SMAC 1

1
STRATEGIC MANAGEMENT AND ACCOUNTING

• Strategic Management
• Stakeholder analysis
• Corporate objectives
• Sustainable competitive advantages
• Strategic Management Accounting
• Appropriate analysis
• Long-term considerations
• Nonfinancial data

2
STRATEGIC MANAGEMENT AND ANALYSIS

• Strategic considerations
• Strategic Marketing Analysis
• Total Value-Chain Analysis
• Target Costing
• Life-Cycle Management and Costing
• Operational considerations
• Activity Based Analysis
• JIT Operations A Management Philosophy
• Total-Quality Management and Costing

3
STRATEGIC OBJECTIVES

• Primary Objectives
• What the shareowners expect from their
  participation in the organization
• Increase in shareowner value
• Secondary Objectives
• What the organization expects to give to
  and receive from each stakeholder group
  other than its owners
• Increase in social value

4
STRATEGIC MANAGEMENT

• The fundamental idea of strategic planning is
  quite simple Continuously reassess what
  customers want, what competitors are doing, and
  other relevant environmental elements (such as
  emerging technology and trends in government
  legislation) size up these environmental
  changes and use, or develop, available resources
  to turn these changes into advantages.
• Obviously, carrying out strategic planning
  successfully is a lot more difficult than
  understanding what it is.

Atkinson, Anthony A., Rajiv D. Banker, Robert S.
Kaplan, and S. Mark Young, Management
Accounting, Prentice Hall, Inc., 1995, p. 471.
5
WHAT IS STRATEGY?

• Competitive strategy is about being different.
  It means deliberately choosing a different set of
  activities to deliver a unique mix of value.
• the essence of strategy is in the activities --
  choosing to perform activities differently or to
  perform different activities than rivals.
• Porter, Michael E., What is Strategy?, Harvard
  Business Review, November-December, 1996.

6
Porters Strategic Positions

• Cost leadership
• Product or service differentiation
• Focus on market niche

7
DEVELOPING COMPETITIVE ADVANTAGE

Differentiation with Cost Advantage
Superior
Differentiation Advantage
Relative Differentiation Position
Focus
Low Cost Advantage
Stuck-in-the Middle
Inferior
Inferior
Superior
Relative Cost Position
8
STRATEGIC MANAGEMENT ACCOUNTING

• Accounting exists within an business primarily
  to facilitate the development and implementation
  of business strategy...
• Three important generalizations emerge from this
  way of viewing management accounting
• Accounting is not an end in itself, but only a
  means to help achieve business success
• Specific accounting techniques or systems must be
  considered in terms of the role they are intended
  to play
• In evaluating the overall accounting system...
  the key question is whether the overall fit with
  strategy is appropriate.
• Shank, John K. and Vijay Govindarajan, Strategic
  Cost Management, The Free Press, Macmillan, Inc.,
  1993, pp. 6-7.

9
Strategic Cost Management
Strategic position analysis--an organizations
basic way of competing to sell products or
services.
Value chain analysis--the study of
value-producing activities, stretching from basic
raw materials to the final consumer of a product
or service.
Cost driver analysis--the study of factors that
cause or influence costs.
10
BALANCED SCORECARD

• A multi-dimensional measurement system that
  translates an organizations mission and strategy
  into performance measures

11
Balanced Business Scorecard
Vision Strategy

12
LRP vs. STRATEGIC MANAGEMENT

• Long Range Planning
• Historical continuity
• Periodic orientation
• Internal focus
• Optimistic
• Detailed financial terms
• Management by Exception

• Strategic Management
• Recognition of change
• Extended time horizons
• External focus
• Proactive but realistic
• Multiple data sources
• On-line analysis
• Entrepreneurial
• Global viewpoint

13
STRATEGIC MANAGEMENTKey Questions

• In what markets will we compete?
• How will we position ourselves within these
  markets?
• What will the basis of our competitive advantage?
• What specific people, processes, other resources
  are necessary to successfully compete?

14
GROWTH-SHARE MATRIX
High
?
MARKET POTENTIAL
Low
High
Low
MARKET SHARE
15
PROCESS PERSPECTIVE
Post- Sale Service Process
Operations Process
Innovation Process
Create Product/ Service Offering
Customer Need Satisfied
Service the Customer
Deliver the Products/ Services
Build the Products/Services
Identify the Market

16
VALUE CHAIN ANALYSIS

• Focus of the analysis
• External vs. Internal (traditional)
• Highlights profit improvement areas
• Linkages with suppliers
• Linkages with customers
• Process linkages within a business unit
• Linkages across business units
• Steps in the analysis
• Identify an industrys value chain
• Assign costs, revenues, and assets to value
  activities
• Diagnose cost drivers
• Develop sustainable competitive advantages

