STRATEGIC ALIGNMENT,

ACTIVITY AND WORKFLOW

MODELING, AND BUSINESS
RULES
Chapter 8
 Step 6: Define Strategic Alignment
Matrices
■ Before we discuss strategic alignment matrices in detail, we should first
understand the relationships that exist between business plans in the Why
columns [C6], data in the What column [C1], and also activities and
processes in the How column [C2].
Relationship Between Business Plans, Data, and Activities
■ Policy statements are defined as qualitative guidelines that establish
boundaries of responsibility. They define the scope of that part of the
enterprise.
■ Goals and objectives are defined as quantitative targets for achievement,
with measure, level, and time. Goals are typically long term; objectives
are short term.
■ The measures for goals and objectives are implemented as attributes in
data entities.
Step 6: Define Strategic Alignment
Matrices
Relationship Between Business Plans, Data, and Activities
Strategies and tactics are used to define activities and processes. Strategies
in the Why column [C6] indicate what has to be done to achieve goals or
objectives.
They equate in the How column [C2] to activities that also define what has
to be done, but not how. Tactics in [C6] indicate how to carry out relevant
strategies.
Similarly, processes in [C2] define how to carry out various process steps
to implement relevant activities.
Aligning Business Plans to Organizational
Structure (Column 6–Column 4)
■ We will start by discussing the alignment of business plans to
organizational structure.
■ This is represented in a matrix showing business plans [C6]
listed on the left as rows, with organizational units for the
organizational structure [C4] as column headings.
■ This is an important matrix:
■ It shows organizational units that are involved in each planning
statement and, hence, defines why the unit is needed.
■ It answers the key questions of “Who?” and “Why?”
Step 7: Activity Modeling Concepts

■ Activity modeling is based on the IDEF0 technique as developed by the U.S.

Department of Defense.
■ It is used to transform activities listed in column 2, row 1, into activity models in
column 2, rows 2 and 3. But first, we need to understand the differences between
functions, activities, and processes.
Differences Between Functions, Activities, and Processes
■ Functional areas are used to manage related functions within an enterprise. A functional
area is part of the organizational structure in the Who column and Planner row [C4R1]
—it groups related functions for management purposes.
 Step 7: Activity-Based Costing
■ Activity-based costing is a technique that is used for activity cost accounting.
■ Cost and performance data of activities can be gathered using ABC for further analysis.
The application of different technologies can help identify alternative or innovative
approaches.
■ To improve profitability and performance, it is critical to understand where an
organization’s time is spent and, in detail, what the organization does and how it does it.
ABC is used to achieve this, through the following steps:
– Build an activity model of relevant activities.
– Establish cost and performance measures.
– Identify and eliminate non value-added activities.
– Simplify, integrate and streamline value-added activities.
– Emphasize reuse of assets.
 Step 7: Activity-Based Costing
■ Activity cost and performance data provide information that is
used to identify accurate product costs, waste in activities,
improved business process opportunities, cost drivers
(factors causing costs), business strategies, and tactical and
operational plans.
■ Process improvement using ABC results in increased
effectiveness (i.e., improvements in quality) and efficiency
(i.e., improvements in productivity).
Steps of Activity-Based Costing

■ Five steps are involved in the application of ABC:

– ABC Step 1: Analyze activities.
– ABC Step 2: Analyze costs.
– ABC Step 3: Establish measures.
– ABC Step 4: Calculate activity costs.
– ABC Step 5: Analyze activity costs.
ABC Step 1: Analyze Activities

 This step determines the scope of the activity analysis.

 It identifies and defines the activities, and then builds and classifies activity models.

As defined by James Brimson and John Antos in their book [8]:

Activities are a combination of people, technology, supplies, methods, and environment
that produce a given service. Activities describe what the enterprise does; that is, the way
time is spent and the outputs of the process.
ABC Step 2: Analyze Costs

■ This step identifies the cost elements of each activity and subactivity.
■ The cost basis that is to be used is determined
■ It traces all significant costs to activities and determines total resource
consumption by activity or subactivity.
■ If an exact tracing of costs to activities is not feasible, costs that cannot
be directly linked to an activity are allocated in the best way possible.
■ Once the costs are known, the measures can be established.
ABC Step 3: Establish Measures

Activity measures and performance measures are determined and

classified in this step.
An activity measure is a measure of the volume of the activity. A
performance measure is a measure of how well the activity is
performed.
ABC Step 4: Calculate Activity Costs

■ Once the activity measure has been determined, the total cost for the
activity can then be calculated. The allocated portion of the non traceable
costs is added to the activity cost. The sum of each activity’s costs is
multiplied by the activity’s frequency—
■ The number of times the activity is performed relative to a single
execution of the parent activity—to obtain the total cost for that activity.
■ The total volume of the activity measure is divided into the total activity
cost to obtain the cost per activity measure. This provides the basis for
analysis of the activity costs in the next step.
ABC Step 5: Analyze Activity Costs

■ In analyzing costs, the emphasis is to decide:

which activities add value,
Which activities incur the highest cost,
What drives that high cost.
From this, an analysis can be done to determine what will streamline,
improve, delete, or automate the cost driver.
■ Part of the rationale for identifying cost drivers is to consider
elimination or changes in activities.
ABC Step 5: Analyze Activity Costs

■ The most important information determined during this

analysis is the identification of non value-added activities.
■ A non value-added activity may be one that is performed due to
nonconformance to standards or policies, or used to correct or
revise some form of deficiency.
■ The cost drivers may be responsible for the nonvalue-added
activities. Nonvalue-added activities introduce nonvalue-added
costs.
ABC Step 5: Analyze Activity Costs
■ Forming Activity Alternatives
Alternatives consider the effect of changes made to one or more components
of an activity model. These alternatives include the following:
■ A different input: Costs may be reduced by simplifying an input or
changing an input’s properties while retaining form, fit, and function.
■ A different control: A revised regulation or specification may relax a
process tolerance, thus causing a cost decrease.
■ A different by-product: An improved process may reduce or eliminate
waste so a by-product can be reused. For example, in a wood process
mill, the sawdust waste can be used to produce other types of wood
products such as in the manufacture of particle board.
ABC Step 5: Analyze Activity Costs
■ Forming Activity Alternatives
■ A different mechanism:
 Changing the skill level of the resources may reduce the time and cost
to execute a task;
 Automating a process may reduce cost by displacing a manual activity
■ A different set of activities: Changing activities can eliminate non value-
added activities.
 Monitoring the Benefits
■ The result of activity analysis is that ABC is an ongoing management
tool that compares actual costs to projected costs for continual process
improvement.
■ Variance tracking is also used to track the difference between projected
and actual costs. This should include a “tolerance band” for costs and
performance measures.
■ If the results are not within the tolerance band, the alternative should be
reevaluated and perhaps a new improvement opportunity identified.
■ When an activity alternative is selected, it then becomes the new
functional baseline for the activity. This results in an ongoing
reengineering or process improvement.
Step 8: Workflow Modeling