Part A Strategic planning and control
Ho Xin
Semester 2, 2012
Introduction to strategic management accounting
Performance management and control of the organisation
Business structure, IT development and other environmental and ethical issues
Chapter 1 Introduction to strategic management accounting
Ho Xin
Content
Planning, control and decision making
Management accounting information
Strategic planning and control
Techniques used in strategic planning and control
Factors impacts on strategic planning
1. Introduction to planning, control and decision making
Planning
decision making
Control
Strategic
Management
Operational
Ex. Go shopping
Planning and control are two sides of the same coin.
Anthony, Management Control System
Strategic planning
Management control
Operation control
The process by which management assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives
Anthony, Management Control System
Strategic planning is the process of deciding on the goals of the organization and the strategies for attaining these goals.
“Management control is the process by which managers influence other members of the organization to implement the organization's strategies.“ It is the processes by which (1) organizational objectives are achieved and (2) the use of resources is made effective and efficient.
Task control is the process of ensuring that specific tasks are carried out effectively and efficiently. The focus of operational control is on individual tasks or transaction.
The essential difference between strategic planning and management control is that the strategic planning process is unsystematic.
Control can be strategic or operational.
Strategic control is concerned with monitoring the implementation of the organization’s strategy to ascertain how well the strategic objectives are being achieved, . managing shareholder expectations.
Operational control systems are designed to ensure that day-to-day actions are consistent with established plans and objectives. It focuses on events in a recent period. Operational control systems are derived from the requirements of the management control system. Operational control will not lead to changes in that strategy.
Five-Step Decision Making Process
Identify the problem and uncertainties
Obtain information
Make predictions about the future
Make decisions by choosing between alternatives
Implement the decision, evaluate performance, and learn
2. Management accounting information for strategic planning and control
Future uncertainty
Long period, big changes and new ventures
MAI will be based on incomplete data and will use forecast and estimate.
Unlikely to give clear guidelines for management decisions and incorporate some risk and uncertainty analysis.
For long term plans, DCF techniques ought to be used in financial evaluation.
The management accountant will be involved in project evaluation, managing cash, operational matters and reviewing the outcome of the project and so on.
External and competitor orientation
Environment consideration
A strategy is pursued in relation to competitors.
The challenge for management accountants
Traditional accounting systems have had a number of perceived failings.
More relevant information for strategic planning, control and decision making may not be provided by traditional management accounting systems.
Strategic management accounting
Strategic management accounting is a form of management accounting in which emphasis is placed on information about factors, which are external to the organisation, as well as on, non-financial and internally-generated information.
External orientation
Future orientation
Help to ensure Goal congruence
competitor’s costs, product profitability or customer profitability
How performance management fits into strategic planning and control
Performance management is a way of trying to:
Direct and support the performance of employees and departments, so that they work as efficiency and effectively as possible.
Ensure that individual goals are aligned with the organisation’s overall goals and business strategy.
Strategic planning, performance measurement and monitoring, business intelligence, analytics, people management, financial planning and budgeting, data warehousing, risk management, business process re-engineering, knowledge management, dashboards and scorecards, and key performance indicators.
How performance management fits into strategic planning and control
Performance management systems
Plans, with set guidelines and targets, to help measure how efficiently goals are being met, and identify areas where performance can be improved.
Can be linked to reward programmes.
Performance management
People management, performance monitoring
Performance management system
Should be:
Derives from the company’s strategic objectives
Have clear links between performance measures at the different hierarchical levels
Strategic planning is necessary before any performance management can take place.
3. Corporate planning and corporate objectives
Strategic / corporate / long-range planning involves formulating, evaluating and selecting strategies to enable the preparation of a long-term plan of action to attain objectives.
Corporate objectives concern the firm as a whole.
Strategy is the direction and scope of an organisation over the long term which achieves advantage in a changing environment, through its configuration of resources and competences with the aims of fulfilling stakeholder expectation.
