to its development, it can
be appropriated without major risks of rejection (Alcouffe et al., 2008).

Case n°3. Two separate departments unite The Balanced

Scorecard as a Tool for Greater Performance
A local government in France implemented the Balanced
Scorecard in order to determine areas for progress in its policy
 towards young people. Under this purview, the strategic objective
was to make sports accessible to everyone. Two years prior to the
Balanced Scorecard ’s implementation, an exhaustive survey was
conducted by the management accounting department. On the basis
of the collected data and of the nine-step process towards the
implementation of a Balanced Scorecard (Rohm, 2002), a strategic
reflection was initiated. In the first place, a three-day seminar was
organised with various directors and senior executives in charge of
policy towards young people. A second stage involved all other civil
servants working on this policy through numerous training session
seminars. This Balanced Scorecard revealed that this policy towards
young people was at the intersection of two separate departments.
Their employees were accordingly all involved with the training
irrespective of their functional affiliation. For the first time, separate
departments would work jointly towards a common objective. It
resulted from this a demand from other directors willing to
implement a Balanced Scorecard in their respective divisions in
order to foster collaborations towards greater achievements.

This case reveals that a Balanced Scorecard can be successfully

implemented if strategy is clearly defined and agreed upon by
organisational members. It also appears that the preliminary strategic
reflection required by the implementation of a Balanced Scorecard led
management to review the way operations are conducted and to re-
engineer their processes. In this case, re-engineering took the form of
cross-departmental collaborations. More broadly, a lesson that can be
learnt is that strategic operations need to be reviewed, concomitantly
as a Balanced Scorecard is being implemented. To some extent, the
Balanced Scorecard appears as a common rhetoric used by all
organisational actors (Nørreklit, 2003) and thereby operating as a
cement fostering organisational culture (Smircich, 1983).

Case n°4. An international software company The Balanced

Scorecard as a Tool for Greater Performance
Within the French subsidiary of an international software
company, a Balanced Scorecard project arises in 2003. Local
management wishes to clarify each of their employees’ roles, duties
 and responsibilities, considering the organisation was unclear. The
Balanced Scorecard was presented as a way of identifying who is in
charge of what and where performance lies. The consultants
working for the company so supported the idea as to having a very
good command thereof until they could commercialise a Balanced
Scorecard software! What caused some dissension was the choice of
key performance indicators and the required strategic initiatives:
whilst management has some set ideas consultants disagree and
suggest theirs instead. The project was blocked until the
international headquarters decided to implement a Balanced
Scorecard in each of the subsidiaries. French management and
consultants opposed this intrusion from the headquarters into their
professional realm and ended up jointly articulating their Balanced
Scorecard .
Notwithstanding their effort, the Balanced Scorecard imposed
from the headquarters was implemented. This one was a translation
of the missions assigned by the main stockholder to senior
management and therefore mostly a reporting technology disjointed
from people’s day-to-day work. Therefore, a second, unofficial
Balanced Scorecard was implemented to help French management
follow up strategy execution by their subsidiary. This unofficial
Balanced Scorecard found itself mobilising management and
consultants who would use it on a day-to-day basis.

The main lesson that can be learnt from this case is that having a
Balanced Scorecard is not necessarily and systematically a synonym for
operations and performance alignment with strategy . What enables
this alignment is appropriation and utilisation by organisational
members outwith mere reporting. This observation reinforces the idea
of a two-way relationship between the Balanced Scorecard and
strategic concerns (strategy , operations and performance ): they are
supportive of each other and appear as a continuous process. As the
official Balanced Scorecard seems to be misaligned with strategy and
operations, the need for an alternative renewed dialogue between local
management and consultants, conveying the merits of a participative
process (Malina & Selto, 2001, 2004). It does seem that this renewal of
dialogue was made possible because this unofficial Balanced Scorecard
was fixing the official tool’s drawbacks and failures.

Case n°5. The International Organisation of La Francophonie

The Balanced Scorecard Unsupported by Management
In the 2000s, the International Organisation of La Francophonie
sought to optimise international coordination for the development of
commercial policies. Accordingly, 50 executives from 22 African
countries were involved in a collective reflection revolving around
strategic analysis, priority objectives, indicators and actions. This
reflection enabled the formulation of a collective strategy upon
which all delegates agreed. This agreement was made possible
because they were all invited to work on of the Balanced Scorecard ’s
contents and shape. The main challenge was that directors, team
leaders and project managers had been to date insufficiently
involved in collective reflections, defining a strategy for the
organisation at odds with what grass roots people were in a capacity
of doing. Notwithstanding this collective effort, senior management
remained disinterested in the approach and did not support this
Balanced Scorecard ’s development and actual implementation.

This case reveals the political dimension of performance management

and more specifically of a Balanced Scorecard (Mehrpouya & Samiolo,
2016). It is manifest here that any performance system can be
implemented only if it gains support from top management. If this
latter shows no or little interest, nothing can formally happen. This
emphasises the fact that a performance management system is
legitimated by the interest management has in its usefulness and
pertinence. This case conveys the need for processes aimed at enrolling
any actor likely to prevent a performance management system from
happening (Alcouffe et al., 2008; Joannidès & Berland, 2013; Jones &
Dugdale, 2002; Justesen & Mouritsen, 2011).

Case n°6. A construction company The Balanced Scorecard as a

Tool for Greater Performance
 In 2007, a French construction company implemented a
Balanced Scorecard to strengthen their sustainable development
policy . About 15 executives working on Quality/Safety and
Environmental matters at the headquarters and on various sites held
a seminar aimed at defining a sustainable development strategy on
the principles underlying a Balanced Scorecard . The team was
expecting from the project the outcomes below:
– define priorities;
– share a common vision;
– formalise strategy to enable managers to include it into their
decisions;
– prioritise corporate objectives and performance indicators;
– decline strategy from management to branches and to local teams;
– improve transversality;
– facilitate knowledge sharing and management;
– intertwine strategy and operations;
– make things clear and visible in execution;
– foster an international value creation framework.
After three years of discussions, the project was still not
eventuating. With the Global Financial Crisis, sustainable
development policies seemed to no longer be a priority for the
company where management decided to abandon the Balanced
Scorecard .

One lesson can be learnt from this case: the environment and
unexpected changes in economic circumstances can result in the
Balanced Scorecard never being implemented. Such can be the case,
even if management and employees are equally enthusiastic and share
a common vision. This confirms that the economic environment plays a
significant role in the definition of strategic priorities. Changes in the
environment can therefore alter strategic priorities and subsequent
related projects. Here, the Balanced Scorecard was eventually not
implemented mostly because it was not considered strategic anymore.
That is, implementing it would not have been aligned with strategy .
These six cases all highlight a different facet of the alignment of
strategy , operations and performance management the Balanced
Scorecard promises. In the 2000s, the Balanced Scorecard appeared as
a novelty capable of regaining lost relevance. The six cases convey the
fact that the Balanced Scorecard ’s novelty rests mostly in this concern
with regaining relevance. Its implementation and utilisation shed light
on the same issues confronting any performance management system:
how it is eventually promoted and then utilised is not necessarily
rational. The technology can be utilised to serve local strategies or
resistance strategies. It can also be utilised in so many different ways
that it is deviated from its initial purpose and missions (Quattrone &
Hopper, 2005). It proceeds from this that the question of alignment
does not revolve around its extent but more strategic issues. It must be
made clear with what strategy operations and control should be
aligned (Carter & Mueller, 2006). But also, it appears as a necessity that
the Balanced Scorecard promoters be perceived as legitimate actors
within the organisation; otherwise, counter-practices would emerge
(Joannidès, 2012). Lastly, the Balanced Scorecard raises a question
pertaining to arbitrations the need for a communication device and
confidentiality imperatives.
In management and accounting research, resistance is traditionally
studied as a reaction to change; only very rarely is it considered as part
of the process of operationalising a vague management or accounting
ideal (Gray, 2010). Moreover, resistance is generally presented as
frontal opposition to an idea or a practice. The Salvation Army case
shows that resistance also pertains to any friction making an object
deviate from its initial trajectory and arrive at another destination. In
an organisational setting, such a form of resistance can be found in the
way that different understandings of a management or accounting idea
can lead to practices deviating from its initial purpose. Far from being
mere opposition to change, resistance is a force enabling the
operationalisation of an idea.

2 Issues in Performance Management

Performance management systems, and especially the Balanced
Scorecard as widely popularised, are not left without being critiqued.
Such critiques have led to suggesting some working alternatives to the
Balanced Scorecard . This latter has however become strengthened by
such critiques, turning performance management into a spectacle.

2.1 Critiques and Alternatives

The Balanced Scorecard has to date been bitterly critiqued, owing to a
series of ambiguities surrounding its ambiguous essence and the
ideology underlying its core principles and diffusion. Building upon
these critiques, opponents to the Balanced Scorecard articulated some
alternatives that have not spread very far.

2.1.1 An Ambiguous Ontology

The underlying assumptions of the Balanced Scorecard are challenged,
highlighting the weaknesses of the Balanced Scorecard ’s conceptual,
logical and epistemological bases (Nørreklit, 2000): “the cause-and-
effect Relationship is problematic since claiming that some factors are
necessarily profitable is problematic unless this follows logically from the
concepts involved” (p. 76). Cause-effect relationships imply that two
items are independent and not logically connected, whilst in the case of
the Balanced Scorecard , the four perspectives can be logically
explained and linked together. In the second place, reasons Nørreklit
(2000), the Balanced Scorecard is limited by an ambiguous relationship
to time due to a necessary lag between the definition of objectives,
measurement and the effects of corrective actions. It transpires that the
Balanced Scorecard conflates measures occurring at different points in
time and presents them as cause and effects. However, the delayed
effect of a corrective action can be known by definition only later on.
Managers thereby have no guarantee that these corrective actions will
have the expected effect on the four dimensions of their Balanced
Scorecard . This leads to question the consistency of metrics used
within one perspective as well as across the four perspectives. More
generally, Nørreklit (2000) questions whether the Balanced Scorecard
can operate as a credible strategic control device. For strategy control
to be worked out, the four perspectives should bring insights into the
organisation situation vis-à-vis the economic, social and political
environment in which it operates. Objectives, metrics and comparisons
relating at least to suppliers and public authorities would be more than
appropriate and eventually are absent. Thereby the Balanced Scorecard
conceptually neglects major features of strategy and cannot succeed in
controlling strategic management.
Arguably, these conceptual weaknesses stress that the Balanced
Scorecard , far from being an efficient management and strategy control
device, is the offspring of a certain ideology (Bessire & Baker, 2005;
Bourguignon et al., 2004). When compared to the French Tableau de
bord, the Balanced Scorecard appears as a way of thinking assuming
that any action undertaken responds to microeconomic concerns.
Financial measures relate to profit maximisation, whilst non-financial
measures stress utility function maximisation (Bourguignon, 2005).
Accordingly, such a management control device can only be generic and
claim to apply to most situations without being discussed and agreed
upon. At best, performance indicators can be negotiated. In no way can
the four perspectives be negotiated or discussed, as they are part of the
system (Bourguignon et al., 2004). In order for this microeconomic
ideology to be applied, the Balanced Scorecard can only be imposed by
managers on the entire organisation, implying that hierarchic
structures be adopted. It transpires from this critique that the
implications of its microeconomic ideology preclude the Balanced
Scorecard from integrating pertinent strategic issues and measures and
be a systematic appropriate management control device. It can apply to
some contexts but remains hardly transferable to other situations (e.g.
non-profits or public sector organisations).
As the Balanced Scorecard has no strong theoretical foundations
and is underpinned by an ideology preventing it from being easily
transferable, its four dimensions appear as a rhetorical device aiming at
convincing managers (Nørreklit, 2003). The visual representation of
how the four dimensions are intertwined and the labels every student
and manager knows very well make the Balanced Scorecard , not
necessarily a pertinent management control device, but an argument to
pass on a management idea. In negative, the loose diffusion of Beyond
Budgeting can be partly explained by its lack of visualisation and
apparently working concepts (Becker, Messner, & Schäffer, 2009).

2.1.2 Alternatives to the Balanced Scorecard

The Balanced Scorecard became popular very soon after 1996, when
the book was first published. This popularity led the authors to develop
strategy maps as methodologies aimed at fine-tuning alignment
(Kaplan & Norton, 2000). This approached made systematic, formal and
visual something that had already long been existing in French
organisations: tableaux de bord a.k.a. dashboards (Bessire & Baker,
2005; Bourguignon et al., 2004; Busco & Quattrone, 2014, 2018). Later
on, in the name of control alignment with strategy , the Balanced
Scorecard has been abundantly critiqued by other experts
endeavouring to develop alternative technologies. Such was the case of
the Boston Consulting Group developing the Real Asset Value
Enhancement model (Strack & Villus, 2002). This model pretends to
prolong the Balanced Scorecard by computing correlations between
operational dimensions and value creation through a Capital Value
Added indicator. With this model, only indicators correlated with this
one deserve to be taken into consideration for performance appraisal.
To date, there is very limited knowledge of organisations applying this
RAVE model. British consultants have developed another alternative to
the Balanced Scorecard , the Performance Prism (Neely, Adams, &
Kennerley, 2002) contesting the narrow conception of strategy offered
by the Balanced Scorecard . Whilst the Balanced Scorecard views
strategy as a mere internal concern for organisations the Performance
Prism views it in a holistic manner: stakeholders’ expectations,
satisfaction and contributions are included.
The rhetoric upon which the Balanced Scorecard rests (Nørreklit,
2000) as well as its unsuitability to certain cultural settings
(Bourguignon et al., 2004) has raised numerous bitter critiques
articulated mostly in Europe. In Latin countries, the Balanced Scorecard
fails to convince; or, when it does convince, its implementing does not
work. Two sets of critiques on the Balanced Scorecard are articulated.
Firstly, having strategic vision as core, the Balanced Scorecard can
only be a control technology imposed by top managers (Bessire &
Baker, 2005). At the time where employee participation, bottom-up
approaches and devolution are promoted, top-down management may
appear as inconsistent if not contradictory. This internally as yet
unresolved contradiction could give some employees the impression
that management intrudes into their professional realm to question
their competences and reduce their autonomy. This technology is
accordingly perceived as an additional surveillance technology calling
for resistance (Bourguignon & Chiapello, 2005). Therefore, employees
in Latin countries tend to privilege tableaux de bord they define and fill
in by themselves. Rather than abiding by objectives management sets
for them, employees in Latin countries tend to prefer defining their
own key performance indicators , setting objectives by themselves and
design their tableaux de bord in a way they like (Bessire & Baker, 2005).
Contrary to the Balanced Scorecard , tableaux de bord do not have a
standard format.
Secondly, building on this cultural dimension, critics of the Balanced
Scorecard argue that this technology is strongly grounded in the US
business ideology, not always compatible with European, African or
Asian approaches (Bourguignon et al., 2004). This ideology consists of
viewing the organisation and organisational life through neoclassical
microeconomic lens as manifested as follows. Being a top-down
technology, the Balanced Scorecard operates like a performance
contract binding subordinates and managers, whereby the organisation
is explicitly viewed as a nexus of contracts (Cyert & March, 1963;
Jensen, 1983). Associated with the North-American accountability
philosophy, honouring a contract leads to rewards whilst failing to do
so results in sanctions if not litigation (Roberts, 2001). It is part of this
culture and ideology that an employee incapable of performing well
should be made redundant on the spot. Contradistinctively, European
ideology would suggest that performance is not a contract but a road
map helping employees. Pursuant to this view, not meeting an objective
should not result in disciplinary actions or litigation. In relation to the
Balanced Scorecard ’s contractual dimension is its over-emphasis on
economic efficiency and rationality at the expense of social aspects of
organisational life and company societal purpose (Meyer, 2002).
Figure 4 conveys a Tableau de bord constructed by a sales manager
in a French company. Although items in this dashboard are in French,
what is important is to see that this manager organised it in a way that
is especially pertinent for his or her own activities, the main objective
being turnover increase. Green and red arrows as well as weather
forecast signs are utilised to highlight satisfactory or insufficient
achievements; a graph allows the sales manager to trace his or her
performance over a certain period of time, and a histogram enables him
or her to compare current performance against peers’ achievements.
Fig. 4 A customised Tableau de bord

2.1.3 The Balanced Scorecard ’s Visualising Power

Considering the Balanced Scorecard a specific tool, given its ultimate
integrative ambition, we are questioning whether and how its
integrated dimension makes it a spectacular framework. This
discussion is developed along two acts. In the first place, the Balanced
Scorecard appears as a stage where performing arts are produced.
Secondly, this point is reinforced by its visualising power, as more than
just a stage.
As the Balanced Scorecard has spread through strong rhetorical
devices amongst which visualisation, questioning whether and how its
integrated dimension makes the Balanced Scorecard a spectacular
framework should contribute beyond the mere Balanced Scorecard
literature. We seek to contribute more generally to an emerging stream
dealing with visuals.
A management accounting device, the Balanced Scorecard
intrinsically plays a role similar to other generalised accounting
systems and technologies, e.g. double-entry bookkeeping (DEB) and
ERPs. Double-entry bookkeeping rests upon the balancing of records
expressing in visual and memorisable quantitative (monetary) terms
the organisation story (Quattrone, 2009). Like DEB, the Balanced
Scorecard enables to categorise the world, not in two but in four, using
labels easy to remember: “accounting inscriptions (in budgets, activity
based costing systems, Balanced Scorecards, and the like) mean little if
not enacted through specific orthopraxis which, in the context of this
paper and early modern treatises, was related to the art of memory and
rhetoric” (Quattrone, 2009, p. 112). The Balanced Scorecard , like any
other accounting technique, especially ERPs, rests upon an imagery
that enables managers to make events integrative of memory of the
past and the future (Quattrone & Hopper, 2005). Seemingly, the power
of accounting—and de facto the Balanced Scorecard —lies in its
capacity of transforming ideas, words and events into images (tables,
diagrams, graphs, etc.) put together by a manager directing the scenery.
The notion of spectacular imagery in management accounting and
financial reporting is reinforced by the fact that accounting operates as
the liturgy of business (Davison, 2004, 2011; McKernan & Kosmala,
2007). Accounting figures, through diagrams, tables and graphs, can be
compared to ceiling glass in churches, sacralising the place in which
they operate (Davison, 2004; Dean, 2007). Knowing that religious
liturgy is a form of spectacle in which divinity is revealed and explained
to people (Latour, 2002, 2010), we can consider that the Balanced
Scorecard , like other accounting devices and practices, offers a similar
form of spectacle. Arguably, accounting so pervades the sub-conscious
of organisational actors as to inculcate them notions of profitability ,
return or accountability (Rahaman, Everett, & Neu, 2007). Accordingly,
understanding the conceptual bases, forms and practices of the
Balanced Scorecard as a spectacle could enrich the knowledge we have
of the visualising power of accounting.

2.2 The Balanced Scorecard as Spectacle’s Integrated Form

The concept of the spectacle (Debord, 1967), as built by the
situationists (the Situs), is very well known in artistic and political
arenas and streams. It also inspired academics in diverse areas,
including economics and management. That is the Balanced Scorecard
appears as more than just a powerful visual technology but also
contributes to the Spectacle Society denounced by Guy Debord and
relayed by the proponents of the May 1968 events in France.

2.2.1 The Balanced Scorecard as Spectacle

Gumb (2007) and Uddin, Gumb, & Kasumba, (2011) recently reminded
us of a few accounting pieces of research drawing on the concept of the
spectacle. Only Uddin & et al., (2011) clearly use the typology made by
Debord (1967, 1988), defining the integrated spectacle as a
continuation of the concentrated and the diffuse forms of spectacle. The
concentrated form, present in bureaucratic and totalitarian regimes, is
“attended by a permanent violence” (Debord, 1967, t. 42) based on
propaganda and struggle for resistance: likewise, the diffuse form is
softer and is generally “associated with the abundance of commodities,
with the undisturbed development of modern capitalism” (Debord, 1967,
t. 42). The concentrated form of the spectacle can be instanced by the
German and Russian dictatorial regimes, whilst the diffused form can
be incarnated by the American way of life and its mass consumption.
These two forms of spectacle stand in opposition to each other. Yet,
they can be reconciled through the integrated form that Debord (1998,
V) views as “integrated itself into reality to the same extent as it was
describing it, and that it was reconstructing it as it was describing it.” It is
much more efficient and pervasive, as it “spread itself to the point where
it now permeates all reality” (Debord, 1998, V).
Out of these extreme situations, the concentrated and diffused
forms of the spectacle can be considered ideal types that are rarely
observed. Debord instances this point by showing that the integrated
type appeared in France and Italy in the seventies, when state
capitalism became the dominant scheme. This integrated form
resembles a modern conception of the spectacle operating as “the
autocratic reign of an economy of commodities which acquired an
unaccountable sovereignty, and all the new techniques of governance
which accompanies this reign” (Debord, 1998, II). Panama’s former
leader Manuel Noriega is presented by Debord as a typical
representative of that form of spectacle: he simultaneously showed
high abilities in business relations with capitalistic authorities and
some popularity as an anti-imperialist hero. The general confusion
emanating from integrated spectacle makes it complex to understand
and to keep under control, as compared to the concentrated and diffuse
forms.
The spectacular domination was to be treated with a working
antidote that could be found in situations. For recollection, the situation
was a post-Dadaist way to promote some form of resistance—through
carnival, theatrics or détournement—to the spectacular domination.
These resistance practices now tend to be hijacked in the integrated
scene where listed firms fund anti-establishment or government -
controlled agencies encourage protesting movements. Henceforth has
the situation become more and more difficult to scrutinise.
There lays the most significant specificity of Debord vis-à-vis his
main follower Baudrillard, who extended situationist theories with his
concepts of simulacra and hyperreality. Whereas the early Situs held the
ambitious project of transforming our lives via the creation of
situations, Baudrillard’s political economy of the sign depicts a world in
which the spectacle became the reality, and the map the territory. Any
revolutionary project therefore proves to be very difficult, if not
impossible. The spectacle achieves its aim: it reconciles bureaucratic
centralism and participation, separation and team spirit, alienation and
empowerment. Belief in a potential for creating situations is what
distinguishes the early Situs from later comments by Debord. Whilst
the early situationists were mostly avant-garde artists, Debord was
considered a realist social theorist. Baudrillard and Debord stand in
opposition, also because the former had some influence on academic
accounting literature: the simulacrum and hyperreality concepts are
applied to a critical interpretation of the income and capital as
accounting figures (Macintosh, Shearer, Thornton, & Welker, 2000).
When the realm of the spectacle achieves its integrated form, it
expands by integrating more and more dimensions, e.g. society,
environment or sustainability. In these situations, numbers always play
a role , as “the technological innovation movement is an old one and is
part of capitalist society (…). But since he took its most recent
acceleration (following the second World War), it strengthens further the
spectacular authority as it reveals everyone bounded by numerous
experts, by their calculations and their self-satisfied judgments on those
calculations” (Debord, 1998, V). Paradoxically post-modern
technologies offer space for new resistance opportunities leading to the
dérive and détournement of the contested object individuals’ actions so
inevitably transform the original intent as to make it impossible to
arrive at destination (Derrida, 2002a, 2002b, 2002c).
With the shift to the new Millennium, Dérive and détournement have
been presented as significant trends in the “digital situationist” Internet
environment , incarnated by hackers (O’Neill, 2008). Uncontrollable IT-
driven networks nowadays allow integrative frameworks on which
political legitimacy might be challenged in favour of more or less naïve
geeks. Some critical academic literature uses Debord’s works so as to
point out a dialectics between social control and resistance. Such
dialectics can be found, respectively, in the news as spectacle through
the 8 Live concerts and the Higher Education debate in the USA. In the
latter case, market forces suggested that curricula would be ranked in
accordance with the marginal dollar that a degree would enable a
graduate student to earn. Universities would be regulated by standards
such as accreditation enabling to compare them with each other. In the
competition for attracting students, faculty and funds, universities
would closely scrutinise what the others do, developing a form of social
control. These controls as well as the logic of market forces were
subject to opposition from faculty and students enrolled (Kamuf, 2007).

2.2.2 The Balanced Scorecard as the Spectacle Society’s Core

In several respects, the Balanced Scorecard can be seen as any
management accounting device having largely spread into practices.
Most of the critiques reason that the Balanced Scorecard , through the
visuals offered by the quasi-panoptical representation of the four
perspectives surrounding vision and strategy placed in its centre, is
mainly a rhetorical device for the diffusion of management accounting
images. For critics, the Balanced Scorecard has then acquired the status
of a ritual, a hyperreality, a liturgy (Davison, 2010). The visual
representation offered by the interplay between its four dimensions
and strategy could be comparable to T accounts in double-entry
bookkeeping (Quattrone, 2009). More than any other accounting
technology, the Balanced Scorecard appears as a vector of conviction.
Conviction is not achieved by a charismatic personality, as it could be
found in concentrated forms of spectacle in which a Higher Stakeholder
shows the way. Neither is it merely a collection of images
representative of a diffuse form in which nobody would know who
initiates Balanced Scorecard approaches. At least—in its normative
form—it is an advanced concentrated form, like it is depicted by
Debord (1998, IV): “concerning the concentrated side, its directive centre
now became occult: nevermore one places here a known leader, a clear
ideology”.
The spectacular dimension of the Balanced Scorecard in itself is
nothing new: as any other managerial technique, it generates
enthusiasm, raises critiques and contributes to the renewal of our
representations of organisations. However, the originality of our
argument lies in our contention that the Balanced Scorecard is not an
ordinary management accounting device, and this for three reasons.
Firstly, its technical and normative aspects are rather poor. Most of the
aggregates and indicators in a Balanced Scorecard , to be analysed,
require no specific skills. When it is coupled with user-friendly
software, the output is much easier to analyse than financial reporting
sheets. Secondly, the operational content of a Balanced Scorecard is
liable to concern every manager , every division in the organisation.
Thirdly, the Balanced Scorecard tells a story, not only on historical
figures explaining the raison d’être of the organisation. The Balanced
Scorecard mainly relates to the organisation’s future and imagery can
operate as a map conveying the journey thither.
This peculiarly ambitious status of the Balanced Scorecard relies on
its integrative dimension, whilst traditional management devices are
either concentrated—e.g. accounting figures, financial metrics, value
creation ratios—or more diffuse—e.g. reputation, intangible values,
social responsibility (Uddin et al., 2011). The Balanced Scorecard
reconciles both forms in providing a story linking them in a holistic
framework. As the two forms of the spectacle no longer stand in
opposition to each other, any historical conflict , such as the opposition
of capital and labour , has been eradicated. The integrated form of
spectacle enabled by the Balanced Scorecard leads all organisational
actors to be connected to each other through a strategic cascade (Gioia
& Thomas, 1996) whose ownership is diffuse, whilst controls remain
more or less considered concentrated management accounting
(Cravens & Oliver, 2006).
In its essence, the Balanced Scorecard seems to offer the
organisation a unitary status of an entity dispossessed from all its
previous contradictions on property rights, value sharing or resource
allocation. As the questions addressed by finance-focused performance
appraisals are potentially sources of conflicts, the Balanced Scorecard
precludes disputes and tensions. This ontology of the Balanced
Scorecard —an integrated spectacle—enables us to understand
Kaplan’s and Norton’s journey. As they first designed a management
control device aimed at better strategic alignment, they extended with
strategic mapping (Kaplan & Norton, 2000, 2004) and execution
premium (Kaplan & Norton, 2006, 2008).
Are we critical or not is no more the debate, as the ability to critique
is also an indicator. In opposition to more or less standardised
accounting principles, the Balanced Scorecard allows a lot of freedom in
the choice of indicators. Once an indicator shows alarming results can it
be deleted and replaced with more politically correct substitutes. Such
a depersonalisation of strategic discourse paradoxically leaves room for
manoeuvre. Balanced Scorecard implementation often involves several
managers from different divisions, and it seems difficult to engage
higher strategic authorities (e.g. the board) in the process (Drew &
Kaye, 2007). Accordingly, middle staff and line managers, who are now
likely to promote their own indicators and introduce these into the
Balanced Scorecard system, can acquire strategic legitimacy.
Such derivative potential is pinpointed (Ittner & Larcker, 2003), as
“subjectivity in the Balanced Scorecard plan allowed area directors to
incorporate factors other than the scorecard measures in performance
evaluations, to change evaluation criteria from quarter to quarter, to
ignore measures that were predictive of future financial performance ,
and to weight measures that were not predictive of desired results” (p.
753). But resistance and subjectivity might also be seen as key success
factors of a Balanced Scorecard ’s implementation: “The typical
structure of the project team involves a steering committee, a team of
experts (Financial, HR and IT experts), a Quality Assurance team and the
main project team. We have established that the project team should
encompass no more than eight employees of various hierarchical levels
(…). We should also note that constructive arguments have been
recognized when both employees supporting the Balanced Scorecard
initiative and others more skeptical of this endeavour are included in the
project team.” (Papalexandris et al., p. 218). These points are critical as
they highlight the twofold specificity of the integrated spectacle as an
interpretive framework for the Balanced Scorecard .
Firstly, the Balanced Scorecard places the critique far beyond extant
approaches focusing on the selection of KPIs (financial versus non-
financial), the balance amongst the four dimensions or their rhetorical
aspects (Nørreklit, 2000, 2003). The caveats we address are not about
instrumental limitations of the Balanced Scorecard , but on the
influence it has through its integrative dimension. Arguably, its main
strength lies in the integrated form of the spectacle so characterising it
as to reconcile authority, strategy and control.
Secondly, we integrate the two aspects of interpretive critique of the
Balanced Scorecard : alignment (Ittner, Larcker, & Randall, 2003) and
ideological dimension underpinned by the ideology it carries on
(Bessire & Baker, 2005; Bourguignon, 2005; Bourguignon & Chiapello,
2005; Bourguignon et al., 2004). The former concerns a concentrated
conception of the spectacle, where the Balanced Scorecard is a
controlling device aiming—successfully or not—at influencing
behaviours. On the other hand, the latter refers to a communicative
Balanced Scorecard (re)telling—with user-friendly images—the story
of the American win-win company.
If the Balanced Scorecard in practice actually proves to be less
integrated than it claims to be, it nevertheless remains integrative in its
intention, in the story it tells. By chance, integration and alignment are
far from perfect, and critique is reversed: field managers might drift the
Balanced Scorecard for their own sake and thereby create situations
against bureaucratic spectacle. We contend here that the Balanced
Scorecard is a much more open device. Whereas the notions of income
and capital mainly concern financial experts, such as analysts, standard
setters, accountants, auditors or tax regulators, the Balanced Scorecard
integrates diverse indicators supposed to appeal to a broader audience.
Even though escape from income and capital is made possible through
a not-for-profit posture, escape from an integrated framework
including all kind of metrics is more difficult. Yet, some of these metrics
are generally regarded as opposed to profit . It might also be easier for a
field manager to redesign the content of his or her Balanced Scorecard
than its profit and loss figures. Debord often evokes the ability of the
integrated spectacle to foster participation rather than opposition. As
everyone partakes in the construction, diffusion and use of a Balanced
Scorecard , there is no more need for struggle and conflict . We thereby
follow Uddin’s et al.’s (2011) analysis of Participatory Budgeting as it
was promoted, namely through Aid Agencies, as a way to introduce
integrated spectacle in Uganda, formerly more concerned by the
concentrated form. We also adopt the relativistic position of
researchers questioning the achievement of the integrative dimension
of the Balanced Scorecard in which data indicate that there is wide
variation in the effectiveness of a Balanced Scorecard in providing
integrative information (Chenhall, 2005, Meyer, 2002). This suggests
that the adoption of Balanced Scorecard is not a sufficiently strong
indicator that performance measurement systems will provide
integrative information (Chenhall, 2005; p. 415). Figure 5 summarises
these observations.

