Download STRATEGIC MANAGEMENT ACCOUNTING CUAC 412 CHAPTER

STRATEGIC MANAGEMENT ACCOUNTING CUAC 412
CHAPTER OBJECTIVES
1. Explain role of strategic management accounting
2. Discuss major features of SMA
3. Analyse techniques used in SMA
4. Explain strategic planning and control.
5. Explain strategic planning process
6. Explain the role of management accountant
STRATEGIC MANAGEMENT ACCOUNTING

A strategic plan of an organisation is the bridge which tries to connect the
available resources with the corporate objectives.

It indicates how the organisation will allocate resources to attain its objectives.
Definition of strategic management accounting

Is a set of tools which provides the planners with all important inputs, facts,
figures and documents on which to base their plans?

Mainly focuses on the organization’s external environment and long-term process.

It adds value to strategic decisions by linking strategic objectives of the firm at
corporate and business unit levels by use of financial information systems and
performance measures.

Focuses attention on suppliers, customers and competitive rivals.
Major characteristics of SMA
a) External orientation---------focuses on

Competitor information – (cost prices, market share) in developing and monitoring
business strategy.

Suppliers and customers –contribution to value chain perspectives (market) by
looking at products offered to satisfy customer demands.
b) Long term process

Focus on using qualitative and quantitative (internal and external) in the strategy
formulation of a business.
c) Forward looking

Provides information about potential changes in the market, competitor, customer
choices, and supplier profile.
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d) Holistic approach

Collects all information that may impact on the business from all spheres of the
business, including the internal sources of the organisation for example besides looking
at customer preferences, target age group also looks at cost of additional features,
machinery requirements etc.
TECHNIQUES EMPLOYED IN SMA
a) Activity based costing (ABC)
b) Attribute costing –considers products as a package of different features for example
mobile phone may have built in FM Radio and a camera and costing should consider all
those.
c) Benchmarking

Identification of best practices and comparing the organisation‘s performance to those
practices with the aim of improvement.
d) Competitive position monitoring ---provides competitor information showing where the
organisation stands compared to its competitors in the market penetration, product
features, cost of products and product pricing etc.
e) Competitor cost assessment----concentrates on cost structures of competitors. Gives
insights into the cost structures/components which are higher than those of competitors.
f) Competitor performance appraisal based on public financial statements. These provide a
source of competitor evaluation.
g) Customer accounting –considers customers or groups of customers as units of accounting.
Analyses them into industrial, commercial, domestic or profitable and non profitable
etc.
h) Integrated performance measurement –considers both financial and non financial
measures.
i) Life cycle costing. See performance management
j) Quality costing –classifies and monitors costs.
k) Strategic costing –incorporating costs into strategic management process and analysis of
costs, according to strategic management requirements.
l) Strategic pricing

Involves product pricing in a competitive business environment by strictly focusing on
competitor’s products, their attributes, prices and the pricing strategies adopted by
competitors.
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K. Target costing ---see earlier courses
M. Value chain costing

An approach to accounting that considers all activities performed from design to the
distribution of the product.

Mainly aims to identify areas whose department processes, friction and self interest
reduce the quality of the service to the customer or increase costs.
STRATEGIC PLANNING AND CONTROL
a)

Strategic planning
Organisation’s process of defining strategy ,or direction and making decisions on how
to allocate its resources to achieve its corporate objectives including capital and
people. For example SWOT, PEST,etc.

It determines future courses of action of an organisation.
b) Strategic control

Concerned with tracking the strategy as it is being implemented, detecting any
problem areas or potential problem areas and making necessary adjustments.

Due to long time span, during the period numerous projects may be undertaken,
investments made and actions undertaken to implement the new strategy
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STRATEGIC PLANNING PROCESS
MISSION
---what business are we in?
---------where do we want to go?
OBJECTIVES
SITUATIONAL
-----------what is the environment that surrounds us.
ANALYSIS
STRATEGY
------------how are we to get there?
FORMULATION
IMPLEMENTATION
----------put strategy into effect
--------how well have we done?
WHAT ISCONTROL
STRATEGY?
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It is ‘Long-term direction…’,‘A means to achieve...’,‘A course of action aimed at allowing an
organisation to achieve its objectives and satisfy its mission…’
‘The core of a company’s strategy concerns its markets and its products and is about
choosing:
1 where to compete – which business segments.
2 how to compete – on what basis shall we compete.’
‘A means to achieve a sustainable competitive advantage’.
OVERVIEW -THE STRATEGIC PLANNING PROCESS
The rational approach – suggests that there is some logical sequential process to the
development of strategy. A significant amount of formal procedure with a skilled team input.
The emergent approach – suggests the strategy tends to emerge rather than be as a result of
a logical formal process.
A definition of strategy – provided by Johnson and Scholes:
Strategy is the direction and scope of an organisation over the long term: which achieves
advantage for the organisation through its configuration of resources within a changing
environment, to meet the needs of markets and to fulfill stakeholder expectations
Strategic planning process – what does it include?
• Board of directors and senior management teams;
• Information systems to assist management;
• Research of strategic capability – internal environment;
• Research of the external environment;
• Clarified objectives;
• Position audit;
• Strategic analysis, choice and implementation
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TYPES OF STRATEGY
Corporate strategy (Which)
It raises the question of which businesses shall we be in?
This may involve consideration of acquisition and diversification and will see an organisation
being in more than one business.
Corporate strategy is concerned with
• Entering new industries;
• Leaving existing industries.
Business strategy (How)
Having selected a market, the organisation must develop a plan to be successful in that
market.
The aim is to compete successfully in the individual markets that the company chooses to
operate in.
Business strategy is concerned with how to:
• Achieve advantage over competitors;
• Avoid competitive disadvantage.
Corporate strategy affects the organisation as a whole whilst business strategy will focus upon
strategic business units (SBUs). An SBU will be a unit within an organisation for which there
is an external market for product distinct from other units.
Functional strategy (operational strategies)
This is concerned with how the component parts of the organisation in terms of resources,
people and processes are pulled together to form a strategic architecture which will
effectively deliver the overall strategic direction.
Operational strategy is concerned with
• Human resource strategy;
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• Marketing strategy;
• Information systems and technology strategy;
• Operations strategy.
These could be unique to the SBU and benefit from being individually focused or the
corporate unit may seek to centralise them and so benefit from synergy.
THE BOARD OF DIRECTORS
What is corporate governance?

The system by which companies are directed and controlled.
The Board of Directors are responsible for the governance of their companies. This is where
strategy is set.
Board responsibilities are as follows:
• Setting the strategy;
• Providing leadership to effect the strategy;
• Supervising the management of the business;
• Reporting to shareholders on stewardship.
Relevant aims of corporate governance)
• To increase the disclosure to stakeholders in general;
• To ensure that companies are run on ethical grounds and do not operate illegally;
• To provide increased confidence in the company for existing and potential investors and
thus promote investment in companies and subsequent economic growth;
• To increase transparency at the board level of operations.
NB Corporate governance seeks to improve the confidence of stakeholders in the companies
that operate within an environment. Better confidence sees improved investment by
stakeholder groups.
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Key ideas
Board operation
• Regular board meetings to assist in retaining full and effective control over the company
and to monitor the executive management;
• Clear division of responsibility at the head of the company to ensure a balance of power. No
one individual should have ultimate control;
• Include non-executive directors of sufficient calibre;
• Formal schedule of matters for decision and minutes to ensure control;
• Boards to make full presentations at the AGM with question and answer sessions afterward.
Non-executive directors
• To bring an independent view to strategy, performance, resources and standards of
conduct;
• Free of any interference which would distort judgment – to be ‘vigorously independent’
• Formal selection process for the board as a whole;
• Recruited on basis of experience and expertise;
• To provide added credibility.
Executive directors
• The decision makers;
• Full disclosure of remuneration along with explanation of any performance-related element;
• Executive reward to be subject to the recommendations of a remuneration committee.
Reporting and controls
• Objective is to present understandable and balanced view of position.
• Directors responsibility statement to be published.
• To generally improve the disclosure regarding board operation.
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The role of the strategic management accountant
The management accountant is a support resource.
Assistance as follows then:
• Provides information to assist the decision-making process;
• Numerical work;
• Costs and revenues – actuals and forecast;
• Budgets and plans;
• Narrative work – commentaries and periodic reporting;
• Efficiency and effectiveness studies i.e. value for money;
• Measures performance and adapts the measurement mix.
Usually prepares a formal periodic report which contains both narrative and numerical
information.
PRACTICE QUESTIONS
a) Identify and discuss the circumstances that have brought about the proposition that
traditional management accounting control systems have lost their 'relevance' to today's
manufacturing and organisational environment.
(10 marks)
(b) Evaluate strategic cost management initiatives which may be used in order to restore the
'relevance' of management accounting control systems in today's manufacturing and
organisational environment.
(15 marks
Question 2
Question 2- group one assignment
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Management accounting practice has traditionally focused on techniques to assist
organisational decision –making and cost control. In concentrating on the internal
environment, the management accounting function has been criticized for not addressing
the needs of senior management to enable effective strategic planning. In particular, the
criticism has focused on inadequate provision of information which analyses the
organisation’s exposure to environmental change and its progress towards the
achievement of corporate objectives.
Required:
Explain how strategic management accounting can provide information which meets the
requirements of senior management in seeking to realize corporate objectives. (2omarks)
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Chapter 2
MISSION, OBJECTIVES AND STAKEHOLDERS
Chapter objectives
1. Define and construct a mission statement
2. State features of a mission statement
3. Explain objectives.
4. Explain stakeholder power analysis showing needs of each stakeholder
5. Discuss MENDELOW’S POWER INTEREST MATRIX
Explain the concept of external environment
ORGANISATIONAL MISSION

A mission statement is a statement in writing that describes the basic purpose of an
organisation and what it is trying to accomplish.

It outlines the broad direction that an organisation will follow and summarises the
reasoning and values that underlie that organisation.

The purpose of the mission statement is to communicate to all the stakeholder
groups. It has been described as the ‘reason for being’. E.g. ‘To produce cars and
trucks that people will want to buy, will enjoy driving and will want to buy again’
(Chrysler)
Mission statements

Different characteristics exist and are dependent upon the purpose of the mission
setting within an organisation.

