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?
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