QUALITY

INTRODUCTION
Current global competitive environment requires
companies to become customer driver and making
customer satisfaction a key priority.
This is so because customers are demanding over
improving levels of service regarding cost, quality,
reliability, delivery and the choice of innovative new
products.
Companies that develop a reputation of low quality
products loss market share and face declining profits
A quality product results in no defects.
Defective products results in high warrant costs and
dissatisfied customers.
Garrison (2006) note ‘”that customers who have bad
experience tell approximately 11 people about it” - and
is the worst form of advertising.
Eliminating inferior quality can therefore result in
substantial savings and higher revenues.


 Refers to a process where all business functions are
TOTAL QUALITY MANAGEMENT

involved in a process of continuous quality

(T Q M)

improvement.
TQM is not a technique, a broad management
approach or methodology dealing with processes and
attitudes.
 T Q M besides focusing on statistical monitoring of
manufacturing process now includes customer
oriented process of continuous improvement that
focuses on delivering products or services of consistent
high quality in a timely fashion.
Initially developed for manufacturing organisations
but now suits any environment such as a university—
cut has a director of quality who regulates quality
issues.
It is cheaper now to produce quality product than
producing inferior products which result in excessive
expenditure on inspection, rework, scrap and warranty
repairs.
T Q M therefore focuses on designing on building
quality rather than trying to inspect focusing on
causes rather than symptoms of poor quality.
Principles of TQM
Continuous improvement
Involves achieving excellence in an incremental way
It is an ongoing process
Employees involvement-need continuous training
and motivation to consistently achieve better and
better quality .
Customer involvement
Commitment of top management
Their willingness and participation must be clear and
visibly seen by all.
Supplier relationships
TQM aims to prevent and allow immediate detection
of errors and problems solved at root source rather
than correction of problems after their occurrence.
Thus quality designs works better than inspection
quality after poor designs.
TQM attempts to expose problems rather than hide or
burry them.
TQM- creates, encourages and nurtures simplicity,
instead of bureaucratic approach of adding controls.
It attempts to identify and eliminate non-value added
activities thus naturally motivating people to use
quality procedures.
Thus it is better and hence it is cheaper to do every
process right at first time, rather than not to do it right
then correct it afterwards.
TQM practices include the use of statistical process
control ,customer focus, and interfunctional design
efforts and quality performance measures include
customer’s perception of quality, defects in parts per
million and the percentage of units that pass through
final inspection without requiring rework.
TQM practices leads to improved JIT performance by
reducing manufacturing process variance.
Variance reduction permits stock safety inventory
reduction and yields shorter cycle times, both
standard measures of JIT performance through
elimination of rework.
JUST IN TIME SYSTEM(JIT)
Is a management philosophy aimed at eliminating
manufacturing waste by producing only the right
amount and contribution of parts at the right place at
the right time.
JIT aims to minimise the presence of non-value adding
operations and non-moving inventories in the
production line.
The result is shorter throughout times better on –time
delivery performance, higher equipment utilisation,
lesser space requirement, lower costs and greater profits
Founded in Japan in the 1970s.
It was developed and perfected by Taiichi Ohno of
Toyota and he is now referred as the father of JIT.
JIT aims to achieve zero inventories , minimal work in
progress through the entire supply chain.
JIT practices include set up time reduction, schedule
flexibility and use of Kanban.
JIT performance can be measured by inventory
turnover, cycle time, lead time, delivery
performance and other measures
JIT aims at eliminating waste through simplification
of manufacturing process.
Major objectives of JIT
Increasing the organisation ‘s ability to compete with
and remain competitive over long run.
Competitiveness is increased by use of JIT
manufacturing process as they can develop a more
optimal process for the firm.
Increasing efficiency within the production process.
Efficiency is obtained through the increase of
productivity and decrease of cost.
Reducing wasted materials, time and effort which in
turn help reduce costs.
 other benefits
Identify and respond to consumer needs.
Optimal quality/cost relationship-eliminate large
amount of resources and efforts in inspection and
reworking the production of defected goods.
Development of a reliable relationship between
suppliers
Plant design for maximizing efficiency.
Adopting the work for continuous improvement
Reduce unwanted waste- JIT eliminates waste from
over production, waiting time, transportation waste
and inventory waste, waste of motion and waste from
defects.
Basic elements of JIT
PEOPLE involvement
Maintaining a good support and agreement from
people involved in production.
Reduces time and effort in implementation of JIT and
minimises chances of creating implementation
problems.
Maximising people ‘s involvement carry through
introduction of quality circles and total involvement
concept.
Management gets support from stockholders and
owners of the company, labour organisation,
management support and government support.
PLANTS –certain specifications are needed to
implement JIT such as:
Plant layout-allow maximum working flexibility- use
of “multifunctional workers”.
Demand pull production- producing only when order
is received.
Kanban-use of card or tag system
Self improvement
Continuous improvement
SYSTEM-
Technology and process that combines the different
processes and activities together. – Material
Requirement Planning and Manufacturing Resource
planning.
When Just In Time is in use, the following goals can be
achieved:

Elimination of non-value added activities
Zero inventory (no buff inventory)
Zero defects
Both sizes of one
Zero breakdowns
100% on time delivery service.

