Strategic planning is the

process of deciding on
Part A [STRATEGIC PLANING AND CONTROL]
objectives of the
organisation, on changes in
Chapter 1: these objectives, on the
resources to attain these
Introduction to objectives, and on the strategic
planning and control policies that are to govern
the acquisition, use and
disposition of these
resources.

What is strategic Management control is management

accounting?
Strategic
accounting is a form of
accounting in which
placed on information
which are external to the
well as on, non-financial
generated information.
the process by which
managers assure that
resources are obtained and management
used effectively and management
efficiently in the emphasis is
accomplishment of the about factors,
organisation's objectives. It organisation, as
is sometimes called tactics
and internally-
or tactical planning.

Examples of how Operational control (or performance

management fits into operational planning) is strategic
planning and control the process of assuring that
specific tasks are carried
Neely’s 'Four CPs of Performance
out effectively and
Measurement'
efficiently.
1. Check position – how well are we
doing? (This should look at
both financial and non-financial
factors). This fits in with strategic
analysis.
2. Communicate position – to stakeholders so that they know how the
business is performing. This also fits in with strategic analysis.
3. Confirm priorities – setting targets for business and developing action
plans to help achieve them. This comes under strategic choice.
4. Compel progress – measuring performance is a strong driver for change,
especially if it is linked to reward. This comes under strategic
implementation.
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Strategic planning

Strategic planning model

To develop a business strategy, an organisation has to decide the following.

 What it is good at
 How the market might change
 How customer satisfaction can be delivered
 What might constrain realisation of the plan

 What should be done to minimise risk

 What actions should be put in place

The structure of strategic planning

Rational model of strategic planning

The rational model of strategic planning involves strategic analysis, strategic

choice and implementation.

The rational model is divided into following three stages

1. Strategic analysis
2. Strategic Choices
3. Strategy implementation

1. Strategic Analysis

2. Strategic Choices
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Stage Comment
Strategic Come up with new ideas on how to  Value chain
options compete, where to compete and method analysis
generation of growth  Scenario building
 Acquisition vs
organic growth
Strategic Normally each strategy has to be  Stakeholder
options evaluated on the basis of analysis
evaluation  Acceptability  Risk analysis
 Suitability (ratios and
 Feasibility sensitivity
 Environmental fit analysis
 Decision making
tools (decision
trees, matrices,
ranking and
scoring methods)
 Financial
measures (ROCE,
DCF)

Strategic Involves choosing between the

selection alternative strategies
 Competitive strategies are the
generic strategies for competitive
advantage an organisation will
pursue (which determine how you
compete)
 Product-market strategies
(which markets you should enter
or leave) determine where you
compete and the direction of
growth
 Institutional strategies (ie
relationships with other
organisations) determine the
method of growth

3. Strategy implementation
Strategy implementation is the conversion of the strategy into detailed
plans or objectives for operating units.

The planning of implementation has several aspects. The strategic planning

process is thus multi-layered

 Resource planning (i.e. finance, personnel) involves assessing the key

tasks that need to be carried out and determining the timing of them.
 Operations planning looks at the systems employed to manage the
organisation.
 Organisation structure and control systems may need to be changed.
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Types of strategy
 Corporate strategy is the most general level of strategy in an organisation,
the strategy for the business as a whole. It involves issues such as:

(a) Diversifying or limiting activities

(b) Investing
(c) Surviving
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 Business-level strategy is concerned with how an organisation approaches

a particular market, or the activity of a particular business unit. An example
of a business strategy is the decision by Mercedes-Benz to expand its product
range to include four wheel drive vehicles

Business level strategy involves choice between

 Cost leadership strategy

 Differentiation strategy
 Focus

 Cost leadership means being the lowest cost producer in the industry as a
whole. By producing at the lowest cost, the manufacturer can compete on
price with every other producer in the industry, and earn the highest unit
profits, if the manufacturer so chooses. Management accounting techniques
would be used to monitor and control costs. Decisions would be made
based on the lowest cost outcome.

 Differentiation is the exploitation of a product or service which the industry

as a whole believes to be unique. A differentiation strategy assumes that
competitive advantage can be gained through particular characteristics of
a firm’s products. Performance management will still need to consider cost
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issues but it will also need to look at the particular differentiating features of
the product (or service) so decisions would not be based on cost alone.