Some suggestions:
• It should be a brief statement of purpose that is easily understandable;
– Pepsi – ‘To beat Coke’
– Fedex – ‘Absolutely, positively, overnight’;
• It may state the general areas that the business intends to operate in;
• It is not time based;
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It should not include commercial terms;
• It should communicate with all stakeholder groups;
• It should be flexible enough to cater for change;
• It should reflect the distinct advantages of the organisation;
• It should be memorable.
Missions can:
• Have an internal or external focus•
Be designed to communicate to stakeholder groups and act as a basis for compromise;
Different characteristics exist and are dependent upon the purpose of Act as a starting point
for the derivation of objectives and strategy;
• Be used as part of the brand and marketing mix.
Examples
Girl Guides Association
‘To help a girl reach her highest potential’
Comment
In eight easily-recalled words it gets straight to the point. It is clear and direct whilst not
being clever and flashy.
A further example:
“We, the people of Du Pont, dedicate ourselves to the work of improving life on our planet;
we have the curiosity to go further.....the imagination to think bigger..... The conscience to
care more.....we will answer the fundamental needs of the people that we live with to ensure
harmony, health and prosperity in the world. We will respect nature and living things... and
will each day leave for home with conscience clear and spirits soaring.’ from the Du Pont
website
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The whole process of mission setting has been criticised heavily as some feel that it is a waste
of scarce resources and does not produce significant benefits that outweigh the costs.
Mission and objectives
A mission is an open-ended statement of the firm’s purpose and strategy. Objectives are more
specific and seek to translate the mission into a series of mileposts for the organisation to
follow.
Objectives are often considered to be SMART:
• Specific – clear statement, easy to understand;
• Measurable – to enable control and communication down the organisation;
• Attainable – It is pointless setting unachievable objectives;
• Relevant – appropriate to the mission and stakeholders;
• Timed – have a time period for achievement.
Key issues:
Objectives
• Are financial and non-financial;
• Will be multiple;
• Will conflict;
• Will vary across stakeholder groups;
• Will; need to be prioritised;
• Will drive the strategy
Stakeholder analysis
Mission and objectives need to be developed with two sets of interests in mind:
1 the interests of those who have to carry them out e.g. managers and staff;
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2 the interests of those who focus on the outcome e.g. shareholders, customers, suppliers
etc. Together these groups are known as stakeholders – the individuals and groups who have
an interest in the organisation and as such may wish to influence its mission, objectives and
strategy.
Given the range of interests in organisations, it is not surprising to find that the mission may
take several months of negotiation before it is finalised.
The key aspect is that it takes the stakeholders into account when formulating the mission
and objectives of the company.
The problem is that stakeholder interests often conflict and so an order of priority is required
based upon relative power and interest.
The different stakeholders need to be identified and potential for conflict needs to be
ascertained in advance.
The mission setting process can be a useful basis for getting the stakeholder groups to
communicate their ideas and then be able to appreciate other viewpoints.
Stakeholder power analysis
This can be broken down into five steps:
1 Identify the key stakeholders.
2 Establish their interests and claims on the organisation, especially as new strategic
initiatives are likely to be developed.
3 Determine the degree of power that each group holds through its ability to force or
influence change as new strategies are developed.
4 Consider how to divert trouble before it starts, possibly by negotiating with key groups in
advance.
5 Develop mission, objectives and strategy, possibly prioritizing to minimise power clashes.
This may involve negotiation amongst the various groups of stakeholders.
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Stakeholder groups and possible power sources
Managers
• Large or small company?
• Company performance against industry and economy – How well is it doing
Technical skills – are they in short supply?
• Non-executive directors? – Can they dilute or challenge?
Employees
• Unionised?
• Cultures?
• Skills base?
Government
• Laissez-faire?
• Shareholding?
• Political involvement?
Lenders
• Loan conditions?
• Amount and terms of loan?
• Non-executives? Provided by lenders?
Shareholders
• Voting powers?
• Family influence?
• Number of shareholdings?
• Rate of change of holdings?
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• Extent of staff and managers who own shares?
Customers and suppliers
• Power from grouping together?
• Volumes involved?
Alternative suppliers?
Different groups will have different influence – each case will need to be treated in context.
The more power and interest, the greater the involvement in setting the mission and
strategy.
MENDELOW’S POWER INTEREST MATRIX
Mendelow's matrix provides a way of mapping stakeholders based on the power to affect the
organisation and their interest in doing so. It identifies the responses which management
needs
to
Following
make
+
Low
High
+
Low:
+
the
categorisation
Low
Low
to
High:
of
:
stakeholders
stakeholders
Small
in
in
the
a
different
manufacturing
customers,
Major
Customers,
Employees,
Environmental
High + High: Institutional Investors, Local Planning Authority
Stakeholder Mapping: The Power Interest Matrix
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quadrants.
Small
Central
Groups,
company:
Shareholders
Govt,
Local
Media
Community
• Key players will be the most significant. Look to see how many there are. The more there
are, the greater the need for compromise and the larger the chance of conflict.
• Keep satisfied will usually leave you alone so long as you adhere to their conditions e.g.
being socially responsible.
• Remember things change and so the keep informed of today may be the key player of
tomorrow.
Managing the relationship with stakeholder groups
Powerful stakeholder groups must have confidence in the management team of the
organisation. The organisation should ensure therefore that adequate management systems
are in place.
Some suggestions:
• Allocate organisational responsibility for the process along with a budget;
• Use a team for a broad range of opinion and expertise;
• Establish and order the objectives of the organisation. Identify the areas for potential
conflict and target resources into those areas;
• Frequent face-to-face meetings with the key player and keep satisfied groups;
• Communication processes for the other two groups – possibly via public Q&A sessions;
• Periodic formal reporting and the use of a website for ‘frequently asked questions
ETHICS AND SOCIAL RESPONSIBILITY
Social responsibility

The idea that an organisation should behave responsibly in the interests of the society
in which it operates.

This behaviour requires an ethical approach where ethics can be defined as... ‘The
discipline dealing with what is good and bad and right and wrong or with moral
duty and obligation.’ Websters Dictionary.
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
The organisation operates within an environment and that organisation will need to
behave ethically in the long term or that environment will reject it and the
organisation will cease to be.

Most organisations fail within a very limited time span (10 years ) and research has
suggested that a significant factor contributing to that has been the failure to act with
social responsibility.

The suggestion is that social responsibility is the key factor to ensure the long-term
survival of the organisation.

Lack of it implies a short-termist viewpoint and systems need to be deployed to ensure
a broader perspective in setting strategy for an organisation.
The Problem
Ethical behaviour definitions will:
• Vary between cultures and individuals;
• Vary over time within those cultures and be subject to continual slow adaptation;
• Be influenced by emotion and so lack rationality;
• Lead to ‘pressure groups’ pressing for certain kinds of behaviour that may eventually lead
to open conflict.
Most believe that public sector organisations have social responsibility as one of their primary
objectives (or should have). Not all believe that private companies should have social
responsibility on their agendas.
Milton Friedman argues:
‘The business of business is business’
He sees the only responsibility as being to the shareholder and views donations to charity and
‘the Arts’ as being ‘fundamentally subversive’.
The organisation will need to consider the ethical context of their strategy and ensure that
they understand how society may change in the future and how they themselves may need to
adapt.
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Consider
Is it ethical to:
• Experiment on animals?
• Drill for oil?
• Build roads through the countryside?
• Allow smoking in public areas?
• Pay senior executives large increases in salary?
Train students to pass exams?
Different groups of people will respond in different ways. The management team will need to
consider these viewpoints in developing their strategies.
Central to achieving strategic success is the idea of fulfilling customer and consumer needs
(the marketing concept). One of those needs may well be a requirement for ethical behaviour
by the organisation.
The social responsibility argument benefits the company in the following ways:
• Product safety – can be used as a core competence and as a basis for differentiation.
• Working conditions – can be used to attract higher calibre staff.
• Honesty in approach – can lead to brand strengthening.
• Avoiding pollution – will save costs in the long run and win business in increasingly
sophisticated markets where this is now a threshold competence.
• Avoiding discrimination – gives access to a wider human resource base.
• Sponsorship – tax deductible, staff rewarding and advertising.
Social responsibility and financial value
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The value of the firm will be the present value of the future perceived cash flows. This will
involve taking the perceived future cash flows and adjusting with a risk-adjusted cost of
capital.
• Anything that can reduce the cost of capital will add value – being socially responsible will
reduce the risk of adverse environmental reaction and so the cost of capital must come down.
• Anything that extends the perceived value of the future cash flows will add value. A socially
responsible organisation will be allowed to operate longer within society and so there will be
more years of cash flow in the future. A misbehaving organisation will be closed down by the
disgruntled ‘keep satisfied’ stakeholder groups
Question 1
Ethical issues and Mendelow’s matrix – Plastic Ware Plc,
Plastic Ware Plc is a private company which has been manufacturing plastic toys for the last
three years. Its factory is located in a city called Harare. It sells goods worldwide. In spite of
having many competitors, the company has been making good profits since its first year of
operation. Plastic Ware Plc’s strategy is to keep its costs at a minimum and compete on the
basis of price.
Boss has recently been appointed as the CEO of Plastic Ware Plc, after retiring as the CEO of
a very successful toy making company. In Plastic Ware Plc, she has observed the following:

A substandard material is used in making the toys. This material may be dangerous to
health if children put the toys in their mouths. However, the company has not given
any warning on the packaging of the toys.
Rather, Plastic Ware Plc products are advertised as being safe and are claimed to improve
children’s memory and motor skills at a faster rate than the toys manufactured by other
companies (which has not been scientifically proven).

All the workers (including child labourers) are required to work for more than 100
hours a week which is far above the maximum working hours prescribed through
legislation. Since unemployment is high in Harare, people staying there are prepared
to work for lower wage rates. Plastic Ware Plc is successful in keeping its costs at a
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minimum by employing people in Harare at minimum cost (without paying fair wages
or bonuses).

Every year Plastic Ware Plc donates $15,000 to a political party whose leader is
Carnival. This is because Carnival is also the chairman of Easy-money, a financing
company, which provides finance to Plastic Ware Plc, at low interest rates.
Furthermore, the company has recently received adverse publicity through a local newspaper
which reported that the emissions from the factory are polluting the environment of Harare.
There is no emission treatment plant in Plastic Ware Plc. In addition, the material used by
Plastic Ware Plc, is bad for the environment. The newspaper has also highlighted, and
published photographic evidence of, the poor hygiene conditions in Plastic Ware Plc, and the
fact that female workers who have young children are allowed to bring their children inside
the factory, which could be dangerous.
After becoming aware of all the above facts and reading the newspaper, Boss immediately
called a board meeting and communicated her view that “our dream is for the company to
grow by leaps and bounds and become a market leader. However, this can only be achieved
by incurring some cost in the short term and therefore we should stamp out all unethical
practices.”
However, Milko, the finance director disagreed, stating that “we are running the business for
profit. If we give up all these practices, our costs will increase and will directly affect our
performance. In addition, although we are asking workers to work for more than the
maximum working hours, this helps them to earn more money, without which they might not
be able to provide for their families.”
About 80% of the shares in Plastic Ware Plc, are held by the directors (excluding Boss) and the
remaining 20% of the shares are held by people outside Plastic Ware Plc.
There is no
substantial holding by any shareholder; rather many people each hold a few shares. As a
result, the directors are in a dominant position when it comes to taking strategic decisions
(the external shareholders are dormant).
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Required:
(a) Discuss the ethical issues with reference to the case given above and their impact on the
performance of Plastic Ware Plc, (long-term as well as short-term). (10 marks)
(b) Using Mendelow’s matrix, map the following stakeholders of Plastic Ware Plc:
(i) employees
(ii) customers
(iii) directors of Plastic Ware Plc,
(iv) shareholders (other than directors)
(v) the government (15 marks)
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ENVIRONMENTAL ANALYSIS
The organisation exists in an environment, categorised into internal and external parts.
As the organisation is an open system, it will be affected by the environment in which it
operates.
Part of the strategic planning process requires an analysis of the environment that the
organisation operates within. Management should try to understanding of the past and the
potential for the future and its possible impact upon the organisation. This will involve
research by skilled teams with appropriate budgets and the use of a variety of analytical
skills.
It should be remembered that all organisations are different and that modern
environments are turbulent by nature and subject to ongoing change.
There are a variety of tools and techniques to assist this environmental research which
can also be used for general strategic planning purposes.
Environmental Analysis
Internal Environment
Strength and Weakness
External Environment
Opportunity and Threats
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EXTERNAL ENVIRONMENT
PEST Analysis
P Political (Including legal)
E Economic
S Social
T Technological
Political
Social
• Change of government
• Demography
• New laws
• Culture & lifestyle
• Political union
• Education
• War
• Income
• Tax
• Consumerism
• Global political moves
Economic
Technological
• Interest rates
• Rate of development &
• Exchange rates
transfer
• Inflation
• Innovation
• Unemployment
• Obsolescence
• Balance of payments
• Changing cost base
• Business cycle
This simple, cheap model provides headings for management to list items under.
Also known as PESTLE, SLEPT, Le Pest & co
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PORTER’S 5 FORCES MODEL
1 Threat of new entrants
This will depend upon the extent to which there are barriers to entry.
Establish:
• Which barriers exist?
• The extent that they are likely to prevent entry;
• The organisation’s position – is it trying to prevent or attempt entry?
Economies of scale

The scale of operation allows economies of scale to be reaped which new entrants
may not be able to match e.g. supermarkets with bulk purchasing, the computer
industry and the steel industry.
Requirement for entry

This could be high for capital intensive industries such as chemicals, power and mining
but low for High Street retailers who would be able to lease premises. Pharmaceutical
industry has large R&D costs and long lead times.
Access to distribution channels

For decades brewing firms have invested in bars and pubs which has guaranteed
distribution of their product and made it difficult for competitors to break into the
marketplace.

Effectively the new entrant is prevented from reaching the customer.
Cost advantages independent of size

Access to cheaper labour or raw materials. Well-established companies know the market
well and have the confidence of the major buyers along with the established architecture
which serves the market.
Expected retaliation
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
If you expect a competitor to retaliate on your entry then this may act as a deterrent to
enter the market – they may enter a price war and drive down margins in response to your
entry.
Legislation

Legal
conditions
may
exist
for
entry
e.g.
licences
and
personal
guarantees,
telecommunications and financial services.
Differentiation

Branding may create customer loyalty and inelastic demand for their product which may
take longer to break down for the new entrant.
Switching costs

Customers may have to invest in the trading relationship via contractual arrangements or
an investment in IT. To switch supplier would entail substantial costs and therefore the
new entrant would have a challenge on their hands.
2 Bargaining power of buyers

This is likely to be high when there is a concentration of buyers, particularly if the volume
purchases of the buyers are high e.g. grocery retailing.