Fig. 5 The Spectacle triangle

In a bureaucratic organisation, corresponding to a concentrated

form of the spectacle, managers are held accountable for metrics linked
to their status as responsibility centres. As they reconsidered profit
centres, they account for their margins; are they investment centres
they are supposed to provide satisfactory ROIs. Or as cost centres, they
are judged on their ability to meet more or less flexible standards. In a
more diffused form of spectacle, in companies driven by customers,
networks and markets, managers hold local leadership positions where
their communicative abilities and their influence on behaviours are
central. Attention is focused on “intangible” stakes, serendipity,
entrepreneurship, reputation.
In the integrated form of the spectacle, both perspectives are
bundled. A manager is accountable for financial and operational
metrics. In the Balanced Scorecard , he or she is concomitantly
supposed to reduce costs—including for instance hidden costs like
absenteeism—AND to meet socially responsible targets obliging him or
her to strive with diversity by hiring more women, disabled people or
ethnic minorities. Such a conduct might precisely provoke higher
absenteeism. The story could resemble a schizophrenic P. K. Dick-like
novel. Even though the Balanced Scorecard does not integrate any
contradictions in the story it tells about win-win causalities: social
responsibility policy generates good reputation as an intangible asset,
with better employee empowerment, which helps the company for
maximising internal process efficiency, to satisfy customers and finally
increase financial performance .
In both ideal-typical forms of the spectacle, dilemmas like the one
related above could lead to conflicts opposing an expense -limitative
obsession held by profit centre managers and the financial function to a
good thinking but costly human resource strategy . Situations could be
the occasion to solve those conflicts through occasional negotiation,
dispute and arbitrage. The introduction—or integration—of diverse
metrics in the Balanced Scorecard tends to automate the process, and
the critical moment becomes the introduction of an indicator in the
framework. Our contention that the Balanced Scorecard integrates and
solves tensions resonates with the idea developed in The New Spirit of
Capitalism that one strength of Capitalism lies in its ability to expand
through the constant absorption of its critiques (Boltanski & Chiapello,
1999, 2006).

3 Conclusion
In most organisations, concerns about performance management have
become more and more central. Whilst in the 1970s and 1980s
performance was too often collapsed to financial metrics the advent
and generalisation of the Balanced Scorecard and other tableaux de
bord have brought other dimensions of performance to light. The
Balanced Scorecard arrived at a time where Capitalism was changing:
the reign of the mono-product manufacturing company operating on a
domestic market came to a finality (Abdel-Maksoud, Cerbioni, Ricceri,
& Velayutham, 2010; Chenhall, 2005; Chow, Shields, & Chan, 1991). In
such companies that have emerged after World War II in the context of
countries’ reconstructing and households’ equipping, performance
mostly related to economies of scale consisting of capability of selling
large quantities at a standard cost (Oakes & Miranti, 1996). With
strategy ’s rising, traditional performance measures would no longer be
appropriate, justifying the Balanced Scorecard and competing
alternatives.
Performance management systems were designed for profit -
making companies and are unsurprisingly characterised by strong
reliance on accounting performance measures (Lau et al., 1995; Otley &
Fakiolas, 2000). However, outwith profit -making companies , other
organisations concerned about performance do not necessarily need to
rely on such accounting-like metrics. In sports, performance
management still lies in athletes’ behaviour on the field and on their
scores. Likewise, in arts and culture , performance takes on forms that
can hardly be accounted for, such as the launch of a new movement or
the development of a new colouring scheme. Performance
management, more than anything, needs to be perfectly aligned with
strategy and focus on what really counts for the organisation as
strategic. Pursuant to this, a performance management system in itself
must be aligned with organisation strategic concerns. A Balanced
Scorecard or a Tableau de Bord is not suitable for every organisation. In
designing a suitable performance management system, judgement and
discernment must be exerted.

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© The Author(s) 2018
Vassili Joannidès de Lautour, Strategic Management Accounting, Volume I
https://doi.org/10.1007/978-3-319-92949-1_4

4. Strategic Planning and Forecasting

Vassili Joannidès de Lautour1

(1) Grenoble École de Management, Grenoble, France

Vassili Joannidès de Lautour

Email: vassili.joannides@grenoble-em.com

Keywords Forecast – Strategic planning – Revenue accounting –

Expense accounting – Investment accounting

As the work of management accountants evolves towards acting as

internal business partners and consultants, they are increasingly tasked
with contributing to the articulating of forecasts (Hope, 2006; Molridge
& Player, 2010). Their role ’s reinventing has progressively led them to
focus more on the future than in the past (Hope, Bunce, & Röösli, 2011;
Molridge & Player, 2010). Their expertise has been more and more
acknowledged so as to depart from past figures and past-based
performance assessment towards envisioning the future. From
technicians of figures and corporate resources, they have become
experts capable of translating strategy into numbers (Chottiyanon &
Joannidès de Lautour, 2018; Molridge & Player, 2010).
This involvement of management accountants in forecasting marks
a major breakthrough in their professional history, since envisioning
the future significantly differs from traditional budgeting . The Master
Budget has long played a central role in organisations, being the most
important ritual in corporate life (Ezzamel, 2009; Gambling, 1987;
Pettersen, 1995). Budgetary practices have become so routinised that
the Master Budget ’s strategic dimensions have progressively been
forsaken. Therefore, following the steps of the Balanced Scorecard as a
renewed, powerful instrument for management performance , think
tanks have articulated needs for realigning estimates for the future with
corporate strategy (Johnson, 1994; Kaplan & Johnson, 1987).
Therefore, improvements to the Master Budget have been suggested at
first (Kim, Siegel, & Shim, 2011), such as zero-base budgeting (Pyhrr,
1973) or activity -based budgeting (Evans & Ashworth, 1995; Hixon,
1995). Notwithstanding these improvements aimed at making the
Master Budget be more future-oriented, management accountants
would by definition remain past-focused. It is through an active work
from professional think tanks, such as the Cam-I that some more
management accounting innovations could be articulated and diffused
(Alcouffe, Berland, & Levant, 2008; Ax & Bjørnenak, 2005; Berland &
Chiapello, 2009; Lapsley & Wright, 2004; Malmi, 1999; Mellett,
Marriott, & Macniven, 2009; Perera, McKinnon, & Harrison, 2003), such
as forecasting (BBRT , 2009a, 2009c, 2009d, 2009f; Cam-I , 1999).
Nowadays, most organisations do articulate forecasts: given their
strategic environment , current circumstances and their possible
evolution, companies endeavour to anticipate how much money can be
generated in the future and how the value chain should accordingly be
organised. In contradistinction to the Master Budget ’s philosophy
viewing expenses as costs, forecasting implies that expenses are the
investment necessary to generate value . Whilst the Master Budget sets
out to answer the question of how much this shall cost , forecasting
does seek to identify how much money can be earned.
This chapter is organised pursuant to the chronology of forecasts’
articulating. What first occurs is anticipating changes in the company’s
environment and measuring their impact on activities. Once changes in
the environment estimated, corporate forecasters readjust the business
model and value chain accordingly prior to translating these changes
into financial figures.

1 Forecasting as Anticipating Environmental

Changes
The articulating of forecasts is more than just a series of computations
or application of growth coefficients to past figures. Contrary to the
Master Budget that ignores the corporate environment , forecasts rest
upon a comprehensive anticipation of environmental changes. These
comprise of market circumstances, economic circumstances and
geopolitics. In this undertaking, not only management accountants are
involved in forecasting; they are associated with all other qualified
actors in the company as well as external consultants.

1.1 Envisioning Market Circumstances

The articulating of forecasts consists of imagining how the future could
look like, given what we already know. That is, these forecasts must be
substantiated with facts, figures and arguments making the figures
convincing. Tomorrow as envisioned in forecasting rests upon three
intertwined pillars: market forces, economic circumstances and
geopolitical matters.
Whilst the Master Budget seems to operate within a set, rigid and
predicable environment forecasts take any market forces into account.
These correspond to pressures that can be exerted on the company
from outside and thereby affect operations and ultimately the value it
can generate. Traditionally, these market forces are fivefold:
competitors, the existence of substitute products on the market ,
regulations, customers’ preferences and stability, and lastly suppliers’
negotiation power (Porter, 2002), as summarised in the figure hereafter
(Fig. 1).
Fig. 1 Market forces

1.1.1 Competitors
At any time, market and competition structure can change, which will
necessarily have an impact on existing or remaining actors’ own
positioning. The most-known situation is that of a market into which
new competitors enter, thereby contesting historical actors’ leadership
(Baumol, 1982). Some market conditions can facilitate or accelerate the
emergence of new actors what would affect existing competitors’
operations and capability of generating value (Porter, 2008).
The first condition is that of a lucrative market requiring limited
entry investments and from which it is possible to step out with limited
losses in case of no success (Baumol, 1982). Such can be the case of
service companies requiring minimal estate, equipment or intangible
assets, such as patents, software and franchise fees. In the twenty-first
century, with the rise and growing significance of intangible assets,
what Baumol (1982) calls “contestable markets” tends to fade.
This first market condition is therefore replaced by a lesser version:
new competitors would join a market where profit can be generated
with reasonable investment and fixed costs. A recent example could be
that of Hyundai Motors which started exporting cars to Europe in 1992,
thereby challenging most European automakers on this growing
market (Steers, 1999). The entrance of this competitor has restructured
the European automotive market , undermining French manufacturers
no longer competitive on their historical segment (Southerton &
Southerton, 2014).
The second market condition is that of a technology or a patent
falling into public domain and is freely accessible to new actors. In this
situation, competitors join as followers with a possibility that they
could someday challenge the incumbent . In this situation, new actors
can emerge at any time to adopt an existing technology. At times, these
new entrants contribute to technological advances through R&D , but
most of the time stay as long as this existing technology remains
lucrative as it stands (Smith, Collins, & Clark, 2005). Such has
historically been the case on the market for electronic goods, starting
with portable tape players following the Sony Walkman (du Gay, Hall,
Janes, Mackay, & Negus, 1996) or the Apple iPod’s mp3 format
(Weijters, Goedertier, & Verstrecken, 2013). Unknown manufacturers
have joined the market and quit very quickly, when the market started
to become less lucrative.
The third market condition proceeds from the second it nuances:
new competitors can enter into a market when its lead product is
growing and the incumbent is broken even. In this situation, even
though technology and patent have not fallen into public domain yet,
they can serve as an inspiration for new actors who would replicate its
basis and amend some of its features so as not to be prosecuted for
counterfeiting and intellectual property violating (Porter, 2008; Resnik,
2003; Simburg et al., 2009). These new competitors do not suddenly
emerge but are certainly companies from a side industry which,
through business intelligence, are alerted of when the incumbent or
historical actors shall be broken even. At this stage in product life cycle ,
the new actor can engage into this market and sell a similar product at
a lower price, thereby starting to dominate through costs (Porter, 1985,
1998b). Such has been the case on the market for electronic goods in
the 2010s, where new actors, such as Wiko or LG, have engaged after
the Apple touch screen technology had been so dominant that it was de
facto if not de jure fallen into public domain (Cain, 2018).
The fourth market condition is that the lead actor’s product is at the
growth stage, which shall enable economies of scale and quick profit for
new entrants. In this case, these new actors build on a minimal value
chain whereby they outsource the manufacturing of their product to
suppliers, whereby they only account for product variable cost , itself
reduced as quantities increase (McGahan & Porter, 2002; Porter, 1986).
Such is often the case in the market for electronic goods as well as for
fashion design (see The Devil wears Prada for instance).
In each of these situations, the coming of a new actor shall change
market and competition structure with an impact on revenues and the
value that can ultimately be generated. Accordingly, when establishing
forecasts, management accountants must be extremely attentive to the
likelihood of entry for a new actor. This implies that market
circumstances, product life cycle , the current value chain and cost
structure be perfectly known. Hence, the date when a new actor is likely
to join must be anticipated. Knowing that there may be a new
competitor on the market is not sufficient: management accountants
need to estimate the impact of this new actor’s activity on corporate
positioning and sales, which economists call crossed elasticity. If this
elasticity is already known to the industry, its impact on sales can be
easily known. If this elasticity is unknown to the industry, management
accountants need to estimate it. For this, it will be necessary to identify
precedents where products’ chosen characteristics are very close to
those concerned by the potential entry of new actors. It is crucial that
this elasticity be clearly measured; hence, the variation in revenues
from sales can be anticipated.
If, for whatever reason, a competitor quits the market , this shall
also have an impact on corporate activity . It is therefore crucial to
anticipate if any competitor is likely to quit the market . Reasons can be
multiple: bankruptcy, strategy change, merger or acquisition, etc.
Whatever the reason for this exit is, it is necessary to anticipate
occurrence likelihood and measure its impact on sales. When a
competitor disappears, if the market is not declining, its market share
will be shared amongst remaining actors. In which case, management
accountants need to estimate by how much their own company can
benefit from this market share transfer. In order to estimate this
elasticity, they need to be perfectly clear with the share, presence and
activism of each actor on the market . Conditions for attracting these
clients must be clarified and quantified (what investments are
necessary).

1.1.2 Substitute Products

As with new competitors, management accountants must know the
market and its current actors so as to identify the possibility that a
product could be launched as a substitute to their employer’s.
Substitute products can emerge on the market under certain strategic
circumstances, very similar to those enabling the entry of new
competitors. Whilst new competitors would enter into a contestable
market , a substitute product tends to be the fact of existing
competitors in a market characterised by high entry costs. Accordingly,
a substitute could only be launched and produced by a competitor
having already incurred part or all of these fixed costs (McGahan &
Porter, 2002; Porter, 1986, 2008). Traditionally, such can be the fact of a
company already acting as a competitor on different market segments
and taking the opportunity of this new product to diversify its portfolio.
The development of a substitute product can occur for a mature
market , when the incumbent utilises its lead product as a cash cow and
prepares its aftermath (decline or next generation). When the product
is mature, the incumbent incurs fixed costs for its next product without
necessarily being in a capacity of launching soon. Through business
intelligence, existing competitors can determine when the incumbent is
incapable of reacting if its lead product is challenged by another one.
Three options are open.
The first option consists of launching a very similar product sold
cheaper, i.e. cost domination and the subsequent absorption on a
customer basis. If the product ’s price elasticity is high, the cost
domination strategy may undermine the incumbent ’s sales. Such can
be the case with electronic goods or the ready-to-wear fashion industry
through general brands mimicking one another and advertising
inexpensive similar products. If the product ’s price elasticity is low, the
transfer of customers to the new product shall not too strongly affect
the incumbent . As with new entrants, management accountants must
be very attentive to the product ’s price elasticity on one hand and to
the new product that is likely to be launched and threatens the current
one. Often, distributors and merchandising companies do develop their
own branded products competing with their suppliers as with cola-
based sodas (Nestle, 2017).
The second option is that of producing a product offering some
different features, i.e. differentiation strategy . Such can occur when the
lead product on the market is generic and has a limited amount of
variations, such as colour, shape or size, which can often be ascribed to
the fact that the incumbent mass produces it. In this situation, customer
tastes are such that they expect the possibility of customising their
products. Thence, existing competitors would organise their production
around a more or less advanced lean model, in order to be able to
respond as tightly as possible to these specific needs (Anvari,
Sorooshian, & Moghimi, 2011; Organ, 1997). This option can be either
the case of an existing competitor already familiar with lean production
and management or capable of venturing with actors themselves lean-
savvy. Such a situation can occur in the whiteware industry or
housecleaning products industry where products tend to be relatively
generic. In this situation, management accountants need to estimate
the rate of substitution between these products and the quantify impact
the new one can have on sales. More so than with new entrants, cross-
elasticity measures need to be developed together with the marketing
team.
The third option consists of launching ahead of the incumbent a
next generation of the same product , i.e. technological domination.
This substitute is clearly aimed at making the incumbent ’s lead
product prematurely obsolete. It is therefore not just this product that
shall cause a consumption transfer but the incumbent ’s incapability of
reacting or the time needed to adapt itself. If the product launched by a
competitor dethrones the current lead product , this latter’s sales are
more than likely to drop. This decrease in sales can be expected to be
stronger if the newly launched product is sold at a similar price: for the
same price, customers can purchase a more advanced technology. In
this situation, management accountants’ role consists of doing business
intelligence aimed at detecting competitors’ technological advances and
intentions. Also, management accountants should be in a capacity of
suggesting possible strategic and operational responses to this
substitution.
All told, strategic planning requires that management accountants
to be in a capacity of informing the probability that a substitute product
be launched and quantifying its possible impact on sales if no corrective
action is taken. This requires that management accountants should
spend a fair amount of their time doing business intelligence, i.e.
informing themselves as to what competitors are doing.
In case the company does not know these elasticity measures, two
options are possible. The first one consists of relying on precedents
confronting the company presenting some features common to the
current situation. The second option consists of calling on professional
unions or external consultants who may have metrics available
enabling to estimate these elasticity measures and the impact of
substitute products can have on sales.

Case n°1. Polaroid Substitutes and New Entrants

Since it was established, the Polaroid corporate had been the
world leader of photography by implementing the instant printing of
pictures. Until the 2000s, owing to its patents and technological
advance, Polaroid was never challenged and occupied a quasi-
monopoly situation. Management had not anticipated that the
advent of informatics and digital cameras would make its lead
product obsolete. The company maintained its instant-print camera,
although digital cameras, personal computers and printers were
spreading. Sales dropped until 2007, where the last factory was
closed down and 2008 where the company filed for Chapter XI
bankruptcy protection. New entrants would sell products acting as
perfect substitutes for the instant-print camera. It is only in 2017
that Polaroid could be revived by associating its instant-printing
technology with digital cameras. Notwithstanding this technological
update, Polaroid has not been able to reconquer its historical
position on the marker (Ewing & Hitchcock, 2017).
1.1.3 Changes in Regulations
The third market force that management accountants need to
anticipate lies in any change in regulations that could occur in a
country. Any change in regulations pertaining to product characteristics
may result in this latter being legally banned from a certain country. On
the short term, this would imply that its manufacturer should recall at
its own costs every single unit sold and would not be allowed to deliver
it anymore. On the mid-term, changes in regulations will result in the
company’s incurring unexpected extra costs to conform to these. Such
regulations can concern hygiene and safety (Chan, 1979; C. Cooper,
Coulson, & Taylor, 2011; Rosner & Markowitz, 1987) relating to product
components, as well as environmental matters (Latin, Tannehill, &
White, 1976; Willmott, Puxty, Robson, & Cooper, 1992) or social issues,
such as human rights or labour laws (Gahan, Mitchell, Cooney, Stewart,
& Cooper, 2012; Suddaby, Cooper, & Greenwood, 2007).
Together with corporate lawyers , management accountants are
required to conduct legal intelligence so as to identify in some strategic
countries what laws and other regulations are planned to be issued. As
most laws and regulations are not enforced just after being passed but
apply after a period of transition, companies can have time to adjust
and conform thither. At times, however, especially when hygiene, health
and safety are at stake, regulations can be immediately applicable.
When regulations are not immediately applicable, management
accountant and corporate lawyers are required to estimate how
conformance can be practically achieved and quantify its cost .
Depending on the severity of these new regulations, costs can be
associated with the cost of the new, compliant materials for the final
product , the cost of accredited supplier in the supply chain or cost of
conformance audits and controls (Gilliland & Manning, 2002; MacLean
& Behnam, 2010; McKendall, DeMarr, & Jones-Rikkers, 2002; Parker,
2000; Rossing & Rohde, 2010; Weber & Wasieleski, 2013). Or, if
conformance implies that the entire value chain or the entire business
model be revised, management accountants need to estimate the cost
of re-engineering. It can also happen that management accountants
warn against the necessity to withdraw from a market because the cost
of conformance to new regulations is too excessive.
 In order to anticipate possible changes in regulations, management
accountants together with corporate lawyers are expected to follow
country electoral agenda as well as parliamentary and governmental
agendas. Governments usually announce in advance what regulations
they are intending to change and often present a timetable. Likewise,
parliamentary agenda is usually made public, as part of democratic
vitality. In addition, agenda contents can be known and discussed on
the occasion of public meetings with officials, such as press conferences
or public talks. It is also possible to have informal meetings with MPs or
governmental advisors so as to have hints of possible changes in
regulations. Such active lobbying can be the joint fact of political
management accountants and corporate lawyers .

Case n°2. The Dieselgate and the automotive industry Change

in Regulations
In July 2015, while Volkswagen cars were tested for the emission
of polluting gases, controllers discovered that the company had
installed on its vehicles software detecting tests and thereby altering
emissions. This pre-installed software led to under-estimations of
pollution from Volkswagen vehicles. Late 2015, other automakers
were caught under-estimating their gas emissions. Suddenly, most
European mayors have issued decrees banning from their cities
diesel-fuelled vehicles with no transition period. National
governments and the European Commission have subsequently
prepared new regulations aimed at terminating the production of
diesel-fuelled vehicles by 2030. Consequent to these changes in local
and national regulations, automakers have been constrained to
review their entire business model, since diesel-fuelled vehicles had
represented up to 60% of their sales. Production technology but also
car technology and renewable energies were to be sought for,
inducing an unprecedented and unexpected review of the industry’s
business model and new investments. On the short-term, corporate
forecasters were to anticipate massive declines in sales owing to the
scandal. On the longer-term, they were to anticipate defiance from
their customers and difficulty in gaining their confidence back
(Howard, 2017; Landini, 2017).
1.1.4 Customers: Changes in Consumer Behaviour
The fourth market circumstance that can change and deserves to be
traced relates to customers and consumption behaviour . Consumption
habits can unpredictably change without a clear or systematic
explanation. Only consumption trends can be followed on a day-to-day
basis, so that the company can only readjust in response thither.
Management accountants, as for changes in other market
circumstances, must pursue economic intelligence. In this particular
case, three paths can be taken.
The first path consists of conducting surveys to current and
prospective customers so as to grasp their consumption habits,
preferences and expectations. In case of any change in their tastes or
intentions, company management can be conscious of the impact this
may have on sales. Such surveys can be conducted by the marketing
and sales department with help from management accountants in the
wording of question items and the constructing of scales. Management
accountants contribute to these studies by instilling questions and
metrics enabling to measure the impact of any change in consumer
behaviour on corporate sales. For their part, marketing and sales
managers can word questions directly relating to consumption
behaviour . As conducting such surveys is not central to the use of
managerial time and resources, it is not unusual that these be
outsourced to external polling institutions. In which case, question
items are co-constructed between the client company’s management
accountants and the polling institution experts.
The second path consists of relying on sociological studies pre-
existing the rise of this management concern and producing results
useful to the company. Such studies have been conducted by academics
and made available to the company. In this case, study results can
suffice. Very often, though, company management accountants call on
the author of the study for additional explanations or advice as to the
use of their results. In this respect, scholars authoring the study are
called on qua external consultants; they thereby do interventionist
research (Jönsson & Lukka, 2005) for which they are paid or not.
The third path, which is the least usual, consists of hiring internal
sociologists in charge of independently conducting surveys relating to
consumption behaviours. Unlike interventionist researchers asked a
specific task at a point in time, these corporate sociologists are
permanently working on applied research directly mattering to their
employer. Such corporate sociologists apply scientific research tools to
studies explicitly ordered by their employer, enabling to identify trends
in consumer behaviour and, through econometric models, to anticipate
future changes. Results from applied research serve as a strong basis in
the establishing of forecasts. This third path to anticipating changes in
consumer behaviour is uncommon because numerous companies may
consider hiring full-time sociologists is uselessly expensive. Therefore,
corporate sociologists are especially present in large companies . This
approach was initially launched by two French sociologists: Renaud
Sainsaulieu and Michel Crozier in the 1970s, working respectively for
Renault and France Telecom (Crozier & Landau, 1971; Sainsaulieu,
1977).

Case n°3. Teenagers’ consumption behaviours Change in

Customers
It is generally accepted in marketing studies that the most
volatile population of consumers is that of teenagers. Their
consumption behaviours are unpredictable and unstable. Such is the
case because they construct themselves in reaction to the adults’
world and because they tend to follow fashions dictated by some
community leaders. Accordingly, they may like a certain product for
some time and suddenly leave it in disgrace for no particular reason.
Accordingly, companies directing their products at teenagers
stringently follow sociological surveys as to their consumption
behaviours, in order to anticipate trends and identify community
leaders to tease and attract. The industries especially exposed to
unexpected changes in teenagers’ consumption behaviour are in
fashion, cosmetics, gadgets, electronics (smartphones, tablets) and
sportswear. These brands do not just regularly renew their
collections but also estimate the risk of falling in disgrace, which
makes the work of forecasters and marketers complicated (Quart,
2004)

1.1.5 Suppliers: Changes in Negotiation Power

The fifth market circumstance in which any change could affect
corporate future lies in suppliers and more broadly the supply chain.
Suppliers’ condition can change in three ways potentially affecting their
clients (Steinle & Schiele, 2015).
The first possible change that needs anticipating is that of
bankruptcy. The default of a supplier would be problematic for a
corporate client, since this latter could not produce and sell. When
clauses in some contracts binding this client to others stipulate fines or
damages to be paid in case of non-delivery, supplier bankruptcy could
have a dramatic impact. Therefore, it is especially crucial that its
financial health and sustainability be anticipated. As any company, a
supplier can be defaulted for numerous reasons: working capital
management and lack of cash, insufficient orders from clients, social
tensions, machine breakdown, etc. In order to anticipate and avert a
possible default, depending on the client–supplier relationship, open-
book accounting and on-site controls from the client company are
especially suitable. If the supplier has only this company as a client,
such external and lateral controls are possible (Mouritsen, Hansen, &
Hansen, 2001). Such controls are possible if the supplier has just one
client on whom it is dependent. In other cases, when the client is one
amongst others but significantly contributes to the supplier ’s profit ,
contractual audits are possible: auditors are paid to control its financial
health (Baylis, Burnap, Clatworthy, Gad, & Pong, 2017; Mennicken,
2010).
The second possible change in supplier condition is the termination
of the relationship binding it to the client. Such can occur when the
contract needs renewing with no guarantee for the client that the
supplier would agree. In case the contract is terminated, the client is
confronted with exactly the same situation as in the case of supplier
bankruptcy. Outwith the mere loss in sales and risk of fines and other
damages to pay to their clients, the company is confronted with a risk
that this supplier engages in a relationship with a competitor. In this
case, the supplier ’s specific technology and expertise would serve
another company with a risk of cannibalisation. In anticipation of this
risk , management accountants need to engage in business intelligence
relating to competitors’ behaviour and relations. In addition, together
with corporate lawyers , management accountants need to estimate the
possible cost of losing this supplier as well as the possible gains in
suing both supplier and competitor (Dorf, 2006).
The third possible change can occur when the supplier becomes
stronger in the relationship and can impose its own conditions on the
client: selling price, product characteristics or processes. Such can
occur when the client company has one exclusive or major supplier . If
both are codependent, the risk that the supplier alters the relation is
lower than in the situation where the supplier has several clients. For
instance, in the automotive industry, subcontractors produce materials
and equipment for most carmakers; hence, they can be quite strong in
the relationship (Ahmad, Rasi, Zakuan, & Hisyamudin, 2015; Cowton &
Dopson, 2002; Yang, Nasr, Ong, & Nee, 2017). In this case, management
accountants are tasked with the anticipating of possible claims that
suppliers would articulate and anticipate their structural impact on
costs (Free, 2008).

Case n°4. Fisher Body and General Motors Change in Supplier -

Client Relations
Fisher Body was an automobile coachbuilder. In 1960, after
successfully making the coach of the first Chevrolet Corvair for
General Motors, the Detroit conglomerate became its exclusive
client. In 1975, with the first Chevrolet Chevette, Fisher Body
became General Motors’ exclusive supplier . Suddenly, in 1980, when
General Motors changed the design of one piece on its cars, Fisher
Body’s technology and processes was unable to respond to its client.
The production delivered to General Motors was inadequate. Not
paying for it would cause Fisher Body’s bankruptcy whilst paying for
it would put General Motors in financial hardship. If Fisher Body
went bankrupt, General Motors would be incapable of producing its
lead vehicles. Confronted with this co-dependency, General Motors
decided to pay for this delivery and accounted for it as a loss (Pelfrey,
2006).

1.2 Macroeconomic Circumstances

In articulating forecasts, not only do corporate circumstances need to
be anticipated but also the overall trends and variations of the economy
as well as the economic policies that can be conducted by governments.

