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

Porter’s Strategic Positions

 Cost leadership
 Product or service
differentiation
 Focus on market
niche
 SMAC - 7

DEVELOPING COMPETITIVE
ADVANTAGE

Differentiation
Superior Differentiation
Advantage with Cost
Advantage

Relative
Differentiation
Focus
Position
Stuck-in-the Low
Middle Cost
Inferior Advantage

Inferior Superior

Relative Cost Position

 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 Cost Management

Strategic position
analysis--an
organization’s basic way Value chain analysis--
of competing to sell the study of value-
products or services. producing activities,
stretching from basic
raw materials to the
Cost driver analysis-- final consumer of a
the study of factors that product or service.
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
Financial Perspective
How do we look to our
shareholders?

Customer Perspective Business Processes

How do we look to our Vision & What business
customers? Strategy processes are the
value drivers?
Organization Learning
Are we able to sustain
innovation, change
and improvement

 SMAC - 12

LRP vs. STRATEGIC MANAGEMENT

 Long Range Planning  Strategic Management

– Historical continuity – Recognition of change
– Periodic orientation – Extended time
horizons
– Internal focus – External focus
– Optimistic – Proactive but realistic
– Detailed financial – Multiple data sources
terms – On-line analysis
– “Management by – Entrepreneurial
Exception” – Global viewpoint
 SMAC - 13

STRATEGIC MANAGEMENT
Key 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

High

?
MARKET
POTENTIAL

Low

High
Low
MARKET SHARE
 PROCESS PERSPECTIVE

Post- Sale
Innovation Operations Service
Process Process Process

Create
Customer Build the Deliver the Service Customer
Identify Product/
Need Products/ Products/ the Need
the Market Service
Services Services Customer Satisfied
Identified Offering


 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 ANALYSIS
PAPER PRODUCTS INDUSTRY
Timber Farming
Competitor B

Logging and Chipping

Pulp Manufacturing
Competitor D

Paper Manufacturing

Competitor G
Competitor F
Converting Operations

Competitor E
Distribution

End-Use Customer
 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

ESTABLISHMENT OF TARGET COSTS

Estimated
Market
Price

Market
Research

Define Target
Product/ Understand Define Cost
Customer Customer Product
Niche Requirements Features

Competitor
Analysis
Required
Profit
 SMAC - 20

ATTAINMENT OF TARGET COSTS

Compute Cost Gap Design Costs Out Produce

Perform
Value
Engineering
Release
Initial Compare Design Estimate Design to Actual
Cost to Target Products/ Achievable Production Cost
Estimates Cost Processes Cost

Perform
Cost Undertake
Analysis Continuous
Improvement
 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

100
90
85

80
66

60

40

20

0
Product Preliminary Detailed Production Logistics
Planning Design Design & Support
Testing
 SMAC - 23

LIFE-CYCLE COST COMMITMENT

Life-cycle
Cost
100
90
85

80 Cash
Flow
66

Life-cycle
cost ($) 60 Matched
Cost

40

20

0
Product Preliminary Detailed Production Logistics
Planning Design Design & Support
Testing
 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 COSTS
Costs 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

Cost Dimension

Resources

Process Dimension

Driver Performance
Analysis
Analysis Measures
Why? What? How Well?

Product
and
Customers
 SMAC - 30

PERFORMANCE MEASURES
New 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


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
SMAC - 31
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

Dept 1 Dept 2 Dept 3

Product A A A Finished A

Product B Lathes Grinding B Welding Finished B

B

JIT Manufacturing Layout

Cell A Cell B

Grinder

Lathe Welding Lathe Welding

Product A Finished A Product B Finished B

 SMAC - 33

JIT OPERATIONS
Other 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 OPERATIONS
Costs 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
 JIT OPERATIONS
SMAC - 35

Service 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 MANAGEMENT
Essential 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

High Do right Do right

things wrong
(failure)
things right
Quality (Winner!)
of
Design
Do wrong Do wrong
things wrong things right
Low (failure) (failure)

Low High

Quality of Conformance
 SMAC - 43

COSTS OF QUALITY
Prevention 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 QUALITY
Continued
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 COSTS

Traditional View

Total
Quality
Costs
Cost

Total
Failure
Costs

Total
Control
Costs

Percent Defects 100%

Optimal
(AQL)
 SMAC - 47

QUALITY COSTS
Contemporary View

Total
Cost Quality
Costs

Total
Failure
Costs

Total
Control
Costs

100%
Percent Defects