This is likely to be further accentuated when the selling industry comprises a large
number of small firms and the product is standard with little or no switching costs
involved.
. Bargaining power of suppliers

A close linkage to the preceding section. Supplier power is likely to be high when:
• The input is important to the buying company;
• The supplier industry is dominated by a few suppliers who have secure market positions and
are not subject to competitive pressure;
• Supplier products are branded or involve switching costs;
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• Supplier customers are highly fragmented with little buying power.
4 Threat of substitutes

Substitutes can render products obsolete and can be direct or indirect. They can be
based on actual products or uses e.g. a Rover or a SAAB; a car or a bicycle.

There can also be substitution based on income or even doing without e.g. new
furniture or a holiday; giving up smoking.

The availability of substitutes can place a limit on price and change the basis of the
product.

Consideration must be given to the ease with which consumers can switch to
substitutes along with the perceived value that consumer groups would place on the
products.

At the same time, evaluation of potential actions to build customer loyalty should be
undertaken.

For example, advertising to build brand image.
5 Competitive rivalry

Some markets are more competitive than others. In highly competitive markets,
companies regularly monitor competitors.

It can be intense or remote and tends to depend upon historical development
Factors affecting level of rivalry:
• The extent to which competitors are in balance – roughly equal sized firms in terms of
market share or finances – often leads to highly competitive marketplaces;
• Stage of the life cycle. During market growth stages all companies grow naturally whilst in
mature markets growth can only be obtained at the expense of someone else;
• High storage costs may lead to cost cutting to improve turnover which in turn increases the
rivalry;
• Extra capacity comes in large increments which mean price cutting may follow to fill
capacity;
27
• Difficulty in differentiating product leaves the basis for competition on price or augmented
product;
• High exit barriers mean that some companies must stay in the market.
Conclusion
A desirable circumstance would be a situation where there are weak suppliers and buyers,
few substitutes with high barriers to entry and little rivalry.
A SWOT analysis

Summarizes the key issues from the business environment and the strategic capability of
an organisation that are most likely to impact on strategy development.

Johnson, Scholes and Whittington in their book ‘Exploring Corporate Strategy’ noted
SWOT analysis as a technique used in strategic planning to evaluate the Strengths,
Weaknesses, Opportunities and Threats that might affect business strategy.

It involves specifying the objective of the business venture or project and identifying
the internal and external factors that are favourable and unfavourable to achieving that
objective.

The aim is to identify the extent to which the current strengths and weaknesses are
relevant to, and capable of, dealing with the threats or capitalising on the opportunities
in the business environment.
Once the objective of an organisation has been identified, SWOT analysis can be used to help
in the pursuit of that objective.

Strengths and weaknesses are internal factors. Strengths are the attributes of the
organisation that are useful to achieving the objective whereas weaknesses refer to
the attributes that are detrimental to achieving the objective.

Opportunities and threats are factors external to the organisation. Useful external
factors are categorised as opportunities whereas detrimental factors are categorised
as threats.
28

External factors may include macroeconomic matters, technological changes,
legislation, socio-cultural changes and changes in the competition.

Senior management in an organisation might have their own opinion about the
strengths and weaknesses of the organisation, but a management information system
should be in place to provide measured and reliable information about strengths or
weaknesses.
Diagram 3: SWOT analysis
The list below contains examples of activities, processes and resources that may be
categorised under strengths and weaknesses:
_ Resources such as financial resources (e.g. availability of loan and capability of raising
equity funds are strengths) human resources (e.g. highly skilled employees may be a strength
whereas not having the desired skills may be a weakness) and assets of different forms (e.g.
having land, buildings or plant is a strength whereas not having them is considered to be a
weakness).
_ Cost advantages of intellectual property rights (patents, copyrights, etc.).
_ Innovation (ability to develop new products and add new attributes to the existing product
are the strengths of an organisation), having own research and development function is a
strength.
_ Possession of state of the art machinery is strength whereas not having such machinery may
be considered a weakness.
_ Goodwill towards the business (e.g. possessing products with a renowned brand name) is
considered strength.
_ Skilled management and effective style are strengths (on the contrary, lack of skill in
management is a weakness).
_ Having a well-established distribution network and owning a fleet of distribution vehicles
are strengths.
The following are the list of possible opportunities and threats to an organisation as posed by
different external factors:
29
_ Expansion or down-sizing of competitors (expansion of competitors may pose a threat
whereas down-sizing may provide an opportunity)
_ Stock market trends (e.g. a bullish secondary market provides an opportunity for raising
funds through public issue at a high premium)

_ economic conditions (e.g. economic growth or recession, change in exchange rate,
change in interest rates, anti-monopoly regulations, rate of inflation, fiscal policy
(taxation policy) of the government, etc.)

_ Expectations of stakeholders (e.g. shareholders expecting high dividend and
appreciation in the value of shares; lenders expecting timely repayment of the
principal and interest etc. may have a favourable / unfavourable impact on the
performance of an organisation technological advancement (may be an opportunity if
the organisation can exploit the new technology at the earliest and accordingly
achieve a competitive edge)

_ tastes and habits of customers (may either present an opportunity or pose a threat
to the organisation)

_ Political issues (e.g. government regulations, government policy, government
spending programmes, consequences of a change of government may have a
favourable or unfavourable impact on the operations of an organisation)

A SWOT analysis may focus on future choices and the extent to which an organisation
is capable of supporting these strategies. There are, however, some dangers in
undertaking a SWOT analysis. The major dangers are as follows:

_ A SWOT analysis can generate very long lists of apparent strengths, weaknesses,
opportunities and threats. What matters, however, is to be clear about what is really
important and what is less important.

_ there is a danger of over-generalization. Identifying a very general explanation of
strategic capability does little to explain the underlying reasons for that capability.
So, SWOT analysis is not a substitute for more rigorous, insightful analysis.
Question 1
Inscor is the world's largest and best-known food service retailing group with more than 3000
‘fast-food’ outlets in over 20 countries. Currently half of its restaurants are in Africa, where
it first began 20 years ago, but up to 1,000 new restaurants are opened every year worldwide.
30
Restaurants are wholly owned by the group (it has previously considered, but rejected, the
idea of a franchising of operations and collaborative partnerships). As market leader in a
fiercely competitive industry, Inscor has strategic strengths of instant global brand
recognition,
experienced
management,
site
development
expertise
and
advanced
technological systems. Inscor's basic approach works as well in Asia as it does in Africa:
although the products are broadly similar, menus are modified to reflect local tastes. Analysts
agree that it continues to be profitable because it is both efficient and innovative. The
group's vision is to be ‘the world's favourite’ through service, cleanliness and value, and it is
following three main strategies:
• to achieve profitable growth by building on key strengths;
• to ‘delight’ every customer in every restaurant;
• to be a good employer in each community in which it has a restaurant. (Despite this, some
critics claim staff are mainly unskilled and lowly paid.)
Inscor's future plans are to maximise global opportunities and continue to expand markets.
Inscor has long recognised that the external environment can be very uncertain and
consequently does not move into new locations or countries without first undertaking a full
investigation.
You are part of a strategy steering team responsible for investigating the key factors
concerning Inscor's entry for the first time into the restaurant industry in Chinhoyi.
Required:
(a) Justify the use of a PEST framework to assist your team's environmental analysis for the
Republic of Borderland. (8 marks)
(b) Discuss the main issues arising from applying this framework, and highlight what further
information is needed by Inscor in Chinhoyi. (17 marks)
(Total: 25 marks)
QUESTION 2
You are responsible for managing the preparation of all revenue and cost budgets for a motor
component manufacturer. You are aware that the external environment has a significant
31
impact on the business activity and financial performance of your company and that the
current information systems are underdeveloped and ineffective in this respect.
Required:
(a) Identify which aspects of the external environment you are likely to consider and give
reasons for your choice. (10 marks)
(b) Identify where you might find the relevant sources of information. (5 marks)
(c) Suggest how an external environment information system could be introduced into your
company. (5 marks)
(20 marks)
32
Chapter 3
Chapter objectives:
1. Explain strategic management accounting techniques.
2. Discuss the various categories of cost of quality.
3. Prepare a cost of quality report.
4. Discuss the concept of value chain
5. Explain the concept of benchmarking.
TECHNIQUES EMPLOYED IN SMA
WHY THERE IS NEED FOR ACCURATE COST MEASUREMENT SYSTEM

In target costing cost drivers should be established as these determine cost activities
to enable allocation of costs on a cause and effective relationship.

Random allocation of costs should be avoided.

The cause and effect relationship enables reduction of cost for the 0rganisation rather
than on a single product.
EXAMPLE
The project cost of a product for G T was $80 when the desired target cost is $60.
G T engages the design team to undertake intensive target costing exercise and the results is
that a projected cost of $50 is arrived at.
How could this have been achieved?
(i)
Design teams first make use of competitors’ products and undertake a tear down
analysis – dismantling the product to get insights into potential design
improvement that can be launched.
(ii)
Carry out value engineering- that is identifying new designs that can be carried out
at lower cost. This involves make use of standard parts rather than customer made
parts. (The two processes reduce direct material, direct labor and rework costs).
(iii)
Carry out functional analysis – and interview potential customers on value placed
on a function – these enable elimination of functions including in prototype but of
less value.
(iv)
Further reduction in cost of material and labor.
33
(v)
The team engages in redesigning the production and support process. (redesigning
ordering and receiving process by reducing number of suppliers. These cut c0sts in
inventory management.
(vi)
Marketing and distribution patterns are also subjected to intensive review which
should result in lower costs.
KAIZEN COSTING

-Popular with Japanese as a mechanism for reducing and managing cost.

-It refers to making improvements to a process through small incremental amounts
rather than large innovations (e.g. Toyota Noah) – discuss concept.

It is applied during manufacturing stage of the product life cycle rather that at design
stage as targeted costing.

Aims to achieve cost reduction through increased efficiency in the production process
and hence lower cost reductions as product is already in manufacturing stage and
some costs are already lock in. (e.g. material, labour e.t.c)

-Make use of employee empowerment that is workers are given responsibility to
improve processes and reduce costs.
ACTIVITY BASED MANAGEMENT
- ABC was used to give more accurate costs to products rather than cost management
applications.
- Activity based management (AGM) is term used to describe cost management applications to
ABC.
- ABM requires only first three stages of ABC that is:
(i)
Assigning costs of cost pools/cost centre for each activity
(ii)
Determine the cost driver for each major activity.
-The fourth stage for allocation to product may be omitted.
-ABM views business as a set of linked activities that alternatively add value to the customer
and hence managing the basing on the activities.
-The view assumes that activities consume costs and hence management managing activities
costs will be managed in the long run thereby satisfying customer needs while making fewer
demands on
-ABM analysis costs by activities and thus provides information to management on why costs
are responsibility centre.
34
-ABM reports by activities where as traditional analysis is by department.
-It provides more meaningful information thereby giving visibility to costs of doing activities
that make up the organization enabling management action unlike the traditional approach.
Johnson (1990) suggested that knowing costs by activities triggers to necessary action to
become competitive
- Eliminating many small orders and concentrating on larger value order, the demand for
customer processing activities are decreased and further spending on the activity reduced.
Activities can be classified into value added and non value added
-A value added activity is an activity that customers perceive as adding usefulness to the
product or service they purchase or an activity that supports the primary objective of
producing outputs.
-Non-value added Activity is an activity where there is an opportunity for Cost reduction
without reducing the product’s Service potential to the Customer. e.g Inspecting Storing and
moving R.M.
-Reporting the cost of non-value added activities draws Management’s attention to the vast
amount of waste that has been tolerated by the org.
-Eliminating non-value added activities is given top priority and by doing so the organization
permanently reduces the cost it incurs without reducing the value of the product to the
customer.
Activity based Management
-ABC was used to give more accurate cost to a product rather than cost management
applications.
-Activity based Management (ABM) is term used to describe cost management applications to
ABC.
ABM requires only first 3 stages of ABC that is:
i) Identify major activities that take place in org.
ii) Assigning cost to cost pools / cost centres for each activity.
iii) Determine the cost driver for each major activity.
-Managing the basing on the activities.
-The view assumes that activities Consume Costs and hence managing activities lost will be
managed in the long run thereby Satisfying Customer needs while making fewer demands on
organizational resources.
35
-ABM analyses Costs by activities and thus provides Information to management on why costs
are incurred and output from the activity by activity rather than by dept or responsibility
centre.
-ABM reports by activities where as traditional analysis is by department.
-it provides more meaningfully information thereby giving visibility to cost of doing activities
that make up the organisation enabling management action unlike the traditional approach.
QUALITY
INTRODUCTION

Current global competitive environment requires companies to become customer
driver and making customer satisfaction a key priority.

