Slide 4.1

4. Strategic Management Accounting Basics of strategy & Key aspects of strategic management accounting & Balanced Scorecard Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.2

Introduction This chapter explores the use of management accounting information in the implementation and evaluation of an organisation’s strategy.
The chapter also highlights the key aspects of strategic management accounting and explains the objectives of balanced scorecards as systems of performance measurement


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.3

Learning Objectives 1 2

3 4

Recognise that different conceptions of strategy exist Consider how some organisations adopt identifiable generic strategies such as product differentiation and cost leadership Identify key aspects of strategic management accounting (SMA) practices Understand the objectives of balanced scorecards as systems of performance measurement Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.4

Learning Objectives (Continued) 5.

Understand how the potential of SMA systems relies on understanding the organisational context

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.5

Learning Objective 1 Recognise that different conceptions of strategy exist

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.6

What is Strategy? Strategy describes how an organisation matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives.
In formulating its strategy, an organisation must thoroughly understand the industry in which it operates.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.7

Learning Objective 2 Consider how some organisations adopt identifiable generic strategies such as product differentiation and cost leadership

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.8

Generic Strategies
1 2

Two generic strategies that organisations use are: Product differentiation Cost leadership.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.9

Product Differentiation


–

Product differentiation refers to offering products and services that are perceived by customers as being superior and unique relative to those of its competitors. Coca-Cola in the soft drinks industry

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.10

Cost Leadership Cost leadership is achieving low costs relative to competitors.
How does a company achieve low costs? – Productivity and efficiency improvements – Elimination of waste – Tight cost control


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.11

Implementation of Strategy To be successful, a company must both formulate an effective strategy and implement it vigorously.
Management accountants have an important role to play in the implementation of strategy.
This role is designing reports to help managers track progress in implementing strategy.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.12

Learning Objective 3 Identify key aspects of strategic management accounting (SMA) practices

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.13

Strategy Industry analysis focuses on five forces: 1 Competitors
Reducing prices of products is critical to growth for any industry.
Competition is severe along the dimensions of price, timely delivery and quality.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.14

Strategy (Continued) Potential entrants into the market
Competition usually keeps profit margins small.
Existing companies are likely to have lower costs.
Existing companies also have the advantage of close relationships with customers. 2

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.15

Strategy (Continued) Equivalent products
Technologies that allow customers flexibility reduces the potential for equivalent products or new technologies to replace existing products. 4 Bargaining power of customers
Customers have bargaining power because they buy the products and can obtain the products from other potential suppliers. 3

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.16

Strategy (Continued) Bargaining power of input suppliers
Suppliers of high-quality materials have some bargaining power to demand higher prices.
Skilled engineers, technicians and manufacturing labour have some bargaining power to demand higher wages. 5

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.17

Learning Objective 4 Understand the objectives of balanced scorecards as systems of performance measurement

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.18

The Balanced Scorecard The balanced scorecard translates an organisation’s mission and strategy into a comprehensive set of performance measures.
The balanced scorecard does not focus solely on achieving financial objectives.
It highlights the non-financial objectives that an organisation must achieve in order to meet its financial objectives.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.19

The Balanced Scorecard (Continued)
1 2 3 4

The scorecard measures an organisation’s performance from four key perspectives: Financial Customer Internal business processes Learning and growth.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.20

The Balanced Scorecard (Continued) The balanced scorecard gets its name from the attempt to balance financial and non-financial performance measures to evaluate both short-run and long-run performance in a single report.
Why does the balanced scorecard reduce management’s emphasis on short-run financial performance?


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.21

The Balanced Scorecard (Continued) Because the non-financial and operational indicators measure fundamental changes that a company is making.
The financial benefits of these fundamental changes may not be captured in short-run earnings.
Strong improvements in non-financial measures signal the prospect of creating economic value in the future.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.22

Perspectives of the Balanced Scorecard
1 2 3 4

There are four perspectives of the balanced scorecard: Financial perspective Customer perspective Internal business process perspective Learning and growth perspective.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.23

1 Financial Perspective This perspective evaluates the profitability of the strategy.
Phonetelecoms’ key strategic initiatives are cost reduction relative to competitors and growth.
The financial perspective focuses on how much of operating profit and return on capital employed results from reducing costs and selling more units.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.24

Financial Perspective (Continued) Objective: – Increase shareholder value.
Measures: – Increase in operating profit – Revenue growth.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.25

Financial Perspective (Continued) Target Actual performance performance

–

–

Initiatives Manage costs and unused capacity €1,500,000 Build strong customer relationships €2,100,000

€2,000,000 €2,500,000

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.26

2 Customer Perspective This perspective identifies the targeted market segment and measures the company’s success in these segments.
Objectives: – Increase market share – Increase customer satisfaction.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.27

Customer Perspective (Continued)
–

–

Measures: Market share in communication networks segment Customer satisfaction survey.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.28

Customer Perspective (Continued)

– –

Initiatives Identify future needs of customers Increase customer satisfaction

Target Actual performance performance 6% 90% of customers give top two rating

7% 87% of customers give top two rating

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.29

3 Internal Business Process Perspective


This perspective focuses on internal operations that further both the customer perspective by creating value for customers and the financial perspective by increasing shareholder wealth.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.30

Internal Business Process Perspective (Continued)
– – –

Objectives: Improve manufacturing capability Reduce delivery time to customers Meet specified delivery dates.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.31

Internal Business Process Perspective (Continued)
–

– –

Measures: Percentage of processes with advanced controls Order delivery time On-time delivery.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.32

Internal Business Process Perspective (Continued)

–

–

–

Initiatives Organise teams to implement advanced controls Reengineer order delivery process Reengineer order delivery process

Target Actual performance performance

75%

75%

30 days

30 days

92%

90%

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.33

4 Learning and Growth Perspective
– – –

Objectives: Develop process skill Empower work force Enhance information system capabilities.

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.34

Learning and Growth Perspective (Continued)
–

–

–

Measures: Percentage of employees trained in process and quality management Percentage of front-line workers empowered to manage processes Percentage of manufacturing processes with real-time feedback. Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.35

Learning and Growth Perspective (Continued)

–

–

–

Initiatives Employee training programme Supervisors act as coaches rather than decision makers Improve off-line data gathering

Target performance

Actual performance

90%

92%

85%

90%

80%

80%

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.36

Pitfalls when implementing a BSC
1. 2. 3. 4

5

Pitfalls when implementing a balanced scorecard Don’t assume the cause-and-effect linkages to be precise. Don’t seek improvements across all of the measures all of the time. Do not use only objective measures in the scorecard. Don’t fail to consider both costs and benefits of initiatives such as spending on information technology and research and development. Don’t ignore non-financial measures when evaluating managers and employees. Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.37

Learning Objective 5 Understand how the potential of SMA systems relies on understanding the organisational context

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.38

Organisational context Strategic management accounting practices exist in different forms within organisations seeking to use both financial and non-financial information as well as integrating internal with external market based information.
They are also subject to wider contextual influences including nation specific effects.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.39

Organisational context (Continued) SMA systems may include a wide array of techniques or be narrowly focused in terms of their cost management priorities.
Their implementation and effects within organisations are best considered in visionary and creative terms rather than in reactive and technical terms.
Understanding the organisational context is key to the development of effective SMA potential.


Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008

Slide 4.40

End of Chapter 4

Based upon Bhimani, Horngren, Datar, Foster, Management and Cost Accounting, 4th Edition, © Pearson Education Limited 2008