PA2: Strategic Financial Management Module 3 Tools for strategic financial analysis
Lectures and handouts by: Joanne Bonderud, CGA
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PA2 Module 3 Tools for strategic financial analysis
Part 1: Overview 2007-2008
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Overview • Topics covered in this module: – Strategic cost management – CVP analysis – Strategic positioning analysis – Value chain analysis – Cost driver analysis – Shareholder value analysis 2007-2008
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Overview – Overview of case analysis – Avoiding pitfalls in case analysis
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Objective • When you have completed module 3, you should understand the importance of: – preparing special reports – evaluating the outcomes – designing, evaluating, and advising – monitoring the accuracy of performance measures – developing and assessing financial benchmarks 2007-2008
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Objective • You should also be more confident in your ability in using a systematic approach to problem solving.
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Recommended study approach • Read the topics. • Work through the cases in the PA2 Cases binder. • Complete the assignment.
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Online discussion • Posting deadlines!!
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Part 1
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PA2 Module 3 Tools for strategic financial analysis
Part 2: Difference between management accounting and strategic cost management 2007-2008
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Topic 3.1 Learning objective • Summarize the difference in approach between traditional managerial cost analysis and strategic cost management.
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Strategic cost management • What is strategic cost management? • Three major themes: – Value chain analysis – Strategic positioning analysis – Cost driver analysis
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The role of accounting information • Strategy-making tasks: – Vision and mission statements – Setting objectives – Formulating a strategy • Strategy implementation – Control systems
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Developing and using accounting information • Understand the firm’s overall strategy
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Management accounting vs. strategic cost management • Focus • Management accounting = internal focus • Strategic cost management = external focus
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Part 2
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PA2 Module 3 Tools for strategic financial analysis
Part 3: Cost-volume-profit analysis 2007-2008
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Topic 3.2 Learning objective • Explain and provide examples of CVP analysis.
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Cost-volume-profit analysis • Three elements: – Cost – Volume – Profit
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Cost-volume-profit analysis • Deals with how costs and profits change with a change in volume • Analyzes the effects on profits of changes in such factors as variable costs, fixed costs, selling prices, volume, and the mix of products sold • Can show whether a product or service is profitable for the organization 2007-2008
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Cost-volume-profit analysis cont’d. • CVP analysis is sometimes referred to simply as breakeven analysis. • Break-even analysis is only one element of CVP analysis. • Activity 3.2-1: CVP analysis.
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Part 3
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PA2 Module 3 Tools for strategic financial analysis
Part 4: Strategic positioning analysis 2007-2008
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Topic 3.3 Learning objective • Explain and provide examples of strategic positioning analysis.
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Porter’s five forces • Porter’s five forces: – Threat of new entrants – Bargaining power of customers – Bargaining power of suppliers – Threat of substitute products or services – Rivalry among existing competitors
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Porter’s five forces
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Three choices • Cost leadership • Differentiation • Focus on market niche
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Strategic positioning analysis vs. traditional standard costing • Strategic positioning analysis: – Focuses on the role of cost information and its dependency on the firm’s strategies. • Traditional standard costing: – Solely concerned with determining unit costs. – Narrow focus on reducing costs.
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Part 4
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PA2 Module 3 Tools for strategic financial analysis
Part 5: Value chain analysis 2007-2008
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Topic 3.4 Learning objective • Explain and provide examples of value chain analysis.
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Value chain analysis • Value chain analysis provides a systematic method for examining the development of competitive advantage within an organization. • A value chain is an organization's set of linked, valuecreating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services.
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Value chain analysis cont’d. • Strategy is not determined by industry positioning alone. • Internal capabilities must be considered. • Firm’s value chain is only a part of a larger system of value chains
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Areas for profit improvement • Linkages with suppliers. • Linkages with customers. • Process linkages within the value chain of a business unit. • Linkages across business unit value chains within the firm. 2007-2008
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Value chain methodology • The value chain methodology has three steps: – Identify the industry's value chain and assign costs, revenues, and assets to value activities. – Diagnose the cost drivers regulating each value activity. – Develop sustainable competitive advantage.
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Part 5
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PA2 Module 3 Tools for strategic financial analysis
Part 6: Cost driver analysis 2007-2008
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Topic 3.5 Learning objective • Explain and provide examples of cost driver analysis.
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Cost driver analysis • Investigate variables that regulate activities. • Identify factors that explain the variation in costs of each value activity. • Complements value chain analysis.
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Cost driver analysis cont’d. • Cost drivers can be classified by levels of activity or cost. • Four activity levels: – unit level – batch level – product-sustaining level – facility-sustaining level
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Cost driver analysis cont’d. • Unit-level activities: – Performed each time a unit is produced. • Batch-level activities: – Performed each time a batch of units is handled or processed. • Product-sustaining level activities: – Undertaken to support specific products. • Facility-level activities: – Performed to support an entire organization. 2007-2008
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Part 6
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PA2 Module 3 Tools for strategic financial analysis
Part 7: Shareholder value analysis 2007-2008
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Topic 3.6 Learning objective • Compare and contrast shareholder value analysis and cost driver analysis.