This is so because customers are demanding over improving levels of service regarding
cost, quality, reliability, delivery and the choice of innovative new products.

Companies that develop a reputation of low quality products lose market share and
face declining profits

A quality product results in no defects.

Defective products results in high warrant costs and dissatisfied customers.

Garrison (2006) noted that customers who have bad experience tell approximately 11
people about it” - and is the worst sort of advertising.

Eliminating inferior quality can therefore result in substantial savings and higher
revenues.
TOTAL QUALITY MANAGEMENT (T Q M)

Refers to a process where all business functions are involved in a process of continuous
quality improvement.

T Q M besides focusing on statistical monitoring of manufacturing process now
includes customer oriented processes of continuous improvement that focuses on
delivering products or services of consistent high quality in a timely fashion.

It is cheaper now to produce quality product than producing inferior products which
result in excessive expenditure on inspection, rework, scrap and warranty repairs.

T Q M therefore focuses on designing on building quality rather than trying to inspect
focusing on causes rather than symptoms’ of poor quality.
36
COST OF QUALITY

Quality cost are cost that are incurred to prevent defective products from falling into
the hands of customers or that are incurred as a result of defective units.

Quality costs are divided into four groups two of which are prevention and appraised
costs (incurred to in an effort to keep defective products from falling into customer’s
hands)and internal failure costs and external failure costs (incurred for the failure to
prevent defects despite efforts).
PREVENTION COSTS

Are costs incurred to keep defects from occurring?

It therefore relates to any activity that reduces the number of defects in products or
services.

They includes costs of preventative maintenance, quality planning and training,
system development, quality engineering, quality circles, statistical process control
activities, and the extra costs of acquiring higher quality raw material, technical
support to suppliers.
QUALITY CIRCLES

Consist of small groups of employees that meet on a regular basis to discuss ways to
improve the quality of output (includes both management and workers)
STATISTICAL CONTROL PROCESS

Is a technique used to defect whether a process is in or out of control?

An out of control result in defective units and may be caused by a miscalibrated
machine or some other factor.

In this method workers use charts to monitor the quality of units that pass through
their work stations.

By using charts workers can quickly spot processes that are out of control and creating
defects.
37

Problems are then corrected immediately thereby preventing further defects rather
than waiting for an inspection to catch defects.

JIT systems can be employed as support systems to suppliers.(see inside)
APPRAISAL COSTS

These are costs incurred to ensure that materials and products meet quality
conformance standards

These are sometimes referred as inspection costs.

Example of such costs include inspecting purchased parts, products, testing and
inspection and work in progress, quality audits and field tests.

Employees are empowered to take responsibility for quality to enable quality to be
built into products rather than relying on inspection to get the defects out.
INTERNAL FAILURE COSTS

Are costs associated with materials and products that fail to meet quality standard

These cost result from identification of defect during the appraisal process.

Examples of such cost include scrap, rejected products, reworking of defected units
caused by quality problems.

It should be noted that appraisal activities focus on symptoms rather on causes and
they do nothing to reduce the number of defective items.

However appraisal activities do bring defects to the attention of management, which
may lead to efforts to increase prevention activities so that defects do not happen.
EXTERNAL FAILURE COSTS

Costs that result when a defective product is delivered to a customer.
-
Examples of cost in this Category include warranty repairs and replacement, products
recalls e.g Toyota in 2011 call over 20 000 defective cars which move on the market ,
Liability arising from legal action against a company and lost sales arising from a
reputation of poor quality .

When these costs are incurred they can devastate profits.
38
DISBIBUTION OF QUALITY COSTS

Studies in United States shows cost of quality to range between 10% and 20% of total
sales where as experts say these range between 2% and 4%.

When the quality of Conformance is Low, total quality cost is high due to Internal and
external failure costs.

A low quality of Conformance means a high percentage of units are defective and have
high failure costs.

However, as the Company Spends more and more on prevention and prevention, the
percentages of defective Units drops and Low Internal and External failure cost close
to zero.

The best way to prevent defects from happening to design Some experts and managers
Contend that the total quality cost is not minimized until quality of Conformance
approach 100% and defect rates get as low as 1 in a million Units .

Others argue that eventually total quality cost increase as the quality of Conformance
increases or approaches 100% and defect rates are very processes that reduce the
Likelihood of defects and to continually monitor processes using statistical process
Control method.
QUALITY COSTS REPORTS

These provide an estimate of the financial Consequences of the company’s current
level of defects.

It details the prevention costs, approval costs, and costs of Internal and external
failure that arise from the company’s current level of defective products and services.
-
Example of quality cost report.
JB Ltd Quality Cost Report
Prevention Costs
Year 2010
Amount
Systems development
400
39
Percentage
0,80
Quality training
210
0,42
70
0,14
320
0,64
1 000
2,00
Inspection
600
1,20
Reliability testing
580
1,16
Supervision of testing and inspection
120
0,24
Depriciation of test equipment
200
0,40
1 500
3,00
Supervision of prevention activities
Quality improvement projects
Total
Appraisal costs
Total
Internal failure cost
Net costs of scrap
900
1,80
1 430
2,86
Downtime due to defects in quality
170
0,34
Disposal of defective products
500
1,00
3 000
6,00
Rework and labour and overhead
Total
External failure cost
Warranty repairs
400
0,80
Warranty replacement
870
1,74
Allowance
130
40
0,26
Cost of field advertising
600
1,20
Total
2 000
4,00
Total quality cost
7 500
15,00
As a percentage of total sales which is assumed to be
$50 000
Uses of quality cost information
Helps managers to see the financial significance of defects as they may not be aware

of the magnitude since such costs cut across deptmental lines and are not normally
tracked and accumulated by the cost system.

It also helps managers identify the relative importance of the quality problems
faced by the firm i.e the report may show that scrap is a major quality problem or
that the company is having huge warranty costs giving managers a better idea of
where to focus efforts.

It also helps managers to see whether their quality costs are poorly distributed. In
general quality costs should be distributed more towards prevention and appraisal
activities and less towards failures
Limitations of cost of quality information

Simply measuring and reporting quality cost does not solve quality problems

Results usually lag behind quality improvement programs. Total quality cost may even
increase as quality control system designed and installed. Decreases in the cost may
not begin to occur until the quality program has been in effect for a year or more.

The most important quality cost, lost sales arising from customers’ ill will, is normally
omitted from the quality cost report because it is difficult to quantify.
International Aspect of Quality
41

The Japanese companies borrowed heavily from the work of W. Edwards Deming
and introduced quality circles, JIT , the idea that quality is everyone’s
responsibility, and the emphasis on prevention rather than an inspection.

In the 1980s, quality re-emerged as a pivotal factor in the market and hence need
to have a strong quality program in place.
The I. S. O 9 000 standards (international standards organisation)

Is based in Geneva, Switzerland established quality control guidelines.

To get certification producer must demonstrate that:
 A quality control system is in use, and the system clearly defines an
expected level of quality.
 The system is fully operational and is backed up with detailed
documentation of quality control procedures.
 The intended level of quality is being achieved on a sustained; consistent
basis.
 Documentation is important here, that is it should be detailed precise
that if all the employees in a company were suddenly replaced, the new
employees could us the documentation to make the product exactly as it
was made by the old employees.
 I.S.O certification is not limited to manufacturing companies only.
*Give examples in Zimbabwe of C O.S that attained I.S.O
TOTAL QUALITY MANAGEMENT AND IT’S IMPLICATIONS FOR MANAGEMENT ACCOUNTANTS

Total quality management (TQM), as an approach, has its foundations in Japan. It is
based on the writings of a few insightful individuals, such as Demming and Juran, who
identified that an important aspect of success was delivering quality products and
services to customers. To achieve this, a quality focus must permeate throughout the
entire organisation and not just in a few areas.

TQM has many elements and it is not an easy approach to implement as it can be
expensive and require many organizational changes. Some of these elements are:

Customer involvement – Quality is defined by the customer, not by the company. As
a result, to be quality focused, it is essential to find out what the customer wants and
42
try to deliver this in a cost-effective way. This involves eliminating items that are not
valued and concentrating on those that are.

DEVELOP LONG TERM SUPPLIER RELATIONSHIPS

– TQM, on one level, looks beyond the company, but also requires us to look backwards
as well.

To make a quality product requires quality inputs and this is helped through close
working with suppliers.

This can involve helping suppliers to implement TQM in their own organisation,
identifying ways of saving money and assisting with training.

The incentive for the supplier is a long term contract – the incentive for the recipient
is targeted cost reductions as part of the contract.

Empowering employees – TQM requires a culture change in many Western businesses,
where the employees are given considerable power and authority. We rely on
employees to be their own quality controllers and give them the ability to stop
production if problems arise – this requires trust.

Quality circles are formed, where teams of employees are given the freedom to find
solutions to problems and to come up with their own methods.

Clearly, much of TQM is production-based as can be seen by some of the elements
above

The changes that TQM brings results in amendments to processes and products and
how the factory operates.

However, TQM is much more than this – it is a ‘whole-company’ philosophy, meaning
that all functions must embrace the approach and thinking for it to work.

For example, there is no point in production having top quality products coming out if
the after-sales service is of poor quality and discourages customers from purchasing.
As with other functions, management accountants (MA) are affected by TQM being
implemented

It is essential for MA’s to be involved in the implementation process itself so that the
final system allows them to perform their key duty of providing management
information their key duty of providing management information.

Otherwise, MA’s risk being marginalised. In fact, a well devised system, using IT, can
make information provision easier and allow the MA to involve themselves in more
analysis i.e. interpreting the data, rather than just reporting it.
43

The performance measures under TQM are quite different to those applied by
traditional companies.

While profit and return on investment continue to be highly relevant, actual measures
of quality (which are components of profit anyway) must be taken and reported.

The measurements themselves may be automated or taken by others such as
production or marketing, but many companies require the MA to consolidate this
information into management reports.

This allows for better comparison across measures, such that discrepancies in one may
be explained by differences in another.

Examples of such measures would be vendor performance (frequency of defects, time
to deliver) and customer satisfaction (customer surveys, time to resolve complaints).

The MA attempts to express these measures of quality in quantitative form to make
them more understandable and unbiased.

This also means that, where low measures are found (for example, slow delivery or
low satisfaction ratings), the profit impact can be quickly determined of making (or
not making) a change.

Cost of quality reports are a key aspect of TQM and are often used as a basis for
deciding on whether to implement the approach or not.

These reports are prepared by the MA from information from many different
departments and show how much the company will need to spend if it tries to:

Benchmarking ‘world-class’ companies to establish and implement best practices is
another element of TQM and the MA needs to be involved here.

The MA can assist in the research process to establish if such practices are viable and
cost-effective – this is referred to as a ‘Cost-Benefit Analysis’.

Indeed, this is an important overall exercise that goes beyond the Cost of Quality
report (which is more to do with ongoing/running costs).

Implementing TQM is likely to require considerable capital investment (to update
machinery and amend factory layout to facilitate easy movement) and training (at all
levels) and this can be very expensive, particularly as training may be required for
quite some time before full implementation has been achieved.