 Focus involves a restriction of activities to only part of the market (a

segment). In a focus strategy, a firm concentrates its attention on one or
more particular segments or niches of the market, and does not try to serve
the entire market with a single product. Management accounting would focus
on monitoring the activity either concentrating on cost as above, or on:

o Providing goods and/or services at lower cost (cost-focus)

o Providing a differentiated product or service (differentiation-focus)

Planning and control at strategic and operational levels

Following are the key differences between strategic and operational level planning
and control

Strategic Operational
Broad-brush targets ( less detailed) Detailed
Covers the whole organization Departmental activities
External input Mainly internal information
External focus Internal focus on actual procedures
Future oriented feed forward control More concerned with controlling current
performance against plan
Double loop feedback Single loop feedback (changing
performance rather changing objectives
or plans )

What problems will arise if there is no link between strategic and

operational levels?

 Unrealistic plans
 Inconsistent goals
 Poor communication
 Inadequate performance measurement

Gaps and false alarms

Strategic control depends on

 avoiding 'gaps' and 'false alarms'

 Identifying milestones of performance

 False alarms motivate managers to improve areas where there are few
benefits to the organization

(i) Over-emphasis on direct costs is foolish when most costs are overheads
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(ii) Labour efficiency measures are easily manipulated and ignore labour
effectiveness
(iii) Machine standard hours are irrelevant, as long as the firm has enough
capacity

 Gaps are important areas that are neglected

(i) New product introduction

(ii) Customer satisfaction
(iii) Employee involvement

 Different measures apply to different industries. In continuous

processes, such as chemicals, throughput time is not important as there will
always be buffer inventory. However, it is important in consumer electronics.

Influences on strategic control system

There are four influences on a strategic control system

(a) The time-lag between strategic control measures and financial results
(b) The linkages with the other businesses in a group
(c) The risks the business faces
(d) The sources of competitive advantage

Strategic management accounting in multinational companies

Probable reasons for opening up a foreign subsidiary

 Extend a product life cycle

 Intense domestic competition
 Higher risk at domestic market
 Cost leadership ( economies of scale)
 Differentiation ( a differentiated product might appeal at different
overseas markets)
 Expecting competition from overseas producers in domestic market
 Product is global
 Profit margins may be higher
 Seasonal fluctuations may be leveled out

What issues should be taken into account before setting up a foreign

subsidiary

a) Strategic level
 Does the strategic decision to get involved overseas fit with the
organisation's overall mission and objectives?
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 The organisation have (or can it raise) the resources necessary to

exploit effectively the opportunities overseas?

b) Tactical level
 How can the organisation get to understand customers' needs and
preferences in foreign markets?
 Does the organisation know how to conduct business abroad, and deal
effectively with foreign nationals?
 Are there foreign regulations and associated hidden costs?
 Does the organisation have the necessary management skills and
experience?
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Differences between domestic and international business

Factor Domestic International

Cultural factors  Few language problems  Many language barriers
 Homogeneous market  Fragmented, diverse markets
 'Rules of the game' understood  Rules diverse changeable and
 Similar purchasing habits unclear
 Purchasing habits may vary by
nation or region
Economic  National price  Diverse national prices
factors  Uniform financial climate  Variety of financial climates,
 Single currency ranging from very conservative to
 Stable business environment highly inflationary
 Currencies differing in stability and
real value
 Multiple business environments,
some unstable
Competitive  Data available, usually accurate  Formidable data collection
factors and easy to collect. problems
 Competitors' products, prices,  Many more competitors, but little
costs and plans usually known information about their strategies
Political factors  Relatively unimportant  Often significant
Technological  Use of standard production and  Training of foreign personnel to
factors measurement systems operate and maintain equipment
 Adaptation of parts and
equipment
 Different measuring systems

Financial performance issues in multinational

organizations
Objectives

 Capital structure (different rates of interests)

 Cost structure
 Accounting policy ( e.g. depreciation methods)
 Government policy
 Transfer price
 Exchange rate fluctuations
 Domestic competition
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Protectionism in international trade

Protectionism is the discouraging of imports by government action.

Some governments seek to protect their home producers from foreign

competition by making it harder to
import from overseas. A wide variety of methods are used.

1. Tariffs or customs duties

2. Non-tariff barriers
3. Exchange rate policy

Non-tariff barriers

Non-tariff barriers include:

 Import quotas
 Minimum local content rules
 Minimum prices and anti-dumping action
 Embargo ( complete or partial ban on trading with particular country)
 Subsidies for domestic producers

Formal systems
Advantages of a formal system of strategic planning

 Identifies risk
 Forces managers to think
 Forces decision making
 Better control
 Enforces consistency at all levels
 Time horizon ( some plans are needed for long term)
 Co-ordination of activities of different units of business
 Clarifies the objectives by asking mangers to define what they want
to achieve
 Allocates responsibility

Criticism of a formal strategic planning

 Practical failure ( research has not proved that formal planning contribute
to success)
 Routine and regular ( only covers routine and regular issues)
 Discourages creativity
 Internal politics ( ignores battles between managers)
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Solution to the problem: Freewheeling Opportunism

The freewheeling opportunism approach suggests firms should not bother

with strategic plans and should exploit opportunities as they arise. This
allows decision making at all levels of the organisation.