1.2.1 Macroeconomic Trends

The articulating of corporate forecasts is not disincarnated but finds
itself grounded in the anticipation of macroeconomic trends. Such is the
case because a company does not operate in isolation from the rest of
the world and is necessarily affected by its economic environment . As
numerous institutions articulate economic forecasts, corporate
management can count on various sources and triangulate them to
make their own opinion as to future economic trends. Amidst these
institutions articulating economic forecasts are the International
Monetary Fund, the World Bank, the OECD, the Federal Reserve of the
USA or the European Central Bank. These institutions have their own
economists independently modelling economic trends and envisioning
the near future. They periodically release their forecasts, to which
multinational companies are especially attentive (Ericsson, 2017).
Global Macroeconomic Indicators
These forecasts are utilised to establish realistic and justified corporate
forecasts in contradistinction to preparing the Master Budget .
Opponents to budgeting and budgetary control denounce the fact that
the Master Budget is often disconnected from economic circumstances.
Such is the case, as it is common that preparing a budget would mainly
consist of applying an average growth rate extrapolated from past
trends to past figures. An implicit assumption in the Master Budget ,
rejected by forecasters, is that the economy is convex and cyclical,
therefore entirely predicable (Berger & Udell, 1998; Molridge & Player,
2010). In this respect, budgeting appears as a game whereby figures are
produced because this exercise is a well-accepted corporate routine.
Conversely, forecasts are aimed to serve as a reliable road map for
management and must therefore be entirely justified. Macroeconomic
forecasts operate mainly at three levels.
The first level of forecasts pertinent for companies is that of global
macroeconomic indicators pertaining to economic growth . The
assumption is that a company does not operate in isolation from the
rest of the economy. Economic growth forecasts serve to estimate the
possibility that corporate activity increases, stagnates or decreases for
the upcoming period. In case of economic crisis, sales are unlikely to be
as high as at the time of economic recovery (Arnold, 2009). During
economic crisis, corporate clients may have difficulties paying their
invoices; suppliers may be defaulted, etc. But also, unemployment
forecasts are important, for two reasons. Firstly, when the
unemployment rate is low, companies may have more difficulties to find
qualified employees. This situation can have an impact on labour costs
or on the cost of losses because of under-production (Bhattarai, 2016;
Donayre & Panovska, 2018). In return , when unemployment forecasts
are high, this may impose lower wages, i.e. reduced labour costs. But
also, when the company is engaged in B2C, anticipating a high
unemployment rate can affect sales, except if the company is producing
Giffen goods, i.e. goods whose consumption increases as resources
decline (e.g. potatoes, rice, pasta, bread)
These macroeconomic figures enabling the company to estimate its
potential production , sales and employment are often supplemented
with more qualitative indicators pertaining to entrepreneurs’ or
consumers’ morale (Bachmann & Elstner, 2015; Kumar, Husain, &
Mukherjee, 2017; van Oest & Franses, 2008). Such qualitative
measures, produced by these economic institutions as well as other
independent think tanks or polling institutes, enable companies to have
an intuition of the extent to which customers are likely to purchase
goods and services or companies in which to invest. Such qualitative
soft measures may give a clue of the general business climate and can
therefore lead forecasters to be more or less optimistic in their
articulating.
Industry-Specific and Market Indicators
The second level of forecasts on which companies tend to rely in
articulating theirs relates to the industry in which they are operating.
The industry’s economic situation is not systematically a replica of the
economy at large. Therefore, it is also important for forecasters to have
a clear vision of how their industry is expected to evolve on the
considered period. This evolution can have many explanations, such as
a change in customers’ tastes and behaviour , a change in regulations
opening new markets and a naturally growing/declining market . Such
industrial forecasts can be articulated by either professional syndicates,
independent economic institutes or public institutes. Corporate
forecasters are especially attentive to such releases, since they enable
them to refine their own anticipation of how their own market is likely
to evolve.
The third type of economic indicators on which corporate
forecasters rely pertain to market circumstances outwith their industry.
What is a concern for corporate forecasters is the evolution of the
market for the raw materials their company needs for its own activity .
Expected price variations shall have a direct impact on the costs
incurred by the company. When prices decrease, this is rarely a
problem for the company whose reaction can be either to reduce its
selling price or increase its profit margin. Raw materials ’ price increase
is, however, problematic, confronting the company with a dilemma. On
the one hand, the company absorbs this impact by reducing its profit
margin. Such can happen if the selling price is left unchanged. But, if the
product ’s price elasticity is high, this can also happen if the selling
price increases. On the other hand, the company may decide to alter
product characteristics by replacing the product with a cheaper one. If
the company is doing B2B, there may be a risk of contracts’ terminating
and fines to be paid, since the product is not the one initially
contracted. If the company is engaged in B2C, depending on the impact
of material’s change on product characteristics and quality, consumers
may decide not to purchase it anymore.

Case n°5. Copper and semiconductors Change in the Market for

Materials
Owing to its characteristics, copper has been the privileged metal
for the production of chips and most electronic devices. But also,
being stainless, copper has been utilised in construction for tubes
and pipes. Until the 2000s, copper price was relatively stable and
therefore predictable, which is a reason for its popularity. In 2004,
copper rates have quadrupled and then have continuously grown
until 2016 (https://​www.​dailyfx.​com/​copper-prices). Consequently,
the price of semiconductors has dramatically increased, leading
manufacturing companies to envisage alternative metals. As no
other metal had the same characteristics as coppers, these
companies were confronted with a major dilemma. Either they
 would increase their selling price or they would entirely review the
value chain so as to sell a product at a similar price as before.
Companies such as Intel, ST Microelectronics, NVIDIA or Texas
Instruments, has been affected (Zlatanov, 2017).

1.2.2 Economic Policy Trends

The public sector and more particularly governmental authorities can
influence economic cycles and the business environment through
public policy measures. These economic measures can operate in four
areas potentially affecting companies : budgetary policy , monetary
policy , industrial and commercial policies. Accordingly, forecasters
need to be as informed as possible of what these policies are likely to
be. When there is no election to come in a country scrutinised, it can be
assumed that economic policy shall be a continuation of the existing
policy . Hence, companies only follow announcements of new measures.
If, however, there is a major election in the country in the period to
come, the economic programmes of the candidates likely to win the
polls need to be scrutinised and their impact for the company
simulated (Morikawa, 2016).
Fiscal Policy
The main economic policy trend that can be anticipated by forecasters
consists of fiscal policy . Governmental authorities generally make clear
announcements sufficiently ahead, in order for taxpayers (companies
included) to prepare themselves for possible changes. Some fiscal
policy areas are common to most businesses, such as changes in Value
Added Tax (a.k.a. Goods and Service Tax ) or Corporate Tax . Any change
in taxation rate will have a mechanical and predicable impact on
company profit . Accordingly, any change in these must be anticipated
by forecasters. When, as in the case of the European sovereign debt
crisis, a country’s debt level is too high, governmental authorities can
be obligated to abruptly increase tax without giving long notice
(Tanasescu & Oliva, 2018), with a major impact on companies (Lane,
2012).
Conversely, a trend inherited from the Public Choice has since the
1970s consisted of downsizing the public sector and reducing tax in
most countries, namely as these have been increasingly engaged in a
form of fiscal competition to attract businesses and investors (Dima,
Dima, & Barna, 2014; Justman, Thisse, & van Ypersele, 2005). Such tax
reductions can take on numerous forms, the best known being the
simple change in taxation rate. For instance, in 2018, the Trump
administration announced a structural reduction in Corporate Tax from
35 to 25%, praised by entrepreneurs. Other forms can consist of
various subsidies public authorities can offer businesses. These can be
subsidies for innovative businesses, for environmentally concerned
companies , small business launch , etc. (Egger & Falkinger, 2006). Such
subsidies and tax exemptions can have a positive impact on company
activity and profit , whence they must be included into corporate
forecasts. Likewise, if governmental authorities are planning to
abandon some of these subsidies or modify eligibility criteria, this must
be taken into account by corporate forecasters.

Case n°6. The French Research Tax Credit Fiscal Policy

In 1983, noticing insufficient R&D and technological innovation
in the country, French authorities enforced a tax credit for private
companies investing in R&D . This was aimed at encouraging French
companies and attracting foreign companies . The Tax Office would
pay back up to 40% of R&D expenses to these companies after three
years of continuous investment. This support to R&D and innovation
has led forecasters in numerous international companies to review
their estimates and choose to locate these activities to France. Until
2018, this fiscal incentive has resulted in R&D expenses amounting
up to EUR 8.7 billions in 2013 against 5 billions in 2007. Owing to
generous tax credits for innovative companies , R&D expenses have
grown by 20.9% and the number of patents by 28.3% over the same
period (Bozio, Irac, & Py, 2014).

Monetary Policy
The second best-known public policy area likely to impact on
companies is monetary policy , with namely two aspects: interest rate
and currency exchange rate (Chen, Kirsanova, & Leith, 2017;
Courchene, 2000). Arguably, variations on the interest rates decided by
the Central Bank shall have a direct impact on the cost of capital for the
company (cost of debt and of equity ). As economic theory suggests,
interest rate levels do influence corporate investment. Therefore,
together with company CFO , management accountants, when
establishing forecasts, pay special attention to the Central Bank
governors’ declarations and intentions. Since Alan Greenspan’s
governance, Central Banks have adopted a more predictable
management of interest rates; hence, other economic agents can be
prepared and organised accordingly (Cochrane & Taylor, 2016).
The second dimension of monetary policy to which corporate
forecasters may pay attention is currency exchange rate. Although most
currencies are freely traded on capital markets, Central Banks’ actions
can influence their value . This was seen with the Quantitative Easing
strategies adopted by the Federal Reserve Bank of the USA and the
European Central Bank since the 2008 Global Financial Crisis. By
creating money through low or negative interest rates, they could
support the exchange rate of the euro and the US dollar (Joyce, Miles,
Scott, & Vayanos, 2012; Kapetanios, Mumtaz, Stevens, & Theodoridis,
2012). The assumption is that a high exchange rate impairs exporting
companies whilst it fosters importing companies , and vice versa.
Accordingly, in the articulating of corporate forecasts, management
accountants and cash managers must altogether anticipate possible
currency variations and look for ways of hedging risk and avoiding
costs skyrocketing (Salas-Molina, Martin, Rodríguez-Aguilar, Josep, &
Arcos, 2017).

Case n°7. Capital market reactions to The Fed announcements

Monetary Policy
Since Alan Greenspan was the Reserve Bank of the United States
of America governor, companies and investors have been awaiting
announcements re monetary policy . Regularly, an announcement of
changes in interest rates has led capital markets to react.
Announcements of interest rate increase have usually been followed
by a decline in stock prices on capital markets, investors thereby
anticipating that companies would invest less, because funding is
dearer. Conversely, announcements of interest rate decrease have
most of the time been followed by stock price increase, investors
anticipating the possibility of growing corporate investments
(Demiralp & Jordá, 2004; Glick & Leduc, 2012). These reactions
 reflect investor’s rational anticipations re monetary policy and
investment opportunities resulting from changes in the cost of
capital.

Industrial Policy
The third area of public policy that can affect companies and need to be
anticipated and taken into account when establishing forecasts is that
of industrial policy resting on two pillars (Chang, 1993). The first pillar
consists of these industrial areas deemed strategic by governmental
authorities and therefore benefitting from certain advantages, such as
public offerings, subsidies, special taxation or softer regulations.
Conversely, industries deemed non-strategic or problematic for a
country may face fiscal and legal obstacles. For instance, in countries
such as France, the UK or the USA, the Defence industry perceived as
strategic by governmental authorities , benefits from public support to
manufacturing and exporting (Heidenkamp, 2013).
The second pillar consists of variations in competition laws either
through regulations or court decisions potentially affecting the conduct
of business operations. Tougher competition regulations and
jurisprudence would tend to be more protective of smaller businesses
at the expenses of larger ones perceived as potentially dominant
(Bishop & Walker, 2010). From a dominant business perspective,
tougher competition policy can result in massive fines to be paid for
breaching or averting competition , as with Microsoft. The company has
regularly been condemned to pay fines reaching billions of euros to the
European Commission for breaching competition laws, especially in
relation to the domination exerted by the Windows operating system
on the computer market (Waltradud, 2014). Likewise, when AT&T
announced its intent to take Time Warner over in an USD 85 billion
deal, the US Department of Competition and the US Department of
Justice have blocked the operation deemed a breach of competition
laws; the new venture would have found itself in a quasi-monopolistic
situation (United_States_Congress, United_States_Senate, &
Committee_on_the_Judiciary, 2017). In either case, company operations
and profit have been directly impacted by the toughening of
competition laws. In large companies potentially accused of being
dominant on their market , forecasts of competition law variations are
scrutinised together by corporate lawyers and management
accountants. The former do legal intelligence, identifying trends in
jurisprudence and assessing the legal risk for the company. For their
part, the latter do translate these risks into figures expressing costs or
resources for the period to come. If fines or other forms of damages are
expected to be paid, these need to be taken into consideration and
included into business forecasts, i.e. the cost of non-compliance with
norms (Çürük, 2009; Greenberg, 2010; Parker, 2000; Weber &
Wasieleski, 2013). Although non-compliance with regulations and
breaching laws are unethical behaviour , it is relatively common that
companies arbitrate in favour of paying fines rather than conforming,
because the sanction is less costly for them than changing. Such is
determined by management accountants.
Commercial Policy
The fourth area of public policy that can affect companies and needs to
be anticipated in the articulating of forecasts is commercial policy . Just
like industrial policy , commercial policy rests upon two pillars: tariffs
and customs on the one hand and free trade agreements on the other
hand, each being the other side of the same coin (Vogel, 2018). In the
absence of trade agreements between countries, some goods and
services can be subjected to specific tariffs or custom rights, thereby
increasing their selling price and undermining global sales. When such
products are directly competing with local products and are
endangering a national company, they can be strongly taxed as an
explicit manner of discouraging purchases. This case arose in 2017–
2018 with a 300% tariff imposed on Bombardier Aircrafts in the USA
where Boeing would have been endangered (http://​money.​cnn.​com/​
2017/​10/​06/​news/​companies/​boeing-bombardier-trade-ruling-tariff/​
index.​html). In other situations, special tariffs can be imposed on goods
or services in response to a decision made by a foreign government ,
such as an extraordinary tariff decided by the Bush Administration on
French cheese and wine because the French government decided not to
join a military action in Iraq organised by the US Army in 2003
(https://​www.​theguardian.​com/​world/​2009/​jan/​17/​france-america-
import-tariffs). Together with corporate lawyers and the CEO cabinet,
management accountants, when articulating their forecasts, are
expected to take possible changes in tariffs and trade into account and
simulate their impact on corporate sales, when articulating their
forecasts.
The second pillar, or commercial policy , which is better known,
consists of free trade agreements. Whilst tariffs on goods and services
are not always made public, free trade agreements are generally well
known a long time prior to their ratification and enforcement.
Accordingly, it is possible to find in the public realm information on
what goods and services shall be concerned and under what
circumstances. This is why for instance, management in multinational
companies have been particularly attentive to the progress made in the
negotiations surrounding the Transatlantic Trade and Investment
Partnership (TTIP) since 2014: this agreement would have opened new
markets for them in North America and Europe (Mayer, 2015). As with
tariffs, management accountants and corporate lawyers are expected to
model and simulate the free trade agreement’s impact on company
sales.

Case n°8. EU tariffs on Chinese Solar panels Changes in

Commercial Policy
On June 4th 2013, the European Commission announced a
change in tariffs imposed on solar panel aimed at countering Chinese
manufacturers suspected of dumping practices. The press release
says:
“Today the European Commission has decided to impose
provisional anti-dumping duties on imports of solar panels, cells and
wafers from China. This decision follows a thorough and serious
investigation and extended contacts with market players. As the
market for and imports of solar panels in the EU is very large, it is
important for this duty not to disrupt it. Therefore, a phased
approach will be followed with the duty set at 11.8% until 6 August
2013. From August on the duty will be set at the level of 47.6%
which is the level required to remove the harm caused by the
dumping to the European industry. The European Commission
reiterates its readiness to pursue discussions with Chinese exporters
and with the Chinese Chamber of Commerce in order to find a
solution in line with Article 8 of the Basic Anti-Dumping Regulation
 so that provisional duties can be suspended and a negotiated
solution achieved. The European Commission reaffirms its readiness
to have the EU-China Joint Committee in the next weeks at a
mutually agreeable date to discuss in a constructive manner all
topics of our trade relations in line with our common WTO
commitments and in the spirit of our strategic partnership.”
Targeted companies ’ forecasters were notified that they would
need to take these new tariffs and tolls on their products into
account when establishing their estimates. After tolls and tariffs,
selling price being higher than before, sales volumes are likely to be
less. Forecasters would accordingly estimate the price elasticity of
their sales after these new tariffs and tolls to anticipate plausible
sales.

1.3 Geopolitical Circumstances

In contradistinction to the Master Budget designed for companies
operating on a domestic market only, twenty-first-century forecasting
rests upon the idea that a company is necessarily confronted with
global markets. Markets are no longer just domestic, as the supply
chain can be organised worldwide as clients can be based all around
the world (Busco, Giovannoni, & Riccaboni, 2007; Dussel & Ibarra-
Colado, 2006; Gahan et al., 2012; Mistelis, 2000). Pursuant to the
companies ’ anchoring in global markets, the twenty-first century has
marked the need for taking geopolitical circumstances into account,
namely country-specific risk items. Corporate forecasters must be
capable of assessing the current geopolitical situation of a country
where they are doing business and anticipating likely trends in the near
future (Conboye, 2017). Country-specific risk assessment rests upon
four pillars: geography, demography, politics and economics.

1.3.1 Knowing Country Geography

In order to anticipate the likelihood of serene and continuous activity
or crisis, geography is the first dimension that needs to be appraised.
This geographical assessment basically comprises of three parts. The
first layer of geographical analysis consists of analysing the visible
geography of a country, such as rivers, mountains, ocean access and
seaside. This allows to identify in the first place potential climatic risks,
such as floods, snowfalls and avalanches. When this first layer of risk is
understood, it becomes possible either to avert it by not locating
activities in these areas or to estimate the cost for the company in case
this risk eventuates. For instance, the 2011 major floods in Queensland
(Australia) may have alerted business managers that the area may be
unsafe for establishing factories or inventories, since production and
stocks could be destroyed if floods happen again. The risk was initially
estimated at AUD 1 billion but eventually reached c.30 billions, with
300 roads destroyed and about 4 million people evacuated (Gearing,
2017).
The second layer of geographical analysis consists of appraising
invisible geology, such as tectonic or volcanic activity , which allows to
estimate the risk of eruptions or earthquakes. When a country is
located on two or more tectonic plates, these may converge or diverge,
causing different types of natural disasters. Diverging plaques may
result in earthquakes associated with a tsunami devastating everything
in a large area, as evidenced in 2005 in Phuket (Indonesia) or in 2010
in Fukushima (Japan) where devastations were initially estimated JPY
5000 billions and eventually reached 11,000 billions, c. EUR 38 billions
(Mahaffrey, 2015). Converging tectonic plates may result in regular
earthquakes associated with the rise of mountains and volcanos; such
countries are also exposed to the risk of volcanic activity , as Southern
Italy, Iceland or New Zealand (Sheets, 2013). As with floods, the
articulating must take this risk into account and estimate the cost of its
eventuation for the company.
The third layer of geographical analysis rests upon the examination
of borders and neighbourhood in order to identify possible territorial
conflicts. When political and natural borders match, the territorial risk
is lower than in the case of political borders being arbitrary. France and
Spain are separated by the Pyrenees Mountains; Austria and Italy are
separated by the Alps; the UK, Australia and New Zealand are islands
with the ocean as natural borders. However, Japan is archipelago with
atolls and micro-islands located in territorial waters that can be
contested by neighbours, such as China or Russia (McGregor, 2017).
Unnatural frontiers are particularly visible in most African countries, as
though they had been drawn with a ruler. This results in populations
and territory mismatching: on the same territory can be several
different ethnic groups. Conversely, an ethnic group can be split over
two or more countries. When an ethnic minority is feeling oppressed in
a country, an uprise and a rebellion can occur, potentially leading to a
civil war as in Central Africa (Axe & Hamilton, 2013), genocide as in
1994 in Rwanda (Dellaire, 2005) or expat abduction as in Nigeria
(Huault, 2002). When operating in these countries, companies need to
estimate the probability of risks eventuating and its potential cost
(private militia to protect expat and corporate installations, cost of
ransoms, bribes to pay, etc.)
This need for geographical analysis mostly concerns large
companies or multinational companies effectively dealing with
overseas countries exposed to various risks. Possible associated costs
for the value chain , the supply chain or expats need to be estimated
and included into forecasts.

Case n°9. Earthquake risk in New Zealand Declining Forecasts

After the 2011 earthquake in Christchurch and the aftershock
that devastated New Zealand’s South Island, the Ministry for Higher
Education released a note indicating a dramatic drop in applications
for student visas to New Zealand. It seemed that overseas students
were scared of the earthquake risk in New Zealand and therefore
withdrew their applications for university admission in the country.
Consequently, notwithstanding a major effort to redesign and
rebuild the University of Canterbury and increasing protection
against earthquakes, New Zealand universities struggled to attract
students. As overseas students contribute to 60% of New Zealand
universities’ resources, anticipating a drop in international
applications necessarily had an impact on revenue forecasts
(International_Division_Ministry_of_Education, 2012).

1.3.2 Knowing Country Demographic Trends

As with geographical analysis, corporate forecasters need to take
demographic factors into account. These relate to local population
characteristics and shall enable to anticipate how operations can be
conducted in the area or how goods and services good are to be sold.
Demographic factors comprehend metrics relating to age pyramid and
fecundity, gender weighting, family structures, life expectancy but also
anything enabling to identify a region’s linguistic and anthropological
composition (e.g. race or ethnicity ). Traditional demographic factors
revolving around the age of the population enable to anticipate a
region’s growth potential, the assumption being that young regions are
more dynamic than ageing ones. In a “young” region, the population is
more likely to be capable of working. In the twenty-first century, owing
to educational progress, a young population is likely to be better
educated than an elder one. Also, a young population is likely to work
for a longer time than an elder one. In other words, a young region is
more likely to provide a company with workforce. When establishing
forecasts, multinational firms do anticipate population growth and age
in countries where they are operating, being likely to privilege African
countries to find qualified employees over ageing Japan or Germany. In
these two countries, the ageing population is likely to be more
experienced than in younger countries and therefore demand higher
wages for similar occupations. Similarly, knowing population age allows
to anticipate the likelihood of goods and services sales in the region.
The assumption is that consumption habits differ from one age to
another. Hence, not the same sales can occur in a younger or an elder
region.
A second demographic dimension important to take into account
pertains to class composition and national income sharing. In countries
where social inequalities are high, the likelihood of having a solvent
middle class capable of consuming goods or capable of being educated
is low. Accordingly, companies operating there may not be in a capacity
of counting on very skilled labour or significant consumption.
Conversely, the narrow, solvent population owning most of national
wealth is more likely to purchase superior goods, viz. those goods
whose consumption increases faster than income (e.g. luxury, wines
and spirits).
A third dimension of demography that corporate forecasters need to
take into account is anthropology (religion, race and ethnicity ).
Understanding religious trends enables to anticipate how locals would
position themselves vis-à-vis work and management but also vis-à-vis
the product or good sold (Joannidès, 2009). For instance, in Haiti or
Western African countries such as Nigeria or Zimbabwe, religion is
strongly influenced by a voodoo legacy whereby people are subjected to
God’s severity and accept their hard condition as a gift confirmed in the
next life. Consequently, local employees are unlikely to take initiatives
or be creative, just like they are unlikely to protest against their
condition (Dijk, 2001; Goldberg, 1983; Iannaccone, 1995; McCloskey,
1991). This is how some multinational firms do establish factories with
hard work conditions for locals who will not uprise.
An extension of religion, race and ethnicity deserves special
treatment in the understanding of a country when forecasts are being
articulated. As these two notions of race and ethnicity are abundantly
developed discussions on internationalisation and management
control, they will not be further developed here. Understanding the
ethnic composition of a country or region will enable forecasters to
anticipate possible issues, conflicts or misunderstandings that may
arise amongst local employees and undermine the conduct of
operations. In case of conflicts and misunderstandings, productivity
may find itself lowered, thereby unexpectedly increasing total costs
(Hamilton, Knouse, & Hill, 2009; Oakes & Young, in press; Richardson &
Cragg, 2010).
Each of these demographic factors can have a strong impact on the
costs incurred by companies or the income they can generate.
Therefore, not taking these demographic dimensions into consideration
could result in unpleasant surprises for companies . Official statistics
released by country authorities or intergovernmental organisations can
be utilised by corporate forecasters to estimate their future activity and
related figures (see the World Bank, the International Monetary Fund,
the Bank for International Settlements, the UNESCO, the UNHCR, etc.).
Rather than utilising these figures as rigid metrics, forecasters can
qualitatively estimate their trends and impact on their figures.

1.3.3 Economic Infrastructures

Just knowing a region’s geography and demography cannot suffice to
establish realistic and therefore reliable forecasts. These need to be
complemented with a fair understanding and anticipation of economic
infrastructures existing in the country. Outwith mere economic
indicators, such as growth rate, unemployment or inflation, corporate
forecasters need to take account levers of endogenous growth into
consideration (Barro, 1996). These comprise of all public and private
infrastructures enabling a continuous activity on a given territory, such
as schools and universities, hospitals and dispensaries, roads and
railway, airports and harbours, but also electricity, water, telephone or
satellite connections.
The first component of economic infrastructures comprising of
schools, universities, hospital and dispensaries relates to social-
educational infrastructures. When these are present and of good
quality, companies operating on the territory can expect to count on an
educated, skilled and healthy workforce. That is, the presence of such
infrastructures supposedly has a positive impact on costs, productivity
and ultimately profitability . Conversely, absence of such infrastructures
may result in higher costs for companies . Or, as in certain cases, the
company may need to build its own infrastructures so as to count on
the expected workforce, which needs a cost to be estimated.
The second component of economic infrastructures consists of
transport infrastructures facilitating corporate logistics . The presence
of roads, (fast) trains, airports and harbours makes the transport of
people, materials and goods possible and safe. Conversely, absence
thereof can undermine or avert corporate activity from happening.
These can appear as a major unexpected cost for companies if not
anticipated. Establishing a factory in a country with no roads but just
sand tracks may deteriorate good quality upon delivery and thereby
end up being accounted for as a loss. It is therefore crucial that
corporate forecasters be conscious of this.
The third component of economic infrastructures relates to energy
and communication as the main enabler of corporate activity . Limited
access to power or water may undermine a factory’s operations.
Likewise, poor telephone or Internet connection may limit those
communications supposedly driving corporate activity , such as placing
orders, issuing invoices or receiving payments. This lack of
infrastructures would lead to higher costs, lower income and thereby
lower profitability . Conversely, by enabling corporate activity , the
presence and good functioning of such infrastructures would certainly
result in higher profitability .
 All told, when preparing corporate forecasts, management
accountants need to gather as much quantitative and qualitative data
on such economic structures. Most of the time, apart from
macroeconomic figures, little data are publicly available on these
economic structures. Therefore, corporate forecasters need to work
together with people knowing these countries and regions very well.
Such people can be former expats known for a long service in these
countries. When returning from their service, they can share with
corporate forecasters their knowledge and appreciation of these
economic infrastructures. For forecasters in companies having limited
experience in these overseas countries, it is possible to purchase data
from local chambers of commerce, decentralised foreign office bureaus
or specialised private consultants.

Case n°10. Fast Broadband in Australia Change in Economic

Infrastructures
Until 2011, numerous international companies were hesitant to
invest and operate in Australia, because telecommunications were
difficult and expensive. Owing to country size and limited
population, the National fast Broadband Network was characterised
by insufficient investments. No private companies would undertake
such massive investment with little return associated. Therefore, the
Julia Gillard Labor government announced public investment by AUD
11 billion to encourage Telstra and other telecom companies to
modernise and upgrade the National Broadband Network (http://​
www.​news.​com.​au/​finance/​business/​julia-gillard-welcomes-nbn-
agreements/​news-story/​75cf0217231af91f​7a59a1b46a978211​).
When this investment was discussed before the House of Parliament
, this announced change in economic infrastructures would make
Australia more attractive to international investors. Subsequently,
international companies ’ forecasters could include this ease of
access to fast-broadband Internet into their estimates and consider
locating some activities to Australia, especially knowing that the
country is highly dependent on foreign investment (http://​www.​abc.​
net.​au/​news/​2013-09-17/​berg-foreign-investment-abbott-
government/​4962416).
1.3.4 Political System
The last country-specific dimension that corporate forecasters need to
take into consideration relates to political institutions and agenda. This
political dimension is certainly the most complex that corporate
forecasters need to take into consideration, inasmuch as it counts many
apparently disjointed facets. Although these may seem to be
disconnected from each other at first glance, when put altogether, they
give a fair glimpse of the main risks that can be faced in this country.
The assumption is that economic decisions are strongly influenced by
legal constructs and institutions (Lang, 2013).
The first dimension is certainly the most visible and easiest to
grasp: political regime, institutions and electoral agenda. When a
regime is a democracy, an authoritative or flexible autocracy, stability in
country differs, with potential implications for companies operating
there. In a democratic regime, most protests take the poll path, by
changing parliamentarians and governments. That is, the risk of a
revolution is lower in a democratic regime than in one the local
population perceives as dictatorial. Western countries, including Japan,
are liberal democracies where governments can be replaced through
the polls with minimal contestation of electoral results. Conversely,
countries where the regime is autocratic and authoritative are exposed
to the risk of a revolution, an uprise against the power or a civil war.
Such has been the case in a number of sub-Saharan African countries
such as Ivory Coast, Liberia and Central African Republic, but also in
Northern Africa with the Arab Springs since 2010 (Badiou, 2012).
Lastly, liberal autocratic regimes, i.e. those looking after their
population through strong social structures, are less exposed to this
political risk . Such can be the case of the Gulf’s Oil monarchies (Miller,
2016).
A country political system’s second component proceeds from the
former and can be appreciated through stability and durability. Stability
can be appreciated in terms of how long a government can remain in
office and develop its policy . Instability does not only concern non-
democratic countries and is not systematically associated with
revolutions, uprises or civil wars. Democracies where governments
change too often may appear as a risk to companies , since it can be
difficult for forecasters to anticipate possible changes in tax or
regulations. This has long been the case in Belgium, where the country
was with no government for more than a year between 2015 and 2016
(F. Cochrane, Loizides, & Bodson, 2018). A similar case could be seen in
Italy where no coalition could be formed at the parliament between
2015 and 2018, where numerous governments were deposed and
citizens called to the polls twice a year (Sassoon, 2017)
Political stability can also be appreciated through the terms’ average
duration and political agenda. Even if coalitions can form a government
and remain in office until the end of the term, if this latter is too brief
and leads to major swings from one election to another, a risk of
political discontinuity could occur. When a newly elected government
undoes what their predecessors did, it becomes difficult for corporate
forecasters to anticipate what is likely to occur in this country. An
example thereof could be Australia where parliamentarians’ term is
three years and the majority changes almost after each election. This is
how a carbon tax and some subsidies to public schools decided by Julia
Gillard’s Labour government in 2013 have been entirely undone by the
Tony Abbott’s and Malcolm Turnbull’s Liberal governments since 2015
(Coleman, 2016). Something similar can be seen in the USA where the
Trump administration has endeavoured to undo the Obamacare, with
major financial impacts on private companies ’ and insurances’ costs
(Baldwin & Andersen, 2017). Conversely, whatever the results of polls
are at the European Parliament , the main parties tend to have
systematically entered into a coalition and conducted a continuous
policy term after term since 1979 (Nugent, 2017). Political stability
shall result in predictable policies and associated costs for companies
whilst instability opens for uncertainties that could result in
unexpected costs (Schwartz & Thompson, 1990). Therefore, corporate
forecasters need to estimate the risk of political changes in countries
where their company is operating. Given the limited amount of publicly
available information, multinational companies ’ forecasters need to
call on international experts, such as constitutionalists or political
scientists specialised in the country and advising them on these
matters.
The third dimension of a country’s political institutions lies in its
legal and judicial system and confidence that can be placed therein. The
ease or difficulty foreign companies can have to claim their rights and
have them protected needs to be taken into consideration too when
establishing corporate forecasts. When claiming rights and their
protection is difficult (clear and transparent procedures, absence of
corruption, etc.), foreign companies may incur unexpected costs, such
as bribes, racketing, ransoms, other duties or fines for past conduct
historically legal but later on deemed illegal. The level of confidence
that can be placed in a country’s legal system cannot be estimated
without advice from lawyers knowing local laws. Therefore, corporate
forecasters tend to associate with partners from international legal
firms having bureaus and staff in these countries (Demirgüç-Kunt &
Maksimovic, 1998). The choice of such Queen’s Counsel, barristers and
solicitors in these countries rests upon similar criteria as the choice of
auditors amongst the Big Four: a professional rigour evidenced through
an internationally recognised brand (Flood, 2007). In this situation,
management accountants, together with corporate lawyers and legal
advisors, estimate and monetise the legal risk associated with the
conduct of operations in foreign countries.

