Management Accounting Tpoics

A. Operational Tools:

1. Costing Tools:a) Activity-based costing (ABC)ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered as the modern alternative to absorption costing, allowing managers to better understand product and customer net profitability. This provides the business with better information to make value-based and therefore more effective decisions. ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional absorption costing tends to focus on volume- related drivers, such as labour hours, while activity-based costing also uses transaction-based drivers, such as number of orders received. In this way, long-term variable overheads, traditionally considered fixed costs, can be traced to products.The activity-based costing process:

ExampleThe Chinese electricity company Xu Ji used ABC to capture direct costs and variable overheads, which were lacking in the state-owned enterprises (SOE) traditional costing systems. The ABC experience has successfully induced standardisation in their working practices and processes. Standardisation was not a common notion in Chinese culture or in place in many Chinese companies. ABC also acts as a catalyst to Xu Jis IT developments first accounting and office computerisation, then ERP implementation.Prior to the ABC introduction in 2001, Xu Ji operated a traditional Chinese state-enterprise accounting system. A large amount of manual bookkeeping work was involved. Accounting was driven predominantly by external financial reporting purposes, and inaccuracy of product costs became inevitable. At this time, Xu Ji underwent a series of flotation following Chinas introduction of free market competition.The inaccuracy of the traditional costing information seriously impeded Xu Jis ability to compete on pricing. The two main tasks for the ABC system were to: trace direct labour costs directly to product and client contracts; and allocate manufacturing overheads on the basis of up-to-date direct labour hours to contracts.b) Throughput accountingThroughput Accounting (TA) is a principle-based and simplified management accounting approach that provides managers with decision support information for enterprise profitability improvement. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting. As such, Throughput Accounting is neither cost accounting nor costing because it is cash focused and does not allocate all costs (variable and fixed expenses, including overheads) to products and services sold or provided by an enterprise. Management accounting is an organization's internal set of techniques and methods used to maximize shareholder wealth. Throughput Accounting is thus part of the management accountants' toolkit, ensuring efficiency where it matters as well as the overall effectiveness of the organization. It is an internal reporting tool.For example: The railway coach company was offered a contract to make 15 open-topped streetcars each month, using a design that included ornate brass foundry work, but very little of the metalwork needed to produce a covered rail coach. The buyer offered to pay $280 per streetcar. The company had a firm order for 40 rail coaches each month for $350 per unit.C) Overhead AllocationThe allocation of certain overhead costs to produced goods is required under the rules of various accounting frameworks. In many businesses, the amount of overhead to be allocated is substantially greater than the direct cost of goods, so the overhead allocation method can be of some importance.There are two types of overhead, which are administrative overhead and manufacturing overhead. Administrative overhead includes those costs not involved in the development or production of goods or services, such as the costs of front office administration and sales; this is essentially all overhead that is not included in manufacturing overhead. Manufacturing overhead is all of the costs that a factory incurs, other than direct costs.We need to allocate the costs of manufacturing overhead to any inventory items that are classified as work-in-process or finished goods. Overhead is not allocated to raw materials inventory, since the operations giving rise to overhead costs only impact work-in-process and finished goods inventory.The following items are usually included in manufacturing overhead: Depreciation of factory equipment Quality control and inspection Factory administration expenses Rent, facility and equipment Indirect labor and production supervisory wages Repair expenses Indirect materials and supplies Rework labor, scrap and spoilage Maintenance, factory and production equipment Taxes related to production assets Production employees benefits UtilitiesExampleMulligan Imports has a small golf shaft production line, which manufactures a titanium shaft and an aluminum shaft. Considerable machining is required for both shafts, so Mulligan concludes that it should allocate overhead to these products based on the total hours of machine time used. In May, production of the titanium shaft requires 5,400 hours of machine time, while the aluminum shaft needs 2,600 hours. Thus, 67.5% of the overhead cost pool is allocated to the titanium shafts and 32.5% to the aluminum shafts. d) Marginal costing:Marginal costing distinguishes between fixed costs and variable costs as conventionally classified. The marginal cost of a product is its variable cost. This is normally taken to be; direct labour, direct material, direct expenses and the variable part of overheads.Marginal costing is formally defined as: the accounting system in which variable costs are charged to cost units and the fixed costs of the period are written-off in full against the aggregate contribution. Its special value is in decision making.The term contribution mentioned in the formal definition is the term given to the difference between Sales and Marginal cost. ThusMARGINAL COST = VARIABLE COST DIRECT LABOUR + DIRECT MATERIAL + DIRECT EXPENSE + VARIABLE OVERHEADSExampleIf a manufacturing firm produces X unit at a cost of $ 300 and X +1 units at a cost of $ 320, the cost of an additional unit will be $ 20 which is marginal cost. Similarly if the production of X-1 units comes down to $ 280, the cost of marginal unit will be $ 20 (300 280).e) Variance Analysis:Variance Analysis, in managerial accounting, refers to the investigation of deviations in financial performance from the standards defined in organizational budgets. Variance analysis typically involves the isolation of different causes for the variation in income and expenses over a given period from the budgeted standards.ExampleSo for example, if direct wages had been budgeted to cost $100,000 actually cost $200,000 during a period, variance analysis shall aim to identify how much of the increase in direct wages is attributable to: Increase in the wage rate (adverse labor rate variance ); Decline in the productivity of workforce (adverse labor efficiency variance); Unanticipated idle time (labor idle time variance); More wages incurred due to higher production than the budget (favorable sales volume variance).f) Standard Costing:Standard costing is an important subtopic of cost accounting. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.Rather than assigning the actual costs of direct material, direct labor, and manufacturing overhead to a product, many manufacturers assign the expected or standard cost. This means that a manufacturer's inventories and cost of goods sold will begin with amounts reflecting the standard costs, not the actual costs, of a product.Standard costing and the related variances is a valuable management tool. If a variance arises, management becomes aware that manufacturing costs have differed from the standard (planned, expected) costs.If actual costs are greater than standard costs the variance is unfavorable. An unfavorable variance tells management that if everything else stays constant the company's actual profit will be less than planned.If actual costs are less than standard costs the variance is favorable. A favorable variance tells management that if everything else stays constant the actual profit will likely exceed the planned profit.If we assume that a company uses the perpetual inventory system and that it carries all of its inventory accounts at standard cost (including Direct Materials Inventory or Stores), then the standard cost of a finished product is the sum of the standard costs of the inputs:1. Direct material2. Direct labor3. Manufacturing overheada. Variable manufacturing overheadb. Fixed manufacturing overheadUsually there will be two variances computed for each input.

g) Kaizen Costing:Kaizen costing focuses the organizations attention on thing that managers and operators of an existing system can do to reduce costs. Therefore, unlike target costing, which planners use before the product is in production, operations personnel use kaizen costing when the products in the production. Whereas target costing is driven by customer considerations, kaizen costing is driven by periodic profitability targets set internally by senior management (Kaplan & Atkinson, 2001).