17
VALUE CHAIN ANALYSISPAPER PRODUCTS INDUSTRY
Timber Farming
Competitor B
Logging and Chipping
Competitor C
Pulp Manufacturing
Competitor D
Paper Manufacturing
Competitor A
Competitor G
Converting Operations
Competitor F
Distribution
Competitor E
End-Use Customer
18
VALUE-CHAIN STRATEGIC MANAGEMENT

• Integration with sustainable competitive
  advantages
• Low cost
• Differentiation
• Management relative to competitors
• Better value for equivalent cost
• Equivalent value for lower cost
• Placement in the value chain
• Each firm is only a part of the total chain
• Overall value chain for each firm is unique

19
ESTABLISHMENT OF TARGET COSTS
Estimated Market Price
Market Research
Define Product/ Customer Niche
Target Cost
Understand Customer Requirements
Define Product Features
Competitor Analysis
Required Profit
20
ATTAINMENT OF TARGET COSTS
Produce
Compute Cost Gap
Design Costs Out
Perform Value Engineering
Release Design to Production
Initial Cost Estimates
Compare to Target Cost
Design Products/ Processes
Estimate Achievable Cost
Actual Cost
Perform Cost Analysis
Undertake Continuous Improvement
21
LIFE-CYCLE MANAGEMENT AND ACCOUNTING

• Cost commitment vs. incurrance
• Product life cycle
• Life-cycle costs
• Whole-life costs
• Management of life-cycle costs
• Strategic implications

22
LIFE-CYCLE COST COMMITMENT
90
85
66
Product Planning
Preliminary Design
Detailed Design Testing
Production
Logistics Support
23
LIFE-CYCLE COST COMMITMENT
Life-cycle Cost
90
85
Cash Flow
66
Life-cycle cost ()
Matched Cost
Product Planning
Preliminary Design
Detailed Design Testing
Production
Logistics Support
24
LIFE-CYCLE COST MANAGEMENT

• Management of activities throughout a products
  entire life-cycle so that a long-term competitive
  advantage is created
• Consideration of the total value-chain of the
  product is essential to life-cycle management
• Specific considerations
• Relation to target costing
• Identification of development stage costs
• Cost reduction and control

25
ACTIVITY BASED ANALYSIS

• Activity Based Costing
• A costing system focused on ESSENTIAL ACTIVITIES
  comprising a firms operations.
• Costs are first traced to these activities and
  then to products/services.
• Activity Based Management
• A system-wide, integrated approach which focuses
  attention on activities performed by the firm and
  assessing their value,
• The objective is to identify and continue only
  those activities that add value.

26
VALUE-ADDED ACTIVITIES

• Those necessary to remain in business
• Required - comply with legal requirements
• Discretionary
• Produces a desired state of change in product or
  service
• Not achievable by other activities
• Enables other activities to be performed
• VALUE-ADDED COSTS
• Costs to perform value-added activities with
  perfect efficiency

27
NONVALUE-ADDED ACTIVITIES

• Activities that are either unnecessary or are
  necessary but inefficiently performed and can be
  improved
• Nonvalue-added activities Nonvalue-added costs
• From THE CUSTOMERS PERSPECTIVE (within strategic
  constraints)
• Examples of nonvalue-added activities
• Scheduling
• Moving
• Waiting
• Inspecting
• Useless accounting reports

28
OBJECTIVES OF ACTIVITY BASED MANAGEMENT

• Elimination of all unnecessary activities
• Increase efficiency of necessary activities
• Improving operating functions
• Improving combination of activities
• Sharing necessary activities
• ADD, NEW , VALUE-ADDED ACTIVITIES

29
The Two-Dimensional ABM Model
Cost Dimension
Resources
Process Dimension
Driver Analysis
Performance Measures
Analysis
What?
Why?
How Well?
Product and Customers
30
PERFORMANCE MEASURESNew Competitive Environment

• Performance standards
• Ideal standards
• Goals for operating level personnel
• Continuous improvement philosophy
• Basis for trend evaluation
• Currently attainable standards
• Reported to top management
• Relates to current resource management
• Directly correlates to ABM

31
JIT OPERATIONS A Management Philosophy

• JIT Operations
• Demand-Pull System
• Focused Operations
• Reduce Setup Time Enables production of small
  batches (generates economies of scope)
• Insignificant Inventories
• Total Quality Management
• Interdisciplinary Labor
• Decentralized Support Services

• Traditional Operations
• Production-Push System
• Functional Departments
• Produce Large Batches Reduces total setup time
  (generates economies of scale)
• Significant Inventories
• Acceptable Quality Levels
• Specialized Labor
• Centralized Support Services

32
Traditional Manufacturing Layout
Dept 1
Dept 2
Dept 3
A
Product A Product B
A
Finished A Finished B
Lathes
Grinding
Welding
B
B
JIT Manufacturing Layout
Cell A
Cell B
Grinder
Lathe
Welding
Lathe
Welding
Product A
Finished A
Product B
Finished B
33
JIT OPERATIONSOther Considerations