2 Forecasts as Business Model Translation

Into Numbers
Once the corporate environment is well understood, the articulating of
forecasts requires the business model be adapted accordingly. Prior to
translating anticipations into numbers, corporate forecasters need to
redesign the business model and value chain . This constant re-
engineering is required; hence, the company is always inline with its
environment . It is on the basis of this revised value chain that
corporate activity for the upcoming period can be translated into
monetary estimates.

2.1 Preparing Corporate Business Model for Tomorrow

Unlike the Master Budget that assumes value chain existence and does
not call it into question, forecasting rests upon the principle that the
company’s business model may need to be profoundly reviewed as the
environmental changes. Unlike the Master Budget , forecasting rests
upon the assumption that re-engineering is necessary. But also, unlike
traditional change management presented as necessarily incremental
to foster people’s adhesion, re-engineering associated with forecasting
must lead to radical and instant change management (BBRT , 2009b,
2009c, 2009d, 2009f).

2.1.1 Strategising and Operationalising

Once the environment surrounding the organisation is understood and
its impacts on corporate activities estimated, the corporate business
model needs to be made particularly clear. This includes how strategy
takes account of the environment and operations shall be organised
accordingly.
Devising Strategic Planning
At this stage of forecasters’ activity , neither metrics nor financialisation
of corporate activity is needed. Rather, the forces driving the corporate
environment must be included into strategic objectives and direction.
That is, corporate strategy cannot be indifferent to anticipations re
competition structure, the possible launch of a substitute similar to
company products, changes in regulations, consumer behaviour ,
supplier relationships but also economic and country-specific risks,
corporate strategy . Company strategists need to review strategic
directions, which leads to review the following.
As corporate strategy is reviewed and updated, the type of
operations required to support this strategic direction is likely to
change. It shall proceed from a strategic review a new way of doing
things and therefore imply re-engineering. Some links in the value
chain , formerly deemed strategic, may be considered less and therefore
qualify for outsourcing. Some other links previously deemed peripheral
may become strategic and therefore qualify for backsourcing (Duan,
Grover, & Balakrishnan, 2009; Kotlarsky & Bognar, 2012). In the case of
a firm operating worldwide, the international value chain may require
adjustments with the relocation of certain activities to either cheaper
or safer countries, depending on their new strategic role for the
company (BBRT , 2009b, 2009c). This is what the figure hereafter
represents as informed operational plans: what operations are needed
to fit within this changing environment (Bird & Orozco, 2014; Mederos,
2018).
 Once adequate operational plans are clear and the corporate
business model is designed, the scope of responsibility for each link in
the value chain needs to be determined. Some links may be converted
into a cost centre , an investment centre , a profit centre or revenue
centre (Anthony, 1965, 1988), which they were not necessarily in the
past. Although their position within the value chain may remain
unchanged, their contribution to corporate value may be altered. In this
case, their raison d’être and their formal objectives may be profoundly
altered. The formal actions that are required and as well as their
strategic objectives needs to be determined at this stage of forecasting
(Anthony, 1965; Holloway, 2004; Molridge & Player, 2010). In other
words, what needs to be done to operationalise and organised the
revised strategy appears as the practical application of environmental
changes to the company (Murray, Kotabe, & Westjohn, 2009). At this
stage, these do not rest on any financials.
As the new value chain is being designed, the costs and income that
changes in the environment can formally be integrated. Even prior to
articulating their detailed and thorough impact on corporate figures,
this latter needs to be systematically and accurately quantified,
generally under the form of elasticity measures or lump sums. At this
stage of forecasts’ articulating, management accountants’ role consists
of putting rough or qualitative estimates into working numbers that can
be applied to the various links in the old and the newly revised value
chain . If the revised value chain appears as a fully adequate and
proportionate response to these measures of environmental changes,
elasticity items should approach zero, meaning their impact has been
entirely and properly absorbed. The figure hereafter summarises this
generic approach to strategising and operationalising (Fig. 2).
Fig. 2 Strategising and operationalising

Delineating the Business Model

Ultimately, these rough financial elasticity estimates shall lead to a
different value chain emphasising the core business model, i.e. these
links especially strategic to the company and therefore requiring steady
investment. In the twenty-first century dominated by intangible assets,
innovation and technology appear as especially central. Accordingly, a
growing number of business models consist of fully integrating R&D ,
assemblage as well as marketing and sales then perceived as an
investment centre , a profit centre or a revenue centre. In return ,
supportive links, such as IT or HR, tend to be viewed as an expense
centre at times deserving to be outsourced (Chamassian, 2016;
Lamminmaki, 2008; Langfield-Smith & Smith, 2003; Nicholson, Jones, &
Espenlaub, 2006). The figure hereafter summarises the form a revised
value chain can take in the process of strategising and operationalising
(Fig. 3).
Fig. 3 Designing the value chain

2.1.2 Market Forces’ Impact on the Business Model

The aforementioned generic model of strategising and operationalising
follows a series of practical steps in which corporate strategists and
forecasters need to engage. The five forces potentially affecting a
company’s position on the market are not stable and rigid. Rather, these
tend to evolve with the economic environment . What can alter a
company’s position and activity are new entrants or substitute
products, regulations, consumer behaviour or suppliers.
New Entrants, Substitute Products and the Value Chain
In the first place, corporate generic strategy may need to be reviewed. If
new competitors enter into the market or if a substitute product is
launched, an existing company must articulate a strategic response.
New actors may engage in a growing or mature market . In a growing
market , new actors can pretend to dominate by costs; on a mature
market , domination from competitors can operate through
differentiation (Porter, 2002, 2008). Accordingly, an existing company
confronted with changes in competition structure finds itself obliged to
articulate a working strategic response: cost domination ,
differentiation from as yet unknown new competitors or a bundle of
both approaches.
 Deciding on either strategic response will not be without an impact
on operations: the value chain will certainly need to be pursuantly
revised. In the case of a cost -based response, the necessary value chain
may consist of outsourcing or backsourcing some links, abandoning
some activities or undertaking major investments in new activities.
Unless the entry of a new competitor or the launch of a new product
can be well anticipated and prepared, the main response from the
attacked company tends to be cost -based. Conversely, a change in
competition structure can be anticipated and prepared when the
launch stage of a product is over and sales start increasing until break-
even . Assumedly, around break-even, the probability that new entrants
join significantly increases (Anderson & Zeithaml, 1984; Porter, 2008).
In this situation, management in the potentially threatened company
may have already anticipated this and prepared either a strategic
change or a review in the value chain , operational prior to this change
in competition structure (Gersick, 1989, 1994). In either situation, new
entrants join because of market lucrativeness allowed by growing
quantities. Accordingly, in order to maintain its historical competitive
advantage, the threatened company is inclined to stay on a mass
production track. The figure hereafter summarises these effects (Fig. 4).

Fig. 4 Adapting the value chain to changes in competition

Changes in Regulations and the Value Chain

In the case of a change in regulations anticipated by forecasters, it is
relatively obvious that product specifications or the value chain will
have to be reviewed. Regulations pertaining to raw materials or
product characteristics are usually announced ahead, issued with a
certain transition period until being fully enforced. Although
management is given some time to adapt, not anticipating these may
result in competitors taking advantage of a delayed response.
Therefore, as soon as discussions surrounding such a change in
regulations start to be credible, corporate lawyers and forecasters,
together with production and marketing , need to review the product
itself and arrive at a schedule and agenda in order for this change to be
operational. Whilst anticipating changes in product characteristics,
either suppliers are also implementing the required change so as to be
in a capacity of delivering the newly requested materials , or
management will seek for new suppliers.
When anticipated changes in regulations address corporate
processes, forecasters together with management controllers and the
COO need to review the links in the value chain directly impacted. In the
twenty-first century, such regulations tend to address environmental
matters (Latin et al., 1976) as well as hygiene and safety or employee
treatment (Rosner & Markowitz, 1987, 1991). This may have three
possible responses between which management accountants-as-
forecasters are required to arbitrate on the basis of responses’
profitability . With the first possible response, corporate forecasters
may estimate that conformance is worth the cost , because this secures
access to a large or growing market . This is often the case of foreign
companies operating in the European Union or the USA, perceived as
the largest two markets in the world economy. Not complying with
their regulations closes doors to their customers. In this case where
forecasters suggest complying, the new process and value chain need to
be designed and the cost of this change estimated. The second possible
response can consist of downsizing and outsourcing parts in the
process that cannot easily be changed. In this case, forecasters need to
estimate the cost of abandoning some activities as well as that of
outsourcing. If, by outsourcing some links in the value chain , those
relinquished can be ceded, the possible income generated from this
operation needs to be anticipated. The third possible response to
anticipated changes in regulations can consist of relocating those links
in the value chain that are directly affected by changes in regulations.
The figure hereafter summarises these effects (Fig. 5).
Fig. 5 Adapting the value chain to changes in regulations

Consumer Behaviour and the Value Chain

The third dimension of environmental changes confronting corporate
forecasters likely to lead to a value chain review relates to customers.
Assuming that corporate forecasters can rely on credible information re
changes in consumption behaviours, these may lead to revising any of
marketing ’s four Ps, which necessarily has an impact on the value
chain .
When the product itself needs to be reviewed, its intrinsic
characteristics are to be altered. This may lead to change materials ,
offer the possibility of choosing its characteristics or tailor-produce it
(lean production ). In either case, the value chain cannot remain
unchanged. The smallest change may lie in changing the supply chain
when product characteristics must change; the utmost change is
certainly that of a product shifting from mass to lean production . In
this latter situation, management accountants-as-forecasters together
with marketing managers need to estimate the optimal value chain
required to shift from mass to lean production , often associated with
the imperative of selling the revised product at the same price. Thence,
its cost structure will mechanically change. This may lead to moving
some links into countries where local costs are low enough to cover the
cost of reviewing the value chain . Such costs regard redundancy plans
in regions where activities need to be terminated, fines, costs of vacant
buildings or idle equipment, etc. Corporate forecasters are required to
anticipate and estimate all these costs (Bogsnes, 2008; Molridge &
Player, 2010).
When changes in consumption behaviour revolve around product
price, not reducing selling price could be dramatic for the company.
This imposes that costs should accordingly be reduced. The selling
price expected by customers becomes the target price at which the
company must arrive. This necessarily leads to reviewing the product ’s
cost structure and cut where possible. If those costs that need to be
managed are cosmetic (e.g. packaging, warranty), reviewing the value
chain tends to merely consist of amending the supply chain. Corporate
lawyers together with management accountants estimate the costs of
this reviewing (fines for contract early termination, cost of finding new
suppliers, etc.) and the savings these enable. In order to absorb these
costs, the savings realised on the price of materials should be sufficient.
If they are not, other areas of the value chain may also need to be
reviewed, which can take the form of relocating some unexpected
activities to places where costs are lower or outsourcing certain non-
strategic links. When expected price decrease requires that the product
should remain identical, it is the entire value chain that management
accountants, corporate lawyers and the COO need to review, with the
objective of realising economies of scales through mass production in
low-cost countries. Again, the cost of relocating needs to be estimated.
When consumer expects changes in product presentation or
promotion, corporate value chain does not require major adjustments.
Rather, changes are certainly necessary in marketing policy
(promotion) or in customer -relationship management. The changes
required being relatively minor, corporate forecasters merely need to
clarify with marketing and sales how their own activity shall be
affected. The costs incurred on the occasion of this change or the
savings realisable need to be estimated and included into the revised
business model. The figure hereafter summarises these effects (Fig. 6).
Fig. 6 Adapting the value chain to changes in consumer behaviour

Suppliers and the Value Chain

When changes in market circumstances concern suppliers, corporate
forecasters, management accountants, the COO and corporate lawyers ,
they need to estimate the costs of revising the supply chain. As with
changes in regulations, the cost of terminating a relationship must be
estimated. But foremost, if the supplier itself is not anymore in a
capacity of abiding by its client’s standards, the cost caused by and
revenue generated from prosecution and a court case need to be
estimated and the schedule of cash flows anticipated: the legal
procedure will need to be modelled. Likewise, these forecasters need to
estimate the cost of finding new suppliers and establishing new
contracts with them. Such costs may also include the cost of
opportunity resulting from the transition period until new suppliers
are fully operational. In this particular situation where the supply chain
needs to be profoundly revised, corporate forecasters are confronted
with the imperative of accurately designing the timetable for this
change including a detailed statement of inflows and outflows over the
entire period (Laswad & Baskerville, 2007). The figure hereafter
summarises these effects (Fig. 7).
Fig. 7 Adapting the value chain to changes in supplier -relations

2.1.3 Economic Circumstances’ Impact on the Business

Model
Anticipated changes in economic circumstances may lead corporate
forecasters to review company value chain accordingly. Including such
external economic forecasts into the business model implies a strategic
response pursuing a certain strategic objective and potentially affecting
position on the market and mode of production .
Macroeconomic Indicators and the Value Chain
When macroeconomic indicators change, corporate forecasters can
have a relatively fine view of how the economy is likely to behave over
the next period under consideration. With a high growth rate, the
company is confronted with two competing forces. On the one hand,
anticipated economic growth can be perceived as a positive sign:
corporate clients’ or customers’ propensity to purchase the product is
higher. On the other hand, economic growth has two series of
consequences that could affect a company’s future position on the
market .
The first consequence proceeds from the Philips curve: economic
growth is accompanied by decreasing unemployment and therefore an
increase in labour costs. Total costs and cost per unit will increase. At
this stage, corporate forecasters need to integrate consumption’s price
elasticity into their forecasts. As with price-driven consumer behaviour
, the entire value chain may need to be revised in order to meet as a
target price the current selling price. Economic growth may therefore
result in corporate forecasters recommending that certain links in the
value chain should be outsourced or relocated to regions where labour
costs are lower. The second consequence lies in the possibility that new
competitors enter into the market , since the economy is growing. In
this case, macroeconomic figures can lead to a situation similar to that
of new entrants or substitute products on the market . Corporate
forecasters are confronted exactly with the same issues in terms of
value chain re-engineering.
Knowing their market specifics, corporate forecasters need to
devise their own model in which this triple effect of economic growth
can affect their own activity . This is more specifically management
accountants’ role first: devising a weighted average coefficient of sales
elasticity to economic growth . Depending on this weighted elasticity,
the value chain may need to be more or less reviewed as in the case of
new entrants.
Industry-specific economic forecasts shall have an effect similar to
economic growth which they refine. A twofold phenomenon occurs.
The first phenomenon is similar to the ß in the CAPM: the industry
growth rate can amplify economic growth (superior goods) or be
known for rating below (Giffen goods). Thence, industry-specific
measures shall refine the weighted average coefficient of sales elasticity
to economic growth . The second phenomenon consists of splitting
subsuming these industry-specific economic figures into one for each
geographical area in which the company operates. The same industry
can be steadily growing in one region and declining in another. This
shall have a major consequence for corporate forecasters: management
accountants together with the COO and the CFO shall review the entire
value chain so as to ensure that it is consistent with company markets
worldwide. The company’s value chain adapts with international
expansion. Accordingly, depending on the product and on markets,
management accountants set out to optimise the value chain
worldwide. This may result in relocating some links in the value chain
into from declining to growing markets (e.g. from Europe to Asia).
Factories can be dismantled in declining markets whilst new ones are
opened in growing markets. In parallel, other supportive links in the
value chain may be relocated closer to these new factories. In
contradistinction to a response to new entrants, optimising the value
chain is not necessarily a cost -response but most of the time a profit
response. The assumption underlying the decision is that it is optimal
to incur costs closer to value than afar.
 Macroeconomic indicators relating to company markets likely to
affect its activity may result in forecasters recommending changes in
the value chain . These indicators can relate to the price of materials on
international markets but also in anticipations of interest and exchange
rates’ variations. Economic theory traditionally suggests that variations
in interest rates, by making investments more or less expensive for
companies , may result in attracting or repulsing businesses. The
assumption economists make is that companies ’ propensity to invest is
higher in countries with lower interest rates (Bonner & Sprinkle, 2002;
Stiglitz & Greenwald, 2003). Accordingly, management accountants, the
CFO and COO shall simulate the cost and savings realised by
disinvesting in countries with increasing interest rates and investing in
countries with lower rates. The implicit assumption is that re-
engineering shall be undertaken if there is a belief that the expected
change is likely to be structural and last. This may lead forecasters to
recommend closing down and relocating some of their investment
centres to places where interest is low (e.g. R&D , high-tech activities,
financial engineering). These issues are at the intersection of mere or
rough macroeconomic figures and anticipations re monetary policy ,
known as rational expectations (Barro, 1976; Barro & Gordon, 1983).
Exactly the same logic applies to anticipation of variations in
currency exchange rate. In this case, management accountants, together
with the CFO and cash managers, shall articulate a response to a
durable and structural anticipation of such a variation. In case of an
exporting company whose profitability is contingent upon a “cheap”
currency, a dramatic increase in exchange rate may result in forecasters
recommending relocation into a country where the currency is more
stable or cheaper. Since the launch of the euro in 1999, such has been
an obsession for forecasters in North American as well as European
countries, leading to relocations onto either shore of the Atlantic Ocean,
as variations in currency exchange rates were impacting on companies ’
profitability . In this case, the impact is very similar to what changes in
regulations would foster. In a nutshell, the value chain would be
restructured in such a way that importing links should be located in
countries with a high exchange rate, exporting links in countries with a
low exchange rate and transfer pricing from the latter to the former
(Sombart, 1916). This would result in expenses occurring in countries
where the purchase power parity is high and income in countries
where the currency is inexpensive (Porter, 1998a). The figure hereafter
summarises these impacts (Fig. 8).

Fig. 8 Adapting the value chain to economic circumstances

Economic Policy and the Value Chain

Whilst macroeconomic indicators provide forecasters with an intuition
of economic cycles and trends, their estimates also rest upon their
anticipation of economic policy . As the effects of monetary policy on
the re-engineering of the value chain are very much aligned with
forecasts of market evolutions, these are not discussed. However,
corporate forecasters include their anticipations re countries’ fiscal
policies. This activity , conducted by management accountants together
with corporate lawyers and tax experts, is a.k.a. tax intelligence and
fiscal optimisation. Traditionally, companies have been confronted with
three options, reduced to two since the GAFA have shed light on major
loopholes in fiscal legislations (Col & Patel, 2016; Frecknall-Hughes,
Moizer, Doyle, & Summers, 2017; Hansen, Crosser, & Laufer, 1992; G.
Richardson, 2008; West, 2017). Historically, inspired by Public Choice
economists, companies would be inclined to locate their activities in
countries where tax was least: company tax , VAT (a.k.a. GST) or tax on
financial activity (see Chapter 8 for more detail). Corporate forecasters
including tax experts would recommend locating labour -intensive links
in countries with limited tax associated with labour , i.e. any extra costs
that would lead to a significant gap between gross paid by the company
and net wage received by the employee . Traditionally, European
countries have undergone major disinvestments from international
companies between the early 1980s and the mid-2000s, thereby
evidencing the lack of a competitive advantage in Europe (Porter,
1998a).
The second option highlighted by large international companies has
consisted of ignoring tax as such and negotiating rulings (a.k.a. tax
returns, tax shelters or tax shields) with the tax office in countries
where they were operating. In this case, corporate forecasters would
not consider fiscal policy as such in their activity but the likelihood that
a tax ruling could be negotiated with national fiscal authorities .
Usually, their bargaining power would rest upon their significant
contribution to employment: if authorities disagreed on a tax ruling,
the company would just engage in massive redundancy plans and quit.
Until the mid-2000s, this has happened on numerous occasions,
especially in European countries. France’s constitution prohibiting tax
ruling, no French authorities have been allowed to consent discounts to
international companies . These latter have therefore relocated a
number of activities to Ireland or Luxembourg where this was possible
(Justman et al., 2005; Oates, 2001). Rather than anticipations of rough
tax rates, forecasters take this possibility of negotiating taxation into
account and redesign company value chain under the purview of
minimising total tax paid. After a scandal known as the Luxembourg
Leaks arose in 2014 in relation to an illegal tax ruling consented by
Jean-Claude Juncker to the main overseas companies when he was the
Prime Minister, then appointed as the President of the European
Commission (Evertsson, 2016; Sikka, 2015). The third option, which
has been generalised by the GAFA through the virtual conduct of
activities, has long been known to tax experts and management
accountants: international transfer pricing (Boyns, Edwards, &
Emmanuel, 1999; Chang, Cheng, & Trotman, 2008; Cools, Emmanuel, &
Jorissen, 2008; Dikolli & Vaysman, 2006).
Corporate forecasters re-engineer the business model, not
necessarily in operational terms but in legal-fiscal terms. Formally, the
value chain remains unchanged whilst each link has a different, new
legal and fiscal definition as well as a revised accounting treatment. As
a result, in countries where company tax is high but where there is an
operational competitive advantage, it is not unusual that subsidiaries
are charged massive amounts from others and the international
headquarters so as to end up incurring losses leading to tax credits. In
return , international profits are located in countries where tax is lower
(Boyns et al., 1999; Chang et al., 2008; Cools et al., 2008; Dikolli &
Vaysman, 2006). In other words, it is not just tax itself that motivates
re-engineering but the capability of avoiding its payment or not that
corporate forecasters take into account.
These issues surrounding fiscal policy apply in similar terms to
commercial policy strategists as forecasters scrutinise. A country’s
commercial policy can lead to results similar to those from fiscal policy
and are therefore included into business planning in the same way. A
major difference, however, lies in the fact that commercial policy leads a
country to partly relinquish its sovereignty. This results in the fact that,
contrary to tax rulings being possible, commercial rulings being
impossible. Therefore, management accountants together with
corporate lawyers and strategists need to estimate the need for
establishing certain links in the value chain into newly opened
countries so as to secure markets and consequently sales. With
commercial policy , showing a presence in countries does not
necessarily mean that highly strategic activities or links in the value
chain need to be established there. Such presence can take the form of
regional headquarters or just a bureau (Mayer, 2015). Although this
does not profoundly revolutionise the business model and its value
chain , some costs will be incurred which management accountants-as-
forecasters need to estimate.
Industrial policy estimates can also influence the shape of a
company’s future value chain , forecasters seeking for the most
advantageous places to locate activities. The impact industrial policy
can have on the business model and its value chain is mainly twofold.
The most obvious effect can be that of special support from country
authorities given to certain industries, companies or activities deemed
strategic. In this case, a number of mechanisms can exist, such as public
subsidies or clusters. These need to be taken into account by
forecasters, for corporate activity can be facilitated or accelerated at a
relatively reduced cost .
 The other effect, less obvious but equally important, is that
corporate forecasters can identify companies operating in this country
as possible targets for a merger or an acquisition in order to benefit
from this public support and enter into a market otherwise hardly
accessible. In this situation, it is mostly the board of directors (COO ,
CFO , CEO , Chief Legal Officer) that estimate the necessity to engage or
not in this direction. In estimating the need for external growth ,
corporate forecasters may identify possible redundancies and decide to
annul them. If forecasters are aiming for the optimal value chain , they
will be inclined to maintain those links with a proofed and proven
competitive advantage at whichever venture partner (Arnold, 1991).
That is, some links at either partner will be abandoned, which results in
terminating certain activities and closing down some subsidiaries all
over the world. Systematically, what is being sought is profit
optimisation, which means re-engineering the value chain is not
necessarily driven by cost -killing policies. Cost -killing often appears as
the consequence of an industrial decision recommended by forecasters
(Hope et al., 2011; Molridge & Player, 2010).
When a merger or an acquisition is suggested, corporate forecasters
articulate a financial plan for the expected operation: target acquisition
or merger cost , financing and a schedule of the steps to be followed.
This is how major operations, such as the Alcatel-Lucent merger
happened in 2006 so as to become the first tube and fibre maker for
secure communications in the world, aimed at countering the
emergence of a Chinese company. French authorities (for Alcatel) and
American authorities (for Lucent technologies) considered this
partnership was strategic especially on Defence matters, perfectly
falling within the scope of the military alliance binding the two
countries and the NATO (Coupland & Arthur, 2014). The table hereafter
summarises the impact forecasts of economic circumstances can have
on a company’s business model and value chain (Fig. 9).
Fig. 9 Adapting the value chain to economic policy

2.1.4 Geopolitical Situation’s Impact on the Business Model

As with economic circumstances, anticipated changes in the
geopolitical situation can have an impact on a company’s forecasts and
business model. Accordingly, and to a differentiated extent, geography,
demography, economic infrastructures and the political -legal system
can influence the designing of a company value chain .
Geography and the Value Chain
As geography is more than just the territory determined through
political boundaries, its main features can influence corporate business
model and value chain . In the twenty-first century, geography tends to
be associated with climate change and consequent natural disasters,
but also geology and potential natural resources. Even though a
country’s main geographical characteristics are invariants and
structural, global warming and climate change can have an effect on
some of them (Jones, 2016), with a possible impact for corporate
forecasters.
Unlike economic circumstances, corporate forecasters probably do
not pay the same attention to geography. However, when operating in
industries where access to raw materials and natural resources is
central to maintaining a competitive advantage, following geological
discoveries is part of their intelligence activity . When it is known that
geologists are looking for new mining possibilities in certain countries,
this may be of special interest for companies . Corporate forecasters can
thereby anticipate the conditions of their company’s presence in these
areas. This may lead them to recommend opening bureaus, plants or
factories close to these natural resources. If proximity to natural
resources and raw materials is especially central to the competitive
advantage, corporate forecasters may be inclined to recommend
relocating other links in the value chain that are directly concerned, e.g.
production . Hence, proximity to natural resources and raw material
may result in recommending that factories or plants should be closed
down in some countries and moved to those with newly discovered
natural resources and raw materials . In so doing, corporate forecasters
need to estimate the cost of relocating at the same time as the savings
generated from this proximity (e.g. decrease in logistics costs). Whilst
articulating these estimates, management accountants devise and run
their own simulation models informed with various elasticity
measures. Such was the case in the USA in the mid-2000s, as shale gas
was discovered. The abundant presence of shale gas, a fossil energy
with properties very similar to oil but cheaper and easier to exploit
because of disconnection from political concerns, would change the
cost of energy for a number of companies. Already since then,
forecasters at North American Oil and Gas majors had been considering
the possibility of establishing refineries in the USA and closing down
some located in politically unstable countries where activity was risky
and potentially costly (Zhiltsov & Zonn, 2017).
Similarly, possible changes in invariants, though unlikely to occur,
are scrutinised from afar: the digging of a tunnel under a mountain and
connecting regions or countries otherwise separated, the construction
of a channel between two rivers enabling to link different regions, etc.
Such changes usually relate to massive investments and infrastructure
works known announced before actualisation. Accordingly, when these
means of communication and transport are of special interest for a
company, its forecasters shall follow up progresses and advances in
these areas. As with natural resources, this may lead forecasters to
recommend setting some activities near these new hubs, under the
purview of optimising the value chain . This may result in them
suggesting moving plant, factories or warehouses closer to these
communication hubs, which may also have an impact on the weight of
logistics in the value chain . As with natural resources, corporate
forecasters articulate simulations of the savings generated from
relocating some of these activities into these regions as well as the cost
of abandoning these links in other areas (cost of redundancy, fines,
etc.). Until 2014, corporate forecasters in Australian and New Zealand
shipping companies were scrutinising the progress of the enlargement
of the Panama Canal so as to be capable of freighting heavier cargos and
transport more merchandise to the Northern Hemisphere. This was
supposed to reduce their fleet and crew whilst larger warehouses
would be needed on ports. These companies whose business model has
traditionally been shipping could embrace a new dimension:
warehousing and inventory. As a result, when the canal was effectively
enlarged, they could optimise their value chain accordingly: fewer but
larger cargos, larger shipments, fewer employees and more docking
outsourcing (Lorange, 2005; Porter, 2014).
Corporate forecasters do not only scrutinise the positive
externalities associated with geography but also risks. As abundantly
informed, major risks in the twenty-first century are consequences of
climate change and global warming: tsunamis, earthquakes, blizzards,
cyclones, etc. Accordingly, corporate forecasters distantly follow
estimates of effective changes in local circumstances. Given the
probability that these risks occur, corporate forecasters are required to
estimate their costs in case of these events’ occurring. This would
comprehend the direct cost of losses (equipment, materials , goods,
people, etc.), the opportunity cost of not being able to produce and sell,
as well as the cost of reconstruction. These simulations can be
complemented with recommendations re the opportunity of relocating
to less risky places. Thence, simulations of costs and savings induced by
relocating accompany their report. The table hereafter summarises the
impact anticipations re geography can have on a company’s business
model and value chain (Fig. 10).
Fig. 10 Adapting the value chain to geography