Advantages

1. Good opportunities are not lost

2. A freewheeling opportunistic approach would adapt to change (e.g. a very
steep rise in the price of a key commodity) more quickly
3. It might encourage a more flexible, creative attitude

Disadvantages

1. There is no co-ordinating framework for the organisation, so that some

opportunities get missed anyway
2. It emphasises the profit motive to the exclusion of all other
considerations
3. The firm ends up reacting all the time rather than acting with a purpose

Combining the two approaches: flexibility

An approach combining both can include

 planning activities to nurture strengths and

 develop competences and environmental scanning activities to identify
opportunities which are suitable for the company's competences

Matching formal strategic planning with freewheeling opportunism is not

impossible, but it means deciding what aspects of organisational life are to be
planned and identifying how potential opportunities are to be sought and
evaluated.

The focus for planning activities is:

 Running existing businesses effectively

 Determining the resource capability of the organisation and its
competences
 Planning environmental scanning activities so that opportunities are
actively hunted down and assessed for alignment with the company's
mission, resource capability and management expertise

A freewheeling opportunistic approach can then be adopted to exploit a

firm's competences. These competences develop in a variety of ways.

 Experience in making and marketing a product or service

 The talents and potential of individuals in the organization
 The quality of co-ordination
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The distinctive competence of an organisation is what it does well, or

better, than its rivals.

Core competence: Some competences are necessary to stay in business at

all. For a restaurant, catering is a core competence; for a manufacturing firm
it is not

A competence is core if:

 It provides potential access to a wide variety of markets
 It contributes significantly to the value enjoyed by the customer
 It should be hard for a competitor to copy ( city bank’s ATM)

SWOT analysis and performance management

SWOT analysis summarises the key issues from the business environment and the
strategic capability of an organisation that are most likely to impact on strategy
development. (Johnson, Scholes & Whittington)

 Strengths: characteristics of the business, or project team that give it an

advantage over others
 Weaknesses (or Limitations): are characteristics that place the team at a
disadvantage relative to others
 Opportunities: external chances to improve performance (e.g. make greater
profits) in the environment
 Threats: external elements in the environment that could cause trouble for
the business or project

(a) Match strengths with market opportunities

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Strengths that do not match any available opportunity are of limited use while
opportunities which do not have any matching strengths are of little immediate
value.

(b) Conversion This requires the development of strategies that will convert
weaknesses into strengths in order to take advantage of some particular
opportunity, or converting threats into opportunities which can then be matched
by existing strengths.

Benchmarking
Following are types of benchmarking

 Internal benchmarking. A method of comparing one operating unit or

function with another within the same industry
 Functional benchmarking. Internal functions are compared with those of
the best external practitioners of those functions, regardless of the industry
they are in (also known as operational benchmarking or generic
benchmarking)
 Competitive benchmarking. Information is gathered about direct
competitors, through techniques such as reverse engineering.*
 Strategic benchmarking. A type of competitive benchmarking aimed at
strategic action and organisational change.

* Reverse engineering is the process of buying a competitor's product and

dismantling it, in order to understand its content and configuration.

Stages of benchmarking

Organisations should begin by asking themselves the following questions.

 Is it possible and easy to obtain reliable competitor information?

 Is there any wide discrepancy between different internal divisions?
 Can similar processes be identified in non-competing environments
companies willing to co-operate?
 Is best practice operating in a similar environmental setting?
 Is there time to complete the study?
 Is it possible to benchmark companies with similar objectives and strategies

The benchmarking exercise can then be divided into stages.

Step 1: Set objectives and determine the areas to benchmark

Step 2: Establish key performance measures
Step 3: Select organisations to study
Step 4: Measure own and others' performance
Step 5: Compare performances
Step 6: Design and implement improvement programme
Step 7: Monitor improvements
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Step 1 requires consideration of the levels of benchmarking.

Part A [STRATEGIC PLANING AND CONTROL]

Step 1
Decide on what area to benchmark, which will
give the most improvement potential

Step 2
Understand the internal process involved in the
area being benchmarked and collect data on
key performance measures

Step 3
Identify organizations (benchmarking partners)
who are best in class in the area to be
benchmarked

Step 4
Measure and compare performance

Step 5

Design and implement improvement programs