SMAC - 1 STRATEGIC MANAGEMENT AND ACCOUNTING Strategic Management –Stakeholder analysis –Corporate objectives –Sustainable competitive advantages Strategic.

SMAC - 1

STRATEGIC MANAGEMENT AND ACCOUNTING

Strategic Management– Stakeholder analysis– Corporate objectives– Sustainable competitive advantages

Strategic Management Accounting– Appropriate analysis– Long-term considerations – Nonfinancial data

SMAC - 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

SMAC - 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”

SMAC - 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.

SMAC - 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.

SMAC - 6

Cost leadership

Product or service

differentiation

Focus on market

niche

Porter’s Strategic PositionsPorter’s Strategic Positions

SMAC - 7

DEVELOPING COMPETITIVE ADVANTAGE

Relative Cost Position

Inferior Superior

RelativeDifferentiation

Position

Inferior

Superior DifferentiationAdvantage

Stuck-in-theMiddle

Differentiationwith Cost

Advantage

LowCost

Advantage

Focus

SMAC - 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.

SMAC - 9

Strategic position analysis--an

organization’s basic way of competing to sell

products or services.

Strategic position analysis--an

organization’s 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.

Value chain analysis--the study of value-

producing activities, stretching from basic raw materials to the final consumer of a product or service.

Strategic Cost ManagementStrategic Cost Management

Cost driver analysis--the study of factors that cause or influence costs.

Cost driver analysis--the study of factors that cause or influence costs.

SMAC - 10

BALANCED SCORECARD

A multi-dimensional measurement system that translates an organization’s mission and strategy into performance measures

Balanced Business Scorecard

Business Processes

What business processes are the

value drivers?

Organization Learning

Are we able to sustain innovation, change and improvement

Customer Perspective

How do we look to our customers?

Financial Perspective

How do we look to our shareholders?

Vision & Strategy

SMAC - 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

SMAC - 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?

SMAC - 14

GROWTH-SHARE MATRIX

MARKETPOTENTIAL

MARKET SHARE

High

Low

High

Low

?

Service the Customer

PROCESS PERSPECTIVE

Post- Sale Service Process

Operations Process

Deliver the Products/ Services

Build the Products/Services

Innovation Process

Customer Need

Satisfied

Create Product/ Service Offering

Identify the Market

Customer Need

Identified

SMAC - 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 industry’s value chain– Assign costs, revenues, and assets to value activities– Diagnose cost drivers– Develop sustainable competitive advantages

SMAC - 17

VALUE CHAIN ANALYSISPAPER PRODUCTS INDUSTRY

End-Use Customer

Distribution

Converting Operations

Paper Manufacturing

Pulp Manufacturing

Logging and Chipping

Timber Farming

Com

peti

tor

A

Com

peti

tor

B

Com

peti

tor

C

Com

peti

tor

D

Com

peti

tor

E

Com

peti

tor

F

Com

peti

tor

G

SMAC - 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

SMAC - 19

MarketResearch

CompetitorAnalysis

DefineProduct/Customer

Niche

UnderstandCustomer

Requirements

Define ProductFeatures

EstimatedMarketPrice

RequiredProfit

Target Cost

ESTABLISHMENT OF TARGET COSTS

SMAC - 20

ATTAINMENT OF TARGET COSTS

Compute Cost Gap Design Costs Out Produce

InitialCost

Estimates

Compareto Target

Cost

PerformValue

Engineering

DesignProducts/Processes

EstimateAchievable

Cost

PerformCost

Analysis

ReleaseDesign to

Production

UndertakeContinuous

Improvement

ActualCost

SMAC - 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

SMAC - 22

LIFE-CYCLE COST COMMITMENT

0

20

40

60

80

100

ProductPlanning

PreliminaryDesign

DetailedDesign &Testing

Production LogisticsSupport

66

8590

SMAC - 23

LIFE-CYCLE COST COMMITMENT

0

20

40

60

80

100

ProductPlanning

PreliminaryDesign

DetailedDesign &Testing

Production LogisticsSupport

66

8590

Life-cyclecost ($)

CashFlow

MatchedCost

Life-cycleCost

SMAC - 24

LIFE-CYCLE COST MANAGEMENT

Management of activities throughout a product’s 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

SMAC - 25

ACTIVITY BASED ANALYSIS

Activity Based Costing– A costing system focused on ESSENTIAL

ACTIVITIES comprising a firm’s 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.

SMAC - 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 COSTSCosts to perform value-added activities with

perfect efficiency

SMAC - 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 CUSTOMER’S PERSPECTIVE (within strategic constraints)

Examples of nonvalue-added activities– Scheduling– Moving– Waiting– Inspecting– Useless accounting reports

SMAC - 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

SMAC - 29

The Two-Dimensional ABM Model

Resources

Process Dimension

Driver

AnalysisAnalysis Performance

Measures

Product

and

Customers

Cost Dimension

Why? What? How Well?

SMAC - 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

SMAC - 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

SMAC - 32

Traditional Manufacturing Layout

Product A

Product B Lathes Grinding Welding

A

B

A

B

Finished A

Finished B

JIT Manufacturing Layout

Lathe

Grinder

Welding

Product A Finished A

Lathe Welding

Product B Finished B

Cell A Cell B

Dept 1 Dept 2 Dept 3

SMAC - 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

SMAC - 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

SMAC - 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

SMAC - 36

INVENTORY MANAGEMENTEssential Questions

How much inventory must be ordered or produced?

How should the purchase order or internal production be managed?

SMAC - 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

SMAC - 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.

SMAC - 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

SMAC - 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

SMAC - 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

SMAC - 42

QUALITY OF DESIGN& CONFORMANCE

Quality of Conformance

Low High

Quality of

Design

Low

High Do rightthings wrong

(failure)

Do wrongthings wrong

(failure)

Do rightthings right(Winner!)

Do wrongthings right

(failure)

SMAC - 43

COSTS OF QUALITYPrevention 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”

SMAC - 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!

SMAC - 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

SMAC - 46

DISTRIBUTION OF QUALITY COSTSTraditional View

Percent Defects

Cost

Optimal (AQL)

100%

TotalFailureCosts

TotalControlCosts

TotalQualityCosts

SMAC - 47

QUALITY COSTSContemporary View

Cost

Percent Defects100%

TotalFailureCosts

TotalControlCosts

TotalQualityCosts