Resistance can be expected and it is important for the MA to be able to demonstrate
that, if it is the case, TQM implementation will recover the investment in it

As the above illustrates, TQM is a complex and wide-ranging philosophy that has
implications for the entire organisation.
44

The effect that TQM implementation has on the role and function of the MA can be
both short-term (CBA) and long-term (change in reporting) and this makes it important
for us, as MA’s, to be fully aware of what TQM is and how its arrival can change what
we do – if this is for the good, we embrace; if this is for the bad, we make our voice
heard so that we are properly considered)

Author: Chris O'Riordan ACA MBA, Lecturer in Accounting, Waterford Institute of
Technology. (ACCA 2010 ADOPTED
Practice Question 1
QUESTION 1
General Telecommunication Pvt ltd (GTEL) produces telecommunications equipment. In
recent years, the company has lost considerable market share to foreign competition and
to several new domestic companies. Product quality is the main primary factor that gives
one company a competitive advantage over one another. A reputation for reliability and
for meeting customer’s specification is often a determining factor in a sale, even if the
price is high. Kin Kudu, GTEL President decided to implement a company- wide quality
improvement programme. He believes that the company’s survival depends on improving
product quality, and that the way to accomplish this is to adopt the philosophy and
techniques of total quality management (TQM). Laurent’s goal is to make ESC a world
class manufacturer and to become the best in the industry in terms of quality and service.
Kato Lan, GTEL’s vice president of operation is concerned that the attempt to implement
this programmme will cause productivity to decline and costs to increase. He views
‘quality’ as an abstract idea without measureable characteristics. To him, quality
programmes are just executive slogans that lead to employ discussion groups and that
slowdown productivity.
Required
a) In general, identify and discuss at least three factors that will help an organization to
successfully implement a quality improvement programme.
b) Define and briefly discuss the following quality related terms
i.
Total quality management (TQM)
ii.
Employee involvement
iii.
Competitive benchmarking
c) Discuss Kato Lan’s concern at GTEL` Co. that quality programmes only decrease
productivity and increase costs.
Question2
45
“Japanese companies that have used just -in –time (JIT) for five or more years are
reporting close to a 30% increase in labour productivity, a 60% reduction in inventories, a
90% reduction in quality rejection rates, and a 15% reduction in necessary plant space.
However, implementing a just –in—time system does not occur overnight. It took Toyota
over twenty years to develop its system and realize significant benefits from it” source:
Summer C, Aggrawal, Harvard Business review (9/85).
Requirements:
a) Explain how the benefits claimed for JIT in the above quotation are achieved and why
it takes so long to achieve those benefits.(12marks)
b) Explain how management information system in general and management accounting
systems in particular should be developed in order to facilitate and make best use of JIT.
(8MARKS)
Question 3
The introduction of improved quality into products has been a strategy applied by many
organisations to obtain competitive advantage. Some organisations believe it is necessary
to improve levels of product quality if competitive advantage is to be preserved or
strengthened.
Required:
Discuss how a management accountant can assist an organisation to achieve competitive
advantage by measuring the increase in added value from improvement in its product
quality. (20 marks)
Question 4
Although most of Mazongoro Stationery’s operations are concerned with the production of customized
letterhead stationery, a small section of its business is concerned with the mass-production of
standardized items such as calendars and charts. Because of intense competition, quality management is
very important in this part of the business. One of the performance management mechanisms in this area
is a monthly cost of quality (COQ) report in which quality-related costs are classified under four headings
(prevention, appraisal, internal failure, and external failure) and each amount is expressed as a percentage
of the month’s sales revenues.
The following data relates to production and sales of charts in the last four months of 2010:
September October November
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December
Production (units)
2500
2800
3200
3400
Sales (units)
2500
2300
2100
1900
Internal failure (units)
190
200
220
230
External failure (units)
128
110
85
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There was no change in selling price during the four-month period. The seasonal trend in production and
sales was in accordance with expectations; the company deliberately increases its stocks in the early part
of each year to cope with a surge in demand which can be expected in early summer.
Paul Coleman has expressed serious concern about these figures. “External failures fell over the months,
but that is only to be expected because sales also fell sharply. Internal failures grew steadily despite the
reduction in sales.
This part of the organisation is going backwards, not forwards, in terms of quality management”.
REQUIRED:
(a) Present calculations to indicate the effect of this data on the monthly COQ reports, insofar as is
possible from the data provided.
(6 marks)
(b) Do you agree with Paul Coleman’s assessment? Explain your answer and show relevant calculations.
(9 marks)
c) Evaluate the principal stakeholders in the organisation and analyse the nature of the influence and
importance that they hold in their relationship with the
[Total: 25 marks]
Question3
Quality Management (TQM) and a Just-In-Time (JIT) management approach were essential for long-term
market success and profitability, and took a number of practical initiatives in this regard. He recently
obtained the following quarterly data for last year, which he believes will help him to assess the progress
which the company has made towards TQM and JIT:
Quarter 1
First pass yield
83%
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Quarter 2
89%
Quarter 3
92%
Quarter 4
99%
Stock turnover in each quarter
10 times
15 times
20 times
24 times
Cycle time from customer order to delivery
15 days
14 days
13 days
11 days
Late last year, a design change had the effect of considerably simplifying the composition of one of the
company’s main products. As a result, manufacture of a unit of this product during Quarter 4 required just
5 standard components. Previously, manufacture of a unit of the product required 20 smaller components,
some of which had to be manufactured specially for this product.
REQUIRED:
(a) Does the above data indicate that the company is making significant progress towards successful
implementation of TQM and JIT? Justify your answer. (8 marks)
(b) Explain how the trends described in this case are likely to lead to the greater market success and
profitability anticipated by the Managing Director. (6 marks)
(c) Explain the four categories of costs of quality which typically appear in a Cost of Quality (COQ)
report, and give a specific example of a cost in each category. (11 marks)
[Total: 25 marks]
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Cost Management and the value chain

Value chain is a means of increasing customer satisfaction and managing cost more
efficiency.

V.C. is the linked set of value creating activities all the way from basic raw material
sources for component suppliers through to the ultimate end use product or service
delivered to the customer.

Coordinating the individual parts of the value chain together creates the conditions to
improve customer satisfaction in terms of cost efficiency, quality and delivery.

A company that that performs the value chain at lowest cost gain competitive
advantage.

Viewing value chain from customer’s perspective ensures that each link in the value
chain is designed to meet needs of its customers and hence customer satisfaction
should be met.

The value chain when viewed as supplier-customer relationship it can be used to
improve useful feed- back on assessing the quality of service provided by the supplier
and opportunities for improving throughout the organisation.

Shank and Govindarajan (1992) advocates for companies to evaluate its value chain
relative to the value chain of competitors or industry.
They suggested that:
 Identify the industry’s value chain and then assign costs, revenue and assets to
value activities. Activities are building blocks that creates product that buyers
find valuable.
 Diagnose the cost drivers regulating each value activity.
 Develop sustainable cost advantage though controlling cost drivers better than
competitors or by reconfiguring the value chains.
 They noted that focusing on the value chain results in the adoption of a
broader strategic approach to cost management.
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Management Audits / Performance Audits / Value for money Audits.

Used to market cost in both profit and non-profit marking organisations.

Helps management by identifying waste and inefficiency and recommending
corrective action.

These investigate the whole management control system and focus on major issues
such as :
 The nature and functioning of the organization’s management system and procedures.
 The economy and efficiency with which organization’s services are provided.
 The effectiveness of the organization’s performance in achieving its objectives
Fielden and Robertson (1980) basing on their experience with non-profit marking entities in
United Kingdom identified the following as Constituency management audits:
1. An initial analysis of financial statistics, unit cost and other performance indicatorscomparison with past statistics and similar organisation –Differences should be
explained and better ways of doing things found.
2. Management and systems review

Aims to find efficient ways of establishing objectives, policy implementation and
monitoring of results.
Just in time

An approach that involves a continuous commitment to the pursuit of excellence in all
phases of manufacturing systems designs an operation.

Aims to produce the required items at the required quantity, in required quantities
and at definite times.

When J. I. T is in use, the following goals can be achieved:
 Elimination of non-value added activities
 Zero inventory (no buff inventory)
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 Zero defects
 Both sizes of one
 Zero breakdowns
 100% on time delivery service.
NB Though the above targets may not be achieved in real life situation the aim is to strive to
achieve them so as to realize substantial savings.
Practice question 1
Application of the value chain to university process
A university which derives most of its funds from the government provides undergraduate
courses (leading to bachelors’ degrees) and post-graduate courses (leading to masters
degrees). Some of its funds come from contributions from student fees, consultancy work and
research. In recent years, the university has placed emphasis on recruiting lecturers who have
achieved success in delivering good academic research. This has led to the university
improving its reputation within its national academic community, and applications from
prospective students for its courses have increased.
The university has good student support facilities in respect of a library which is well-stocked
with books and journals and up-to-date IT equipment. It also has a gymnasium and
comprehensive sports facilities. Courses at the university are administered by well-qualified
and trained non-teaching staff who provide non-academic (that is, not learning-related)
support to the lecturers and students.
The university has had no difficulty in filling its courses to the level permitted by the
government, but has experienced an increase in the numbers of students who have withdrawn
from the first year of their courses after only a few months. An increasing number of students
are also transferring from their three-year undergraduate courses to other courses within the
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university but many have left and gone to different universities. This increasing trend of
student withdrawal is having a detrimental effect on the university’s income as the
government pays only for students who complete a full year of their study.
You are the university’s management accountant and have been asked by the Vice-Chancellor
(who is the Chief Executive of the university) to review the withdrawal rate of students from
the University's courses.)
(Candidates do not require any knowledge of university admission and withdrawal processes
to answer this question.)
Required:
Apply Value Chain Analysis to the university's activities, and advise the Vice-Chancellor how
this analysis will help to determine why the rate of student withdrawal is increasing. (25
mark)
Question 2
The new manufacturing environment is characterized by more flexibility, a readiness to
meet customer’s requirements, smaller batches, continuous improvements and an
emphasis on quality. In such circumstances, traditional management accounting
performance measures are, at best, irrelevant and, at worst, misleading.
You are required to:
a) To discuss the above statement, citing specific examples to support or refute the
views expressed. (12marks)
b) To explain in what ways management accountants can adapt the services they provide
to the new environment (8marks)
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BENCHMARKING

Is the use of a yardstick to compare performance?

Benchmarking helps in improving performance by learning from the best practices and
the processes by which they are achieved.

It involves regularly comparing different aspects of performance with the best
practices, identifying gaps and finding out innovative methods to not only reduce the
gap but to improve the situation.

Benchmarking performance with best practice organisations may not be confined to
organisations in the same industry.

The best practice of a different industry may be benchmarked. An airliner may
benchmark its on-flight hospitality from the best in the hotel industry.


Benchmarking is not a panacea for all problems.
Rather, it studies the circumstances and processes that help to create superior
performance. Better processes are not merely copied.

Efforts are made to learn, improve and evolve them to suit the organisational
circumstances.

Further, the benchmarking exercise is repeated periodically so that the organisation
does not lag behind in the dynamic environment.

Benchmarking is a process of continuous improvement in the search for competitive
advantage. It measures a company’s products, services and practices against those of
its competitors or other acknowledged leaders in their fields.
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
Xerox pioneered this process in the late 70’s by benchmarking its manufacturing costs
against those of domestic and Japanese competitors and saw a dramatic improvement
in its manufacturing costs.

Subsequently ALCOA, Eastman Kodak and IBM adopted benchmarking. Firms can use
the benchmarking process to improve a diverse range of management functions such
as:
_ maintenance operations
_ assessment of total manufacturing costs
_ product development
_ product distribution
_ customer services
_ plant utilisation levels
_ human resource management
Methods of benchmarking performance
Methods of benchmarking
1. Generic benchmarking / Benchmarking with performance of the previous years:

it is common for organisations to consider their performance in relation to previous
years in order to identify any significant changes.