Demography and the Value Chain

Corporate forecasters in companies operating internationally pay
attention to demographic trends worldwide, as these can enable
optimisation of the value chain and secure a competitive advantage
(Montgomery & Porter, 1991; Porter, 1985). This can take two forms,
depending on population characteristics.
The first impact demography can have on the value chain lies in
proximity to customers. When a market is known for being
demographically dynamic and the population growing, this makes a
potentially growing market . Just taking the number of inhabitants or
citizens in a country may, however, be a major mistake if not associated
with other demographic dimensions. Historically, North American,
Australian and European companies have considered China as a large
market , at the expense of other regions, just because this country had
the population. Until the mid-2000s, the population was not solvent
enough to be in a capacity of purchasing what Western companies
would produce and sell. For decades, numerous Western companies
have been delusional of the Chinese Eldorado (Cooper, 2015).
What forecasters now tend to take into account is rather the class
system in a country accompanied with indicators reflecting education.
As with access to raw materials and natural resources, when a country
can count on a growing solvent middle class, international companies
may find it opportune to locate activities close to consumers.
Accordingly, such demographic indicators may lead forecasters to
recommend establishing subsidiaries and value chain links in these
countries. This could lead to either internal growth or a structural
change in the value chain : production close to markets rather than
necessarily in low-cost countries. Such can be the case for companies
whose product has limited value added or where large quantities
matter. Consumer proximity can often be associated with the quest for
optimised transaction costs, manifested in mass production and the
advanced integration of the value chain (Covaleski, Dirsmith, & Samuel,
2003; Nicholson et al., 2006). In these companies , the weight of
logistics cost in product total cost can result in a lowered competitive
advantage, which market proximity would conversely enable.
Management accountants together with marketing directors need to
estimate the consumption potential proceeding from the existence of a
solvent middle class. In case of mere internal growth , corporate
forecasters estimate potential sales in this particular country or region
as well as the cost of settling thither. This also includes a schedule of
settlement and associated costs. In case some links in the value chain
are relocated to a country where consumption is present, corporate
forecasters need to estimate, as with any relocation solution, the cost
induced by relocation as well as the savings generated thence. This is
what nowadays leads a number of international companies to locate
some new activities to China, such as R&D or marketing and sales,
because there is a growing solvent middle class massively consuming
their goods (Huan, 2005).
Similarly, corporate forecasters, especially HR managers together
with management accountants, scrutinise indicators relating to
education in these countries. Countries with high education and
qualification rates are perceived as countries with high human capital.
Contrary to the twentieth century, where human capital was not
deemed central, twenty-first century’s information age requires a
highly educated and skilled workforce. In order to secure such
competences, corporate forecasters may recommend locating some
links in the value chain with high value added to such countries so as to
count on qualified employees. Such can be the case of countries known
for educating civil engineers, such as France, or making highly qualified
informatics experts, such as India (Alder, 1999; Kobitzsch, Rombach, &
Feldmann, 2001). Such arbitrages usually take the path of relocating
these links from one country to another with a proven educational
competitive advantage (Barro, 1996; Porter, 1998a, 1998b). In this
situation, HR managers and management accountants together
estimate the cost of relocation as well as the gains that can be
generated from attracting a highly qualified workforce. When gains are
superior to the cost of re-engineering, relocation can occur.
Lastly, it is important that corporate forecasters be clear with the
ethnic composition of countries where their company is operating or
intends to conduct operations. Outwith the dimension relating to work
culture , the understanding of ethnic trends in a country enables to
anticipate the possibility of future conflicts within the country to which
the company would be exposed. In this case, country risk specialised
consultants can be solicited by corporate forecasters to assess such
risks and recommend that some activities could be located thither or
not. As with natural disasters, the political risk associated with
ethnicity needs to be assessed, quantified and monetised: the possible
gains in case of peaceful coexistence against the cost of conflicts
weighted with a risk coefficient (Rice & Zegard, 2018). It is often on the
ground of an ethnic risk that international companies are hesitant to
locate some activities and value chain links into some African countries,
especially South Africa where the various ethnic groups do not always
peacefully cohabit, making the country one of the most dangerous in
the world for foreign investors (Rice & Zegard, 2018). In the same vein,
corporate forecasters can recommend quitting a country where inter-
ethnic or interracial conflicts arise and are expected to aggravate. As
with estimates for settlement, when recommending the quitting of a
country, corporate forecasters need to estimate the cost of remaining
weighted with the risk of conflict against the cost of leaving. When
recommending quitting, corporate forecasters need to suggest
alternative locations for relocating these activities. The table hereafter
summarises the impact anticipations re demography can have on a
company’s business model and value chain (Fig. 11).
Fig. 11 Adapting the value chain to geography

Economic Infrastructures and the Value Chain

Corporate forecasters articulate recommendations re the value chain
also based upon anticipations of possible changes in economic
infrastructures and public investment in countries where the company
is operating or could operate. An extension of demography,
anticipations re public investment in population education and health
may have an impact on the value chain forecasters can recommend. The
logic is exactly the same as for class and education characterising
demography: with advice from country risk experts, management
accountants and HR managers can determine the opportunity to settle
or relocate activities to countries where significant investments in
health and education are anticipated. In addition to counting on a
skilled workforce, the company could also rely on healthy employees,
i.e. unlikely to be on sick leave or undergo professional diseases.
Conversely, corporate forecasters may recommend not settling to
countries where public investment in education and health is low,
unless they suggest that the company should undertake them. Such
would be the case if it were deemed indispensable that the company be
present in the country, because of proximity to natural resources, raw
materials or consumers. In case locating links in the value chain into
these countries requires corporate investment in education and health,
its cost estimates are included into the business model as part of the
costs incurred by the link under consideration.
 These side institutions, often presented as part of CSR policy , can
become part of the business model in this capacity (Hoi, Wu, & Zhang,
2016; Iivonen & Moisander, 2014; Sitaoja, 2006). When anticipating
economic infrastructures, this may result in CSR investments, and these
need to be estimated together with CSR managers. The outflows and
inflows induced by such investments would be compared against gains
in corporate legitimacy, social cohesion within the company and
peaceful relations with local authorities (Laine, 2009; Rayman-Bacchus,
2006; Suchman, 1995).
Anticipations re public investment in transport infrastructures have
impacts on the value chain design similar to those of geography but
also extend these as to include roads, railway, harbours and airports.
That is, when geography allows for the development of such
infrastructures, corporate forecasters may follow with alacrity
governments’ economic programmes and planned investments. When
corporate activity can blossom because of such public infrastructures,
the links in the value chain directly benefitting from those might be
relocated there. Logistics , warehousing and to some extent production
could be relocated thither. In this situation, management accountants
are tasked with the articulating of estimates re the costs and savings
induced by the relocation of such activities.
When corporate activity is energy intensive or needs especially
advanced IT circumstances, forecasters stringently follow up possible
public investments in such infrastructures. The impact on the value
chain they can recommend designing is similar to that of proximity to
natural resources. These concerns and their impact on the value chain
are especially vivid, when such public investments in infrastructures
make energy more easily accessible or affordable for companies . In this
case, it is not just the proximity to natural resources and raw materials
that can attract foreign companies but energy or IT costs. Together with
the COO , management accountants do estimate the savings locating
these energy- or IT-intensive links into such countries induce. These
savings are compared against the usual costs of relocating. Ultimately,
the optimal worldwide value chain is that which offers an incontestable
and durable competitive advantage. The figure hereafter summarises
the impact anticipations re economic infrastructures can have on a
company’s business model and value chain (Fig. 12).
Fig. 12 Adapting the value chain to economic infrastructures

Political -Legal System and the Value Chain

Owing to political considerations, corporate forecasters can
recommend entering into a country or leaving it, thereby relocating
activities and value chain links. It is more common to see companies
leaving a country because of its political situation, this being often
perceived as a factor of instability and uncertainty possibly inducing
costs or losses. For this reason, corporate forecasters—management
accountants together with the COO , former expats and country risk
expert consultants—follow up political life and events at a distance.
The main political factor that can lead corporate forecasters to
recommend reviewing the value chain lies in the political agenda itself
and polls. In non-democratic or in young democracies, being politically
corrupt or totally free and reliable, there is always a risk that the
defeated camp contests the final score and raises a militia or army
against the regime. Such has been happening in numerous African
countries since decolonisation with a special emphasis on Central
Africa in 2017–2018: the elected government was considered
illegitimate by the defeated opponent whose camp has raised a militia
and engaged in a civil war. Regardless of other circumstances, it is
perceived very risky for numerous foreign companies to maintain
activities therein, corporate forecasters being likely to recommend
leaving. When suggesting leaving, forecasters are required to offer
alternatives, such as relocating to a safer neighbour country so as to
minimise the losses in terms of competitive advantage.
This utmost form of country risk can be perceived as a caricature.
Therefore, there are also cases where companies may be defiant of
governments democratically elected in safe countries. Such was the
case in France in 1981 when François Mitterrand, just elected as the
President, appointed Communist ministers in his first government . A
number of private investors and companies decided to leave the
country and relocate activities to Germany or Belgium, deeming these
countries more business-friendly (Smith, 2000). Likewise, the British
referendum on membership in the European Union, a.k.a. Brexit, has
led numerous forecasters to consider leaving the country because
remaining would not secure access to European markets. Some
activities have already relocated to Ireland or Luxembourg; others may
follow until Brexit’s effectiveness in 2019 (Whyman & Petrescu, 2017).
More generally, political circumstances embrace governments’
political agenda and anticipated measures. Two phenomena occur. On
the one hand, corporate forecasters are placed in the same situation as
that of anticipated new regulations. In this context, they will estimate
the costs of leaving and of remaining and will articulate a
recommendation as to the ideal value chain . On the other hand, if some
political measures planned by a government in office are reputed for
undermining the company, management accountants together with
corporate lawyers and the COO will articulate a plan for leaving and
suggest alternative locations. Such was the case in 2012 when Hugo
Chavez, re-elected for the third time as Venezuela’s President, decided
to expropriate foreign investors and massively nationalise private
businesses. At that time, corporate forecasters had anticipated massive
losses and recommended relocating to Argentina, the closest and safest
neighbour, or other countries (Strønen, 2017).
Not only does the political system and agenda potentially lead
corporate forecasters to review the value chain , but more generally the
confidence the business world can have in political and judicial
institutions. Such confidence is appreciated by corporate lawyers with
help from legal advisors from the countries under consideration. If they
consider that company rights may be undermined or poorly protected
in a certain country, they can recommend leaving. In this case, those
value chain links located in the country would be moved to a different
country. As with any leave option and relocation operation,
management accountants are tasked with the estimating of the costs
incurred by this reviewed business model. The figure below
summarises impact anticipations re economic infrastructures can have
on a company’s business model and value chain (Fig. 13).

Fig. 13 Adapting the value chain to geography

2.2 Translating the Business Model Into Numbers

Once corporate forecasters have designed the new business model and
associated value chain for the period to come, the numerical dimension
of strategic planning and forecasting commences. Unlike the Master
Budget , where costs are central, forecasts focus on value generation
from whence expenses appear as required investments. Cost appears as
what is induced by re-engineering operations, with the vocation of
being incurred just once. Paradoxically, although profoundly grounded
in strategy , forecasting is certainly the utmost corporate financial
activity whilst the Master Budget tends to neglect major financial
choices. Accordingly, forecasting first estimates value creation, then
financial activity (investing and financing) and lastly the whole value
chain and the risk associated.

2.2.1 Estimating Value Creation

The financial emphasis placed on corporate forecasting leads one to
consider that corporate activity ’s ultimate aim is to generate value (for
stockholders). Within this scheme, what appears as central to corporate
forecasters is company capability of generating such value . This
concern is manifested in the precedence of revenues’ estimating over
anticipating expenses. These shall only appear as the operational
consequence of strategic choices made to generate revenue.
Anticipating Revenues
As a company is not operating in isolation from others, when revenues
are forecasted, these figures first rest upon estimates of how much the
market can absorb. This directly proceeds from macroeconomic
forecasts of industry evolution. Anticipating revenues follow four steps.
Firstly, corporate forecasters triangulate various anticipations so as
to determine a credible, plausible growth rate for their whole market .
In the most common situation, the company has two or more products
and operates in several countries. Accordingly, this first step in
forecasting is supplemented with a refining of these average estimates.
If economic indicators exist for specific products or segments, these
need to be taken into consideration in lieu of average global figures.
Likewise, if anticipations re market evolution in a certain country or
region especially pertinent to the company, these need to be taken into
consideration (Miller & O’Leary, 2007).
As with product life cycle accounting, these segments or regions
serve as a basis for Activity -Based Management (Carlin, 2004; Evans &
Ashworth, 1995; Malmi & Ikäheimo, 2003). Thereby, corporate
forecasters can anticipate how much value can be generated on each of
these segments. Together with segment managers (product managers,
brand managers, region managers, etc.), management accountants
assess either a realistic growth rate or lump sum that can be shared
amongst competitors.
The second step in anticipating revenues from activities consists of
estimating company market share on each segment and thereby a
realistic amount of money that can be earned. This second step rests
upon measures proceeding from a thorough analysis of position on the
market and product life cycle (McGahan & Porter, 2002; Porter, 1980,
2008). At this stage, corporate forecasters mainly focus on growth
expressed in volumes, i.e. regardless of selling price. They first estimate
how many units of this particular product can be sold on this particular
market , given the current competitive advantage.
The third step to anticipating revenues from activities consists of
assessing corporate production capacities. Given the value chain
designed pursuantly to the understanding of the upcoming
environment , it is possible to estimate whether the company can meet
its strategic share. In case the changing environment has resulted in
downsizing or relocation decisions, production capacities may
practically be less than normal. When a factory is moved from one place
to another, it is not certain that the teams employed on new premises
will be familiar with the new equipment or upcoming local work
methods. For some time, a learning period occurs, during which
corporate processes are being adjusted (Argyris & Schön, 1996;
Chenhall, 2005; Miller & O’Leary, 2007; Tsang, 1999). Consequently,
during this transition period, the company cannot reach the maximum
of its production capacities. A fortiori, when a downsizing operation is
engaged, production capacities are less than likely to increase, which
needs to be taken into account when forecasting revenues. In this,
management accountants rely on estimates from the COO team and
production managers. In weighting natural market share by production
capacity, corporate forecasters can estimate production and associated
sales in volume for the period to come. What counts at this stage is the
number of units likely to be sold on each market .
The fourth step consists of transforming these volumes into
monetary value , viz. turnover. Such conversion is more complex than
just multiplying the number of units by selling price. This would only
lead to a rough expression of future revenues in past or current value .
This neglects two major issues, albeit central to corporate forecasters.
The first issue lies in the possible variations of currencies’ exchange
rates, inflation rates and interest rates, i.e. anything that could affect the
final value of product selling price. Given these rational anticipations, it
becomes possible to adjust the future value of these sales (Barro,
1976). These rational anticipations are expressed in sophisticated
financial models integrating these various indicators and selling price
elasticity thither. It is management accountants together with the CFO
and cash managers who run these models. The second issue central to
corporate forecasting lies in the fact that capital has a cost . This relates
to corporate finance’s core assumption that tomorrow’s value is
different from today’s value . Accordingly, future cash flows (turnover)
need to be expressed in today’s terms; hence, comparison with past
figures becomes possible. Together with the CFO , management
accountants discounted these revenues at the cost of capital (Miller &
O’Leary, 1997). The figure hereafter summarises the process whereby
revenues from activities are estimated (Fig. 14).

Fig. 14 Four steps towards revenue estimates

Anticipating Activity Expenses

Once the total revenues activities can generate are estimated, the
expenses associated with these can be anticipated. Unlike the Master
Budget that sees in costs a necessary evil that needs to be kept under
control, forecasting sees expenses appearing as a consequence of
strategic choice (BBRT , 2009c, 2009d, 2009f; Molridge & Player, 2010).
Expenses appear as the financial disbursement required to ultimately
generate value through revenues. As the expenses associated with
possible re-engineering have already been estimated and accounted for,
it is not necessary at this stage of forecasting to compute them anew. It
is not necessary either to take them into consideration whilst
estimating the expenses incurred by future corporate activity . As with
the Master Budget and traditional cost accounting, these expenses
relating to activity unsurprisingly comprise of fixed expenses, labour
expenses and materials expenses (Anthony, 1965; Anthony, Dearden, &
Bedford, 1984).
As with fixed costs traditionally understood in managerial
accounting , fixed expenses relate to the disbursements the company
shall incur to conduct its operations regardless of activity level. As with
fixed costs, these fixed expenses first relate to the rent paid for estate or
equipment. These necessary disbursements are complemented with
some expenses a.k.a. hidden costs or transaction costs (Covaleski et al.,
2003; Lyons, 1995; Nicholson et al., 2006). Such transaction costs
indirectly proceed from adjustments made to the value chain after it
was re-engineered and to work with it. Traditionally, transaction costs
can comprise of disbursements made to select new suppliers
subsequent to relocation or expenses incurred to seek for qualified
employees. Likewise, the cost of opportunity associated with learning
in a transition period needs to be estimated and accounted for (e.g.
training expenses on a new process or technology add up to wages).
Outwith these fixed expenses induced by changes in the value chain
, fixed expenses that need anticipating are those induced by changes in
the company’s environment . Such expenses mostly relate to the
impacts of public policy quantified when the value chain was re-
engineered: disbursements induced by non-compliance with
regulations (e.g. fines, tolls, fees, customs). This can also include the
expenses induced by litigation (expenses for solicitors, barristers,
Queen’s Counsel, fines, damages, deposits, etc.) and expenses
associated with corporate misconduct if applicable (MacLean &
Behnam, 2010)
Once fixed expenses are estimated shall corporate forecasters
anticipate variable expenses, viz. disbursements directly relating to
activity level. As with the Master Budget , these variable expenses
traditionally comprise of labour and material. In contradistinction to
the Master Budget , these fixed expenses are not just extrapolated from
past or present figures but directly proceed from informed (rational)
anticipations of what may cause their variation. Estimating labour
expenses cannot merely consist of multiplying the number of hours
required to meet the anticipated volume by the current hourly rate.
Rather, the impact of changes in social regulations in the country under
consideration must be quantified: it is the new hourly rate whereby the
number of hours required must be multiplied. If, in a country, such as
most continental European countries, the minimum wage is set by law
and imposes itself to companies , prospects need to be included.
Similarly, the risk of strikes and wage increases that could result from
these need to be anticipated (Edvinsson & Stenfelt, 1999).
Whilst the Master Budget does not differentiate between
compensations’ various components, corporate forecasters need to be
extremely clear as to which ones exist. Amongst these, management
accountants together with HR and Compensation & Benefits Directors
need to identify which components are compulsory and which ones are
optional or voluntary. More broadly, anticipating labour expenses can
only proceed from corporate Global Rewards Policy (BBRT , 2009e;
Matolcsy, Wells, & Lee, 2006; Speckbacher & Wentges, 2012; Tornikoski,
2011a, 2011b; Tornikoski, Suutari, & Festing, 2014). These
compensations and benefits result in employees’ net remuneration
significantly varying from the gross disbursement for the company. It is
the total, gross disbursement that needs to be taken into account,
including the impact of possible changes in corporate total rewards
policy (e.g. superannuation plans, medical coverage, schooling for
children). The impact of any change resulting from new regulations or
collective bargains must be assessed regardless of past or present
disbursements (Burke & Hsieh, 2005).
Lastly, materials expenses need to be estimated. As with labour
expenses, corporate forecasters cannot just extrapolate past or present
figures by applying a growth coefficient. Rather, estimates proceed from
the analysis of changes in the economic environment and more
particularly market circumstances. What can cause a change in the cost
of materials needs to be anticipated and accounted for: materials
scarcity and subsequent price increase, changes from supplier rates,
variations in currency exchange rates. Such variations are anticipated
together by management accountants, market analysts and cash
managers. The anticipated cost of materials must include these
features: it is the new unit cost that must be multiplied by the number
of units needed for the planned production . In order to ensure that no
major disbursement is overlooked, corporate forecasters need to
include into the cost of materials the possible costs of risk hedging.
That is, cash managers’ activity needs to be accounted for: the trading
of derivatives on currencies and materials under the purview of
optimising cash disbursements and facilitating the articulating of
forecasts (Salas-Molina et al., 2017).
As for revenues generated from activity , expense estimates must be
discounted at the current cost of capital. The figure hereafter
summarises the main issues in forecasting activity expenses (Fig. 15).

Fig. 15 Estimating activity expenses

2.2.2 Estimating Financial Activity

Forecasting is an activity embracing more than the mere anticipating of
direct revenues and costs from operations. As this activity also
comprises of redesigning the business model and re-engineering the
value chain , forecasters must estimate the main aspects of corporate
financial activity : investment and financing. The assumption
underlying this principle is that operations proceed from investments,
themselves requiring financing (Hope, 2006; Molridge & Player, 2010).
Accordingly, these need to be anticipated and prepared in a way similar
to what is commonly known as capital budgeting (Miller & O’Leary,
1997, 2007).
Planning Investments and Disinvestments
It is commonly agreed in the economic literature that a company needs
investment to grow and develop. It is, however, sometimes unclear to
management accounting what such investments encompass and mean,
albeit this investment activity is central to corporate forecasters.
Traditionally understood, investment consists of relinquishing an
amount of money in the present under the condition that delaying its
perception is associated with a surplus (yield or return ). Capital
markets research focuses on securities (bond or stocks) whilst
corporate finance research emphasises investments mostly in concrete.
And yet, the twenty-first century is characterised by the centrality of
intangible assets (e.g. brands, patents, software or technology), those
becoming a growing case for investing (Daum, 2002; Kaplan & Norton,
2004). From a forecasters’ viewpoint, the main two areas of investment
are in concrete and in intangibles whilst capital markets per se relate to
a very specific activity .
In preparing the Master Budget , investments in concrete tend to be
neglected or at best collapsed to fixed costs. These are often presented
as an extrapolation of the past and present, as though the evolution of
operations was strictly linear. In fact, owing to the quantities markets
can absorb and quantities that the company must sell to maintain its
position against competition , some extensions are often needed. This
can take on numerous forms, such as the establishing of a new factory
or warehouse, just as with the acquisition or construction of new
machines to enable a growing production (Carr & Tomkins, 1996). The
Master Budget rests upon another managerial malpractice: it overlooks
the deterioration of machines and equipment caused by usage. The
Master Budget purports to take those into consideration by formally
accounting for depreciation. It is not just depreciation that matters here
but the additional expenses needed to overcome the impact of
deterioration on production capacities.
When articulating estimates of revenues from sales, if corporate
forecasters identify a gap between the company’s share of what the
market could absorb and its current production capacity, it is more than
likely that investments in concrete appear as a necessity. Such
investments are aimed at meeting the company’s natural or expected
market share and securing its competitive advantage. That is, if the
market is at a rapid growth stage, investment in concrete is inevitable.
Conversely, if production capacity is too high, it may be appropriate to
disinvest: sell tangible assets.
These investment needs can only be expressed by the COO teams
working together with management accountants and the CFO . In this
situation, corporate forecasters proceed as with capital budgeting : they
prepare a financial model of corporate investment. Traditionally, this
model borrows from the Discounted Cash Flow model: for the period
covered by forecasts, inflows and outflows are modelled and
discounted at the cost of capital. Investment planning profoundly
differs from traditional capital budgeting . The period covered by
forecasts is usually shorter than that of the investment itself. This latter
shall still produce effects and generate cash flows beyond this period,
which has major implications. Future cash flows outwith the period
covered by forecasts are by definition totally unknown and
unpredictable, since the environment can change and call them into
question at any time. Therefore, not all possible cash flows are
accounted for, just those most likely to eventuate for the foreseeable
future. This may result in the investment project looking non-profitable,
net present value being less than the initial investment. Whilst
traditional capital budgeting would determine that the investment
should not be undertaken, forecasting assumes it has to be and
envisages how the company shall fill this temporary negative present
value . What is central is the net contribution this investment shall have
to the value generated from the anticipated corporate activity . That is,
net present value is not an investment criterion for corporate
forecasters who conscious of the fact that markets are not linear:
product life cycle as well as the business environment is taken into
consideration (Hope, 2006; Hope et al., 2011).
The Master Budget does not take any account of investments in
intangible assets, although these are more and more central to
corporate success in the twenty-first century (Daum, 2002; Kaplan &
Norton, 2004; Power, 2001). Intangibles are not envisaged by the
Master Budget , mostly because it is difficult to price them and estimate
the cash flows that can be ascribed to them (Zambon, 2016). It is albeit
necessary to estimate the necessary disbursements and their plausible
outcome. Expenses are probably easier to estimate: the cost of
patenting a technology, the cost of retaining talents (HR expenses, such
as Compensation & Benefits), acquisition price for a brand, licence
expenses for a software or technology, etc. The expenses associated
with these invisible assets need to be anticipated and estimated. For the
particular case of intangibles, investment planning implies the whole
company: all directors determine their activity and needs for
intellectual capital. It is then management accountants’ specific task to
convert these needs into expenses.
In return , assessing the inflows associated with these expenses,
though difficult to estimate, must be done. In order to put a financial
value to the outcomes from these intangibles, the approach adopted by
directors, managers and management accountants borrows from the
Balanced Scorecard (Kaplan & Norton, 2004). For each intangible asset,
its contribution to corporate competitive advantage first needs to be
assessed. Once this contribution is clarified, key performance indicators
specific to this intangible need to be set. When these indicators are in
their essence financial, inflows are de facto determined. Such can be the
case of a patent or a license whence the fees or royalties they shall
generate can be known. It is more difficult when this key performance
indicator is not financial. Such can be the case with R&D if performance
is assessed on the basis of the number of patented technologies
(Gleadle & Haslam, 2009).
Admittedly, the inflows generated from intangibles are invisible.
These can be made visible and transformed into tangible outcomes in
two ways (Kaplan & Norton, 2004). This can first be done by comparing
the extra revenues that can be generated because this investment is
undertaken against the revenues that would have been generated
without this investment. Although this approach does not allow to
differentiate between the impact of various assets, at least it enables to
have a financial intuition of a specific asset’s plausible contribution to
value . The second approach consists of assessing the intangible’s
market value over the period covered by forecasts. Contrary to tangible
assets whose value depreciates over time, the value of intangibles does
not and rather tends to appreciate over time. Such is the case of brands
or highly skilled employees whose wage supposedly increases over
years. In other words, corporate forecasters estimate how much
competitors would pay to acquire this specific intangible over the
considered period. Inflows associated with this specific intangible are a
combination of those two approaches, each of them being weighted on
the grounds of the likelihood of their respective eventuating.
Once outflows and inflows associated with intangibles are set, these
are discounted at the cost of capital. Hence, corporate forecasters can
estimate the resources needing mobilising for the conduct of
operations over the considered period. The figure hereafter
summarises these challenges confronting corporate forecasters (Fig.
16).

Fig. 16 Planning investments and disinvestments

Planning Financing
Growth plans need to be funded. Whilst one of the CFO ’s roles consists
of articulating a financial strategy and raising the necessary resources,
corporate forecasters contribute thither by establishing these financial
needs. Traditionally, corporate financing takes three paths: self-
financing, debt or equity . The interplay between these, when corporate
forecasts are articulating, is irrespective of any quest for the optimal
capital structure but rather the optimal financing (Gordon, 1963). As
the notion of what is optimal varies from one company to another, it is
just possible to say that this optimality has little, if not nothing, to do
with that derived from traditional corporate finance (Modigliani &
Miller, 1958). When establishing financing plans, corporate forecasters
ignore the well-known Modigliani-Miller theorems.
The choice between self-financing, equity and debt tends to be
rather underpinned by strategic and internal policy concerns as well as
financial capabilities. It is commonly admitted that long-term
investments and expenses should be financed with long-term
resources. The advent of highly profitable companies generating
massive cash flows has significantly altered this view. In the twenty-
first century, it seems to be accepted that surplus generated from past
and present activity can be utilised to finance massive investments.
This is how Amazon took Whole Foods over for USD13.4 billions
(Wingfield & de la Merced, 2017) or Berkshire Hathaway (Warren
Buffet’s investment fund) purchased KraftHeinz for USD100 billion
(Chaboud, 2016), both paid cash. Self-financing is possible under two
conditions. On the one hand, the company must generate sufficient
surplus to be in capacity of utilising them to finance its investments. On
the other hand, the board of directors must have agreed on a policy
enabling that part or all of surplus be reinvested rather than paid out as
dividend to stockholders (Manne, 1968; Partington, 1985).
In non-listed companies , there is no real choice between debt and
equity , contrary to listed companies . In the former, two reasons can
make financing through equity difficult. Firstly, because the company is
not listed, its share is illiquid. Therefore, investors agreeing to
contribute to its capital structure must have a relatively long-term
interest in this business or investment plan. In the twenty-first century,
most technology start-ups are coveted in this way (Chamassian, 2016;
Davila & Foster, 2005). Secondly, non-listed companies ’ owners may
disregard the risk of being diluted and losing control in case external
stockholders contribute to equity . It is therefore more likely that non-
listed companies privilege self-financing and debt . Privileging debt , a
limited set of options is possible, mostly a collateralised bank loan. In
this case, notwithstanding market opportunities and eventual capital
needs, credit accessibility is often restricted (Stiglitz & Weiss, 1981;
Williamson, 1986).
The CFO together with the CEO , the COO and management
accountants must identify their borrowing capacity. If this exceeds the
required production level to secure their position on the market , two
options arise. On the one hand, they need to engage in a new round of
forecasts, taking account of the maximum financing capacity. This can
lead them to re-engineer the value chain in a way enabling to increase
self-financing capacity through cost reduction. On the other hand,
corporate forecasters can be inclined to recommend ceding non-
strategic assets to generate sufficient cash enabling strategic activity : a
downsizing operation. As the first step of corporate forecasting—
redesigning and re-engineering the value chain —is engaged anew, the
whole process needs to be done all over again. After the second round,
corporate forecasters hold relatively reliable figures of what is feasible
and likely to eventuate.
In listed companies , financing investments are less problematic and
easier than in non-listed companies , because funding options are more
open. As with non-listed companies , current stockholders may be
reluctant to dilution induced by equity increase who, owning a
significant share, may not want or be able to partake in the operation.
Such can also be the case of listed companies where the founding family
is a significant stockholder and does not want to lose control.
Therefore, two debt options arise: bond issuance or collateralised loan.
Listed companies are confronted with credit rationing to a much lesser
extent than non-listed companies , and this is for mainly two reasons. In
the first place, there has long existed a belief that listed companies are
too big to fail. This doctrine still influences credit risk analysts
notwithstanding the bankruptcies of the largest financial institutions in
the world since 1998: LTCM, AIG, Carlyle, Northern Rock, Enron or
Lehman Brothers (Sorkin, 2009). But also, in case a large, listed
company finds itself insolvent, the probability of a governmental
bailout with public monies is very high, as evidenced with the bailout of
most banks by governments in 2008 (Sorkin, 2009).
All in all, the CFO and management accountants altogether estimate
how much money is needed to finance the upcoming period’s
investments and the most appropriate financing. As a way of reassuring
each category of fund providers (banks, bondholders, stockholders),
financing tends to be a combination of the three. The weight of each is
contingent upon the relations between the company and its funders;
there is no golden rule of an optimal weighting. As a result, the CFO and
management accountants’ role now comprises two new facets: financial
engineer and fund-raiser (Chottiyanon & Joannidès de Lautour, 2018;
Hope, 2006). The figure hereafter summarises financing planning (Fig.
17).
Fig. 17 Planning investments and disinvestments

3 Conclusion
Strategic planning and forecasting are an activity central to companies ,
more so than the well-known Master Budget . Unlike this latter,
corporate forecasts are not the replica or extrapolation of past figures.
Rather, strategic planning and forecasting first consist of understanding
the environment surrounding the company well and its impact on
corporate activity . Once this impact is well estimated and measured,
the strategic plan is pursuantly amended, with a potentially strong
impact on the business model and its value chain . Anticipated changes
in the environment may lead to instant re-engineering so as to meet its
currents and maintain the value chain optimal. Whilst the Master
Budget ignores these re-engineering implications, they are central to
strategic planning and forecasting. It is only after the value chain has
been redesigned that corporate forecasters can estimate revenues from
activities and associated expenses, understood as necessary
investments more than costs.
Contrary to the Master Budget usually prepared by managers in
relative isolation from others, strategic planning and forecasting do
involve every concerned party. Accordingly, this activity reflects
teamwork associating management accountants, the CFO , the CEO , the
COO , marketing , HR, lawyers and external consultants. As a matter of
necessity, forecasts are always participatory, each links the value being
required to highlight what is plausible or realistic at their end. Such
participation is made possible by the fact forecasts do not commit
managers as the Master Budget would. Corporate forecasts provide
management with road map of what is likely to occur, given current
anticipations of the company’s environment for the period to come.
Forecasts’ non-committing nature rests upon the assumption that
the environment can unpredictably change. Rather than assessing
actualisations against past ignorance and conjectures, it appears as a
necessity that corrective actions at each level in the company could be
taken. Accordingly, unlike the Master Budget , which is traditionally
prepared for the year to come, forecasts are articulated for a
foreseeable period: from one to three quarters. Unlike the Master
Budget , too often rigid once articulated, forecasts are meant to be
revised, as the environmental changes. Strategic planning and
forecasting are necessarily grounded in rolling forecasts and change
management.