h) Life Cycle Costing As mentioned above, target costing places great emphasis on controlling costs by good product design and production is planning, but those upfront activities also cause costs. There might be other costs incurred after a product is sold such as warranty costs and plant decommissioning. When seeking to make a profit on a product it is essential that the total revenue arising from the product exceeds total costs, whether these costs are incurred before, during or after the product is produced. This is the concept of life cycle costing, and it is important to realise that target costs can be driven down by attacking any of the costs that relate to any part of a products life.

i) Target Costing:Target costing is a system under which a company plans in advance for the price points, product costs, and margins that it wants to achieve for a new product. If it cannot manufacture a product at these planned levels, then it cancels the design project entirely. With target costing, a management team has a powerful tool for continually monitoring products from the moment they enter the design phase and onward throughout their product life cycles. It is considered one of the most important tools for achieving consistent profitability in a manufacturing environment.A numerical example of Target and Lifecycle CostingA company is planning a new product. Market research information suggests that the product should sell 10,000 units at $21.00/unit. The company seeks to make a mark-up of 40% product cost. It is estimated that the lifetime costs of the product will be as follows:1. Design and development costs $50,0002. Manufacturing costs $10/unit3. End of life costs $20,000The company estimates that if it were to spend an additional 15,000 on design, manufacturing costs/unit could be reduced.Required:a) What is the target cost of the product?b) What is the original lifecycle cost per unit and is the product worth making on that basis?c) If the additional amount were spent on design, what is the maximum manufacturing cost per unit that could be tolerated if the company is to earn its required mark-up?Solution:The target cost of the product can be calculated as follows:(a) Cost + Mark-up = Selling price100% 40% 140%$15 $6 $21(b) The original life cycle cost per unit = ($50,000+ (10,000 x $10) + $20,000)/10,000 = $17This cost/unit is above the target cost per unit, so the product is not worth making.(c) Maximum total cost per unit = $15. Some of this will be caused by the design and end of life costs: ($50,000 + $15,000 + $20,000)/10,000 = $8.50Therefore, the maximum manufacturing cost per unit would have to fall from $10 to ($15 $8.50) = $6.50.

j) Quality Costing:In process improvement efforts, quality costs or cost of quality is a means to quantify the total cost of quality -related efforts and deficiencies. It was first described by Armand V. Feigenbaum in a 1956 Harvard Business Review article.Prior to its introduction, the general perception was that higher quality requires higher costs, either by buying better materials or machines or by hiring more labor. Furthermore, while cost accounting had evolved to categorize financial transactions into revenues, expenses, and changes in shareholder equity, it had not attempted to categorize costs relevant to quality, which is especially important given that most people involved in manufacturing never set hands on the product. By classifying quality-related entries from a company's general ledger, management and quality practitioners can evaluate investments in quality based on cost improvement and profit enhancement.Quality costs help to show the importance of quality-related activities to management; they demonstrate the cost of non-quality to an organization; they track the causes and effects of the problem, enabling the working out of solutions using quality improvement teams, and then monitoring progress. As a technique in the introduction and development of TQM, quality costing is a powerful tool for enhancing a companys effectiveness. Quality Costing provides pragmatic advice on how to set about introducing and developing a quality costing system and using the data that emerges. (Barrie G. Dale and J.J. Plunkett).

k) Absorption costing Absorption costing is a process of tracing the variable costs of production and the fixed costs of production to the product. Variable Costing traces only the variable costs of production to the product and the fixed costs of production are treated as period expenses.

Job costing:According to this method costs are collected and accumulated according to jobs, contracts, products or work orders. Each job or unit of production is treated as a separate entity for the purpose of costing. Job costing is carried out for the purpose of ascertaining coat of each job and takes into account the cost of materials, labor and overheads etc.

Batch Costing:This is a form of job costing. Under job costing, executed job is used as a cost unit, whereas under batch costing, a lot of similar units which comprises the batch may be used as a cost unit for ascertaining cost. In the case of batch costing separate cost sheets are maintained for each batch of products by assigning a batch number.

Process costing:Process costing is a term used in cost accounting to describe one method for collecting and assigning manufacturing costs to the units produced. Processing cost is used when nearly identical units are mass produced. (Job costing or job order costing is a method used when the units manufactured vary significantly from one another.)To illustrate process costing, let's assume that a product requires several processing operations each of which occurs in a separate department. The costs of Department One for the month of June amount to $150,000 of direct materials and $225,000 of conversion costs (direct labor and manufacturing overhead). If the number of units processed in June in Department One is the equivalent of 100,000 units, the per unit cost of the products processed in Department One in June will be $1.50 for direct materials and $2.25 for conversion costs. These costs will then be transferred to Department Two and its processing costs will be added to the cost of the units.

Contract Costing:According to CIMA, terminology as a form of specific order costing: attribution of costs to individual contracts. Being a form of specific order costing, contract costing is similar to job order costing. Both these forms are concerned with costing of specific orders. However, the term contract costing is used for jobs which take a long time to complete. Further, work being of a contractual in nature, the same is carried on away from the factory premises (Iyengar, 1998).

2. Pricing Tools:

a) Cost plus Pricing:Cost plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, you add together the direct material cost, direct labor cost, and overhead costs for a product, and add to it a markup percentage (to create a profit margin) in order to derive the price of the product. Cost plus pricing can also be used within a customer contract, where the customer reimburses the seller for all costs incurred and also pays a negotiated profit in addition to the costs incurred.The Cost plus CalculationABC International has designed a product that contains the following costs:Direct material costs = $20.00 Direct labor costs = $5.50Allocated overhead = $8.25

The company applies a standard 30% markup to all of its products. To derive the price of this product, ABC adds together the stated costs to arrive at a total cost of $33.75, and then multiplies this amount by (1 + 0.30) to arrive at the product price of $43.88.b) Market sensitive Pricing:The amount by which changes in a product's cost tend to affect consumer demand for that product. The price sensitivity of a product within its target market is often used by a business when determining its optimal pricing and marketing strategy for the product.It is important for the suppliers to understand how cost sensitive the customers are; so that they should focus on some strategies always to keep their customers falling under least price sensitive stage. For example, reducing one dollar on a towels price could put that towel on sale and everybody rushes to buy it, but reducing one dollar on a car will not make any difference and will not attract customers by any means. Hence the primary challenge for all the organizations should be making certain that the change in price is perceptible for all the customers.c) Segmented pricingSegmented pricing is said to be done when a company fixes or sets more than one price for a product, irrespective of its production and distribution costs being the same.Segmentation must be done keeping in mind the cost parameters. Further, the perceived value of the product must be constantly assessed and it must be ensured that the image of the brand doesnt get degraded at any stage due to this activity.