Historical comparison alone may lead to complacency if the organisation shows a
growing trend since not only growth but also the rate of improvement compared to
that of competitors is important for the evaluation of performance.
2. Strategic benchmarking:

It is aimed at improving a company’s overall performance by studying the long term
strategies and approaches that helped the ‘best practice’ companies to succeed.
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
It involves examining the core competencies, product / service development and
innovation studies of such companies.
3. Process benchmarking:

Companies use this to improve specific key processes and operations with the help of
best practice organisations involved in performing similar work or offering similar
services.
4. Functional benchmarking

Companies use this to improve their processes or activities by benchmarking with
companies from different business sectors or areas of activity but involved in similar
functions or work processes.
Internal benchmarking:

This involves a company benchmarking against its own units or branches.
The advantages of this type of benchmarking are, the business units of a company
situated in different locations may allow easy access to information, even sensitive
data, and also it takes less time and uses fewer resources than other types of
benchmarking.
6. External benchmarking:

Companies use this in order to follow the practices of the organisations that
succeeded on account of their practices. This kind of benchmarking provides an
opportunity to learn from high-end performers.
7. Public domain benchmarking:

In this method, the bench marker collects data from public sources like consumer
magazines, newspapers, etc., analyses the data and provides a report. The following
are the steps / process of public domain benchmarking:
i. Determining objectives of the study
ii. If the data is available, analyse it and produce report
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iii. In case the data is not readily available,
_ Acquire products for testing, record data of trial results to analyse it and producing report
_ Design, test and carry out survey to analyse it and producing report
8. Review benchmarking:

This is typically carried out by a team visiting each participant, identifying relative
strengths and weaknesses, best practices and perhaps making recommendations and
even facilitating improvement activities.
The following are the steps / process of review benchmarking:
i. Determining objectives of the study
ii. Identify potential participants and rank target organisations in order of those that are
preferred to be in the study
iii. Draft a list of proposed information and data required from target participant
iv. Contact potential participants for inviting them to participate in the study
v. Finalise objectives, scope, data, timescales and team
vi. Complete visits to ensure that data and information is properly understood
vii. Analyse data and produce report
9. Competitive benchmarking:

Is used by companies to compare their positions with respect to the performance
characteristics of their key products and services.

Competitive benchmarking involves companies from the same sector. The following
are the methods of carrying out competitive benchmarking:
a) Trial benchmarking:

Is carried out by trialing and/or testing products and services from other organisations
and comparing them against your own products and services. The following are the
steps / process of trial benchmarking:
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i. Determine the objectives of the study
ii. Identify potential target organisations
iii. Develop list of information and data requirements
iv. Carry out comparison
v. Analyse data and produce report
b) Survey benchmarking:

It is similar to trial benchmarking and usually carried out by an independent
organisation surveying customers to ascertain customers’ perception of relative
strengths and weaknesses compared to competitors.

Survey may be carried out by interview, post, phone, emails, etc. in the form of
questionnaire.
The following are the steps / process of survey benchmarking:
i. Determine the objectives of the study
ii. Design, develop and pilot test the survey
iii. Carry out survey
iv. Analyse data and produce report
7.2 The benchmarking process
Benchmarking processes lack standardization.
However, common elements are as follows:
1. Identifying the need for benchmarking and planning

This step will define the objectives of the benchmarking exercise. It will also involve
selecting the type of benchmarking.

Organisations identify realistic opportunities for improvements.
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2. Clearly understanding existing business processes

This step will involve compiling information and data on performance. This will include
mapping processes.

Information and data is collected by different methods, e.g. interviews, visits and
filling of questionnaires
3. Identify best processes / practices

Within the selected framework, the best processes are identified.

These may be within the same organisation or external to the organisation.

Moreover, the best processes / practices may be from a different industry.
4. Compare own processes and performance with that of others

While comparing the gaps in performance between the organisation and the other
organisations, better performance is identified. Furthermore, gaps in performance are
analysed to find their causes.

Such comparisons have to be meaningful and credible. The feasibility of making
improvements in the light of the conditions that apply within the organisation is also
examined.
5. Prepare a report and implement the steps necessary to close the performance gap


A report on the benchmarking initiatives containing recommendations is prepared.
Such a report includes the action plan(s) for implementation.
6. Evaluation

Business organisations evaluate the results of the benchmarking process in terms of
improvements vis-à-vis objectives and other criteria set for the purpose.

They also periodically evaluate and reset the benchmarks in the light of changes in the
conditions that impact the performance.
IMPLEMENTING A BECHMARKING EXERCISE
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This will involve:

Identifying what is wrong within the current organisation.

Identifying best practice elsewhere.

Contacting, preparing for, and undertaking a site visit.

Gathering, evaluating and communicating the results.
REQUIREMENTS FOR IMPLEMENTATION

Key executive commitment from the outset.

Establish teams for those ranges of opinion and expertise.

A team to manage the project.

A team for the site visit

Budget allocations and training given.

Formalize the process.
PROBLEMS OF BECHMARKING

Best practice companies are unwilling to share data.

Lack of commitment by management and staff.

What is ‘best practice’

Costly in terms of time and money opportunity cost.

Provides retrospective view in a turbulent environment.

REMEMBER: WHAT IS BEST TODAY MAY NOT BE SO TOMMORROW.
QUESTION 1
Magondo Ltd manufactures and distributes generic paper-based products and currently has an
annual turnover of $90 000. At present, the management of magondo ltd is uncertain whether
the purchasing department is maximising its potential in terms of purchasing efficiency and
effectiveness. The management is currently considering the introduction of a system of
benchmarking to measure the performance of the purchasing department.
Required:
59

a) Explain the term ‘benchmarking’ and briefly discuss the potential benefits that can
be obtained as a result of undertaking a successful programme of benchmarking. (7
marks)

(b) Describe how a system of benchmarking could be introduced to measure the
performance of the purchasing department. (8 marks)

(c) Discuss the problems that the management of Magondo Ltd might encounter in
implementing a system of benchmarking and recommend how such problems should be
successfully addressed. (10marks)

Question 2
Benchmarking in a public sector organisation

A local government runs a hospital that provides healthcare services to the general
public. The hospital provides services related to paediatrics, gynecology, cancer and
other general ailments. It has state-of-the-art facilities for the patients and wellequipped diagnostic laboratories and operation theatres.

The hospital is funded by grants that are allocated by the Federal government every
year, which cover all the operating expenses of the hospital. There are special
allocations provided for purchase of new equipment and creation of any new facilities.
It employs a total staff of 150, comprising professional doctors and nurses.

The hospital was founded about ten years ago and has been, since then, operating
successfully. However, the entral grants committee of the central government has
recently raised concerns over the increasing amount of grants being allocated to this
hospital. They feel that the hospital could do with lesser grants. They also suspect
that there is a lot of wastage of money that can be avoided through proper
performance evaluation. The management of the hospital has taken the comments of
the committee very seriously and has taken up the matter to assess their existing
performance management system. Currently, the performance of the hospital is
measured using both financial and non-financial performance measures. The Dean of
the hospital recently attended a training programme, where he learned about the tool
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of benchmarking. He would like to know if it can be used effectively for the hospital
to enhance the performance and reduce wastage.
Required:

(a) Explain the concept of benchmarking and its usefulness for a public sector
organisation like this hospital. (7 marks)

(b) Discuss how benchmarking can be implemented in the hospital to achieve the
objective of performance improvement. Also, briefly enumerate the performance
parameters that can be benchmarked and the use of league tables. (13 marks)
(20 marks
Practice Question 3
Rain Bow Towers is a large high-class hotel situated in a thriving city. It is part of a
worldwide hotel group owned by a large number of shareholders. The majority of the
shares are held by individuals, each holding a small number and the rest are owned by
financial institutions. The hotel provides full amenities, including a heated swimming
pool, as well as the normal facilities of bars, restaurants and good-quality
accommodation. There are many other hotels in the city which all compete with Rain
Bow Towers. The city in which Rain Bow Towers is situated is old and attracts many
foreign visitors, particularly in its summer season.
Required:
(a) State the main stakeholders with whom relationships need to be established and
maintained by the management of Rain Bow Towers. Explain why it is important that
relationships are developed and maintained with each of these stakeholders. (10
marks)
(b) Explain how the management of Rain Bow Towers should carry out a benchmarking
exercise on its services, and recommend ways in which the outcomes should be
evaluated. (15 marks)
Question 4 Benchmarking
Batsirai AIDS Group is a charity concerned with AIDS disease. Its mission statement is;
To fund world class research into the biology and the causes of AIDS disease.
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To develop effective treatments and improve the quality of life for patients.
To reduce the number of people suffering from AIDS disease.
To provide authoritative information on AIDS disease.
Batsirai obtains funding from voluntary donations from both private individuals and companies, together
with government grants. Much of the work it does, in all departments, could not be achieved without the
large number of voluntary workers who give their time to the organisation and who make up
approximately 80% of the workforce.
Batsirai does not employ any scientific researchers directly, but funds research by making grants to
individual medical experts employed within universities and hospitals. In addition to providing policy
advice to government departments, the charity’s advisors give health educational talks to employers and
other groups.
The Board recognises the need to become more professional in the management of the organisation. It
feels that this can be best achieved by conducting a benchmarking exercise.
However, it recognises that the introduction of this process may make some members of the organisation,
particularly the volunteers, unhappy.
Required:
As Financial Controller;
(a) Discuss the advantages and disadvantages of benchmarking for Batsirai AIDS Group. (8marks)
(b) Provide advice on the stages in conducting a benchmarking exercise in the context of
(12marks
(c) Provide advice on how those implementing the exercise should deal with the concerns of the staff,
particularly the volunteers.
(5 marks)
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BUSINESS PROCESS RE-ENGINEERING (BPR)

The fundamental rethinking and radical redesign of business processes to achieve
dramatic and sustainable improvements in critical measures of performance such as
cost, quality, service, and speed.
BPR aims

To achieve dramatic improvements in performance;

To increase the ability of the organisation to meet the needs of its customers;

To challenge existing ways of doing business and eradicate inefficient processes;

To use technology innovatively to carry out business in totally new ways.
NB.BPR draws on the insights of Porter’s value chain by viewing the organisation as a set of
value adding processes rather than as a segmented structure of departments and divisions. As
such, the ‘Value Chain’ is commonly used in BPR as a tool to identify and analyse processes
that are of strategic significance to the organisation.
The main stages of BPR
1 Process identification

Each task performed within the organisation or department being re-engineered is
broken down into a series of processes.

Each process is recorded and analysed to find out whether it is:
– Necessary
– Adding value
– Supporting another value adding process.

It is important that a complete and detailed model of the processes is created (often
this is software-based as the complexity of even simple business processes makes a
paper based model unworkable) as it is to this that post-BPR performance
improvements can be compared.
2 Process rationalisation
63

Those processes which are not adding value, or which are not essential to supporting a
value-adding process are discarded.
3 Process redesign

The remaining processes are redesigned (IT based – WP, Spreadsheet, Accounting
packages, CAD/CAM, EDI) so that they work in the most efficient way possible.

At this stage detailed operating procedures need to be produced for all processes that
are to be performed manually.
4 Process reassembly

The re-engineered processes are implemented, resulting in tasks, department and an
organisation that works in the most efficient manner.
BPR Examples
Mortgage processing

Prior to BPR: In one organisation it was found that the processing of a mortgage
application involved eight different application form with 217 questions, 750 steps,
four IT systems, five functional areas of business, and four interviews with the
customer.

The whole process culminating in a mortgage offer being offered on average some 30
days from form completion.
Post BPR: The process involved one interview, completion of one application form, resulting
in an offer being made within 24 hours.
IBM sales force

Pre BPR: The IBM sales force manually recorded at client meetings the details of the
firm they wished to lease equipment to.

This was passed to their credit division who decided whether the client was creditworthy.

Following approval, the application was passed to corporate finance division to
allocate funds.
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
The legal department issued the salesmen with the legal documentation for the
prospective customer to sign.

The salesmen complained that during the three weeks this took, the customer had
often cooled off or found another supplier.

Research revealed that only about five minutes was actually spent processing the
application.
The rest of the time the documents were resting in in-trays awaiting attention.
Post BPR: Today the IBM sales force have laptop computers into which they input the client
details. This links via a cellular phone to the credit-scoring systems at headquarters and also
to the corporate finance database. It also prints out the legal agreement. It takes about three
minutes.
Advantages of BPR
It is useful in providing an organisation with cost advantages over competitors, and
with improved customer service.