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© The Author(s) 2018
Vassili Joannidès de Lautour, Strategic Management Accounting, Volume I
https://doi.org/10.1007/978-3-319-92949-1_5

5. Beyond Budgeting
Vassili Joannidès de Lautour1

(1) Grenoble École de Management, Grenoble, France

Vassili Joannidès de Lautour

Email: vassili.joannides@grenoble-em.com

Keywords Beyond budgeting – Rolling forecasts – Business plan –

Project management – Performance

Whilst strategic planning is central to strategy ’s executing and

operations’ conducting, budgeting poses a series of problems to a
growing number of organisations and managers. As strategic planning
has slowly become a routine within organisations, its strategic
dimension seems to have been lost at the expense of what is known as
the Master Budget . This latter operates like the reference document as
though the figures produced were engraved in marble. As the Master
Budget has raised dissatisfaction from managers, alternatives thither
have been articulated here and there: activity -based budgeting , zero-
base budgeting and rolling forecasts. Each of these options has revealed
flaws similar to those of the Master Budget : through routinisation,
budgeting and budgetary control depart from their initial mission and
become an increasingly unbearable constraint (BBRT , 2009f; Rickards,
2006).
Pursuant to the Harvard Business School tradition of linking control
and finance to strategy and operations, it was suggested that companies
could relinquish the budget and do otherwise (Becker, 2014; Østergren
& Stensaker, 2010; Player, 2003). Some organisations have decided to
go Beyond Budgeting so as to break free from the annual performance
trap (Hope & Fraser, 2003a) and unlock the performance potential
(Bogsnes, 2008). Consistent with the Harvard Business School
tradition, Beyond Budgeting is not presented as a method or a tool but
as an alternative management philosophy to what has colonised
organisations in the past decades. As the Beyond Budgeting RoundTable
and the Beyond Budgeting Transformation Network reveal, thinking
without the Master Budget under whatever form necessarily leads to
engage in a broad, multidisciplinary reflection. This managerial journey
rests upon a reflection relating to market positioning, strategy and
planning , operations and control, performance management and
measurement, decision-making and organisational structure, incentives
and rewards (BBRT , 2009a, 2009b, 2009c, 2009d, 2009e, 2009f,
2009g, 2009h, 2009i, 2009j, 2009k, 2009l, 2009m, 2009n).
This chapter first explicates the main critiques addressed to the
Master Budget as articulated by the Beyond Budgeting RoundTable and
the Beyond Budgeting Network. Once the reasons for abandoning the
budget are understood, can Beyond Budgeting ’s core principles be
detailed? Lastly, the most eloquent example usually given to introduce
Beyond Budgeting will be exposed: Svenska Handelsbanken.

1 Critiques of Budgets
The Master Budget is known to everybody at any level in society:
business students and graduates, organisations managers, unionists,
political leaders and households. What all these actors have in common
is that they have already heard of or practiced budgeting and forms of
variance analysis (Berland & Chiapello, 2009; Célérier & Botey, 2015;
Edwards et al., 2002; Llewellyn & Walker, 2000; Parker, 2002; Preston
et al., 1992; Walker & Llewellyn, 2000). Critiques on budgets are
twofold: increased ambiguity owing to conflicting roles assigned to
budgets (1) and budgeting ’s unproductivity and waste of managerial
resources (2).

1.1 The Master Budget ’s Conflicting Roles and Ambiguities

As management accounting textbooks put it, the Master Budget has a
series of merits and is thereby presented as the managerial panacea
(Parker, 2002). Unsurprisingly, this large scope of merits and roles
assigned to budgets may at times highlight incompatibilities or
inconsistencies (Barrett & Fraser, 1977), so that budgets may even fail
to fulfil their mission and favour misbehaviour, as though it were
“paying people to lie” (Jensen, 2003). Instead of solving management
problems, it appears that the Master Budget is the place crystallising
contradictions (Covaleski & Dirsmith, 1983; Douglas & Wier, 2005;
Edwards et al., 1996; Flamholtz, 1983; Hofstede, 1967, 1970; Jensen,
2001a; Libby & Lindsay, 2003; Marginson & Ogden, 2005; Parker & Kyj,
2006; Preston et al., 1992; Wildavsky, 1975).

1.1.1 Too Many Roles Assigned to the Master Budget

Being perceived as an imperative for any organisation or department,
the Master Budget is traditionally assigned seven roles, as usually
evidenced in management accounting textbooks (Parker, 2002) and the
ambient managerial rhetoric (Berland & Boyns, 2002; Berland &
Chiapello, 2009; Berland et al., 2010).
Forecasting
The first role assigned to budgets is that of being a synthesis of
economic forecasts articulated by management. In sum, the budget is
the formalising of how at a certain point in time managers perceive the
future. Noticeably, it is never clear how these anticipations are forged.
Ideally, these forecasts should rely not only on the macro- and micro-
economic trends that research institutes anticipate, but also on the
specific trends driving competition on the particular market on which
the company operates.
Even in its roles of summarising forecasts, the Master Budget
oftentimes fails, and this is probably for two reasons. Firstly, in
managerial accounting textbook case studies and exercises, students
are provided with these trends as though these were imposing
themselves naturally to organisations. Admittedly, they know how to
apply these externally imposed variation rates, albeit they do not know
how these are forged (Parker, 2002). Secondly and correlatively, as little
research is done by managers to find appropriate variation rates, the
ones usually applied in business are a sort of a replica of the previous
year’s rate, as though the economy were linear and entirely predictable
(Fernandez-Revuelta Perez & Robson, 1999; Hofstede, 1970).
Planning
The Master Budget ’s second role proceeds from the first: as it is
allegedly a fair summary of economic forecasts, it can be used as a
decent basis for planning , viz. resource allocation (Anthony, 1965). The
Master Budget presents how much money can be earned from one’s
activities, by providing an estimate of how much can be sold. On this
basis, management can determine how many resources are needed,
these being labour , equipment and raw material. This should lead to
plan how production should be organised. This is the role usually
assigned to what is known as capital budgeting : planning investments’
inflows and outflows (Gordon et al., 1990; Miller & O’Leary, 1997,
2007). Every revenue can be planned; in return , every cost has a
purpose in its contributory capacity to generating income, including the
cost of capital as evidenced in the extensive use of the Discounted Cash
Flow model (Jensen, 1986, 2001a, 2001b).
Although this role played by the Master Budget seems to be
credible, it rests upon the same implicit assumption that the economy
is linear and that costs, including that of capital, follow a regular trend.
And yet, financial crises and recession’s occurrences and recurrences
demonstrate that the economy is not as predictable as some tend to
believe (Arnold, 2009; Bezemer, 2010; Hopwood, 2009; Kindleberger,
1978; Krugman, 1992; Roberts & Jones, 2009; Sikka, 2009).
Expense Authorisation
The third role played by the Master Budget proceeds from the other
two and consists of expense authorisation. As expenses proceed from
the expected revenues that can be generated through organisational
activity , these are set in the Master Budget as the maximum amount
that can be spent. Budgets’ third role is certainly the one most
commonly understood as the financial constraint, which economists
opportunely call the budgetary constraint. This notion is unsurprisingly
made central to most budget discourses, in managerial accounting
textbooks (Parker, 2002) and in society (Berland & Boyns, 2002;
Berland & Chiapello, 2009; Berland et al., 2010).
 This role rests upon the assumption that it is impossible to spend
more than what is earned through activities, viz. the implicit
assumption that no external funding is possible. Yet, as taught in
corporate finance courses, contracting debt or equity increase is a
source of funding when there is a lag between cashing and spending.
This well-known third role played by the Master Budget implicitly
assumes that it operates in the context of a mature product and that no
investment has been undertaken and costs incurred prior to generating
income. In other words, this assumption ignores product life cycle
(Granlund & Taipaleenmki, 2005, Lewitt, 1965).
Communication to Employees
The Master Budget ’s fourth role is communication to employees. In
this capacity as a synthesis of organisation forecasts and planning
formalisation, the Master Budget serves as the reference document for
all employees. Supposedly, every employee should be in a capacity of
knowing what are corporate strategic choices and main decisions.
Through the diffusion of the Master Budget , managers supposedly
know everything about the organisation and can therefore make their
own decisions and choices (Abernethy & Brownell, 1999; Abernethy &
Stoelwinder, 1991; Covaleski & Dirsmith, 1986; Hofstede, 1967, 1970;
Jablonsky, 1986; Preston et al., 1992).
This communication role played by the Master Budget rests upon
the implicit assumption that budgeting is a top-down process in which
managers and employees are not involved. That is, this Master Budget
operates in a vertical process where choices made by management are
imposed on lower hierarchic echelons (Parker & Kyj, 2006). To some
extent, this excludes the idea that the Master Budget is participatory,
although research has highlighted in the past three decades the
importance and the actual reach of participation (Brownell, 1983;
Célérier & Botey, 2015; de Haas & Algera, 2002; Dunk, 1989;
Greenwood & Santos, 1992; Lau et al., 1997; Leach-López et al., 2008;
Magner et al., 1995).
People Coordination
The fifth role assigned to the Master Budget is coordination . This role
can be perceived as an extension of communication: the Master Budget
serves as a basis for every manager knowing what others are supposed
to do. A synthesis of organisational forecasts and planning , the budget
supposedly helps managers adjust their decisions after what other
departments do. Through this Master Budget , they can know precisely
how much resources then need to devote to a certain activity upon
which another link in the value chain is dependent.
They can also identify how they need to organise their own day-to-
day activities to meet requirements from other departments. In turn,
their respective constraints and needs are known to other managers
who allegedly adapt thither (Parker, 2002). Interestingly, research has
not emphasised budgets’ coordinating role , unless participation in its
elaborating is an act of strategic negotiation between departments and
managers (Argyris, 1952; Hofstede, 1967, 1970).
Employee Motivation
Managerial accounting textbooks assign to the Master Budget a sixth
role consisting of motivating employees (Parker, 2002). Motivation
occurs at two levels. Firstly, in its capacity of authorising expenses, the
Master Budget can show managers the importance of their respective
departments within the organisation. Assumedly, departments
receiving more money than the previous year or more than another
entity can be considered more strategic or useful. Their managers can
therefore perceive a particular interest in their activity and
acknowledgement of their constraints. As a result of such
acknowledgement, managers should be motivated to achieve high
(Outhwaite, 2009; Piderit, 2000). Secondly, in its capacity of
summarising future organisational activity , the Master Budget finds
itself setting objectives to each department, their managers and
subordinates. It is implicitly assumed that these objectives should be a
managerial incentive to reach the planned objectives by utilising fewer
resources than allocated or an encouragement to achieve higher with
the planned resources.
In either situation, managers are supposedly motivated by their
ability to maximise their production function, perfectly behaving as
homo economicus embracing corporate identity (Kreiner et al., 2006).
This microeconomic assumption can be prolonged with the idea that
managers would be motivated by their ability to maximise profit and
therefore maximise value for stockholders (Guidi et al., 2008; Jensen,
2001b; Kury, 2007). Sociologically speaking, this role played by the
Master Budget assumes employee ’s full and unreserved commitment
to their employer, albeit it is commonly acknowledged that the
youngest generations (X, Y, Z) are much less committed than the ones
preceding them (Freestone & Mitchell, 2004; Tornikoski, 2011).
Performance Assessment
This sixth role can be plausibly envisaged if associated with the seventh
consisting of viewing in the Master Budget a basis for performance
assessment. In managerial accounting textbooks, this latter is usually
summarised through CVP variance analysis (Parker, 2002). As the
Master Budget is perceived as official corporate forecasts, planning and
expense authorisation, managers’ activity and performance , these
textbooks say, is measured against its basis. Favourable variances
would mean positive performance whilst unfavourable variance would
mean negative performance .
If the Master Budget is used as a basis for performance assessment,
there should be rewards associated with employee achievements
(Merchant et al., 1995; Van Veen-Dirks, 2010) and incentives developed
to foster their commitment (Bonner & Sprinkle, 2002; Speckbacher &
Wentges, 2012; Spraakman, 2003; Van der Stede, 2003) as a way of
guaranteeing personnel’s commitment (Simons, 2005). When the issue
of incentives and rewards is raised, the question of how these are
designed and integrated into corporate management control systems is
left unanswered. More broadly, this seventh role assigned to the Master
Budget raises the question of performance management and
measurement.

1.1.2 The Master Budget ’s Conflicting Roles

Not just are the various roles assigned to the Master Budget somehow
internally inconsistent or rest upon disputable assumptions, these roles
are not always compatible two by two. These role incompatibilities
undermine the credibility of the Master Budget as the alpha and omega
of organisation management. These incompatibilities operate mostly at
three levels: time horizon, human dimension and management practice.
Conflicts in Time Horizon
The first notable conflict is time horizon where the Master Budget
serves as a synthesis for corporate forecasts and as a basis for
performance assessment at the same time. When the budget
summarises forecasts, it is an estimate of what is likely to occur over
the considered time period. Looking ahead, the Master Budget cannot
pretend to be accurate and true. Whence the first conflicting role when
it serves as a basis for performance assessment could emerge. Variance
analysis against the budget consists of comparing actual achievements
at the end of the budget period against a conjecture as to what was
understood as likely to occur. The Master Budget ’s time horizon is
problematic mainly for two reasons.
Firstly, it serves as a basis for two management practices that have
no common grounds: envisaging the future on the one hand and
verifying the past on the other. When presented as a forecast, the
Master Budget supposedly serves as a road map with indications and
some landmarks and milestones for management (Molridge & Player,
2010). When it is used as a basis for performance assessment, it
operates as a rigid performance contract committing people.
Secondly, the role as a synthesis for forecasts is future oriented,
whilst basis for performance assessment is notably past oriented.
Looking forward, forecasts cannot commit people; albeit, looking
backward, performance assessment commits people. In other words,
these two roles tend to highlight people’s commitment to figures
whither they can philosophically not be committed.
Conflicts in Personnel Management
The second observable conflict in the Master Budget ’s assigned roles
lies in contradictions pertaining to staff management. This is especially
vivid when the budget is perceived as an expense authorisation and a
motivation device. Both are compatible when the resources allocated to
a department or a manager are consistent with their needs or demands,
if not superior. In this case indeed, personnel can feel committed and
motivated to achieve high.
As the budget highlights corporate strategic priorities, not all
departments will feel acknowledged or deemed important. It is
unrealistic to believe that everybody wins in the Master Budget , unless
the organisation is on an ascending trend and growing fast (McKinley et
al., 1996; Mouritsen, 1998). In a context of growth , most departments
can expect sufficient resources and be contented with what they are
allocated. Apart from young companies or companies whose product is
in the growth stage, such a situation is unlikely to occur. Rather, there
are always discontented managers and employees because they have
not received the resources for which they had applied.
On the basis of an expense authorisation that does not fulfil
managers, it is unrealistic to imagine that they can remain motivated
and committed, and this is mainly for two reasons. Firstly, the perceived
lack of recognition or acknowledgement cannot encourage special
commitment. Secondly, as the Master Budget serves anyway as a
summary for forecasts and a basis for performance assessment with its
rewards and incentives, managers would probably not perceive
discontenting resources as an incentive to achieve high. This conflict in
the Master Budget ’s roles is not just a managerial inconsistency but
can also undermine the conduct of operations and eventual
achievements by demotivating people (BBRT , 2009g, 2009h, 2009l).
Conflicts in Management Practices
The third major conflict in the roles played by the Master Budget
consists of contradictory management practices based on its usage.
Such is especially true when the budget serves as an HR tool aimed at
motivating people and as a control technology aimed at assessing
performance . If the Master Budget is not associated with incentives
and rewards, performance management proceeding whence can be
perceived as a form of disciplinary power exerted by superiors on
subordinates (Hopper & Macintosh, 1993; Miller & O’Leary, 2007;
Roberts, 1996; Roberts et al., 2006). This role conflict is especially vivid
in cultural settings characterised by a high level of individualism or
strong rejection of hierarchic controls as well as contexts where
accountability relations are not formalised (Efferin, 2002; Efferin &
Hopper, 2007).
When confronted with the exercise of controls perceived as
disciplinary power, employees may not find themselves especially
motivated or committed. Rather, they may feel more or less under
undue surveillance and dislike it. In other words, using the Master
Budget as a basis for performance assessment may be perceived as
centralised control treating employees like children instead of granting
responsibilities and devolution (Berland et al., 2010).

Case n°1. CEOs against the Master Budget Bitterest Critiques on

the Master Budget
“The budget is the bane of corporate America. It never should
have existed. Making a budget is an exercise in minimisation. You are
always getting the lowest out of people because everyone is
negotiating to get the lowest number.”
—Jack Welch, General Electric
This is consistent with the conflict arising when the Master
Budget is used for performance assessments and motivation. If
performance is assessed on the basis of a budget and if people are
committed to establishing the budget, probably they will not define
the highest targets but either reachable, reasonable targets if they
are fair, or low targets if they are unfair to the organisation. In order
to remain within the budget or outperform the budget, people will
be inclined to defining low objectives. In this case, the budget loses
its signification, since people do not establish forecasts that are
really consistent with what the organisation is capable of eventually
achieving. The Master Budget becomes a fictions commitment. Then
your budget is just a fictitious thing, a fictitious commitment, if you
are committed to the lowest thing. For this reason, Jack Welch
denounced it as the bane of corporate America.
“Budget is a tool of repression”
—Bob Lutz, Chrysler
“An unnecessary evil”
—Jana Wallander, Svenska Handelsbanken
These two CEOs express the same idea. The Master Budget is a
tool of repression, because people are controlled afterwards only on
the basis of established forecasts which can be disconnected from
real circumstances. Variance analysis , favourable, unfavourable
variances probably do not make sense of reasons for the observed
performance level. Crucial management decisions are made on the
basis of these reported variances, such as redundancy plans or
rewards. As such managerial decision-making is disconnected from
actual, tangible figures, it is at risk of being arbitrary. The Master
 Budget bares all these risks and therefore appears as corporate evil,
certainly unnecessary (Berland et al., 2010).

1.2 The Master Budget ’s Unproductivity

The Beyond Budgeting RoundTable and the Beyond Budgeting
Transformation Network have highlighted the fact that budgeting as a
process is an unproductive activity representing a waste of managerial
time and resources (BBRT , 2009e, 2009j, 2009n).

1.2.1 Too Much Detail Emphasis

The first dimension of the Master Budget ’s unproductivity lies in that
its preparation oftentimes is not associated with strategic thinking.
Forecasts’ articulating rests upon a broad strategic understanding and
reasoning, commencing with the strategy tiers. Very often, instead of
starting from the value that can be generated given strategic and
economic circumstances, managers commence with expenses
regardless of what can be achieved. In budgeting , the organisation
value chain is perceived as a series of cost centres consuming
resources. Conversely, forecasts’ articulating comprehends the value
chain as investment centres, revenue centres or profit centres, not
really as cost centres. Expenses incurred by a department appear as the
financial consequence of strategic decisions and required operations,
not as a constraint existing prior (Hope & Fraser, 1999c, 2003b; Hope et
al., 2006).
Cost -centre-based budgeting results in the Master Budget ’s
preparation listing all possible costs, thereby engaging in a useless
profusion of details failing to give an overview of operations’
conducting. Resultantly, too much effort is placed in the identifying of
all possible costs, and often at the expense of both revenues and the big
picture of future corporate activities. Yet, as the budget supposedly
operates as a road map, the main amounts are central: revenues by
activity , and for each department revenues, cost of labour , cost of
overhead and cost of materials . It is not necessary to detail each line
too much.

Case n°2. Sciences-Po Conseil Unproductive Budgets

 In 2000, Sciences-Po students decided to relaunch the
consultancy firm associated with their university. The pro-vice-
chancellor agrees, provided they produce a budget for the first two
years. The management team comprising of six master’s students
meets in order to prepare the demanded budget. For a week, every
day from 8 a.m. to 8 p.m., they were working on this budget. As they
did not have a clue at that time of the clients they could have and the
revenue they could generate, they were certain of the costs they
would incur. Thence, they first listed all possible costs, each of them
being subject to discussion. These costs included staples, paper
weight, stamp ink colour as well as postage costs for the
communication campaign. When they presented their budget to the
university board, it was rejected, because did not respond to the
initial demand, which was to see the main sources of income and
main cost areas. As this detailed budget was useless, the university
board decided to appoint one of its members as a consultant to the
emerging firm in order to help them prepare a decent budget giving
the big picture of their expected activity .

1.2.2 Time-Consuming Budgeting

Budgeting as a process is usually very much time-consuming, probably
more than people would think. Thereby, managers’ time is utilised for
an activity with low productivity. According to the Beyond Budgeting
RoundTable, about 30% of managers’ time is spent on preparing the
budget, making them unavailable for business activities during that
time (Hope & Fraser, 1999c; Libby & Lindsay, 2003, 2009). This means
managers spend on average 4 months a year preparing their budget for
the following year. As a result, estimates from the Beyond Budgeting
RoundTable highlight that budgeting in American businesses costs the
equivalent of 25 thousand person-days per billion dollars revenue. This
raises the question of what is being done for four months a year spent
on preparing the budget (Hope, 2006).
Preparing the budget for the year commences in the middle of the
previous year: late June, just before summer break. For c. two weeks,
managers work on their side on their respective estimates for the
following year. By themselves, they articulate a first draft of their
forecasts and needs. Mid-July, the first draft is left on the manager ’s
desk taking his or her annual leave. Mid-August after the summer
break, managers resume their forecasts, and pretty often, either
circumstances have changed or people have forgotten what they had
done prior to leaving. As a result, another two weeks is needed to
rework this first draft all over again. As time is flying, managers tend to
meet altogether to discuss their respective forecasts and consequent
needs for the year to come. As two departments articulating their own
forecasts are unlikely to arrive at the same estimates, negotiations are
engaged so as to arrive at consistent forecasts on which everybody
around the table agrees.
Early September, this informal roundtable’s offshoot is submitted to
the CFO and the CEO in order to receive their approval and the desired
funds. This is where the politics of budgeting really starts (Hofstede,
1967, 1970). The CFO contests some amounts for which managers
apply, considering these are certainly over-estimated. In other words,
the CFO may suspect managers to have articulated overly optimistic
forecasts or to have over-estimated their department’s needs. The CFO
gives his or her own view of corporate forecasts and requires a new
version of the preparatory budget taking them into account. In general,
department managers are granted about a month to articulate
consistent and convincing forecasts and formulate their needs for the
year to come.
Until late September, managers meet two by two so as to coordinate
their estimate and their needs—financial, material and human. When
all these adjustments are made, they meet altogether to devise their
collective forecasts and budget. Another meeting with the CEO and the
CFO is usually scheduled early October. In case the department
managers’ meeting would not have reached an agreement, another
week is left as a safety margin until the general meeting. On this
occasion, at best, the CEO and the CFO agree on forecasts’ estimates and
promise to grant department managers with the resources for which
they applied. It is however more likely that this second draft be still
problematic and needs to be revisited. Another fortnight is needed until
the next general meeting. Urged with time, department managers meet
altogether to articulate their collective forecasts from the beginning.
 Mid-October, at best, the third draft is approved and resources
allocated. It is often around mid-October that new products are
launched or announced or that economic and financial crises start
(Krugman, 1992, 2009). It is also the time of year where governments
announce their major political choices for the following year, namely
fiscal reforms or amendments (Jönsson, 1982). These events imply a
change in economic circumstances, resulting in the agreed budget being
obsolete. Any change in economic circumstances, with a butterfly effect,
results in the budget needing to be entirely reconsidered.
Given these changes, the previous three drafts are nil and useless,
the process starting all over again. Another round of forecasts is
engaged, beginning with a fortnight during which department
managers meet to integrate these changes in economic circumstances
into their collective forecasts. Early November, a general meeting with
the CEO and the CFO is organised. On this occasion, the CFO requires
some adjustments to the budget, which results in another fortnight plus
an additional week a safety margin for collectively working on new
forecasts.
Late November, another general meeting is organised. At best, the
new, revised budget is approved. At worst, managers have less than a
month to finalise their budget for the year starting in January. Around
mid-December, people are on Christmas leave and return after New
Year. Thus, managers are entangled with a tunnel effect and a rush in
the making of the budget in the last two weeks of the year.
Budgeting reveals major inefficiency pockets and causes for
managerial unproductivity. These are visible at three levels. Firstly,
managers spend almost four months working full time on their budget.
These four months are not spent on managerial activity , viz. on
productive work. These four months are split over six months, owing to
annual leaves, which results in managers’ day-to-day productive work
being disjointed (a week of effective work for two weeks spent on
budgeting during that time). Secondly, the tunnel effect at the end of the
year reveals that the budget eventually adopted is one prepared in
haste and annihilating all previous efforts and attempts. Ultimately,
managers will have wasted three months, the final budget being
prepared in just three weeks. Thirdly, the urgency caused mid-October
reveals a major problem confronting budgets after they have been
approved: they commit people to figures that can be affected by any
change in economic circumstances that would occur in the course of
the year.
All told, managers spend about four months preparing a budget
which is eventually not approved as such. They devote a significant
amount of their managerial time working on figures committing people
already 18 months before the budget year is complete. Given these
inefficiencies in budgeting , one could ponder why managers, CEOs and
CFOs continue preparing a budget and wasting time and money (Hope
& Fraser, 2003b; Rickards, 2006).
The Master Budget is usually the financial document that serves for
organisational day-to-day management, whilst the technicalities of its
preparation are usually taught in business schools and well
appropriated by practitioners (Ferguson et al., 2009; Parker, 2002).
This Master Budget results from a process associated with strategic
planning and is supposedly the activity whereby expected outputs are
associated with needed resources (Anthony, 1965; Bradley, 2008;
Courtney et al., 2009; Holloway, 2004; Howcroft, 2006; Parker, 2001).
Given the inefficiency and unproductivity raised by budgeting , it would
be legitimate to wonder whether organisations do need one and why
they continue to prepare one year after year. The budget is so
institutionalised that people would not envisage doing without one,
even if they complain about it (Becker, 2014; Berland et al., 2010). The
budget appears as an organisational rite as well as a period of the year
where teams meet and cooperate. It can appear as a form of cultural
practice or a teambuilding activity . At the same time, the budget
reassures a certain number of stakeholders who are in a capacity of
envisioning what organisational plans are for the year to come.