Strategic planning model
What it is good at
How the market might change
How customer satisfaction can be delivered
What might constrain realisation of the plan
What should be done to minimise risk
What actions should be put in place
Strategic planning model
The rational model of strategic planning (Johnson, Scholes and Whittington, 2008)
Strategic analysis
Strategic choice
Implementation
Strategic analysis-> p27
Mission and /or vision
Goals
Objectives
Corporate appraisal (SWOT analysis)
Gap analysis
maximization of shareholder wealth (usually via maximizing profit)
maximization of sales (whilst earning an acceptable level of profit)
growth (in sales, asset value, number of employees etc.)
survival
research and development leadership
quality of service
contented workforce
respect for the environment
Strategic analysis stage—a range of objectives (Step 3)
Strategic choice – C3, 4, 7, 8, 14
Strategic options generation
Strategic options evaluation - SAFE
Strategy selection - How and where you compete with who
Competitive strategies
Product-market strategies
Institutional strategies
Strategies are required to ‘close the gap’
Competitive strategy- for each business unit,
Directions for growth- which markets/products should be invested in
Whether expansion should be achieved by organic growth, acquisition or some form of joint arrangement
Strategy selection
Types of strategy
Corporate strategy
Business strategy – a particular market or BU.
Cost leadership
Differentiation
Focus
Operational and functional strategies
Strategy implementation
Formulation of detailed plans and budgets – resource, operation planning and so on.
Target setting for KPIs(Key Performance Indicators)
Monitoring and control
Strategy implementation
The planning of implementation is multi-layered.
Resource planning
Operations planning
Organisation structure and control system
4. Planning and control at strategic and operational levels
Strategic
‘Broad brush’ target
Whole organisation
External input
External focus
Future-orientated feedforward control
Potential for double loop feedback
Operational
Detailed
Department activities
Mainly internal information
Internal focus, on actual procedures
More concerned with monitoring current performance against plan
Mainly single loop feedback
Case: BMW
Strategic
2007-2020
Increasing sale to more than two million automobiles per year.
Number One
New Opportunities
New efficiency
Operational
Short-term customer demands and market requirements
Linking strategy and operations
An example from George Brown(1994)
A company that adopts new management ideas like TQM, JIT and ABC as its strategy for dealing with a high level of customer complaints.
The company is trying to improve quality and speed of delivery while controlling costs, but it faces a number of problems.
Unrealistic plans
Inconsistent goals
Poor communication
Inadequate performance measurement
Strategic control
Is the organisation on target to meet its overall objectives and is control action needed to turn it around?
Strategic control system
Formal and informal systems of strategic control ->
Gaps and false alarms
Gaps are important areas that are neglected.
Many firms measure the wrong things and do not measure the right things.
False alarm motivate managers to improve areas where there are few benefits to the organisation.
Different measures apply to different industires.
Strategic control systems
Four influence on a strategic control system:
Time-lag between strategic control measures and financial results
Linkages with the other business in a group
The risks the business faces
The sources of competitive advantage
Informal control
Many companies do not define explicit strategic objectives or milestones.
Informal control does not always work.
formal systems of strategic control
Strategy review
Identify milestones of performance
Set target achievement levels
Formal monitoring of the strategic process
Reward
Critical success factors (CFSs) is central to performance management:
Strategic analysis
Internal analysis to identify the firm’s resources and core competences
External analysis to identify CFSs in markets
Strategic choice
Select strategies where the firm has (or can acquire) the core competences to meet the CFSs in the markets concerned
Strategic implementation
Formulation of detailed plans and budgets
Target setting for KPIs for each CSF
Monitoring and control- especially of core competences
formal systems of strategic control
Guidelines for a strategic control system
Formality of the process + how many milestones
Goold and Quinn – ‘LD 3D’ guidelines
Linkage
Diversity
Criticality
Change
Competitive Advantage
Example: strategic control report
Evaluate the reality of the strategies
Format of the strategic control report
Strategic performance measures
Different from strategy control measure
Strategic control measures might require complicated trade-offs between current financial performance and longer-term competitive position, and between different desirable ways of building competitive strength. The main task is to ensure that the right things are measured.