Because significant, rather than incremental, changes in working practices are sought,
an approach is encouraged which is more strategic than operational.
It helps to reduce organizational complexity by focusing on core processes and
driving out unnecessary or uneconomic activities.
It offers an alternative perspective on formulating strategy based upon operating
processes, rather than on products and markets (e.g. are we in the train business or
the transport business?). and
It helps to link together the functional areas of an organisation by focusing on
processes that cut across the value chain from inputs of materials and services to
creating customer satisfaction.
Disadvantages OF BPR

Often used as the pretext for staff reductions;

Viewed as a ‘quick fix’ to organisational problems – one-off cost savings;

Delegation of decision making to lower levels of management – may affect employee
attitudes and behaviour;
65

Senior management may lose commitment, once the programme has been
implemented;

May destroy existing controls within the organisation – reduced internal controls,
quality of staff and accounting procedures, combining procedures, reduced
segregation of duties;

Overlooks the impact on human resources – BPR is a very time-consuming exercise.
Introduction of new processes will involve new patterns of work, break-up of traditional
workgroups, redundancies, loss of staff goodwill;
-
Increases stress on staff – reduction in staff numbers at middle and line management
levels – overload the remaining staff, resulting in reduced effectiveness;
-
BPR focuses too much on improving existing business rather than developing new and
better lines of business. Formalized process.
-
This would be most likely in the larger organisations with a wider range of
stakeholders. It could be the result of a deliberate steering along a predefined path or
the strategy may just evolve as the company develops – the emergent strategy
principle, which reflects the more reactive nature of some strategic determination.
Practice question 1
(i) Explain the term ‘Business process re-engineering’ and how its application might enable
overall business performance to be improved. (9 marks)
(ii) Briefly discuss potential problems which may be encountered in the implementation of a
business reengineering programme.
(8 marks)
iii) Explain the benefits enjoyed through implementation of a business process re-engineering
programme. (9marks)
Question 2
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The main business processes in Mambo Stationery have operated essentially unchanged for more
than a decade. Customers are required to provide detailed job specifications in a standard format
when placing an order. Prior to the running of each job, the relevant letterhead or logo is
retrieved either from Mambo Stationery’s existing customer database files or from an e-mail
attachment sent by each new customer. Paper of the size, weight and colour indicated in the job
specifications is selected from stores and loaded into a printer; both of these are manual
operations which can be performed satisfactorily even by relatively inexperienced staff.
Execution of each job is initiated and monitored using the control panel on whichever of the
business unit’s 20 printing machines is being used for the job. The output from each job is
compared with the initial job specifications before delivery to the customer is permitted.
The Finance Director acknowledges that Mambo Stationery has a high level of repeat business
from long-standing customers, but he is concerned that there have been few new customers in
recent years and that profit has begun to decline. He has an intuitive feeling that a reengineering
of Mambo Stationery’s business processes might help to address some of these problems.
However, he favours a cautious approach to business process reengineering (BPR) in this case,
partly because he does not want to undermine an operation which has in many ways been
successful and partly because he wishes to limit the cost involved.
REQUIRED:
(a) Do you agree with the Finance Director preferred approach to BPR in this case? Provide
specific explanations and examples. (10 marks)
(b) The Finance Director has read that benchmarking against other business units or firms is
often a useful approach in identifying ways of improving business processes.
Discuss the usefulness and feasibility of a benchmarking exercise in which Mambo Stationery
benchmarks itself against each of the following organisations. In each case, illustrate your
answer by reference to the benchmarking of at least one specific business process.
• Mambo Publishing;
• Mazongoro Ltd. (a rival firm of letterhead stationery printers);
• Pottery Ltd. (which customises cups and plates by adding logos and designs, mostly for hotels);
• JRB Ltd. (which provides order-processing services on an outsourcing basis for corporate
clients). (15 marks)
[Total: 25 marks]
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Chapter 4
STRATEGIC POSITIONING
Chapter objectives
1. Explain porter’s generic models.
2. Examine how model achieves strategic positioning of an organization.
3. Discuss performance measurement in private sector.
4. Discuss how a balanced scorecard measures performance.
ACCOUNTING IN RELATION TO STRATEGIC POSITIONING

Porter’s Generic Models

Porter suggests that competitive advantage arises from the selection of a generic
strategy which best fits the organisation‘s environment and then organizing value
adding activities to support the chosen strategy.

Cost leadership --basically being the lowest cost producer in a particular industry.

Differentiation--- this is creation of a customer perception that the product is superior
to that of competitors so that a premium can be charged (that is it is different).

Focus ---this involves utilizing
segments or “niching”

Porter argues that organisations need to address two key questions namely:

*should the strategy be one of differentiation or cost leadership?

*should scope be wide or narrow?

He argues that organisations that can run trying to satisfy all ,end up being ‘stuck in
the middle”

The implication is that Porter advocates that organisations need to make a basic
competitive decision early on in the strategic determination process.

Cost Leadership Strategy

This is based on the view that the business be the lowest cost producer.

Potential Benefits

Business can earn higher profits by charging the same price or even moving to
undercut where demand is elastic.
either of the above in a narrow profile of market
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
Enables Company to build defense against price wars.

Allows price penetration entry strategy into new markets.

It enhances barrier to entry

Allows development of new market

Value Chain analysis

Is central to identifying where cost saving can be made at various stages in the value
chain. Attainment depends upon arranging value chain activities so as to:

Reduce cost by copying rather than originating designs, using cheaper material and
other cheaper resources, producing products with “no frills”, reducing labour costs and
increasing labour productivity.

Achieving economics of scale by high volume sales allowing fixed costs to be spread
over a wider production base.

Use high-volume purchasing to obtain discounts for bulk purchases.

Locating in areas where cost advantage exists or government aid is possible (growth
points, mining)

Obtaining learning and experience curve benefits

DIFFERENTIATION STRATEGY

It is based upon the idea of pursuing customers that a product is superior to that
offered by competitors

Differentiation can be based on product features or creating/altering consumer
perception.

It can also be based upon process as well as product. It is usually used to justify a
higher price.
BENEFITS.

Products command a premium price so higher margins

Demand becomes less price elastic and so avoids costly competitor price wars.

Life cycle extends as branding becomes possible hence strengthening the barriers to
entry.
Value chain analysis can identify the points at which these can be achieved by :
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

Creating products which are superior to competitors by virtue of design, technology,
performance etc. marketing spend becomes important.
Offering superior after sales service by superior distribution, perhaps in prime
location.
Creating brand strength.

Augmenting the product i.e. adding to it

Packaging the product.

Ensuring an innovative culture exists within the company.
FOCUS STRATEGY

This aimed at a segment of the market rather than the whole market.

A particular group of consumers are identified with similar needs, possibly based upon
age, sex, lifestyle, and income or geographical and then the company will either
differentiate or cost focus in that area.

Smaller segments and so smaller investments in marketing operations:

Allow specialization.

Less competition

Entry is cheaper and easier

Requires :

Reliable segment identification

Consumer/customer needs to be reliably identified- research becomes even more
crucial.

Segment to be sufficiently large to enable a return to be earned in the long run.

Competition analysis- given to small market, the competition, if any, needs to be fully
understood.

Direct focus of product to consumer needs

Niching can be done via specialization by:

Location

Type of end user, quality, price, size of customs’, product feature.

If done properly can avoid confrontation and competition yet still be profitable.
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
The attractiveness of the market niche is influenced by the following

The niche must be large enough in terms of potential buyers.

The niche must have growth potential and predictability.

The niche must be of negligible interest to major competitors.

The firm must have strategic capability to enable effective service of the niche.
PRACTICE QUESTION 1
The concept of generic strategies was established by Professor Michael Porter during the
1980s. He stated that a company must choose one of these strategies in order to compete and
gain sustainable competitive advantage. In addition to assessing the source of competitive
advantage,Porter also explained that it was necessary to identify the target for the
organisation’s products or services. This involved distinguishing between whether the target
was broad and covered the majority of the overall market, or narrow and concentrated on a
small but profitable part of it.
Requirements;

a)critically appraise the value of Porter’s Generic Strategy Model for strategic planning
purposes.(10marks)

B)explain how the theoretical principles of the Experience Curve may be applied to
determine a generic strategy for a company.(10marks)
(25 marks)
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BALANCED SCORECARD (BSC

Was developed by Kaplan and Norton(1961)

It is ‘An approach to the provision of information to management to assist strategic
policy formulation and achievement.

Kaplan and Norton (1996) noted that the Balanced Scorecard provides managers with
the instrumentation they need to navigate to future competitive success.

It translates an organisation‘s mission and strategy into a comprehensive set of
performance measures that provide the framework for a strategic measurement and
management system.

It was a response to traditional performance measurement which had tended to focus
on a narrow range of performance measures and helped adopt a short-term focus for
management.

Kaplan likened running a business to flying a plane – airspeed, altitude, heading and
fuel level are just a few of the pieces of information needed. Yet, in many businesses,
managers have to rely on a narrow set of financial indicators to support their decision
making – and this in an environment with many more complexities than a plane.


It retains an emphasis on achieving financial objectives whilst including performance
drivers of these financial objectives thereby also monitoring progress in building the
capabilities and acquiring the intangible assets they need for future growth.

NB. Balanced score card is therefore a system of performance measurements that
organisations uses to track performance on its primary and secondary objectives.

The organisation‘s planning and strategy defines what relationship s the organisation
must develop with employees, its suppliers and the community to be successful with
its targeted customers, defines the focus and scope of the balanced scorecard.

The organisation‘s planning and strategy defines what relationship s the organisation
must develop with employees, its suppliers and the community to be successful with
its targeted customers, defines the focus and scope of the balanced scorecard.
Learning

This is a powerful tool that assists in the running of an organisation.
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
Gains in one area need to be considered with the losses that may arise in other areas
and vice versa. Thus the manager’s view is broadened and the tendency to
concentrate on one measure is reduced, hopefully removed.
Paul McCunn offers some practical guidance
Do
-
use the scorecard as an implementation pad for strategic goals
-
ensure strategic goals are in place before the scorecard is implemented
-
ensure that a top level (non-financial) sponsor backs the scorecard and that relevant
line managers are committed to the project
-
implement a pilot before introducing the new scorecard
-
carry out an ‘entry review’ for each business unit before implementing the scorecard
In other words
-
it can be an ideal vehicle for rolling the corporate strategy down through the
organisation
-
do not invent the strategy as you go along or the scorecard will drive the wrong
behaviour
-
the scorecard project is too big to be anything other than top priority and it should
never be left to the accountants to do
-
it provides valuable lessons and avoids ‘big bang’ risks
-
this minimises the risk of going ahead in unfavourable circumstances and allows you to
customise the project to suit your organisation's needs
Do not
-
use the scorecard to obtain extra topdown control
-
attempt to standardise the project – the scorecard must be tailor-made
-
underestimate the need for training and communication in using the scorecard
-
seek complexity or strive for perfection
-
underestimate the extra administrative workload and costs of periodic scorecard
reporting
In other words
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-
people will rebel
-
your organisation's strategic imperatives are unique – a ready-made scorecard will not
fit
-
do not be fooled by the simplicity of the idea – you have to deal with the huge change
that it brings
-
avoid ‘paralysis by analysis’
-
gathering information for the scorecard is more time consuming than you think

PERSPECTIVES IN BALANCE D SCORECARD

BSC is a set of performance targets and results relating to four dimensions of
performance namely: Financial, Customer, Internal process, and innovation/learning
and growth.


The Financial Perspective

Common measures at business unit level are the operating profit, return on
investment, residual income and economic value added.

Other measures include relevant growth, cost reduction, asset utilization.
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
Financial performance measures provide a common language for analyzing and
comparing companies thereby providing an aggregate view of an organisation’s success

However, financial measures by themselves do not provide incentives for success.

These tell a story about the past, but not the future and hence do not guide
performance in creating value.

THE LEARNING AND GROWTH PERSPECTIVES

It is the perspective that identifies the infrastructure that the business must build to
create long-term growth and improvements.

Emphasis investing for the future in areas other than investing in assets and new
product research and development as these are included in internal business process.

So organisations must invest in ,people ,systems and organisation procedures to
achieve their long term financial objectives:

Key measures identified by Kaplan

Employee capabilities

Information system capabilities

Motivation, Empowerment and alignment

EMPLOYEE CAPABILITIES

Core measurements are employee satisfaction employee satisfaction, employee retention,
employee productivity.

Employee satisfaction can be measured by surveys looking at involvement in decision
making, creativeness etc.

Employee retention can be measured by annual percentage key staff turnover or employee
productivity

INFORMATION SYSTEM CAPABILITIES

Availability of information on customers, internal processes and financial consequences
enhances competitive capabilities.

Measures include percentage of process with real time quality, cycle time and cost
feedback available, percentage of customer facing employees having online information
about customers.