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Shareholder value analysis • Focuses on future cash flows • Five key factors: – Sales growth – Operating margin – Incremental fixed capital investment – Incremental working capital investment – Cash flow effects of income taxes
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Five key factors • Sales growth • Operating margin • Incremental fixed capital investment • Incremental working capital investment • Cash flow effects of income taxes
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Part 7
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PA2 Module 3 Tools for strategic financial analysis
Part 8: Overview of case analysis 2007-2008
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Topic 3.7 Learning objective • Apply a step-by-step framework for analyzing the information provided in case questions.
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Why use case studies? • To bridge the gap between the technical details you have learned and apply them to real-life situations. • To provide an opportunity to integrate the competencies you have developed in the various subject areas throughout the CGA program. • To develop your professional judgment and logical reasoning skills.
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What is a competency? • A competency is defined as a specific behaviour whereby a professional applies knowledge, skills, and/or professional values in a work environment. • The behaviour can be defined, demonstrated, observed, and assessed.
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Case analysis framework • • • • • • • • •
Skim the case. Read the case. Identify problems and issues. Analyze the case data. Generate alternatives. Select decision criteria. Analyze and evaluate the alternatives. Make a recommendation. Action and implementation plan.
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Skim the case • • • • •
Read the first and last paragraphs. Read the first or last sentence of each paragraph. Read the required. Take a quick look at exhibits. Ask yourself: – What is required of me and what is my role? – What is the main issue and why is it important to the organization? – Why has the issue arisen and why now? – When does the issue need to be decided? – How should I allocate my time on this case?
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Read the case • Gather background information • Make notes • Consider the following: – Exhibits – Industry, economy, and competitive factors – Key organizational factors – Affected stakeholders – Readers of reports 2007-2008
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Identify problems and issues • Sometimes the case question will identify the issues for you. • Separate the cause from the effects.
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Analyze the case data • Prioritize the issues. • Determine the appropriate accounting procedure or business tool. • Use qualitative and quantitative analysis. • Identify constraints and opportunities.
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Generate alternatives • Address the causes of the problems and issues you have identified. • Generate as many alternatives as possible. • The case may give you the alternatives. • Alternatives must be plausible and supported with case facts.
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Select decision criteria • Decision criteria help you sort through all of the alternatives you have identified, ensuring that you apply a consistent standard to your analysis.
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Analyze and evaluate the alternatives • Determine the accounting principles, standards, and concepts for each alternative. • Determine the accounting procedure or business tool that is appropriate for the analysis. • Use both qualitative and quantitative analysis. • Determine the ethical, moral, and financial consequences of each alternative. • For each alternative, consider what factors would have to change for you to evaluate it differently. 2007-2008
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Make a recommendation • Remember your role and the requirements of the case. • Assess your decision using the decision criteria you identified. • Your decision or recommendation must follow logically from your analysis. • Accept responsibility for your decision. • Be logical! 2007-2008
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Action and implementation plan • Remember the requirements of the case. • Determine the next logical steps. • Determine who, what, when, where, and how. • Budgeted timeline.
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Modifying the steps • Not all of the questions and comments provided with the nine steps are always applicable.
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Formulating a successful response • Communicate your thought process. • Remember that there is no one correct answer to a case.
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Group approach to case analysis • Teach others. • Learn from others. • Test your ideas. • Develop communication and teamwork skills. • Become more proficient at case analysis.
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Part 8
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PA2 Module 3 Tools for strategic financial analysis
Part 9: Avoiding pitfalls in case analysis 2007-2008
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Topic 3.8 Learning objective • Describe the common errors made in responding to case questions and apply this knowledge as you practice case analysis.
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Failing to read the “required” • Read the “required” section carefully. • Ensure you address everything that is asked of you.
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Failing to take the role ascribed to you • Who are you? – Prepare your response from that perspective. • Who is your audience? – Consider your relationship to your audience.
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Making inappropriate or overly complex assumptions • Assumptions must be reasonable in the context of the case. • Watch the complexity of your assumptions.
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Ignoring the data • Analyze the data. • Incorporate your analysis into the problem identification, decision making, and recommendations.
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Regurgitating facts • If facts are not being disputed, don’t repeat them. • Do not restate the question.
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Incorrectly or vaguely interpreting ratios • Interpret ratios carefully. • Make meaningful comparisons.
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Running out of time • Budget your time. • If you are running out of time as you begin detailed data analysis, simply state in words what your analysis would have consisted of. • You are being assessed as much on the logic of your approach as the specific technical calculations you do.
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Not proofreading your work • Reread your response. • Check for obvious errors.
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Concentrating too much effort on one issue • Avoid spending too much time on one issue or area. • Avoid the tendency to overanalyze areas with which you are most familiar. • Cover all significant and relevant issues of the case.
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Memory dumping • Do not simply write down everything you can think of regarding a certain topic. • Include relevant information; discard irrelevant information.
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Solving cases in the wrong order • Completing certain parts of your analysis first may indicate the direction of further analysis.
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Practice! • You are provided with several opportunities to practice answering case questions. • Remember that there is no one correct answer.
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Part 9
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