ExampleAwers Inc. manufactures and sells red salmon caviar both online and at a brick and mortar retail location. Awers practices SEGMENTED PRICING because they sell their product at two or more prices, where the differences in price is not based on differences in costs" (Armstrong and Kotler pg. 275). For example, a 200-gram can of caviar costs $5.99 in the retail store and only $5.90 online. This price difference is not due to costs because there is only one factory that makes this product and then it is distributed to the retail store and the online store. Online there is an $18 fee for special refrigerated shipping and handling, but this does not affect the price, since it is an add-on price. The segmented prices reflect differences in demand as well as customer perceived value.d) Price Skimming A Skimming policy is more attractive if demand is inelastic. A skimming pricing policy involves setting prices of products relatively high compared to those of similar products and then gradually lowering prices. The skimming price is the highest price possible that buyers who most desire the product will pay (skim the cream off the top -- skim the innovators). This market segment is more interested in quality, status, uniqueness, etc. This policy is effective in situations where a firm has a substantial lead over competition with a new product.A great example of Skimming is DVD players in the late 1990's and early 2000's - in the late 1990's DVD players sold for $500 and $400 when they first came out, then the price dropped to less than $100 by 2001 by 2004 you can get them for $50 or $60 at many different types of stores.e) Penetration Pricing:A penetration pricing policy involves setting prices of products relatively low compared to those of similar products in the hope that they will secure wide market acceptance that will allow the company to later raise its prices. Such a policy is often used when the firm expects competition from similar products within a short time and when large-scale production and marketing will produce substantial reductions in overall costs. The low price must help keep out the competition, and the company must maintain its low price position.f) Transfer Pricing:Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for good, services, or use of property (including intangible property). Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other purpose. Many governments have adopted transfer pricing rules that apply in determining or adjusting income taxes of domestic and multinational taxpayers. A few countries follow rules that are materially different overall, so the transfer pricing getting momentum.

3. Budgeting Tools:

a) Priority- Based Budgeting:Whether attempting to rebuild in a post - recession climate, or persevering through another year of stagnating or declining revenues , the challenge facing local governments remains: how to allocate scarce resources to achieve the community s highest priorities . Priority - based budgeting provides a new lens that produces powerful insights, and local governments that are using it are making significant breakthroughs.Priority- based budgeting is a way for local governments to spend within their means by continuously focusing on the results most relevant to their communities and the programs that influence those results to the highest possible degree. The process involves a systematic review of existing services, why they exist, what value they offer to citizens, how they benefit the community, what they cost, and what objectives and citizen demands they are achieving. Each service or program is assigned a score based on its contribution to desired results so that tax dollars can be allocated to those with the greatest impact.Priority- based budgeting enables a local government to see more clearly which programs are of the highest relevance and to allocate its resources to its highest priorities and focus on delivering high - quality services that reflect what the community expects from it.b) Activity Based Budgeting:Activity based budgeting is the idea that each activity within an organization should record their costs in order to define their expenditures. This can help tie together strategic goals and determine what costs are needed when creating a budget. The basic premise is to streamline costs, improve business practices and meet objectives rather than simply setting a budget based on history, inflation or revenue growth.In an attempt to control indirect costs and improve the data received from the accounting department, General Electric began using activity based budgeting in the early 1960s. The accounting department noted that many indirect costs could be predicted before the costs were actually incurred. In addition, the different departments were not aware of the effect their expenses had on other departments. In order to resolve this problem they began to look at each specific activity in order to determine its costs to the organization.c) Cash Flow Forecast:A cash flow forecast indicates the likely future movement of cash in and out of the business. It's an estimate of the amount of money you expect to flow in (receipts) and out (payments) of your business and includes all your projected income and expenses. A forecast usually covers the next 12 months; however it can also cover a short-term period such as a week or month. The concept of cash flow is quite easy:Net Cash Position = Receipts PaymentsCash flow forecasting or cash flow management is a key aspect of financial management of a business, planning its future cash requirements to avoid a crisis of liquidity . Cash flow forecasting is important because if a business runs out of cash and is not able to obtain new finance, it will become insolvent.Cash flow is the life-blood of all businessesparticularly start-ups and small enterprises. As a result, it is essential that management forecast (predict) what is going to happen to cash flow to make sure the business has enough to survive. How often management should forecast cash flow is dependent on the financial security of the business. If the business is struggling, or is keeping a watchful eye on its finances, the business owner should be forecasting and revising his or her cash flow on a daily basis. However, if the finances of the business are more stable and 'safe', then forecasting and revising cash flow weekly or monthly is enough. d) Zero-Based BudgetingZero-based budgeting is a budgeting method that involves starting with $0 and adding only enough money in the budget to cover expected costs. Example:There are many ways to create company budgets. Let's take the marketing department of Company XYZ as an example. Last year , the department spent $1 million. What's the right way to set a budget for next year?You might simply give the department $1 million again, but this might not reflect the changes in the marketing programs next year, the need to hire more marketing people due to additional sales, or other factors.Another way might be to give all departments a 10% increase or decrease based on what the board of directors would like earnings per share to be next year. This would give the department $1.1 million or $900,000, depending on which way the board goes.A third way would be zero-based budgeting, whereby the department starts with no budgeted funds and must justify every person and expense that should be included in the budget for the coming year. This might result in a budget of, say, $1,024,314, which is higher than last year but reflective of the actual needs next year.e) Incremental budgeting:Incremental budgeting is budgeting based on slight changes from the preceding period's budgeted results or actual results. This is a common approach in businesses where management does not intend to spend a great deal of time formulating budgets, or where it does not perceive any great need to conduct a thorough re-evaluation of the business. This mindset typically occurs when there is not a great deal of competition in an industry, so that profits tend to be perpetuated from year to year.

4. Profitability Analysis Tools:

a) Customer profitability analysis:Customer profitability analysis is a decision tool used to evaluate the profitability of a customer relationship. The analysis procedure compels banks to be aware of the full range of services purchased by each customer and to generate meaningful cost estimates for providing each service. The applicability of customer profitability analysis has been questioned in recent years with the move toward unbundling services.b) Relevant CostingRelevant costing is a management accounting toolkit that helps managers reach decisions when they are posed with the following questions:1. Whether to buy a component from an external vendor or manufacture it in house?2. Whether to accept a special order?3. What price to charge on a special order?4. Whether to discontinue a product line?5. How to utilize the scarce resource optimally?, etc. Relevant costing is an incremental analysis which means that it considers only relevant costs i.e. costs that differ between alternatives and ignores sunk costs i.e. costs which have been incurred, which cannot be changed and hence are irrelevant to the scenario.ExampleCompany A manufactures bicycles. It can produce 1,000 units in a month for a fixed cost of $300,000 and variable cost of $500 per unit. Its current demand is 600 units which it sells at $1,000 per unit. It is approached by Company B for an order of 200 units at $700 per unit. Should the company accept the order?SolutionA layman would reject the order because he would think that the order is leading to loss of $100 per unit assuming that the total cost per unit is $800 (fixed cost of $300,000/1,000 and variable cost of $500 as compared to revenue of $700).On the other hand, a management accountant will go ahead with the order because in his opinion the special order will yield $200 per unit. He knows that the fixed cost of $300,000 is irrelevant because it is going to be incurred regardless of whether the order is accepted or not. Effectively, the additional cost which Company A would have to incur is the variable cost of $500 per unit. Hence, the order will yield $200 per unit ($700 minus $500 of variable cost).