Roles of measures, desirable features
Focus attention on what matters in the long term
Identify and communicate drivers of success
Support organisational learning
Provide a basis for reward
Strategic performance measures
Characteristics of strategic performance measures
Measurable
Meaningful
Defined by the strategy and relevant to it
Consistently measured
Re-evaluated regularly
acceptable
Budgeting
The purpose of budgets -PRIME
Negative effects
Distinction of budgets between strategic and operational levels of a business.
Stages of international development
Domestic stage
International stage
Multinational stage
Global stage
5. Strategic management accounting in multinational companies
Multinational organisations have a central headquarters in one country and subsidiaries in one or more other countries.
Why to set up a foreign subsidiary?
Market issues
New markets
Competitive strategy
Other reasons
strategic and tactical issues
Natural resources strategy, Manufacturing strategy, Commercial strategy, Investment strategy
Managing overseas subsidiaries
Planning
How much control?
Staffing
The modern trend in international business is towards network and alliances.
Which markets should the company enter?
Generally organisations should enter fewer countries in the following circumstances.
Market entry and market control costs are high.
Product and market communications modification costs are high.
There is a large market and potential growth in the initial countries chosen.
Dominant competitors can establish high barriers to entry.
Three criteria for the decision:
Market attractiveness
Competitive advantage
Risk.
differences between domestic and international business
PECTC
Cultural factors -4
Economic factors -4
Competitive factors -2
Political factors -1
Technological factors -1
Control and structure
General policies and particularly financial policies in multinational organisations are often specially designed to further the goals of the parent company, and only incidentally those of subsidiaries or host countries.
Avoid taxes, minimise risks or achieve other objectives.
Control and structure
High
Global product structure
Global heterarchy
Low
International division
Global geographic structure
Low
High
Multidomestic opportunities
Globalisation opportunities
Global matrix structure
Model for global vs. local opportunities
Globalization Strategy
means that product design and advertising strategy are standardized throughout the world.
Coca-Cola
Multidomestic Strategy
competition in each country is handled independently of competition in other countries.
Proctor & Gamble
International Division
Global Product Structure
Global Geographic Structure
Global Matrix Structure
Global Heterarchy (Hedlund, 1986)
large transnational firms
whole world as their playing field
no single country base
local and global advantages
complex multidimensional structure
Global Heterarchy (Hedlund)
Differences from Matrix Structure
Many centres
Stratic role for MNC of subsidiary managers
Different kinds of centres
Coordination through corporate culture
Global Heterarchy (Hedlund)
Differences from Matrix Structure
Degree of coupling between units
Holographic organization
„firm as a brain“ rather than „brain of the firm“
Coalitions
Managers have authority
financial performance issues in multinational organisations
International comparisons
The problems for performance measurement:
Realistic standards
Controllable cash flows
Currency conversion
Basis for comparison
Strategic management accounting in multinational companies
External orientation
Future orientation
Goal congruence
Challenges for the organisation’s planning and control system
Generic strategy
Value chain
Cost drivers
Competitor analysis
6. Strategic planning vs. short-term localised decision
The importance of goal congruence, mutually supportive hierarchically, functionally, logistically and in wider organisational senses
Trade-off between lone-term and short-term objectives
Centralised strategic planning and short-term, localised decision-making
strategic planning or ‘freewheeling opportunism’
Advantages:
Good opportunities are not lost.
Adapt to change more quickly
Encourage a more flexible, create attitude.
Disadvantages:
No co-ordinating framework
Emphasis the profit motive
Reacting all the times rather than acting with a purpose.
The freewheeling opportunism approach suggests:
firms should not bother with strategic plans and
should exploit opportunities as they arise.
This allows decision making at all levels of the organisation.
Management accounting and freewheeling opportunism
No careful rountine of planning, seize such opportunities that arise. But not all ‘opportunities’ will work out.
The management accountant’s role will be investigative.
7. SWOT analysis and performance management
Corporate appraisal (SWOT analysis) is a critical assessment of the strengths and weaknesses, opportunities and threats affecting an organisation to establish its condition before the long-term plan is prepared.