Measures seek to provide indications of the availability of internal process information to
front line employees.
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
MOTIVATION, EMPOWERMENT AND ALIGNMENT

Outcomes of improvements per employee in relation to motivation and empowerment are
key.

Measures are percentage of employee with personal goals aligned to balanced scorecard
and the percentage of employees who achieve personal goals.

THE CUSTOMER PERSPECTIVE

This enables managers to identify the customer and market segments in which the business
unit will compete.

Target segments include existing and potential customers.

Managers should then develop performance measures that track the business unit’s ability
to create satisfied and loyal customers in targeted segments.

The perspectives include core and genuine measures that relate to customer loyalty.

Measures relate to market share, customer retention, new customer acquisition, customer
satisfaction and customer profitability.

MEASURING VALUE PROPOSITIONS

Value propositions are attributes that supplying Companies provide through their products
and services to create loyalty and satisfaction in targeted customer segments Common
attributes despite variations in industries are:

Product or service attributes.

Customer satisfaction/relationship

Image and reputation/market share

Customer profitability

THE INTERNAL BUSINESS PERSPECTIVE

In this perspective, managers identify the critical internal process for which the
organisation must excel in implementing its strategy.

The internal business process measures should focus on internal processes that will have
greatest impact on customer satisfaction and achieving the organisation’s financial
objectives.

Kaplan and Norton identify three principal internal business processes namely:

Innovation
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
Operation processes

Post-service sales processes

INNOVATION

In this process, managers research needs of customers and then create the products or
services that will meet those needs.

Companies identify markets, new customers and the emerging and the latent needs of
existing customers.

They then design and develop new products and services that enable them to reach these
new markets and customers.

Research to establish market size, customer preferences and the price sensitivity for
targeted product and service has been done.

The major problems with research and development are that the benefits are enjoyed
after a long time.

Kaplan and Norton point out that typical develop process in the electronics industry could
have two to five years of sales.

Kaplan and Norton further highlight some of the innovation measures they observed in
organisations as:

Percentage of sales from new products.

New product introduction versus competitors/new product introduction versus plan.

Time to develop next generation of the products

Number of key items in which the company is the first or second to the market.

Break even time.

OPERATION PROCESS

This process starts with the receipt of a customer order and finishes with the delivery of
the product or service to the customer.

The major aim here is to deliver efficient, consistent and timely delivery of existing
products and services to customers.

The emergence of the global competitive environment and the need to make customer
satisfaction an overriding priority has resulted in many companies supplementing their
financial measures with measures of quality; reliability, delivery etc create value for
customers.
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
Thus many organisations now focus on measures that relates to achieving excellence in
terms of time, quality and cost.

CYCLE TIME MEASURES

Total cycle time measures the length of time required from placing of an order by a
customer to the delivery of the product or service to the customer.

In manufacturing organisations cycle time measures the time it takes from starting to
finishing the production process.

Cycle times should be measured and monitored and trends observed

Total manufacturing time consist of the sum of processing time, inspection time, wait time
and move time.

Only process time adds value and the remaining activities are non –value adding activities.

The aim is to reduce time spent on non value added activities and thus minimizing the
manufacturing cycle time.

Thus
MCE =
process time
process time +inspection time wait time move time.

QUALITY MEASURES

These includes measures such as:

Process parts –per million(ppm) defect rates

Yields (ratio of good items produced to good items entering the process.

First pass yields,Waste,Scrap,Rework ,Returns

Percentage of process under statistical process control.

This is the last category relating to the internal business process perspective which
includes warranty and repairs activities, treatment of defects and returns and the process
and administration of customer payments.

Excellent community relationship is vital strategic objective for ensuring continuity
Question 1: Balanced scorecard
The Harare Botanical Gardens has been established for more than 120 years and has the following
mission statement:
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“The Harare Botanical Gardens belongs to the Nation. Our mission is to increase knowledge and
appreciation of plants, their importance and their conservation, by managing and displaying living and
preserved collections and through botanical and horticultural research.”
Located toward the edge of the city, the Gardens are regularly visited throughout the year by many local
families and are an internationally well-known tourist attraction.
Despite charging admission it is one the top five visitor attractions in the country. Every year it answers
many thousands of enquiries from Universities and research establishments, including pharmaceutical
companies from all over the world and charges for advice and access to its collection. Enquiries can range
from access to the plant collection for horticultural work, seeds for propagation or samples for chemical
analysis to seek novel pharmaceutical compounds for commercial exploitation. It receives an annual grant
in aid from Central Government, which is fixed once every five years. The grant in aid is due for review
in three years’ time. The Finance Director has decided that, to strengthen its case when meeting the
Government representatives to negotiate the grant, the Management Board should be able to present a
balanced scorecard demonstrating the performance of the Gardens.
He has asked you, the Senior Management Accountant, to assist him in taking this idea forward.
Many members of the board, which consists of eminent scientists, are unfamiliar with the concept of a
balanced scorecard.
Required:
(a) For the benefit of the Management Board, prepare a briefing on the concept of a balanced scorecard,
which also analyses its usefulness for The Harare Botanical Gardens.
(9 marks)
(b) Discuss the four perspectives that you would employ to develop a suitable balanced scorecard for The
Harare Botanical Gardens and give examples of measures that would be incorporated within each
perspective.
(16 marks)
QUESTION 1
E and E Ltd. consist of a large number of autonomous business units. Each business unit
provides some type of personal transport service (e.g., taxi, car hire services) but the units are
operated and branded separately because they cater for different market segments.
The “Raum Cabs” business unit provides a local service in the Gadzema of Chinhoyi. The main
customers are students, retired people, and young workers. These customers appreciate the good
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value and reliability which are the acknowledged market strengths of “Raum Cabs” compared to
many other transport operators in the area. “Raum Cabs” recently launched a new campaign
advertising its services through the medium of several languages in order to consolidate this part
of its customer base.
The “Spacio Cabs” business unit is based in the same geographical area. Its main customers are
large companies who require rapid, luxurious transport for their senior managers and corporate
visitors. The operating costs of the business unit are high because of the high standards of service
which its customers expect, but “Spacio Cabs” finds it worthwhile to incur these costs because of
the high prices which corporate customers are willing to pay.
Until recently the directors of E and E Ltd. have assessed the performance of each business unit
solely in terms of its monthly profit or loss. However the Financial Director has suggested that,
given the very different strategies of the various business units, it may be appropriate to design a
balanced scorecard for each business unit to facilitate a more comprehensive analysis of its
performance.
REQUIRED:
(a) Outline the four main perspectives (sections) of a balanced scorecard, and discuss the view
that the ‘financial perspective’ should be treated as being of much greater importance than the
other three perspectives. (10 marks)
(b) For each of the two business units described above, give three examples of measures which
you feel should be included in the ‘customer’ perspective of that unit’s balanced scorecard.
Justify the selection of each measure, and explain the assumed linkage between each measure
and the business unit’s long-term financial performance.
(15 marks)
[Total: 25 marks]
Chapter 5
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NON FINANCIAL MEASURES OR CONTROL
Chapter objectives
1. Define non financial measures.
2. Give examples of non financial measures.
3. Explain advantages and disadvantages of non financial measures
NON FINANCIAL MEASURES OR CONTROL

These are controls where non financial performance outcomes are measured
Examples of non financial measures

Human resources -
employee satisfaction
-
Average tenure
-
Turnover

-
Marketing
New product launched
Customer satisfaction
Brand power

Production


-
Number of defects
-
Product returns
-
Capacity utilization
-
New products introduced by suppliers
-
Quality of purchased inputs
Purchasing
Research and development
-
New patents
-
Number of employees with PHDs
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
Customer service
-
Average compliant response time
-
Average wait time
a) It is important to recognize that business operations take place in a competitive,
interactive environment- need to assess performance in relation to the external
aspects as well as the internal costs and efficiency measures that are commonly
used.
Examples of external factors or dimensions considered
1) Quality



Today’s highly competitive global economy demands that a high quality standard is
achieved and maintained in order to avoid losing customers.
Developments such as JIT and its effect in realizing stock levels have further
reinforced the quality message.
Quality can be measured by comparing the value of rejected items and the cost of
correcting defective items.
2) Customer service


The modern philosophy that “the customer is the king “demands a high level of
customer service be opened.
Performance can be measured using the number of customer returns, number of late
deliveries and similar measures.
Alternatively, marked research may be used to test customer reaction.
3) Market share


A business needs to know the size of the market in which it operates and whether the
market is growing in decline or static.
From these external statistics the business share of the market can be monitored.
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3.Staff morale


In order to take advantage of opportunities as they cause it is important for
business staff to be well-trained and motivated.
These may be measure by measuring staff turnover, cost time and absenteeism.
4) Supplier satisfaction


It is important to have good relationship with suppliers so that they will provide the
business with goods and services when they are required.
The most important measure here is number of days credit taken compared to the
agreed terms of trade.
5) Community responsibilities


The modern world expects a business to be supportive of the local community in which
it operates.
This can be measured by the levels of participation and financial support given during
each year.
6) Revenue investment


Certain items of expenditure such as research, development and training costs are
indicators of business long term intentions.
These expenditure levels can be monitors to assess the business commitment to their
future.
Traditional accounting systems record transactions form a monetary point of view. However,
the aspects detailed above demonstrate the need to collect other data, some of which is to
be collected from external source. This will include non financial data and it should be
reported to managers.
The use of strategic management accounting that reports both financial items encourages
managers to think beyond the traditional value based information of management accounting.
A computerized system could be used that enables individual managers to access the levels of
a detailed different performance criterion depending on their personal needs.
Advantages of non financial measures
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Closer link to long term organizational strategies



Financial evaluation systems focus on annual or short term performance against
accounting yardsticks.
They do not deal with progress relative to customer requirements or competitors, nor
other non financial objectives that may be important in achieving profitability,
competitive strength and long term strategic goals, for example, new product
development or expanding organizational capabilities may be important strategic
goals, but may hinder short term accounting performance.
By supplementing accounting measures with non financial data about strategic plans,
companies can communicate objectives and provide measures for managers to address
long term strategy.
Drivers of success

In many industries are intangible assets such as intellectual capital and customer
loyalty rather than hard assets allowed on to statement of financial position though
difficult to quantify non financial data provide indirect qualitative indicators of a
farm’s intangible assets.

Measures related to innovation, management capability, employee relations, quality
brand value explained a significant proportion of a company’s value, even allowing for
accounting assets and liabilities.

By exchanging these intangible assets financially oriented measurement can encourage
managers to make poor, even harmful decisions
Non financial measures can be better indicators of future financial performance.


Even when the ultimate goal is maximizing financial performance, current financial
measures may not capture long term benefits from decisions made now, for
example, research and development tests, or investment in customer satisfaction
which can improve economic performance by increasing revenues and loyalty of
existing customers attracting new customers and reducing transaction costs.
The choice of measures should be based on providing information about managerial
actions and the level of noise in the measures that changes in the performance
measure that are beyond the control of the manager or organization ranging from
changes in the economy to luck 9good or bad)
Managers must be aware of how much success is due to their actions or they will not have the
signals they need to maximize their effect on performance.
Since non financial measures are less susceptible to external noise than accounting measures
their use may improve manager’s performance by providing more precise evaluation of their
actions.
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Disadvantages
They need too much time and are costly resulting in greater costs than benefits
Similarly bureaucracies can cause the measurement process to degenerate into mechanistic
exercises that add little to reaching strategic goals.
Non financial data is measured in many ways and leaves no common denominator. Evaluating
performance or making tradeoffs between attributes is different when some are denominated
in time and some in quantities or percentages and some in arbitrary ways.
Lack of causal link
Many companies adopt non financial measures without articulating the relations between the
measures or verifying that they have a bearing on accounting and stock price performance.
The lack of an explicit causal model of the relations between measures also contributes to
difficulties in evaluating their relative importance. Thus without knowing the size and timing
of associations among measures, companies find it difficult to make decisions or measure
success based on team.
Lack of statistically reliability whether a measure actually represents what it purports to
represent rather than random “measured error”-because measures are based on results of
few surveys, they generally exhibit poor statistical reliability, reducing their ability to
discriminate financial results.
Implementing an evaluation system with too many measures can lead to “measurement
disintegration”-this occurs when an organization abundance of measures dilutes the effect of
the measurement process. Managers choose a variety of measures simultaneously, while
achieving little gain in the main drivers of success.
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