c) Cost-Volume-Profit AnalysisCost-volume-profit (CVP) analysis is used to determine how changes in costs and volume affect a company's operating income and net income. In performing this analysis, there are several assumptions made, including: Sales price per unit is constant. Variable costs per unit are constant. Total fixed costs are constant. Everything produced is sold. Costs are only affected because activity changes.If a company sells more than one product, they are sold in the same mix. CVP analysis requires that all the company's costs, including manufacturing, selling, and administrative costs, be identified as variable or fixed.If The Three M's, Inc., has sales of $750,000 and total variable costs of $450,000, its contribution margin is $300,000. Assuming the company sold 250,000 units during the year, the per unit sales price is $3 and the total variable cost per unit is $1.80. The contribution margin per unit is $1.20. The contribution margin ratio is 40%. It can be calculated using either the contribution margin in dollars or the contribution margin per unit. To calculate the contribution margin ratio, the contribution margin is divided by the sales or revenues amount.d) Economic Value to the Customer (EVC):One of the most difficult areas of the product role is setting product price. Everyone wants to add their 2 cents and opinions fly around the room, often without any research or understanding of pricing dynamics. There are however many flawed practices when understanding the value to the customer, such as taking into account development/products times or cost, "coolness factor", size of the customer's business, or even number of customer units.The reality is that the maximum amount a customer is willing to pay (the Economic Value to the Customer or EVC) can be calculated with a simple formula:EVC = Reference Value + Differentiation ValueAs an example, when I moved to California two years ago I needed to buy a new car for commuting in the bay area. Initially, I was thinking about a BMW M3 convertible (my requirements list has convertible as mandatory), and went to talk to the BMW dealer, took a test drive etc. From memory the M3 was about $70K.After driving the M3 I decided to check out the Mini Cooper S convertible, and found that it met my needs and had a total price of approx. $35K. So the Mini Cooper S became my Reference Value. Although the BMW M3 was clearly a better car than the Mini, I couldn't determine $35K of differentiation value. The Mini had the same three year service plan included, had a cabin size roughly the same as the BMW, had an automatic roof, had more than enough power. So purchased the Mini and I have been very happy with my decision.5. Investment Decision Making tools:

a) Capital Asset Pricing Model (CAPM):The capital asset pricing model (CAPM) is used to calculate the required rate of return for any risky asset. Your required rate of return is the increase in value you should expect to see based on the inherent risk level of the asset.Example: As an analyst, you could use CAPM to decide what price you should pay for a particular stock. If Stock A is riskier than Stock B, the price of Stock A should be lower to compensate investors for taking on the increased risk.The CAPM formula is: ra = rrf + Ba (rm-rrf)where:rrf = the rate of return for a risk-free securityrm = the broad market's expected rate of returnBa = beta of the assetCAPM can be best explained by looking at an example. Assume the following for Asset XYZ:rrf=3%, rm=10%, Ba = 0.75 By using CAPM, we calculate that you should demand the following rate of return to invest in Asset XYZ: ra = 0.03 + [0.75 * (0.10 - 0.03)] = 0.0825 = 8.25%b) Sensitivity analysis:It is the Simulation analysis in which key quantitative assumptions and computations (underlying a decision, estimate, or project) are changed systematically to assess their effect on the final outcome. Employed commonly in evaluation of the overall risk or in identification of critical factors, it attempts to predict alternative outcomes of the same course of action. In comparison, contingency analysis uses qualitative assumptions to paint different scenarios. Also called what-if analysis.

Sensitivity analysis (SA), broadly defined, is the investigation of these potential changes and errors and their impacts on conclusions to be drawn from the model. There is a very large literature on procedures and techniques for SA. This paper is a selective review and overview of theoretical and methodological issues in SA. There are many possible uses of SA, described here within the categories of decision support, communication, increased understanding or quantification of the system, and model development. The paper focuses somewhat on decision support. It is argued that even the simplest approaches to SA can be theoretically respectable in decision support if they are done well. Many different approaches to SA are described, varying in the experimental design used and in the way results are processed. Possible overall strategies for conducting SA are suggested. It is proposed that when using SA for decision support, it can be very helpful to attempt to identify which of the following forms of recommendation is the best way to sum up the implications of the model: (a) do X, (b) do either X or Y depending on the circumstances, (c) do either X or Y, whichever you like, or (d) if in doubt, do X. A system for reporting and discussing SA results is recommended.c) Non-financial factors for investment appraisal:Although the financial case for making an investment is a vital part of the decision-making process, non-financial factors can also be important.Key non-financial factors may include: meeting the requirements of current and future legislation matching industry standards and good practice improving staff morale, making it easier to recruit and retain employees improving relationships with suppliers and customers improving your business reputation and relationships with the local community developing the capabilities of your business, such as building skills and experience in new areas or strengthening management systems anticipating and dealing with future threats, such as protecting intellectual property against potential competitionFor example, you might need to take into account the environmental impact of a potential investment. To some extent, this may be reflected in financial factors, e.g. the energy savings offered by new machinery. But other effects - such as the effect on your reputation - will also be important. See our guide to making the case for environmental improvements.d) Net present value (NPV):NPV is the difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.For example, an investment of $1,000 today at 10 percent will yield $1,100 at the end of the year; therefore, the present value of $1,100 at the desired rate of return (10 percent) is $1,000. The amount of investment ($1,000 in this example) is deducted from this figure to arrive at net present value which here is zero ($1,000-$1,000). A zero net present value means the project repays original investment plus the required rate of return. A positive net present value means a better return, and a negative net present value means a worse return, than the return from zero net present value. It is one of the two discounted cash flow techniques (the other is internal rate of return) used in comparative appraisal of investment proposals where the flow of income varies over time.