1.2.3 A Disjointed and Misaligned Tool

Budgeting has had its heyday from the 1920s until the 1960s for sure,
where it was perceived as a technology enabling managers’
emancipating from directors’ arbitrariness and coping with an
increasingly turbulent environment (Berland et al., 2010). Nowadays,
according to the Beyond Budgeting RoundTable, the Master Budget can
appear as far from strategic forecasts and an outdated practice.
A Budget Far from Strategic Forecasts
Supposedly, if the budget serves just as a summary for organisational
forecasts, it must proceed from a strategic reflection. Strategic
objectives need to be set, from which proceed action plans and
ultimately the expression of resources needed to achieve this. In fact,
the Beyond Budgeting RoundTable highlights the fact that this strategic
reflecting is too often absent from the preparation of budgets (Hope &
Fraser, 2003b; Libby & Lindsay, 2003, 2009). It is not unusual that
strategic claims be collapsed to vague and generic mission statements,
such as Renault in 2014 claiming as a strategy their will to “provide
drivers with a unique car experience”.
Likewise, it is not rare that no reference be made to any of strategy
’s three tiers. It is common seeing no reference to the main strategic
choices made (product differentiation or low cost ) or intent in terms of
market positioning. In return , some companies are known for claiming
as a strategic objective “to provide the highest quality product ever sold
on the market ”. The figure below shows how the ideal forecasting
process is not followed and results in a misaligned and disconnected
budget (Fig. 1).
Fig. 1 Budget as an organisational ritual

Since such mission statements are saying something without any

reference to strategy , operation plans are loose, themselves referring
to nothing. How things should be done for the next budget period tends
to have no other grounds than the fact that things have always been
done this way. Consequently, action plans appear as a mere repeat of
the past without any reflection as to the rationale for replicating what
has always been done. Unsurprisingly, the budget itself often appears as
an extrapolation of the past, i.e. the previous year’s figures with a
multiplying coefficient. Resultantly, ritualised budgeting is
accompanied with no reflection as to how things should be done as well
as for what purpose and achievements.
In most cases, strategy is understood as something far, abstract and
loose, so that no control of strategy ’s executing is done. Performance
management still consists of traditional CVP variance analysis without
strategy or operations being ever questioned. Resultantly, the
consistency and efficiency of resource allocation is never appraised,
since this process is just a corporate ritual. Resultantly, management
accountants monthly report figures highlighting favourable or
unfavourable variances being of little pertinence and usefulness for
managers. As these cannot be connected to any clear strategic objective,
they have little meaning. Variances are produced; green, red or orange
lights are highlighted with no real management response thither. As
financials produced are meaningless and disjointed from strategy , they
find themselves losing their relevance, as though they were produced
for the sake of producing them and not helping managerial decision-
making (Kaplan & Johnson, 1987).
This lack of strategic thinking and strategy appraisal results in a
strong controllability gap, arising precisely because it becomes
impossible to understand whence variances originate and what their
consequences for the organisation can be. As no questioning is engaged,
the decision-making that results from the mere observation of such
variances can be at odds with corporate strategic concerns. It is
common that, on the mere basis of unfavourable variances, some
responsibility centres end up closed down, as though their functioning
were inefficient. Even though this may be the case, the absence of any
clear strategy at the outset does not allow to really assess this, because
the cause-effect relationships explaining such variances are impossible
to establish. Flawed, ritualised budgeting results in budgetary control
practiced with insufficient managerial discernment and probably
wrong decision-making. In other words, managers focus too much on
the figures in the budget and in their honouring that they tend to forget
about strategy , operations and their economic environment (Hope &
Fraser, 1999c, 2003b; Hope et al., 2006; Kaplan & Johnson, 1987).
A Tool Whence Managers Need to Emancipate
Budgeting and budgetary control developed from the 1920s onwards,
firstly in the USA before spreading quite rapidly in the early 1930s with
Great Britain and France following a similar pattern (Berland & Boyns,
2002). The introduction of budgeting was justified by
micromanagement problems which were confronting companies at the
same time as problematisation at a political and macro-level bound
budgetary control with macroeconomic and social discourses. The
increasing size of companies was instrumental in the push for them to
adopt new organisational forms such as the M-Form, and to implement
appropriate management technologies such as budgeting . Although
such practices are well known in accounting research, alternative
explanations for these actions are presented as follows.
The slump of the 1930s led to increased turmoil in the running of
business, squeezing profit margins causing bankruptcies and forcing
businessmen to reconsider their management methods. More generally,
and from the French political standpoint, businessmen of that period
were looking for a “third way”—a conduit between capitalism, which
appeared to be collapsing across the Atlantic, and communism, which
ruled in the Soviet Union. In this way, budgetary control arose from the
corresponding acute need to respond to the industrial and political
crises which developed during this period (Berland & Chiapello, 2009).
More generally, managerial technologies, such as budgeting , developed
as the result of political agendas and reasoning upheld by certain
committed actors. Budgeting was seen as a management device
reflecting societal issues which justified its adoption (Miller & O’Leary,
1987; Rose & Miller, 1992). This formed the basis of institutional logic
of that time, “the manufacturing conception of control”.
From the end of the 1950s, however, some critical discourses called
the practice of budgeting into question. Preparing a budget was no
longer seen as a rational response to socio-economic or political
pressure but to a larger extent as an organisational game in which
actors struggled for power, influence and, ultimately, resource (Argyris,
1952; Hofstede, 1967). As a result, working alternatives to the
traditional Master Budget started being articulated, such as zero-based
budgeting which had only slight impact on practices before falling into
oblivion. It should be noted particularly that, since the 1990s, there has
been a surge of critical discourse within Beyond Budgeting RoundTable
circles.
The launch of the Beyond Budgeting RoundTable in the mid-1990s
resulted in this network becoming active through the number of
consultants who based their business model on this new philosophy.
Since then, the BBRT has extended its sphere of influence
internationally with growing networks in Germany, Australia, South
and North America. As it has spread, so too the network has recruited
information technology leaders, such as SAP, as well as other business
associates and auditors. Books and numerous papers have been
published in a wide variety of prestigious academic and practitioners’
journals (including the Harvard Business Review).
The Beyond Budgeting RoundTable’s proposal is to eliminate
budgeting . From its claimed membership of around 30 in 1998, by
2007 it had expanded to 60 members with over 150 between 1999 and
2007 (Becker et al., 2009). It should be noted here that we are unaware
as to whether or not these members have effectively quit budgeting or
are simply just interested in the idea. This doubt is underlined by the
fact that recommendations articulated by the Beyond Budgeting
RoundTable as to going Beyond Budgeting are less than clear and not
directly executable. On the one hand, they call for major structural
reforms in which employee empowerment plays an important role . On
the other, practicalities range from rolling forecasts to Balanced
Scorecards and new management principles. Such loose
recommendations have resulted in diverging views within the network
of what exactly Beyond Budgeting does comprise. Some alternatives to
the traditional Master Budget have been promoted by actors both
within and without the BBRT . For example, McKinsey Consulting has
questioned the usefulness of the budget, based on the themes
developed by the BBRT , but has not quoted them, whereas others have
launched competing think tanks, the Beyond Budget Transformation
Network (BBTN), in order to emphasise their conviction that the initial
direction of the project had gone completely off course (Becker et al.,
2009).
In spite of major uncertainties surrounding the content and form of
Beyond Budgeting , Hope and Fraser (2003a, 2003b) acknowledge at
least three companies which have effectively gone Beyond Budgeting ,
namely Boeralis, Rhodia and Svenska Handelsbanken. The latter being
explicitly introduced as “the” model to be followed and has raised
pertinent questions about budgeting . Notwithstanding any such
pertinence, budgets are unlikely to disappear, unless the solutions
proposed by the BBRT are convincingly defined and diffused.
BBRT promoters (CAM-I , 1999) develop arguments against budget.
These fit into the institutional logic of the time: budgetary control
developed in a context where markets and value chains were stable. In
this instance, one knew whom one’s competitors were and it was
therefore possible to predict their actions. Lack of available capital was
considered the main hindrance to growth and learning . Business
structures were centralised, and their coordination had an essentially
pyramid-shaped structure. Product life cycle and business strategies
were spread over a longer period of time. Finally, at that time,
operatives were required to comply with the rules, orders and
regulations issued by relevant bodies. At best, argued the BBRT , the
budget favoured incremental innovation (and sometimes immobility)
but did not allow radical changes to be considered.
Bringing new features of the institutional logic of their time in
contradistinction to that of Budget’s climax time, Beyond Budgeting
promoters argue that budgeting gives more consideration to the
constraints surrounding production rather than of customer
satisfaction. Consequently, budgetary control is a tool for managing a
supply rather than a demand market , whilst Beyond Budgeting
emerged in the 1990s not as a result of optimisation but rather of
innovation. Finally, budgeting allowed capital to be rationed (resource
allocation) whereas today the scarce resource par excellence is no
longer capital but know-how, knowledge-sharing and optimisation
(Kaplan & Norton, 2008).
Furthermore, the budget cannot serve as a pertinent basis for
performance management. Where the prime factor for any business is
to maximise value for its shareholders, budgets tend to overly focus on
accounting indicators whose purpose is not to measure value creation.
In other words, budgets and budgetary control lead to control costs
whilst new constraints for businesses are found within their capability
to control value creation for shareholders and customers.
Finally, and to favour innovation in business, managers need to tap
into and foster energy and creativity, which budgets and budgetary
control do not allow as these factors tend to impose a strict hierarchical
structure necessary for tight coordination . Innovation and market
responsiveness, central to value creation for shareholders and
customers, argued by the proponents of Beyond Budgeting require that
managers be emancipated from the rigidity caused by the budget.
Pursuant to this, controls should no longer be centralised by general
management, as is implied by the use of budgets, but should be
decentralised at the executives’ level.
 Eventually Cam-I members developed a rhetoric referring to a new
institutional logic, hence those prevailing in the 1930s and 1950s
becoming no longer relevant in the 1990s. The economies of scale and
rationality promoted in the 1930s and 1950s no longer applied in late
twentieth-century capitalism. The rhetoric deployed highlights 1990s’
institutional logic as a set of rules borrowing from “the sales &
marketing conception of control” (customers) and “the finance
conception of control” (stockholders).
A Tool Incapable of Coping with Environment Turbulences
Environment turbulences were invoked to justify budgeting in the
1930s; following the Great Depression, some actors had considered
budgeting would provide a solution to this crisis. Various promoters of
budgeting were thus active in numerous organisations such as CNOF
and Cegos where political and economic answers to the crisis were
jointly devised (Berland & Chiapello, 2009). They endeavoured to
persuade the French élite and governments of the necessity of
developing both national and corporate planning . After World War II,
this justification vanished as environmental turbulence was no longer
of primary concern, leaving room for a second stream of rhetorical
schemes based on decentralisation.
During the 1990s, as in the 1930s, Beyond Budgeting RoundTable
members used environmental turbulence as an argument for
suppressing budgets which were regarded as a technology unsuitable
for a context requiring responsiveness and continuous adaptation to
ongoing changes. Customers’ new market power, competitor reactions
as well as technical progress had made planning impossible. On the
other hand, managing without a budget would allow for rolling
forecasts in order to adapt better to ever-changing markets. Such
continuous change, the Beyond Budgeting RoundTable argued, can be
characterised by new critical value drivers replacing economies of
scale; these are velocity, organisational learning , customer service,
intangible assets, etc. and this although the corpus of texts dealing with
Beyond Budgeting is smaller than that promoting budgeting .
When budgets first appeared, the argument used to promote them
was environment turbulences as observed in the Great Depression’s
aftermath and its political influences, giving birth to a Fascist regime in
Italy and a Nazi one in Germany. Having a budget was supposed to get
over the crisis time and see beyond. As the Master Budget was an
innovation at that time, it had not been misused yet by unduly
committing people to untenable figures. Since the 1990s, the economy
has been in a quasi-permanent crisis, each shock being stronger than
the previous one and causing increasing drama (Krugman, 2009, 2013).
Owing to this recurrence of economic crises, the figures in a budget
may be obsolete so soon that it becomes useless to prepare one. After
World War II, where the world was to be rebuilt and households fully
equipped, companies could have some visibility over years. Nowadays,
visibility is realistic over a quarter, rarely beyond.

Case n°3. Bat’a in the 1930s When Budgeting is Needed (Berland

et al., 2010)
Bat’a was a Czech shoemaking firm , undoubtedly the most
admired model, or at least the most cited example presented as the
model most cited as an example of organisation, particularly by
those who supported the development of budgeting . Thomas Bat’a,
the company founder, made a dual contribution to the budget
discourse. He placed initial emphasis on sales and related techniques
in order to maximise business volume. He then developed the
organisation by defining homogeneous responsibility centres. These
two achievements cannot be considered regardless of the company
owner’s social concern: Bat’a wished to ensure the material
livelihood of his workers. Having begun his own career as a blue-
collar worker, he was particularly receptive and attentive to
employees’ living conditions. He thus engaged in actions which
might, at first sight, be viewed as paternalistic, such as building
hospitals, establishing schools, encouraging home ownership, etc.
Bat’a’s motivation was broader as his “main idea is to change
workers’ mentalities from those of the worker to those of the
entrepreneur” (Landauer, 1933). At the head of each workshop, he
placed a supervisor who worked for the firm but who formed with
his workmates an autonomous team. The various workshops
communicated by means of an internal transfer pricing system. The
purpose was to make workers as autonomous as possible and to
help them ‘put themselves in the boss’ shoes’ - as with the method
 developed in France by Lucien Rosengart known under the ‘little
boss method’ name (Landauer, 1933). This also enabled Cartesian
principles to be applied to business issues in order to reduce the
complexity facing company owners (Dubreuil, 1936). The aim of
Bat’a was indeed to give more responsibility to firm actors.
“All about a budget philosophy” thereby showing how it [the
budget] can become “an asset in a good human policy ”.
At a time where constructive efforts are made at all times to
characterise the significant place of man in production and make
him an enlightened partner of the direction’s action, it is not
indifferent to stress that, everywhere we subsumed into section,
workshop, detail in the budget procedure, we also gave to those who
constitute one of the company crucial groups (team, workshop,
factory, division) means of being better informed of the goals and
difficulties of the business to which they belong and therefore of
more efficiently influencing productivity. We also know that only
companies having an extremely multifocal budget system can
compute the immediate repercussions of simplifications made
proposed at the division or workplace level and accordingly
distribute consistently with their policy part of the expected
economies to the authors of these suggestions. Financial techniques
and humane management are here mutually supportive. This can go
very far if men all have the same goodwill (CEGOS, 1953).

In World War II’s aftermath, key value drivers were borrowed from a
Taylorist and Fordist approach to business, resulting in economies of
scale. It was the heyday of the large manufacturing company utilising
many blue collars (Fleischman, 2000). Nowadays, key value drivers are
no longer the quest for economies of scale but capability of delivering
on time, adapting the product to more capricious and volatile
customers and constantly innovating, because consumption habits
change very quickly pursuant to technology (Abrahamsson et al., 2010).
Yesteryear’s main constraints confronting organisations were
mostly physical and financial: raising money was difficult, especially
since capital markets were operating domestically only and would
therefore count on limited funds. This was amplified by the fact that
financial flows were physical with the actual exchange of papers and
money. Accordingly, it was also pretty difficult to move machinery or
workforce. Nowadays, owing to the IT revolution occurring in the early
2000s, financial capital is much less of a constraint for organisations:
funding is global, so that a French company can issue bonds or equity
American or Chinese investors will buy. Likewise, in a post-industrial
society, moving a factory, equipment or employees is not as difficult as
in the 1950s (Esping-Andersen, 1999). Under the purview of keeping
up with technological advances and customer needs, it is now crucial to
have under good control human capital and intangible assets, such as
patents, know-how and business intelligence. In the past, the difficulty
was to move blue collars; contradistinctively, nowadays’ difficulty
consists of attracting and retaining mobile white collars. The figure
below summarises these issues making the Master Budget useless in
nowadays’ organisations (Fig. 2).

Fig. 2 Budget’s disconnection from corporate currents

2 Beyond Budgeting as an Alternative

There is no one unique way of abandoning budgets and going Beyond
Budgeting , because this approach is not a method. It is a revised
management philosophy that can be summarised as placing strategy at
the top whence operations proceed and at the service whereof finance
should be. Financial concerns should not be placed as the conventional
neoclassical microeconomic constraints but as the consequence of
strategy ’s executing through operations’ conducting. It is therefore
important to first understand the core of Beyond Budgeting ’s
philosophy prior to engaging in its ten guiding principles.

2.1 Beyond Budgeting Philosophy

Central to Beyond Budgeting is the idea that any expense is potentially
allowed, provided three conditions are met. Firstly, these expenses
should be consistent with strategy and the action plan. Secondly, they
should be consistent and relevant to create value . Thirdly, these
resources for which managers apply should be relevant to beat
competitors and organisational growth (Hope & Fraser, 1997, 1999a,
1999b, 1999c, 2003a).

2.1.1 A Project-and-Business-Planned Resource Allocation

This philosophy has major organisational and managerial implications.
A Beyond Budgeting philosophy cannot be associated with a centralised
large-scale organisation. The first assumption is that grass-roots
managers are in direct contact with the clientele and competitors. They
are the first knowing what is demanded and supplied on the market .
Therefore, Beyond Budgeting needs to rest upon a functioning around
projects with employees acting as project managers. Under this
purview, allocation of resources does not occur at the department or at
functional level but at the project level, each project having its own
value chain (BBRT , 2009b).
The notion of a project is deliberately loose and general, as a project
can take numerous forms, depending on the organisation. Depending
on the context, a project can be a product , a client, an order, a variation
on a product as well as a country or a region. To some extent, the notion
of project intersects with that of activity in Activity -Based Management
(Bhimani et al., 2005; Jones & Dugdale, 2002; Major & Hopper, 2005).
As the organisation functions on a project mode, managers apply for
resources assigned for the purpose of a single project. The application
process, though specific to each organisation, basically consists of
submitting a business plan to the CFO . Unlike a common belief that
managers mostly look at financials in a business plan and almost ignore
the wording, the CEO and his or her team pay a great attention to the
latter. Conventionally, managers prepare a business plan to convince
their partners that their project is viable, especially financially (Mason
& Stark, 2004).
Within the Beyond Budgeting philosophy, managers submit
proposals for projects and need to convince the CEO ’s team that this
project is relevant to the organisation. Under this purview, managers
applying for project funding need to emphasise in writing how their
proposal responds to the quadruple constraint: consistent with
strategy , value creating, relevant to beat competitors, relevant to
organisational growth .

2.1.2 A Four-Criteria Project Assessment Grid

Proving that a project adheres to this fourfold constraint leads
managers to devote a fair amount of time and effort at highlighting how
and why their project needs to be funded. In the first place, managers
are required to clarify how their specific project can appear as an
operationalisation of corporate strategy . As managers need to have a
good command of corporate strategy , this latter must be shared with
employees and not be presented as confidential material accessible to
the board of directors only (Banker et al., 2004; Drew & Kaye, 2007;
Govindarajan & Gupta, 1985; Hoitash, 2011). More or less, depending
on the organisation, the project is systematically confronted with
strategy ’s three tiers—generic strategic objective, positioning in the
market and mode of production —as well as product life cycle and
internationalisation form. Managers develop how their project
contributes to global strategy and is consistent with already existing
projects. This also implies that every corporate project be made public
and accessible to every manager , which is certainly the centralising
role played by IT (BBRT , 2009m; Quattrone & Hopper, 2005). If the
project appears as strategically convincing, the CEO ’s team can engage
in the second dimension: value creation.
When it comes to value creation, understood as profit margin, there
are often misunderstandings as to what funders or investors scrutinise
(Mason & Stark, 2004). Of course, they look at figures and ultimately
the bottom line. However, it is nowadays commonly understood that
financials in business plans are often pure speculation and look good in
order to please investors, appearing like earnings management or
creative accounting (Jensen, 2001a, 2001b, 2003; Kury, 2007). In other
words, figures by themselves have little value and relevance for
management within a Beyond Budgeting logic. Rather, what is
especially scrutinised by financiers is the justification given for every
single figure in the cash flow statement. That is, more than just the
figures, what is deemed important and convincing is how these figures
are formed and whence they are originating. Managers applying for
resources need to clarify every single assumption made as to in-and-
outflows’ evolution. In order to be persuasive, they need to relate to
precedents occurring within the organisation as well as outwith:
figures highlighting value creation are convincing through systematic
internal and external benchmarking (BBRT , 2009c). Supposing that the
CEO ’s team is convinced by the project’s financials, its long-term
relevance can be scrutinised.
Long-term relevance comprises of beating competition and
ensuring organisational growth . Managers applying for resources need
to justify how their project shall provide the organisation with a
competitive advantage (Bowman & Toms, 2010; Joshi & Dangayach,
2009; Montgomery & Porter, 1991). This implies that managers need to
be savvy as to competition structure and competitors’ respective
achievements and competitive advantages, this being enabled through
benchmarking. It could be objected that such information is usually
confidential and almost impossible to obtain (Doupnik & Riccio, 2006;
Radcliffe, 2008). It is obvious that competitors would never share
corporate secrets with a rival organisation. It is the type of information
that be gathered through informal meetings with competitors. Such
informal meetings can occur on many occasions, such as university
alumni meetings, business club or think tank meetings, church, other
organisations such as Free Masonry, the Lions Club or the Rotary Club.
In order to identify and prove that their project can foster or secure a
competitive advantage, it is important to count on managers having
strong ties with others outwith corporate premises (Pratt & Rosa,
2003; Whittle & Mueller, 2008). This need for managers with a strong
personal and professional network is what can explain companies ’
preferences for graduates from the Group of Eight Universities in
Australia (Abbott & Doucouliagos, 2009), Ivy League Universities in the
USA (Lillard & Gerner, 1999) or Grandes Écoles in France (Jeanjean &
Stolowy, 2009; Stolowy et al., 2011).
Lastly, managers applying for resources to fund a project must
emphasise how this latter can contribute to corporate long-term
growth . To some extent, this prolongs the proving of a competitive
advantage the project can generate. Through this justification item,
managers need to show how their project can contribute to developing
a specific technology that can result in a specific patent or other forms
of intellectual property protection (Resnik, 2003; Simburg et al., 2009).
That is, they must prove how easily their technology can or not be
replicated or mimicked by competitors, at what costs for them, as well
as how technological advance can be maintained in case of mimicry. All
told, managers must prove in their business plan that their project is
not a one-shot event but has long-term effects for the organisation.

2.1.3 From Limited to Unlimited Funds

When the CEO ’s team receives applications for project funding, a
protocol is needed to decide on which projects can be funded and in
what order. The idea is that projects most convincing on the four
criteria shall be funded in priority, those being less convincing being
funded lastly it at all. In order to enable the identification of which
projects are most convincing and consistent, it is common that they
rate them (BBRT , 2009a, 2009c, 2009g, 2009h). Within this scheme,
projects can be rated on each of the four criteria and then be given an
overall mark. Depending on the organisation, two options arise to fund
projects.
With the first option, corporate resources are not a constraint, so
that every convincing project can be funded. Thence, only projects
meeting the four criteria are funded, but each of them is. If corporate
resources are insufficient, it is the CFO ’s role to raise new funds. From
the managers of organisational resources, the CFO shifts towards a
corporate fund-raiser. Depending on the project, either equity or debt
can be raised (Hope, 2006). Then, the question of debt vs. equity can be
raised: how to fund these projects? Core projects with the most
prominent long-term effects shall be funded through equity whilst
execution projects can be funded through debt (Hope et al., 2011). This
first option is an evidence of the fact that constraints nowadays are less
financial than yesteryears. This idea can be easily applied to the listed
companies in a capacity of raising money from capital markets. Or, if
not listed, organisations capable of ignoring the financial constraint
must have long-term trust relationships with the funders.
Organisations incapable of ignoring the financial constraint must
opt for the second option consisting of funding projects, following the
law of diminishing returns. The projects funded in highest priority are
those most convincingly meeting the four criteria for financing. Further
projects are funded until there are no more available financial
resources. This means that some projects, though potentially strategic
and profitable, may not be funded and therefore left aside. This also
implies that some, not all corporate resources, be utilised: in the case of
insufficient resources for the funding of a project, this latter is not
funded at all rather than only in part. The resources that are not
utilised on this project can be redistributed to stockholders, thereby
creating instant value for them. To some extent, notwithstanding
insufficient resources, the company finds itself as overfunded and
needs to repay its funders.

Case n°4. The La Rochelle Business School Library Beyond

Budgeting in a University Library
Strategy for a university is to educate students, make them work-
ready and have them finding quickly a good position consistent with
their expectations (Kamuf, 2007). Under this purview, a university
library plays a central role in the educating of students. Its strategic
objective consists of providing students and staff with the most up-
to-date knowledge advances on their subject and keep ahead of
knowledge.
The La Rochelle Business School Library in France implemented
Beyond budgeting in 2008. Academic staff members would apply for
ordering books pursuant to a business plan logic. They were
submitting their order on a form, specifying book price, academic
discipline, usage in class and research as well as authority over its
discipline. Some expensive orders were placed whilst cheaper ones
were not. The chief librarian commented on their policy :
“We fund books such as Business and Accounting Ethics in Islam
by Trevor Gambling and Ahmed Karim, although it costs 200 pounds,
 because we deem it is strategic for our library to have it. Given its
authority in the field of Islamic business, finance and ethics, as
Islamic finance is a growing concern and our school is intending to
launch a Master of Science in Islamic finance, we need this book,
whatever its cost . Conversely, we have colleagues applying for
Accounting for dummies. Even though it costs only 30 pounds, we do
not order it. Having this book on the shelves of a business school
library is not consistent with our strategy : we are not educating
dummies but good professionals. Therefore, we will never order this
book. Also, if we ordered this book, the 30 pounds it is costing might
be missing for another, more expensive order. As a result, if we
decided to buy this book, we would be put at the risk of not being
able to acquire books strategic for us. If we happen to have
insufficient funding, we have to be particularly selective as to the
books we order.”

2.1.4 Beyond Budgeting ’s Organisational Implications

A management philosophy, Beyond Budgeting has major managerial
and organisational implications. By leading to a project management-
based organisation seeking to be agile and responsive, Beyond
Budgeting imposes a flat organisation and rejects traditional
hierarchical structures. Within this flat structure, two-way information
flows, top-down and bottom-up impose themselves, personnel’s
commitment being trusted and financial staff’s role reconsidered.
Flat Organisation
In order to successfully implement Beyond Budgeting , an organisation
must rely on a structure encouraging and facilitating teamwork rather
than individualistic behaviours. The project basis whither Beyond
Budgeting leads necessarily results in a flat organisational structure
and as few hierarchical layers as possible. As the CFO ’s team shifts
from a controller’s role that of an organisational consultant, not too
many layers between grass-roots managers and this department must
exist.
The hierarchy must be flat, grass-roots managers being in a capacity
of accessing the CFO in case of need. Conversely, the strategic board and
the CFO are to place full trust in grass-roots managers’ commitment
and knowledge of local circumstances and needs. This mechanically
leads to turning the organisation into numerous business units
operating relatively independently from one another, which is quite
intuitive in a project-based structure. As a result, project managers can
operate as their own boss, deciding on the use of the resources they are
granted and the way of generating value .
Participation Through Two-Way Information Flows
In many organisations, the notion of participation is often understood
in very generic terms without finding a practical application. The
Beyond Budgeting logic imposes that top management and grass-roots
employees would communicate. The assumption is that top
management’s role consists of defining corporate strategy and its
overall objectives without necessarily knowing what is feasible at the
most local level. Grass-roots managers, confronted with local
circumstances, should have a say as to what should be done locally to
enable strategy ’s operationalising. The assumption is that grass-roots
managers should be savvy enough as to corporate strategy to suggest
practicalities within their realm. Conversely, top management should
trust in grass-roots managers’ capability of understanding corporate
strategy and suggesting ways of executing it (Kaplan & Norton, 2008;
Simons, 2010).
Therefore, top management must regularly communicate to grass-
roots managers what their corporate strategy is and what strategic
objectives are set collectively. In return , grass-roots managers must
communicate to top management what their economic circumstances
are as well as the way they are intending to respond thither. The CFO
appears as a locus where corporate strategy finds local expressions and
where local responses are translated into strategic objectives (Hope,
2006).
Trust in Personnel’s’ Commitment
Whilst most organisations are colonised with the idea that there can be
conflict of interests and agency relationships between top management
and their subordinates, Beyond Budgeting rejects these. Rather, what is
emphasised is full trust in personnel’s commitment to the team and the
organisation. When agreeing that grass-roots managers are in the best
capacity for knowing their local economic circumstances, the
organisation going Beyond Budgeting cannot do otherwise than
trusting their capabilities.
Trust in personnel’s commitment consists of letting grass-roots
managers express their views re the way corporate strategy is executed
within their realm and of listening to the proposals they can articulate.
In other words, trust in personnel’s commitment should not be a mere
statement but should find a way of operating through a real attention
paid to what local managers have to say. The underlying assumption is
that employees who are heard by management are more likely to
commit themselves to meeting corporate objectives. Commitment
results in people’s actions aimed at the best for the organisation
because they have recognition and are acknowledged (BBRT , 2009a,
2009b; Simons, 2005; Simons & Davila, 1998). Such commitment can
be easily observed outwith corporate premises when employees speak
of “us” and present themselves as part of a successful organisation
rather than speaking of “them” and “their achievements” (Kaye & Pike,
1994).
CFOs’ New Role
The Beyond Budgeting philosophy implies that the role of financial staff
and management accountants should change. From guardians of
organisational resources controlling expenses and costs, they need to
become financial and strategic advisors at the service of grass-roots
managers (Chottiyanon & Joannidès de Lautour, 2018; Hope, 2006). As
developed in Chapter 1, financial staff’s role changes towards that of a
business partner or internal consultant. Their expertise should allow
them to help grass-roots managers construct their business plans even
prior to submitting them. Through this new role , financial staff can
advise on the financial implications or feasibility of a project and
possibly recommend certain actions.
In their capacity as internal consultants, their role should also
consist of asking questions and accompanying project managers to find
their own answers. At the core of the organisation, having ties with
every link in the value chain , financial staff is also expected to connect
people upon need. That is, Beyond Budgeting imposes that the CFO and
management accountants no longer appear as mere bean counters
complaining about the cost of things.
2.2 Beyond Budgeting ’s 10 Principles
The Beyond Budgeting philosophy can be subsumed into ten
management principles covering all aspects of organisational life. That
is, outwith the Beyond Budgeting philosophy, implementing this new
approach to forecasting and resource management requires that ten
aspects of management be understood and revisited.

2.2.1 Targets as a Range Rather Than a Fixed Value

Whilst target setting in common organisations consists of rigid metrics,
Beyond Budgeting recommends that these should be adapting and
always relate to strategy . Thence, rather than setting fixed targets that
teams should meet, these must consist of a range taking account of
economic circumstances. Rather than setting a fixed turnover target, a
range within which managers can be contented is more appropriate, for
managers can position themselves within satisfactory achievements,
depending on their current circumstances. Thence, salespeople should
not be set a target consisting of a X-million euros turnover but a
turnover ranging between X and Y millions euros. If they reach range
peak, they can be particularly contented whilst if they reach a low there
is no reason they should be ashamed. The assumption is that their
economic circumstances may not have enabled them to do better. This
relates to trust in their commitment to organisational achievements.
It proceeds from this principle that targets must always be set in
comparison with what competitors do and not in isolation.
Conventional target setting does not take account of economic
circumstances whilst Beyond Budgeting places a particular emphasis
on what competitors do. The assumption is that the organisation does
not operate in isolation of others but contributes to competition . It is
therefore important to constantly benchmark oneself against others to
know what is appropriate and can ultimately create value (BBRT ,
2009c).
Benchmark against competitors is commonly known and developed
in management research. However, internal benchmarks seem to have
been neglected, although they can play an equally important role . By
knowing what other branches confronted with similar circumstances
have done, what has been successful and what has not, grass-roots
managers can have a wiser approach to their own local practices. Their
decision-making can be wisely informed with others’ successes and
failures, so that they learn from peers’ conduct (Fogarty & Ravenscroft,
2000; Kram & Isabella, 1985).
Ultimately, the objective is to do better than competitors. Therefore,
having a history of what others have done on the market and what
peers have achieved in response to competition is important.

2.2.2 Strategy as a Continuous Process

Strategy should not be perceived as a vague mission statement
articulated once a year in the corporate annual report. If such, strategy
appears as a mere intention or profession of faith but by no means a
direction that all corporate members should follow. As Beyond
Budgeting is concerned about beating competition , it is central that
strategy be clearly defined and assessed. Strategy appraisal does not
only consist of assessing its execution and the consistency of operations
therewith. Rather, strategy itself must be questioned at all times, as
economic circumstances evolve.
In response to possible changes in economic circumstances,
strategy must accordingly be revised instantly. This implies that
strategy appears as set not for the year or the budget period but until
economic circumstances change, hence the company remains at all
times on top of it. Any change in market forces, regulations or
geopolitics may affect corporate strategy and lead to amend it (Porter,
2002, 2008).
Making strategy adaptive also implies that operations should be
adapted instantly. Amending strategy is aimed at shifting corporate
positioning, which can only occur if operations follow (Kaplan &
Norton, 2008; Simons, 2010). Concretely, this implies that corporate
value chain must be adaptive and revised instantly in case of any
strategic shift a change in economic circumstances would impose.