Internal appraisal: Strengths and weaknesses
External appraisal: opportunities and threats
A SWOT analysis must first start with defining a desired end state or objective. A SWOT analysis may be incorporated into the strategic planning model.
A key part of strategic analysis
Corporate appraisal
External
1. The macro-environment
The PESTEL analysis
Building scenarios
2. Industries and sectors
the five forces model
The dynamics of industry structure
3. Competitors and markets
Strategic groups
Market segments
Identifying the strategic customer
critical success factors
Internal
The value chain and value network
Activity maps
Benchmarking
External appraisal: opportunities and threats
PEST analysis
The PEST factors combined with external micro-environmental factors can be classified as opportunities and threats in a SWOT analysis.
SWOT alongside PEST/PESTLE can be used as a basis for the analysis of business and environmental factors.
Porter’s 5 Forces model
道斯矩阵、态势分析法
SWOT matrix
S-O strategies pursue opportunities that are a good fit to the company's strengths.
W-O strategies overcome weaknesses to pursue opportunities.
S-T strategies identify ways that the firm can use its strengths to reduce its vulnerability to external threats.
W-T strategies establish a defensive plan to prevent the firm's weaknesses from making it highly susceptible to external threats.
SWOT analysis
Evaluation of the relative importance of the various factors.
Whether they are perceived to exist by the consumers
Threats and opportunities should be independent of the firm.
Exploit, match
Counter or a contingency strategy, conversion
The SWOT technique can also be used for specific areas of strategy such as IT and marketing.
Conversion
Conversion
SWOT analysis and the performance management process
SWOT analysis can provide a valuable guide to the performance management process
Shortcoming, CSFs, the information need, setting targets
SWOT may not be useful in setting operational measures as these are likely to be too detailed for a SWOT analysis.
Case: Nike
8. Benchmarking
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries.
Benchmarking is the establishment, through data collection, of targets and comparators, which will allow relative levels of performance (and particularly areas of underperformance) to be identified.
By the adoption of identified best practices, it is hoped that performance will improve.
Benchmarking sets targets using external information.
Dimensions typically measured are quality, time, and cost.
Types of Benchmarking
Internal benchmarking
Industry benchmarking
Competitor benchmarking
Non-competitor benchmarking
Functional benchmarking
Competitor benchmarks:
Market share
Return on assets
Gross profit margin on sales
Functional benchmarks:
% deliveries on time
Order costs per order
Order turnaround time
Average stockholding per order
7-Stages of benchmarking
Step 1 Set objectives and determine the areas to benchmark - Decide on activity to be benchmarked
Step 2 Establish key performance measures - Study activity in own organisation
Step 3 Select organisations to study - Identify suitable benchmarking partners
Step 4 Measure own and others’ performance - Analysis activity of partners to identify features accounting for superior performance
Step 5 Compare performance
Step 6 Design and implement improvement programme - Adopt ‘best practices’
Step 7 Monitor improvements
Step 1 Set objectives and determine the areas to benchmark
Levels of benchmarking
Resources
Competences in separate activities
Competences in linked activities
A key question within Step 2 is deciding what should be benchmarked.
The resources of information in Step 4:
Financial information
Information about products: Reverse engineering, product literature, media comment and trade association
Information about processes is more difficult to find. – group companies or possibly non-competing organisations in the same industry.
8. Benchmarking
Benefits
Benchmarking and strategic position
Benchmarking and competitive strategy
Other reasons for benchmarking
Disadvantages of benchmarking
Reference
Kaplan, Norton. Strategic-focus organisation, 2001
亨利.明茨伯格，布鲁斯.阿尔斯特兰德，约瑟夫.兰佩尔，刘瑞红，徐佳宾， 郭武文译，战略历程－纵览战略管理学派，机械工业出版社，2001
Stefan Tangen, (2004) "Performance measurement: from philosophy to practice", International Journal of Productivity and Performance Management, Vol. 53 Iss: 8, - 737
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Managers carry out three main activities – planning, directing and motivating, and controlling.
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