e) Internal rate of return (IRR) One of the two discounted cash flow (DCF) techniques (the other is net present value or NPV) used in comparative appraisal of investment proposals where the flow of income varies over time. IRR is the average annual return earned through the life of an investment and is computed in several ways. Depending on the method used, it can either be the effective rate of interest on a deposit or loan, or the discount rate that reduces to zero the net present value of a stream of income inflows and outflows. If the IRR is higher than the desired rate of return on investment, then the project is a desirable one. However, it is a mechanical method (computed usually with a spreadsheet formula) and not a consistent principle. It can give wrong or misleading answers, especially where two mutually-exclusive projects are to be appraised. Also called dollar weighted rate of return.f) Accounting rate of return (ARR):The accounting rate of return (ARR) is a simple estimate of a project's or investment's profitability that subtracts money invested from returns without regard to interest accrual or applicable taxes.Example: Also called the "simple rate of return," the accounting rate of return (ARR) allows companies to evaluate the basic viability and profitability of a project based on projected revenue less any money invested. The ARR may be calculated over one or more years of a project's lifespan. If calculated over several years, the averages of investment and revenue are taken.The ARR itself is derived from dividing the average profit (positive or negative) by the average amount of money invested. For instance, if the annual profit for a given project over a three year span averages $100, and the average investment in a given year is $1000, the ARR would be $100 / $1000 = 10%.g) Discounted payback period:Timeframe required to regain the value of discounted cash flow, so that it equals the value of the initial investment. The formula to calculate this figure is: Payback Period (Year before recovery + unrecovered cost at the start of the year/cash flow during the year).One of the major disadvantages of simple payback period is that it ignores the time value of money. To counter this limitation, an alternative procedure called discounted payback period may be followed, which accounts for time value of money by discounting the cash inflows of the project.h) Payback period:The amount of time taken to break even on an investment. Since this method ignores the time value of money and cash flows after the payback period, it can provide only a partial picture of whether the investment is worthwhile.

6) Other operational tools:

a) Theory of constraints:Used in cost accounting, this method is based on outlining how to eliminate impacts on production while still increasing the profit margin. Impacts on production can include a decrease in production output because of mechanical difficulties or handling waste products effectively.The Theory of Constraints is an organizational change method that is focused on profit improvement. The essential concept of TOC is that every organization must have at least one constraint. A constraint is any factor that limits the organization from getting more of whatever it strives for, which is usually profit. The Goal focuses on constraints as bottleneck processes in a job-shop manufacturing organization. However, many non-manufacturing constraints exist, such as market demand, or a sales departments ability to translate market demand into orders.b) Linear programming:Linear programming (LP; also called linear optimization) is a method to achieve the best outcome (such as maximum profit or lowest cost) in a mathematical model whose requirements are represented by linear relationships. Linear programming is a special case of mathematical programming (mathematical optimization).More formally, linear programming is a technique for the optimization of a linear objective function, subject to linear equality and linear inequality constraints. Its feasible region is a convex polytope, which is a set defined as the intersection of finitely many half spaces, each of which is defined by a linear inequality. Its objective function is a real-valued affine function defined on this polyhedron. A linear programming algorithm finds a point in the polyhedron where this function has the smallest (or largest) value if such a point exists.c) Benchmark:A benchmark is a feasible alternative to a portfolio against which performance is measured.Example: Let's assume you compare the returns of your stock portfolio, which is a broadly diversified collection of small-cap stocks and is managed by Company XYZ, with the Russell 2000 index, which you feel is an accurate universe of feasible alternative investments. If Company XYZ's portfolio returns 5.5% in a year but the Russell 2000 (the benchmark) returns 5.0%, then we would say that your portfolio beat its benchmark. Benchmarks help an investor communicate his or her wishes to a portfolio manager. By assigning the manager a benchmark with which to compare the portfolio's performance, the portfolio manager will make investment decisions with the eci's performance in mind.

d) Decision Tree Analysis:A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. It is one way to display an algorithm.Decision trees are commonly used in operations research, specifically in decision analysis, to help identify a strategy most likely to reach a goal.e) Customer Relationship Management (CRM):Customer Relationship Management are those aspects of a business strategy which relate to techniques and methods for attracting and retaining customers. Customer relationship management (CRM) is a system for managing a companys interactions with current and future customers. It often involves using technology to organize, automate and synchronize sales, marketing, customer service, and technical support.Customer relationship management (CRM) refers to the practices, strategies and technologies that companies use to manage, record and evaluate customer interactions in order to drive sales growth by deepening and enriching relationships with their customer bases.f) 360-degree feedback:In human resources or industrial psychology, 360-degree feedback, also known as multi-rater feedback, multi-source feedback, or multi source assessment, is feedback that comes from members of an employee's immediate work circle. Most often, 360-degree feedback will include direct feedback from an employee's subordinates, peers (colleagues), and supervisor(s), as well as a self-evaluation. It can also include, in some cases, feedback from external sources, such as customers and suppliers or other interested stakeholders. It may be contrasted with "upward feedback," where managers are given feedback only by their direct reports, or a "traditional performance appraisal," where the employees are most often reviewed only by their managers.The results from a 360-degree evaluation are often used by the person receiving the feedback to plan and map specific paths in their development. Results are also used by some organizations in making administrative decisions related to pay and promotions. When this is the case, the 360 assessment is for evaluation purposes, and is sometimes called a "360-degree review." However, there is a great deal of debate as to whether 360-degree feedback should be used exclusively for development purposes, or should be used for appraisal purposes as well. g) Value Chain Analysis:Value chain analysis (VCA) is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. Value chain represents the internal activities a firm engages in when transforming inputs into outputs.M. Porter introduced the generic value chain model in 1985. Value chain represents all the internal activities a firm engages in to produce goods and services. VC is formed of primary activities that add value to the final product directly and support activities that add value indirectly. Below you can see the Porters VC model.Primary Activities

Support Activities

Although, primary activities add value directly to the production process, they are not necessarily more important than support activities. Nowadays, competitive advantage mainly derives from technological improvements or innovations in business models or processes. Therefore, such support activities as information systems, R&D or general management are usually the most important source of differentiation advantage. On the other hand, primary activities are usually the source of cost advantage, where costs can be easily identified for each activity and properly managed.h) Total Quality Management (TQM):A core definition of total quality management (TQM) describes a management approach to longterm success through customer satisfaction. In a TQM effort, all members of an organization participate in improving processes, products, services, and the culture in which they work. The methods for implementing this approach come from the teachings of such quality leaders as Philip B. Crosby, W. Edwards Deming, Armand V. Feigenbaum, Kaoru Ishikawa, and Joseph M. Juran. Total Quality Management (TQM) refers to management methods used to enhance quality and productivity in business organizations. TQM is a comprehensive management approach that works horizontally across an organization, involving all departments and employees and extending backward and forward to include both suppliers and clients/customers.TQM is only one of many acronyms used to label management systems that focus on quality. Other acronyms include CQI (continuous quality improvement), SQC (statistical quality control), QFD (quality function deployment), QIDW (quality in daily work), TQC (total quality control), etc. Like many of these other systems, TQM provides a framework for implementing effective quality and productivity initiatives that can increase the profitability and competitiveness of organizations.