• Reduction in Setup Time
• Key to competitive advantages
• Optimum batch of ONE
• Flexibility and diversity
• Direct cost identification
• Reduction in labor costs
• Guide for automation
• Proactive approach
• Need for operational measures
• Simplified accounting

34
JIT OPERATIONSCosts and Limitations

• Commitment from employers and employees
• Continuous improvement
• Empowerment of employees
• Changed relations with suppliers
• Long-term agreements
• Stipulated prices
• Guaranteed quality
• Delivery assured
• Same for many customers
• Reorientation of operations
• JIT is not for everyone

35
JIT OPERATIONSService Organizations

• Essential Concepts Similar
• Demand-Pull
• Focused Operations
• Reduced Cycle Time
• Simplification of Activities
• Continuous Improvement
• Total Quality Operations
• Multidisciplined labor force
• Decentralized support services
• Examples
• Loan application process at banks
• Processing of claims by insurance companies
• Registration process at universities

36
INVENTORY MANAGEMENTEssential Questions

• How much inventory must be ordered or produced?
• How should the purchase order or internal
  production be managed?

37
WHY IS INVENTORY NEEDED?Traditional View

• Balance ordering (or setup) costs and carrying
  costs
• Satisfy customer demand and avoid stock-out costs
• Avoid operating shut-downs
• Buffer against unreliable production processes
• Take advantage of purchase discounts
• Hedge against future price increases

38
INVENTORY COSTS

• Ordering - costs of placing and receiving an
  order
• Clerical costs, documents, insurance, unloading
• Carrying - costs of keeping inventory
• Insurance, taxes, obsolescence, opportunity cost,
  storage
• Stockout - costs of not having enough inventory
• Lost sales, cost of expediting, cost of
  interrupted production
• Setup - costs of preparing operating facilities
  to produce a particular product or service
• Setup labor, lost revenue (during setup) test
  runs, etc.

39
JIT INVENTORY MANAGEMENT

• Setup Carrying Costs
• Costs of acquiring inventory reduced
• Significant reductions in setup time
• Using long-term purchase contracts
• Carrying costs reduced because of lower
  inventories
• Due-Date Performance
• Lead times reduced for quick response
• Focused manufacturing
• Reduction in setup time
• Improved quality

40
JIT INVENTORY MANAGEMENT

• Avoidance of Shutdown
• Preventive maintenance
• Quality control to reduce defects
• Good supplier relationships for availability of
  materials
• Discounts and Price Increases
• Careful vendor selection
• Long-term agreements
• Prices
• Quality
• Reduction in order costs

41
TOTAL QUALITY MANAGEMENT

• Total Quality Management
• Management philosophy that attempts to eliminate
  all defects, waste, and activities that do not
  add value to customers
• Nature of Quality
• The degree of excellence
• Quality product/service is one that conforms to
  customer expectations
• Types of Quality
• Quality of design
• Quality of conformance
• Costs of Quality

42
QUALITY OF DESIGN CONFORMANCE

Do right things right (Winner!)
High
Do right things wrong (failure)
Quality of Design
Do wrong things right (failure)
Do wrong things wrong (failure)
Low
Low
High
Quality of Conformance
43
COSTS OF QUALITY

• Prevention costs
• Incurred to prevent defects in products or
  services being produced
  
• Quality engineering, quality training programs,
  quality planning and reporting, supplier
  evaluations, quality audits, quality circles,
  design reviews, etc.
• Appraisal costs
• Incurred to determine whether products or
  services are conforming to specifications
• Inspection and testing of raw materials,
  packaging inspection, supervising appraisal
  activities, product and process acceptance,
  supplier verification, and field testing
• The objective is to prevent nonconforming goods
  from being shipped to customers

44
COSTS OF QUALITYContinued

• Internal failure costs
• Incurred because nonconforming products and
  services are detected prior to being shipped to
  outside parties (detected by appraisal
  activities)
• Scrap, rework, downtime due to defects,
  reinspection, retesting, and design changes
• External failure costs
• Incurred because products/services fail to
  conform to requirements after being delivered to
  customers
• Returns, Warranties, Repairs, Product liability,
  Compliant adjustments, and LOST SALES!

45
MANAGEMENT OF QUALITY

• Traditional View
• Balance between prevention/appraisal costs and
  internal/external failure costs
• Identification of an optimal level of defects
• World Class View
• Zero defects approach

46
DISTRIBUTION OF QUALITY COSTSTraditional View
Total Quality Costs
Cost
Total Failure Costs
Total Control Costs
Percent Defects
100
Optimal (AQL)
47
QUALITY COSTSContemporary View
Total Quality Costs
Cost
Total Failure Costs
Total Control Costs
100
Percent Defects