2.2.3 Improvement and Learning

The third principle on improvement and learning proceeds directly
from strategy as a continuous and adaptive process. The Beyond
Budgeting RoundTable suggests that doing without a budget is a key to
success because the organisation can be responsive and adaptive.
Under the purview of responding in time and adapting as an agile
organisation, change management currents cannot apply. It is
traditionally suggested that change management should be longitudinal
and occur over time in a way that does not revolutionise people’s
habits. Beyond Budgeting , in its promoting of agility and
responsiveness, recommends that change must be radical and instant,
not incremental and longitudinal.
The underlying principle is that the timing of incremental change
may be disconnected from that of economic circumstances. Incremental
change operates over a time period often too long to enable
responsiveness and agility. At worst, at the end of the change process,
the organisation is at risk of being at odds with what current economic
circumstances require. Change will have occurred with the dramas
often associated with a revolution in people’s routines and will not have
produced the expected effects.
Through benchmarking and performance assessment, managers
should always be in a capacity of learning from their own actions as
well as from peers’ doings. Through this constant learning process,
managers should be in a capacity of instantly correcting a situation
requiring it (Argyris & Schön, 1996). Radical change can occur at any
level: grass-roots managers, senior executives and board. If it appears
that an activity or a project needs to be prematurely terminated, the
decision must be made instantly and effectuated. Should corporate
value chain be reviewed, this must be done when identified. All told,
Beyond Budgeting prolongs the Six Sigma logic by recommending that
improvement policy be enacted on the spot (Berland et al., 2010).

2.2.4 Resource Management

Whilst conventional budgeting allocates resources for the budget
period—usually the fiscal year—Beyond Budgeting recommends that
resources be managed in a long-term perspective. This implies that
resources be planned and their use controlled not over the year but
over the project’s entire duration. This is the sole condition under
which its overall profitability can eventually be assessed. This relates to
discussions pertaining to product life cycle and target costing .

2.2.5 Coordination Through Cause-Effect Relationships

Whilst budgeting is associated with budgetary control , itself
emphasising figures and unfavourable variances, Beyond Budgeting
recommends that cause-effect relationships should be traced and
managed (BBRT , 2009i, 2009j, 2009n). In this respect, Beyond
Budgeting explicitly borrows from the Balanced Scorecard logic.
Coordinating links in the value chain necessitates that their respective
activity , currents and constraints be understood by others. These
cannot be perceived through mere budgetary figures and conventional
variance analysis (Kaplan & Norton, 1996, 2000, 2006).
Conventional variance analysis highlights favourable or
unfavourable variances from which it is difficult to learn and identify
deep causes. Budgetary control does not give any hint as to the origins
for a favourable or an unfavourable variance. Usually, if a variance is
favourable, managers do not question it; albeit, a favourable variance
could be explained by unexpectedly favourable economic circumstances
rather than organisational efficiency. Likewise, unfavourable variances,
namely relating to labour efficiency, can oftentimes lead to
inappropriate management decision such as disciplinary measures on
employees.
Therefore, by abandoning the budget, Beyond Budgeting
recommends that any internal or external element explaining
achievements should be taken into account. An explanation is
systematically sought for achievements and results, even though these
are in line with expectations. The explanation can be found in internal
business processes, competition structure as well as the political or
regulatory environment . This idea rests upon two principles. Firstly,
appropriate corrective measures can be taken when the cause for a
problem is clearly identified. Secondly, an apparently satisfactory
achievement may hide problems or dysfunctions requiring addressing.
For instance, high sales in volume could be associated with losses’
incurring if sales force grants customers unbearable discounts.

2.2.6 Costs
Within a Beyond Budgeting logic, the notion of cost almost disappears
and is replaced with other concepts, such as expense or investment.
That is, the notion of responsibility centres must be entirely revised.
Whilst budgeting , including capital budgeting (Miller & O’Leary, 1997,
2007; Pfeiffer & Schneider, 2010), sees any link in the value chain as a
cost centre , Beyond Budgeting does not necessarily see those as such
(BBRT , 2009a, 2009j). Traditionally, the budget philosophy consists of
asking how much an action shall cost .
Contradistinctively, Beyond Budgeting consists of asking how much
value can be generated from this expense and how much is needed for
that. Resource management in Beyond Budgeting rests upon the
conception of each link in corporate value chain as an investment
centre , a profit centre or a revenue centre. Costs appear as the
consequence of a strategic project whose expected return is
satisfactory.

2.2.7 Forecasts and Not Tracks

Beyond Budgeting strongly opposes a practice common to budgeting
viewed as a repeat of the previous year’s objectives and allocation with
a coefficient. That is, Beyond Budgeting is strongly associated with
forecasts (BBRT , 2009f; Molridge & Player, 2010). Whilst budgeting is
an incentive to stay on track without caring for the environment and
possible changes in economic circumstances, Beyond Budgeting
recommends that managers should have a vision of what is likely to
occur over the most foreseeable period. Forecasts do not need to be
articulated for a year, since it is unlikely that managers have a 12-
month economic visibility. Consequently, forecasts cannot be
articulated for the entire duration of a project. Depending on the
organisation’s specifics and economic circumstances, the period for
forecasts can vary: it can be a month, a quarter or a semester.
Forecasts’ time horizon and its possible variations lead managers to
articulate rolling forecasts, i.e. forecasts regularly reviewed, as
economic circumstances. Through rolling forecasts, managers can
review their anticipations anytime a change in the environment
justifies it. They do not need to wait until the end of the year to alter
them. As there is no 12-month visibility moreover matching the fiscal
year, it is impossible to allocate resources ex ante. That is, rolling
forecasts are incompatible with a budget’s time horizon and the rigidity
of its resources’ allocating.
As rolling forecasts’ vocation is to be amended as economic
circumstances evolve, they can only serve as a road map for
management and in no way commit people. Rolling forecasts force
managers to formalise in writing and numbers how they perceive the
most plausible way of executing strategy . In this capacity, rolling
forecasts cannot serve as a basis for performance measurement, as
compared to the Master Budget . Controls and performance
management must rest upon other, specific and focused metrics.

2.2.8 Focused Control

Beyond Budgeting is strongly grounded in the Balanced Scorecard logic
that only what can be measured can be managed (Kaplan & Norton,
2000, 2008). The Beyond Budgeting philosophy is associated with the
idea that performance management rests upon the management of
what counts in a way that counts. This implies that controls should
consist of focused key performance indicators and relevant metrics, i.e.
measures directly relating to people’s day-to-day activities. That is,
grass-roots managers’ performance is assessed on the basis of
operational KPIs whilst financial indicators are more of senior
management’s or the CEO ’s responsibility (BBRT , 2009g, 2009h,
2009i; Hope, 2006). Even financials addressed to the CFO need to be
focused, depending on the organisation’s capital structure and financial
constraints. For instance, the CFO in a company owned by long-term
stockholders may be concerned with stock price steadiness and
earnings per share. Conversely, the CFO in a company controlled by a
family may be concerned with return on investments.
In a Beyond Budgeting logic, focused controls and KPIs must be
associated with long-term improvement goals and ranges rather than
fixed targets. Just like rolling forecasts serve as a road map giving a
direction, so should targets and associated KPIs be. It is not the meeting
of an objective at a certain point in time that matters the most but
regularity and steadiness towards it within a reasonable timeframe.
Two examples can be given here. Firstly, sales force’s set target would
not be to make a billion pounds turnover but around a billion, ranging
from 750 millions to 1.25 billion, given what is currently known of the
economic environment . Thence, if sales force realises one billion,
depending on the environment , management can determine whether
this achievement is satisfactory or not. Secondly, if a university seeks to
increase its international ranking, management can determine a certain
amount of ranks that should ideally be taken within a certain number of
years. It would not be realistic and credible to decide that it should be
positioned first in the next ranking.
Central to Beyond Budgeting is that these focused controls should
by no means be compared with a pre-established standard . Rather, any
KPI , be it collective or individual, must be measured relatively to what
peers confronted with similar economic circumstances do. Every KPI
and associated performance should be made publicly accessible to
every manager and employee . Thus, they can compare their
achievements against what internal peers actualise. In case of divergent
performances, it becomes possible to identify what a better performing
peer has done to arrive at this and learn from this. Conversely, it is
possible to determine causes for a lower performance and avert that it
be repeated by others. This implies a full, perfect transparency of
everybody’s objectives and achievements, enabled through IT (BBRT ,
2009m).
Whilst internal benchmarks for performance can easily be utilised,
these are not alone to be relied upon. It is equally important to compare
business units’ performance against what their closest competitors
achieve. Similar business units operating in competing organisations
must be taken as benchmarks, since it is the sole way of determining
how positioned one is vis-à-vis competition (BBRT , 2009c, 2009g). As
with the preparation of business plans, these external benchmarks
require that managers belong to professional networks enabling them
to meet with peers on informal occasions. This informal dimension is
central to the extent that it guarantees freedom of speech and
communication between people and anonymity (Bouty, 2000; Chow et
al., 1999; Dirsmith & Covaleski, 1985).

2.2.9 Incentives
Pursuant to trust in personnel’s commitment, Beyond Budgeting rests
upon the assumption that achievements proceed from collective efforts
and teamwork. Therefore, within this philosophy, individualism should
be banned from organisational management, including performance
management. Compensation, rewards and incentives must be worked
collectively. The underlying idea is that individualised performance
management leads to individualism and internal competition where a
collective approach fosters emulation (BBRT , 2009g).
Individual achievements are supposedly owing to the possibilities
offered by teamwork: if a manager outperforms, this achievement has
been enabled by the work of his or her team. The Beyond Budgeting
philosophy recommends that performance appraisal should not rest
upon individual achievements’ visible signs but seeks to trace cause-
effect relationships and rewards every single effort and contribution
thither. Consequently, if a manager or a department achieves high,
rewards must be shared equally amongst all team members, since this
owes to everybody’s contribution. In return , the Beyond Budgeting
RoundTable argues, employees’ motivation can be enhanced through
such collective recognition, namely because envy or jealousy whither
individual rewards could lead is reduced. Likewise, freeloaders’
behaviour averted (BBRT , 2009g, 2009i, 2009k, 2009l).

2.2.10 Delegation and Devolution

Consistent with trust placed in personnel’s commitment is the need for
delegation and devolution. It is accepted that managers should be
responsible for their project and decisions and therefore could be held
accountable for those. Within a Beyond Budgeting philosophy, this
should operate as two levels.
Firstly, grass-roots managers must be acknowledged as the ones
best knowing their operational environment because they are daily
confronted with it. Pursuant to trust in personnel’s commitment,
devolving grass-roots managers consists of trusting their operational
expertise. Nobody can know better than grass-roots managers what
operations are acceptable and practicable in their local economic
environment . Therefore, the Beyond Budgeting RoundTable
recommends that grass-roots managers could articulate
recommendations relating to the conduct of operations locally and be
heard by top management (BBRT , 2009b, 2009k). Acknowledging
grass-roots managers’ and employee ’s local expertise should result in
favouring bottom-up information flows and recommendations for
management. Grass-roots people can determine the strategy ’s local
feasibility or a need for strategic adaptation.
 Secondly, the project-based management associated with Beyond
Budgeting imposes that grass-roots managers, in their capacity as
project managers, be totally free of their actions and decisions. They
must be able to manage their resources on their own, from spending to
staffing and rewarding. Such freedom cannot work without clear
boundaries expressed through accountability mechanisms (Simons,
2005). A project manager must be held accountable for the extent to
which his or her project meets the four criteria on the basis of which
funding is granted. This requires that a clear contract be set between a
project manager and company senior management, explicitly
determining their respective roles and duties.

3 Beyond Budgeting at Svenska

Handelsbanken
Amidst other cases developed by Hope and Fraser (2003a) and Bogsnes
(2008), the iconic organisation that has gone Beyond Budgeting is
Svenska Handelsbanken—the Swedish Bank of Commerce.

3.1 From Small Towards the Model for Banks in the World
This bank’s story in relation to Beyond Budgeting commences in 1972
when Jana Wallander joins the company in the capacity of its new CEO .
At that time, the company was one of the smallest banks in Scandinavia
and was known for underperforming in comparison with its peers. Jan
Wallander’s main mission consisted of reviving the bank and transform
it into the first retail bank in Sweden.
The objective he was assigned was to make Svenska Handelsbanken
rank first everywhere it has a branch open. After this objective could be
met in Sweden, it was broadened to the whole of Scandinavia: Svenska
Handelsbanken’s strategy was to be ranking first everywhere across
Scandinavia, i.e. Sweden, Norway, Finland Denmark and Iceland.
Afterwards, it became important that it be visible on the international
financial scene by being present in London.
45 years after Jan Wallander initially joined, Svenska
Handelsbanken counts 550 branches and 20 city offices in about 22
countries. As it developed worldwide and stepwise met its strategic
objectives, Svenska Handelsbanken has outperformed its peers:
earnings per share are 30% against 11% for most other banks; return
on equity is 12% against 8% for others. Risk and required core capital
is 5% against 9% for most other banks. All told, Svenska
Handelsbanken is nowadays the most profitable and the least risky
bank in the world, this success being ascribed to Jan Wallander’s
decision to abandon the Master Budget and do otherwise.
The company is now the most popular employer across Scandinavia,
offering wonderful career opportunities to graduates who, upon
joining, can expect higher responsibilities than in any other
organisation. Svenska Handelsbanken attracts the best talents from
Scandinavian universities and alumni from the most prestigious higher-
education institutions. All told, Svenska Handelsbanken can count on
devoted employees with strong business networks and capabilities of
doing informal benchmarking.

3.2 Grass-Roots Management

When abandoning the Master Budget , Svenska Handelsbanken opted
for a model whereby account managers would submit an application
for a loan funding directly to the CEO office. In order for this to be made
facilitated, the company adopted a flat organisation consisting of three
layers. At the top of the hierarchy is the cabinet comprising of the CEO
and the CFO . Below the cabinet was the region director, more or less
supervising a country. That is, there were five region directors, one for
Sweden, one for Norway, one for Denmark, one for Finland and one for
Iceland. At the bottom of this flat hierarchy were account managers, i.e.
frontline officers dealing directly with clients. Every single officer was
considered a strict equal to his or her peers in the five countries.
This flat organisation has resulted in the bank being structured
around c.600 business units operating as profit centres. Consequently,
each branch was totally autonomous and independent from the centre.
The underlying assumption was that local, grass-roots bank officers
were the most capable of knowing what their clients need and what
competitors’ branches do offer. Corporate strategy was simple: every
single branch should be ranking first in its area. Assessment criteria
were covering the number of clients, the total amount of money on
their accounts, loans granted in value and return on loans, including an
appraisal of the risk associated. In order to become first, branches were
required to attract more new customers and funds than their direct,
local competitors. It was the evolution quarter after quarter that was
serving as a basis for appraising strategic objective’s meeting.
Knowing their local clientele and its economic circumstances,
frontline officers were considered most capable of identifying local
needs and offerings. Therefore, what contributed to making Svenska
Handelsbanken meet its strategic objective and rank first everywhere it
had a branch was the fact that loan applications were processed
instantly. Conversely, competitors, i.e. competitors’ branches, were to
apply for funding from corporate budget, application being to be
approved by numerous hierarchical levels. In Svenska Handelsbanken’s
case, local loan officers would prepare a business plan for every single
loan application, in which they would specify how this contract
contributes to ranking first in the area, creates financial value at the
lowest possible risk , beats competitors and guarantees long-term
relationships with clients. That is, longer-term loans would be
privileged over short-term credits. The amount required and the
interest rate applied appeared as the consequence of the contract and
granted, provided the aforementioned four criteria were met. Within
less than 24 hours, the regional manager ’s office would process the
loan application, assessing consistency with the four criteria and
ensure that this particular loan remains consistent with other loans
granted by other branches operating in the region. Within another 24
hours, the CEO ’s office would give a final approval and make the funds
available to the local loan officer. In comparison, other banks would
need at least a week until a loan application was processed and about
ten working days until funds would be made available.
Assumedly, a bank is used to lending money and can count on
routines in the processing of loan applications. Albeit, when a loan
application covers an unusually high amount of money, an unusual
project or contract duration, a special treatment would be required.
This would in a conventional bank exceed amounts authorised in the
budget. At Svenska Handelsbanken, provided the application was
convincingly proving that this particular loan would meet the four
assessment criteria, there was no objection on funding.
 Noticing in the 1980s that suburbs are not all confronted with
similar economic circumstances, the bank sorted branches by type of
clientele: wealthy district, poor district and middle-class district.
Thence, a SEK 10,000 loan (c. GBP 1000) in a poor district would be
strategically as profitable as a SEK 1,000,000 loan (c. GBP 100,000) in a
middle-class area: in either case, this could attract a new customer who
would not go to a competitor. In a poor suburb, what is strategic is to be
capable of lending low amounts with simple instalments. Unlike this, in
a wealthy district, the branch’s strategic concern was to be capable of
lending a high amount of money and offering customer -tailored
funding. What was common to either type of branch was the
contribution to ranking as the first retail bank in the area.
What contributed to Svenska Handelsbanken’s success was the fact
that loan officers would not be affected by funding shortage at the
cabinet. It was the CEO ’s role to make sure that sufficient funding
would be available for every loan application received and approved.
The CEO ’s role shifted from a mere financial controller to that of a
corporate fund-raiser, equity and bonds being issued with great ease
when additional financing was needed. Obviously, this practice was the
exact opposite to budgeting where loan officers would know in advance
how much money they are allowed to lend for the year. This budget
logic would have led to two possible behaviours from loan officers, as
observed in different banks. Some would privilege high, risky loans at
the expense of day-to-day consumption needs. Conversely, some others
would have favoured micro-loans and portfolio diversification at the
expense of highly profitable projects. In either case, the bank neglects
part of its clientele and is likely to fail at reaching the first rank in the
area.

3.3 Benchmark-Based Performance Management

As Svenska Handelsbanken has abandoned the Master Budget ,
performance is not assessed against a pre-established standard .
Rather, it is assessed against two benchmarks: an internal and an
external one. What is deemed pertinent is competitors’ actual
achievements in the area in which a branch operates. The assumption is
that a branch’s performance must be compared with what its direct
competitors confronted with exactly the same economic circumstances
achieve. Thus, at the branch level, the number of new clients, expected
deposits, the amounts lent and the expected risk and return on these
are compared with competitors’. It was thence very easy to identify
whether a local branch was eventually in a capacity of ranking first in
its area.
The second benchmark utilised for performance management was
that of an internal, different branch confronted with substantially
similar economic circumstances. That is, the performance of a branch
operating in a wealthy area would be compared to the achievements of
a different branch operating in a similar area of wealth. Performance
would be assessed in a twofold way. Firstly, through IT, the activity and
therefore performance of every loan officer and branch is made visible
to all peers. That is, processes and achievements are perfectly
transparent to all employees. Accordingly, owing to a Panopticon effect,
contrary to other banks, such as Lehman for instance (McDonald &
Robinson, 2009), loan officers would be extremely cautious when
approving a loan and submitting an application for funding. As
everybody else could know who approved what project, their
professional reputation would have been undermined in case of
excessive risk -taking. Activity visibility enabled through IT would
result in self-regulated lending behaviour . Secondly, visibility could
provide loan officers with valuable insights and advice from situations
similar to one confronting them. In other words, local loan officers
would not feel isolated in their professional activity and would
constantly be in a capacity of learning from peers, even if these operate
at a distance.

3.4 Collective Incentives and Rewards

Employees would first be on a salary with a flat component. Operating
in Scandinavian countries concerned with equality of treatment,
employees’ flat rate was negotiated collectively through the work of
unions, leaving little or no room for individual bargaining. What is more
interesting and original is the structure of variable compensation and
other rewards. These were comprising of three components.
The first layer of Svenska Handelsbanken employee ’s variable rate
consisted of an equal sharing of a third of the surplus redistributed. The
assumption was that corporate performance was owed to the
commitment of every single employee with no distinction. No employee
or no function was deemed superior to others. Those employees whose
visible performance was especially high could achieve this because of
other employees’ help and commitment whose performance cannot be
as easily measurable. Accordingly, a local loan officer, a PA or a porter
would receive the same amount of money from the bank’s surplus.
The second layer of variable compensation consisted of sharing
one-third of the redistributable surplus across regions in accordance
with their relative contribution to global performance . A region whose
contribution was deemed stronger than another would share a higher
amount of the overall surplus. Within the region, as within the branch,
all employees would receive the same amount of money, the underlying
assumption remaining identical.
The third level of variable compensation consisted of sharing the
last third of the redistributable surplus across types of branches, owing
to their economic circumstances. That is, depending on their relative
contribution to the meeting of the global strategic objective—being
ranking first in every area where it operates—branches would receive a
distinctive amount. It would not make a difference granting low loans in
a poor suburb or high amounts in wealthy district, since the basis for
performance assessment was position vis-à-vis competitors. Within the
branch, all employees would receive the same variable compensation.
Importantly, however, every branch would receive a variable rate, as a
reward for the effort made. Obviously, if a branch were found
underperforming, management would seek for the reasons for this
situation and endeavour to devise solutions. As a result, well-
performing branches in poor districts could have higher rewards than
average performing branches in wealthier suburbs.
Financial rewards had no individual component, management
fearing that this would foster competition amongst employees instead
of emulation. The assumption was that differentiating between
employees would undermine corporate cohesion and teamwork.
Therefore, individual rewards, in case of employees deserving a special
acknowledgement, would remain symbolic. Depending on employees,
their role and personal aspirations, symbolic rewards would take
different forms, such as an invitation to a dinner party with the CEO
and other VIP guests, a booking in a nice resort for a holiday or a
weekend, vouchers redeemable in certain shops, or just an
acknowledgement as the employee of the month.

4 Conclusion
Beyond Budgeting appears as a radical alternative to the budgeting and
budgetary control whose limits are bitterly critiqued. This said, Beyond
Budgeting raises a series of questions that cannot be answered as yet
but need pondering. The first of these questions is to know whether
Beyond Budgeting is really an alternative or just a return to ideal
budgeting , as it was initially intended—see Bat’a (Libby & Lindsay,
2009; Rickards, 2006). The second question that can be asked is that of
the cultural dimension: Can Beyond Budgeting successfully be applied
in non-Scandinavian contexts? Is Beyond Budgeting limited by the
Scandinavian egalitarian culture ? The third question appears as the
counterpart of the former: in its promoting of radical change and
instant re-engineering, how compatible is the Beyond Budgeting
philosophy with contexts other than North American? This question is
especially critical since the cases usually presented are success stories.
There is no known evidence of failure stories where re-engineering
imposed by the need for radical change would have clashed with
culture or regulations. This is the fourth question: Is Beyond Budgeting
especially applicable in companies already financially viable? The fifth
question proceeds from the iconic case itself: Could Beyond Budgeting
easily apply to other industries? Is Beyond Budgeting limited to
industries where investments are not characterised by high asset
specificity and low liquidity? Obviously, there is insufficient evidence of
Beyond Budgeting practices to date to determine the reach of what is
promoted as a radical alternative to budgeting and budgetary control .
The business community does not have enough hindsight to know how
applicable this philosophy is.
Notwithstanding these questions left unanswered by Beyond
Budgeting , what characterises this management philosophy is that
everything should proceed from strategy , not from a budgetary
constraint. Rather, strategy should determine operations, which, in
turn, determine the necessary funding and controls. All told, the
Beyond Budgeting philosophy suggests that controls, finance,
operations and strategy should be perfectly aligned.

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Conclusion
This volume’s five chapters insisted on management accounting’s
necessary grounding in strategy . To this end, each of them addressed
one particular dimension of strategy and discussed its delineating into
controls. In this respect, this book entirely subscribes to the Harvard
Business School tradition of seeing in controls a set of technologies
aimed at following strategy execution (Anthony, 1965, 1988; Anthony,
Dearden, & Bedford, 1984; Kaplan & Norton, 2008). These five chapters
provide the reader with a methodology for analysing a company prior
to implementing or utilising a management control system. In this
respect, this volume echoes Porter’s seminal work on techniques and
tools for analysing business and competition (Porter, 1980). It also
echoes Jeremy Hope and Benjamin Fraser’s provocative work calling for
budget-killing (Hope & Fraser, 2003a, 2003b) by replacing cost
accounting logic by a value accounting logic. Rather than seeking how
much things cost , strategic management accounting emphasises how
much value can be generated; whence a constant emphasis on the value
chain .
Outwith the interest this can have for prospective management
accounting graduates and practitioners, this volume is grounded in the
most recent advances in management accounting and related research.
In other words, these five chapters relate to contemporary and ongoing
academic debates. Based on these premises, five lessons can be learnt
from these five chapters. This does not mean one lesson should be
retained from each chapter, but rather five transversal lessons common
to all of them.
The first lesson that can be learnt is that management control
systems necessarily proceed from a strategic reflection. This first lesson
is owed to the fact that the necessity of defining a clear strategy with
manageable objectives through tangible achievements is too often
neglected. Such is especially visible in settings where management
control is collapsed to budgeting , cost accounting and CVP analysis
(Hope & Fraser, 2003a; Kaplan & Johnson, 1987). Albeit, too many
organisations rely on irrelevant or useless controls at odds with their
strategic currents: controls inherited from World War II’s aftermath
and suitable at the time of steadily growing manufacturing companies
operating on growing national markets find themselves applied to
other types of organisations at the information age (Hope & Fraser,
1999a, 1999b). In other words, these traditional controls taught in
most management accounting courses and textbooks are relied upon
without sufficient discernment, which has caused a loss in relevancy
(Hope & Fraser, 2003a; Kaplan & Johnson, 1987). The first lesson that
can be learnt from these five chapters is that management control
systems are company-and-strategy -specific. Controls working in a
particular setting may prove inappropriate in a different one: controls
are contingent. Even though this idea in itself is not really new, since it
has long been defended by Contingency Theorists (Bhimani &
Langfield-Smith, 2007; Bisbe, Batista-Foguet, & Chenhall, 2007; Burns
& Stalker, 1961; Chenhall, 2003, 2005; Chenhall & Euske, 2007;
Chenhall & Smith, 2010; Langfield-Smith & Smith, 2003; Lawrence &
Lorsch, 1967; Otley, 1980), non-traditional contingency factors brought
into the discussion, thereby forcing trans-disciplinary approaches and
the end of silos.
The second lesson that can be learnt relates to strategy ’s main
features. Arguably, these are commonplace to strategic management
scholars and consultants in strategy : generic strategy , position on the
market , mode of production and stage in product life cycle . Even
though these strategic five tiers are nothing really new per se, they can
be for a fair amount of management accounting students and graduates.
Having taught in Australia for close to a decade, I have noticed that
almost all my postgraduate students are highly technical specialists in
their realm but pretty ignorant of non-accounting matters. Most of
them had never heard of Michael Porter’s work or of the models
articulated by the most famous consultancy firms in strategy , such as
McKinsey, the Boston Consulting Group or A.D. Little. That is, their sole
idea of strategy seemed to lie in what companies were advertising. In
particular, I remember a notion of strategy a student of mine
articulated and which left me really perplexed: Holden’s strategy (the
Australian automaker) was to provide the customer with a unique drive
experience. Hearing this, I had no idea at all what this could mean in
fact. And yet, my student was very proud of herself. Therefore, future
management accounting prospects reading this book can retain these
four tiers enabling a strategic analysis prior to deciding on the controls
that should be implemented and utilised.
This leads to the third lesson that can be learnt from this volume:
how the business environment impacts on a specific company’s
operations and can interfere with its performance . These five chapters
insist on the fact that an organisation does not exist in isolation from
others and the rest of the world. Prolonging this idea further can even
lead to claim that a company’s management control system itself is
influenced by the environment . Borrowing from Michael Porter’s work,
this claim implies that the environment cannot be reduced to
competitors, too often presented as something abstract. Rather than
just comprising of these mere competitors, the corporate environment
comprehends products on the market , suppliers and consumers.
Extending the environment ’s boundaries outwith the business world,
these include macroeconomic circumstances and geopolitical issues.
Even though not every organisation is equally impacted by changes in
each of these environmental features, being conscious of their existence
and influence is central to making a savvy management accountant. By
understanding the features of the Chinese economy’s growth , my
students could anticipate the business model of Australian mining
companies but also the growing demands on them for integrated
reporting.
The fourth lesson that can be retained from this first volume’s five
chapters lies in the sense made of a commonplace claim that
management accounting is at the organisation’s core and plays a central
role . This claim is usually articulated in most textbooks’ introductory
chapter without being really substantiated or developed in subsequent
chapters. These five chapters show how management accountants’
work implies steady interactions with other corporate functions from
operations, marketing , human resources, finance or even legal. In other
words, the third lesson that can be learnt is that management
accounting’s main function consists of putting corporate functions’
concerns into relevant numbers. Even though these numbers are often
expressed in monetary terms, such is not the case at all times.
Management accounting produces numbers that count for a specific
audience and in a way that counts for these people (Kaplan & Norton,
1996, 2000, 2004). This point is especially vivid when the value chain is
being designed and its links’ performance managed: different people
have different expectations management accounting should
appropriately fill.
The fifth lesson that can be learnt from this first volume lies in the
fact that management accounting is systematically presented as future-
oriented. This comes in contradistinction to most textbooks presenting
management accounting as a rear-view mirror practice (Hope & Fraser,
2003a, 2003b). Such orientation towards the past is especially vivid in
conventional presentations of the Master Budget and CVP analysis in
the guise of performance management. In this volume, each chapter
shows how management accounting serves to draw and manage a road
map for management. Management accounting is strategic insofar as its
technologies and calculations are directed at anticipating and
estimating what is likely to happen in a foreseeable future. The
monetary dimension, traditionally and mistakenly summarised as how
does this cost (Kaplan & Johnson, 1987; Kaplan & Norton, 2006, 2008),
appears at the end of the chain in strategic management accounting, i.e.
the consequence of this strategic thinking. This is how strategic
management accounting ultimately aligns strategy , operations and
finance.

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Index
A
Accountability
Activity
Audit
Authorities
B
Backsourcing
Balanced Scorecard
BBRT
Behaviour
Belief
Beyond Budgeting
Break-even
Budgetary control
Budgeting
Bureaucracy
C
Cam-I
CEO
CFO
Challenger
Commercial policy
Companies
Competition
Conflict
Consumer
COO
Coordination
Cost
Cost centre
Cost domination
Costing
Culture
Customer
Customer relations management
CVP analysis
D
Debt
Decline
Differentiation
E
Employee
Environment
Equity
Ethnicity
Expense
F
Firm
Fiscal
Follower
G
Government
Growth
H
HR manager
I
Identity
Incumbent
Investment centre
K
Key Performance Indicator (KPI)
L
Labour
Launch
Law
Lawyer
Lean production
Learning
Logistics
M
Manager
Managerial accounting
Market
Marketing
Mass production
Master Budget
Materials
Maturity
Measure
Mission
Mode of production
N
New Public Management
O
Overhead
P
Parliament
Performance
Planning
Policy
Political
Position on the market
Product
Production
Product life cycle
Profit
Profitability
Profit centre
Public Choice
Q
Quality Management
R
R&D
Regulation
Return
Risk
Role
S
Standard
State
Statistical Process Control
Strategy
Supplier
Supply Chain Management
T
Target cost
Tax
Total Quality Management (TQM)
V
Value
Value chain
Variance analysis
Z
Zero-base budget