B. Performance Measurement Tools:

i) Return On Capital Employed (ROCE)A financial ratio that measures a company's profitability and the efficiency with which its capital is employed. Return on Capital Employed (ROCE) is calculated as:ROCE = Earnings Before Interest and Tax (EBIT) / Capital EmployedA higher ROCE indicates more efficient use of capital. ROCE should be higher than the companys capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value.ExampleScott's Auto Body Shop customizes cars for celebrities and movie sets. During the year, Scott had a net operating profit of $100,000. Scott reported $100,000 of total assets and $25,000 of current liabilities on his balance sheet for the year.Accordingly, Scott's return on capital employed would be calculated like this:

As you can see, Scott has a return of 1.33. In other words, every dollar invested in employed capital, Scott earns $1.33. Scott's return might be so high because he maintains low assets level.ii) Cash Flow Return on Investment (CFROI):A valuation model that assumes the stock market sets prices based on cash flow, not on corporate performance and earnings.

It's valuable to consider as many models as possible when looking at the stock market. Financial theory is similar to scientific theory; no model can be entirely proved or disproved, and a diversity of opinions is encouraged Cash flow return on investment (CFROI) is the indicator that helps a firm to evaluate the performance of an investment or product. It can also be termed as the calculation that helps the stock market to set prices on the basis of cash flow.

iii) Residual Income:The amount of income that an individual has after all personal debts, including the mortgage, have been paid. This calculation is usually made on a monthly basis, after the monthly bills and debts are paid. Also, when a mortgage has been paid off in its entirety, the income that individual had been putting toward the mortgage becomes residual income. Residual income is often an important component of securing a loan. The loaning institution usually assesses the amount of residual income an individual has left after paying off other debts each month. If the individual requesting the loan has sufficient residual income to take on additional debt, the loaning institution will be more likely to grant the loan because having an adequate amount of residual income will ensure that the borrower has sufficient funds to make the loan payment each month. Some examples of residual income sources include: Royalties from intellectual property, such as books and patents Subscriptions, advertisements, donations or affiliate links from your blog or website Purchasing an office or apartment building and leasing or renting out the properties A savings and investment program that earns interest E-book sales Stock photography royaltiesiv) Economic Value Added (EVA):Economic value added (EVA) is an internal management performance measure that compares net operating profit to total cost of capital. Stern Stewart & Co. is credited with devising this trademarked concept. Economic value added (EVA) is also referred to as economic profit.Example: The formula for EVA is:

EVA = Net Operating Profit After Tax - (Capital Invested x WACC)

Assume that Company XYZ has the following components to use in the EVA formula:NOPAT = $3,380,000Capital Investment = $1,300,000WACC = .056 or 5.60%EVA = $3,380,000 - ($1,300,000 x .056) = $3,307,200

The positive number tells us that Company XYZ more than covered its cost of capital. A negative number indicates that the project did not make enough profit to cover the cost of doing business.

v) Profit Before Tax (PBT):A profitability measure that looks at a company's profits before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax. Also referred to as "earnings before tax ". Profit before tax measures a company's operating and non-operating profits before taxes are considered. It is the same as earnings before taxes.Example: Simplifying things a bit, revenue minus expenses equals earnings. The resulting figure is usually listed on a company's income statement right before taxes are listed. For example, take a look at the income statement for Company XYZ:

In this example, profit before tax is $150,000 while net income is $100,000.vi) Return on Investment (ROI):Return on investment (ROI) measuresthe gain or lossgeneratedon an investment relative to the amount of money invested. ROI is usually expressed as a percentage and is typically used for personal financial decisions, to compare a company's profitability or to compare the efficiency of different investments. The return on investment formula is: ROI = (Net Profit / Cost of Investment) X 100Example: The ROI calculation is flexible and can be manipulated for different uses. A company may use the calculation to compare the ROI on different potential investments, while an investor could use it to calculate a return on a stock.For example, an investor buys $1,000 worth of stocks and sells the shares two years later for $1,200. The net profit from the investment would be $200 and the ROI would be calculated as follows:ROI = (200 / 1,000) x 100 = 20%The ROI in the example above would be 20%. The calculation can be altered by deducting taxes and fees to get a more accurate picture of the total ROI.

C. Performance Management Tools:

i) Balanced Scorecard:A performance metric used in strategic management to identify and improve various internal functions and their resulting external outcomes. The balanced scorecard attempts to measure and provide feedback to organizations in order to assist in implementing strategies and objectives. This management technique isolates four separate areas that need to be analyzed: (1) learning and growth, (2) business processes, (3) customers, and (4) finance. Data collection is crucial to providing quantitative results, which are interpreted by managers and executives and used to make better long-term decisions.

ii) Business Process Reengineering (BPR):Thorough rethinking of all business processes, job definitions, management systems, organizational structure, work flow, and underlying assumptions and beliefs. BPR's main objective is to break away from old ways of working, and effect radical (not incremental) redesign of processes to achieve dramatic improvements in critical areas (such as cost, quality, service, and response time) through the in-depth use of information technology. Also called business process redesign. Business process reengineering (BPR) is the analysis and redesign of workflow within and between enterprises.

Business process re-engineering is a business management strategy, originally pioneered in the early 1990s, focusing on the analysis and design of workflows and business processes within an organization. BPR aimed to help organizations fundamentally rethink how they do their work in order to dramatically improve customer service, cut operational costs, and become world-class competitors. In the mid-1990s, as many as 60% of the Fortune 500 companies claimed to either have initiated reengineering efforts, or to have plans to do so. iii) Value-based management:Recent years have seen a plethora of new management approaches for improving organizational performance: total quality management, flat organizations, empowerment, continuous improvement, reengineering, kaizen, team building, and so on. Many have succeededbut quite a few have failed. Often the cause of failure was performance targets that were unclear or not properly aligned with the ultimate goal of creating value. Value-based management (VBM) tackles this problem head on. It provides a precise and unambiguous metricvalueupon which an entire organization can be built.

The thinking behind VBM is simple. The value of a company is determined by its discounted future cash flows. Value is created only when companies invest capital at returns that exceed the cost of that capital. VBM extends these concepts by focusing on how companies use them to make both major strategic and everyday operating decisions. Properly executed, it is an approach to management that aligns a company's overall aspirations, analytical techniques, and management processes to focus management decision making on the key drivers of value.iv) Six Sigma:Six Sigma is a set of techniques and tools for process improvement. It was developed by Motorola in 1986. Jack Welch made it central to his business strategy at General Electric in 1995. Today, it is used in many industrial sectors. The term Six Sigma originated from terminology associated with manufacturing, specifically terms associated with statistical modeling of manufacturing processes. The maturity of a manufacturing process can be described by a sigma rating indicating its yield or the percentage of defect-free products it creates. DMAIC

The five steps of DMAIC Define the system, the voice of the customer and their requirements, and the project goals, specifically. Measure key aspects of the current process and collect relevant data. Analyze the data to investigate and verify cause-and-effect relationships. Determine what the relationships are, and attempt to ensure that all factors have been considered. Seek out root cause of the defect under investigation. Improve or optimize the current process based upon data analysis using techniques such as design of experiments, poka yoke or mistake proofing, and standard work to create a new, future state process. Set up pilot runs to establish process capability. Control the future state process to ensure that any deviations from the target are corrected before they result in defects. Implement control systems such as statistical process control, production boards, visual workplaces, and continuously monitor the process.Some organizations add a Recognize step at the beginning, which is to recognize the right problem to work on, thus yielding an RDMAIC methodology. v) Value Stream Mapping:Value stream mapping is a lean manufacturing or lean enterprise technique used to document, analyze and improve the flow of information or materials required to produce a product or service for a customer.

A value stream map (AKA end-to-end system map) takes into account not only the activity of the product, but the management and information systems that support the basic process. This is especially helpful when working to reduce cycle time, because you gain insight into the decision making flow in addition to the process flow. It is actually a Lean tool.The basic idea is to first map your process, then above it map the information flow that enables the process to occur. Value stream mapping

Value stream mapping usually employs standard symbols to represent items and processes, therefore knowledge of these symbols is essential to correctly interpret the production system problems.Value stream mapping is a lean-management method for analyzing the current state and designing a future state for the series of events that take a product or service from its beginning through to the customer. At Toyota, it is known as "material and information flow mapping".It can be applied to nearly any value chain.vi) Performance Prism :Business performance is a concept that has many dimensions and driven by multiple parameters. Most of the existing frameworks do capture the components of performance measurement, but in isolation and not as one integrated unit. This is solved by the performance prism framework.The five facets of the prismThe Performance Prism aims to manage the performance of an organisation from five interrelated facets:1. Stakeholder satisfaction who are our stakeholders and what do they want?2. Stakeholder contribution what do we want and need from our stakeholders?3. Strategies what strategies do we need to put in place to satisfy the wants and needs of or our stakeholders while satisfying our own requirements too?4. Processes what processes do we need to put in place to enable us to execute our strategies?5. Capabilities what capabilities do we need to put in place to allow us to operate our processes?

The Prism is designed to be a flexible tool it can be used for commercial or non-profit organisations, big and small. When light is shined into a prism, it is refracted, thus the Prism shows the hidden complexity of white light. According to Neely and Adams, the Performance Prism illustrates the true complexity of performance measurement and management.

D. Strategic Management Tools:

D.1. Performance Reporting Tools:a) Value Added Reporting:A new form of accounting statement--the value- added statement--is gaining popularity in the United Kingdom, and could easily be adopted in the United States, with beneficial results. Riahi-Belkaoui maintains that the value-added statement can be viewed as a modified income statement: it reports the operating performance of a company at a given point in time, using both accrual and matching procedures. Unlike the income statement, however, the VAS is interpreted not as a return to shareholders but as a return to the larger group of capital and labor providers. Belkaoui spells out how the statement is developed, how it can be adapted to U.S. needs, and what its potential benefits would be. His book will thus interest not only accountants, teachers, and students who follow trends in international and multi-national accounting, but also those who want to prepare for the development of techniques and procedures that might be anticipated in the U.S.

b) Contribution after variable costs:Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.The phrase "contribution margin" can also refer to a per unit measure of a product's gross operating margin, calculated simply as the product's price minus its total variable costs.

The formula for contribution margin is the sales price of a product minus its variable costs. In other words, calculating the contribution margin determines the sales amount left over after adjusting for the variable costs of selling additional products.Example of Contribution MarginSuppose that a company is analyzing its revenues and expenses. The company has sales of $1,000,000 and variable costs of $400,000. The contribution margin for this example would be the difference of $1,000,000 and $400,000, which is $600,000. The $600,000 is the amount left over to pay fixed costs. A 'per product' margin can be found by dividing $600,000 by the number of units sold.c) Gross Margin:Gross margin is net sales less the cost of goods sold. The gross margin reveals the amount that an entity earns from the sale of its products and services, before the deduction of any selling and administrative expenses. The figure can vary dramatically by industry. For example, a company that sells electronic downloads through a website may have an extremely high gross margin, since it does not sell any physical goods to which a cost might be assigned. Conversely, the sale of a physical product, such as an automobile, will result in a much lower gross margin.The amount of gross margin earned by a business dictates the level of funding left with which to pay for selling and administrative activities, financing costs, and dividend payments to investors.Gross Margin FormulaThe calculation is: (Net sales - Cost of goods sold) / Net salesFor example, a company has sales of $1,000,000 and cost of goods sold of $750,000, which results in a gross margin of $250,000 and a gross margin percentage of 25%. The gross margin percentage may be stated in a company's income statement.d) Segmental Margin:Segment margin is the amount of net profit or loss generated by a segment of a business. It is extremely useful to track segment margins (especially on a trend line) in order to learn which parts of a total business are performing better or worse than average. The analysis is also useful for determining where to invest additional funds in a business. However, the measurement is of little use for smaller organizations, since they are not large enough to have multiple business segments.For a public company, any business unit that has at least 10% of the revenues, net profits, or assets of the parent company Another use of the segment margin is on an incremental basis, where you model the estimated impact of a specific customer order (or other activity) into the existing segment margin in order to forecast the results of accepting the customer order (or other activity).e) Net Profit Margin:Net profit margin is the percentage of revenue remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company's total revenue.

The net profit margin formula looks at how much of a company's revenues are kept as net income. The net profit margin is generally expressed as a percentage. Both net income and revenues can be found on a company's income statement.

D.2. Strategic Tools:a) Strategy Mapping:A Strategy Map contains the answer to the question, What do you want to accomplish. A Strategy Map does not contain measures, it contains objectives. This simplifies the selection of measures in the Balanced Scorecard. Strategy maps instill the discipline of Objectives before Measures. A Strategy Map contains objectives that are linked in a cause and effect relationship. The cause and effect relationship is described between objectives in perspectives. Those perspectives are the four main perspectives of the Balanced Scorecard approach, which describe the cause and effect relationship. The scorecard components (Objectives, measures, targets, initiatives, assessments, responsibility) sit behind the objectives on the strategy map.A Strategy Map is about focus and choice. A Strategy Map for a management team contains the few things that that team have to focus on to make the biggest difference. For this reason, Strategy Maps are not operational maps:b) Core Competencies:In their 1990 article entitled, The Core Competence of the Corporation, C.K. Prahalad and Gary Hamel coined the term core competencies, or the collective learning and coordination skills behind the firm's product lines. They made the case that core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services.A core competency is knowledge or expertise in a given area. Core competencies can be assessed by observing a person's behavior at work, while playing a sport or by reviewing a company's output.These examples of different kinds of core competency show how the main strength of a person or a group is its core competency.Examples of Core CompetencyAnalytical Thinking - Applies logic to solve problems and get the job done.Client Service - Ability to respond to the clients and anticipate their needs.Computer Competency - Is skilled at operating a computer.Conflict Resolution - Works to resolve differences and maintain work relationships.Continuous Education - Implements professional development and training.Creative Thinking - Ability to look outside the box and develop new strategies.Decision Making - Can make decisions and take responsibility for them.Document Use - Ability to use and understand documents.

c) Risk management:The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. An organization may use risk assumption, risk avoidance, risk retention , risk transfer , or any other strategy (or combination of strategies) in proper management of future events .Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risk managements objective is to assure uncertainty does not deviate the endeavor from the business goals.Risk sources are more often identified and located not only in infrastructural or technological assets and tangible variables, but in Human Factor variables, Mental States and Decision Making. The interaction between Human Factors and tangible aspects of risk, highlights the need to focus closely into Human Factor as one of the main drivers for RiskCertain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase. For example, it has been shown that one in six IT projects experience cost overruns of 200% on average, and schedule overruns of 70%.d) Mission statement:"Statement of purpose" redirects here. For use in the university and college admissions , see admissions essay .A mission statement is a statement of the purpose of a company, organization or person; its reason for existing; a written declaration of an organization's core purpose and focus that normally remains unchanged over time.Properly crafted mission statements (1) serve as filters to separate what is important from what is not, (2) clearly state which markets will be served and how, and (3) communicate a sense of intended direction to the entire organization. A mission is different from a vision in that the former is the cause and the latter is the effect; a mission is something to be accomplished whereas a vision is something to be pursued for that accomplishment. Also called company mission, corporate mission, or corporate purpose.e) Value engineering:Value engineering (VE) is systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost . Value can therefore be increased by either improving the function or reducing the cost . It is a primary tenet of value engineering that basic functions be preserved and not be reduced as a consequence of pursuing value improvements.The reasoning behind value engineering is as follows: if marketers expect a product to become practically or stylistically obsolete within a specific length of time, they can design it to only last for that specific lifetime. The products could be built with higher-grade components, but with value-engineering they are not because this would impose an unnecessary cost on the manufacturer, and to a limited extend also an increased cost on the purchaser. Value engineering will reduce these costs. A company will typically use the least expensive components that satisfy the product's lifetime projections.How is Value Engineering Applied?The technique of Value Engineering is governed by a structured decision making process to assess the value of procedures or services. Whenever unsatisfactory value is found, a Value Management Job plan can be followed. This procedure involves the following 8 phases :1. Orientation 2. Information 3. Function 4. Creativity 5. Evaluation 6. Recommendation 7. Implementation 8. Auditf) Competitor Analysis:In formulating business strategy, managers must consider the strategies of the firm's competitors. While in highly fragmented commodity industries the moves of any single competitor may be less important, in concentrated industries competitor analysis becomes a vital part of strategic planning.Casual knowledge about competitors usually is insufficient in competitor analysis. Rather, competitors should be analyzed systematically, using organized competitor intelligence-gathering to compile a wide array of information so that well informed strategy decisions can be made.Competitor Analysis FrameworkMichael Porter presented a framework for analyzing competitors. This framework is based on the following four key aspects of a competitor: Competitor's objectives Competitor's assumptions Competitor's strategy Competitor's capabilitiesObjectives and assumptions are what drive the competitor, and strategy and capabilities are what the competitor is doing or is capable of doing.g) SWOT Analysis:SWOT analysis is a simple framework for generating strategic alternatives from a situation analysis. It is applicable to either the corporate level or the business unit level and frequently appears in marketing plans. SWOT (sometimes referred to as TOWS) stands for Strengths,Weaknesses, Opportunities, and Threats. The SWOT framework was described in the late 1960's by Edmund P. Learned, C. Roland Christiansen, Kenneth Andrews, and William D. Guth in Business Policy, Text and Cases (Homewood, IL: Irwin, 1969). The General Electric Growth Council used this form of analysis in the 1980's. Because it concentrates on the issues that potentially have the most impact, the SWOT analysis is useful when a very limited amount of time is available to address a complex strategic situation.

The following diagram shows how a SWOT analysis fits into a strategic situation analysis. Situation Analysis / \ Internal Analysis External Analysis / \ / \ Strengths Weaknesses Opportunities Threats | SWOT ProfileThe internal and external situation analysis can produce a large amount of information, much of which may not be highly relevant. The SWOT analysis can serve as an interpretative filter to reduce the information to a manageable quantity of key issues. The SWOT analysis classifies the internal aspects of the company as strengths or weaknesses and the external situational factors as opportunities or threats. Strengths can serve as a foundation for building a competitive advantage, and weaknesses may hinder it. By understanding these four aspects of its situation, a firm can better leverage its strengths, correct its weaknesses, capitalize on golden opportunities, and deter potentially devastating threats.

h) The Boston Matrix:The Boston Consulting Groups Product Portfolio Matrix Like Ansoffs matrix, the Boston Matrix is a well-known tool for the marketing manager. It was developed by the large US consulting group and is an approach to product portfolio planning. It has two controlling aspect namely relative market share (meaning relative to your competition) and market growth.Problem ChildrenThese are products with a low share of a high growth market. They consume resources and generate little in return. They absorb most money as you attempt to increase market share.StarsThese are products that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income. Keep and build your stars. Look for some kind of balance within your portfolio. Try not to have any Dogs. Cash Cows, Problem Children and Stars need to be kept in a kind of equilibrium. The funds generated by your Cash Cows is used to turn problem children into Stars, which may eventually become Cash Cows. Some of the Problem Children will become Dogs, and this means that you will need a larger contribution from the successful products to compensate for the failures.

i) Environmental Management Accounting:EMA is the generation and analysis of both financial and non-financial information in order to support internal environmental management processes. It is complementary to the conventional financial management accounting approach, with the aim to develop appropriate mechanisms that assist in the identification and allocation of environment-related costs (Bennett and James (1998a), Frost and Wilmhurst (2000)). The major areas for the application for EMA are: product pricing budgeting investment appraisal calculating costs and savings of environmental projects, or setting quantified performance targets.EMA is as wide-ranging in its scope, techniques and focus as normal management accounting. Burritt et al (2001) stated: 'there is still no precision in the terminology associated with EMA'.They viewed EMA as being an application of conventional accounting that is concerned with the environmentally-induced impacts of companies, measured in monetary units, and company-related impacts on environmental systems, expressed in physical units. EMA can be viewed as a part of the environmental accounting framework and is defined as 'using monetary and physical information for internal management use'.