NB Though the above targets may not be achieved in
real life situation the aim is to strive to achieve them so
as to realize substantial savings.

Elimination of non-value added activities
Just in Time aims to eliminate waste.
 Waste is anything that does not add value to a
product.
The lead or cycle time for manufacturing or selling a
product consists of process time, inspection time,
move time queue time and storage time but only
process time adds value to product with all other
adding cost only.
Adopting Just in Time philosophy and focusing on
reducing lead times total costs can greatly be reduced.

Group 25
 E and E ltd produces a range of products. The
company recently upgraded its production facilities to
modern standards replacing labour intensive system.
While problems existed initially the new system has
performed well to E and E ltd’s specifications.
However , Eand E’s customers have complained of on
going problems in terms of quality and late deliveries.
Mr Emmanuel the Chief executive officer is disturbed
at the second issue as he had authorised a huge
increase in the level of work in progress inventory to
keep the new system at full capacity.
At a recent strategic conference in Dubai , he heard of
TQM and JIT production. He is now in the middle of
the road as to whether these philosophies might be the
answer to E and E ltd .
Required
You have been appointed the management accountant
of E and E ltd, advise Mr Emmanuel on the scope for
TQM and JIT to solve the problems faced by
customers. (25 marks.)
COST OFcost
Quality QUALITY
are cost that are incurred to prevent
defective products from falling into the hands of
customers or that are incurred as a result of defective
units.
Quality costs are divided into four groups two of
which are prevention and appraised costs (incurred to
in an effort to keep defective products from falling into
customer’s hands)and internal failure costs and
external failure costs (incurred for the failure to
prevent defects despite efforts).
PREVENTION COSTS
Are costs incurred to keep defects from occurring?
It therefore relates to any activity that reduces the
number of defects in products or services.
They includes costs of preventative maintenance,
quality planning and training, system
development, quality engineering, quality circles,
statistical process control activities, and the extra
costs of acquiring higher quality raw material,
technical support to suppliers.
QUALITY CIRCLES
Consist of small groups of employees that meet on a
regular basis to discuss ways to improve the quality of
output (includes both management and workers)

STATISTICAL CONTROL PROCESS
Is a technique used to detect whether a process is in or
out of control. An out of control result in defective
units and may be caused by a miscalibrated machine
or some other factor.
In this method workers use charts to monitor the
quality of units that pass through their work stations.
By using charts workers can quickly spot processes
that are out of control and creating defects.
Problems are then corrected immediately thereby
preventing further defects rather than waiting for an
inspection to catch defects.
JIT systems can be employed as support systems to
suppliers.(see inside)
INTERNAL FAILURE COSTS
Are costs associated with materials and products that
fail to meet quality standard
These cost result from identification of defect during
the appraisal process.
Examples of such cost include scrap, rejected
products, reworking of defective units delay time
caused by quality problems.
It should be noted that appraisal activities focus on
symptoms rather on causes and they do nothing to
reduce the number of defective items.
However appraisal activities do bring defects to the
attention of management, which may head to efforts
to increase prevention activities so that defects do not
happen
EXTERNAL FAILURE COSTS
Costs that result when a defective product is delivered
to a customer.
Examples of cost in this Category include warranty
repairs and replacement, products recalls e.g Toyota in
2011 call over 20 000 defective cars which were on the
market.
The company suffered Liability arising from legal
action against a company and lost sales arising from a
reputation of poor quality.
When these costs are incurred they can devastate
profits.
DISTRIBUTION OF QUALITY COSTS
Studies in United States shows cost of quality to range
between 10% and 20% of total sales where as experts
say these range between 2% and 4%.
When the quality of Conformance is Low, total quality
cost is high due to costs Internal external failure costs.
A low quality of Conformance means a high
percentage of units are defective and have high failure
costs.
However, as the Company Spends more and more on
prevention and prevention, the percentage of
defective units drops and hence Low Internal and
External failure cost
 close to zero.
The best way to prevent defects from happening to
design Some experts and managers Contend that the
total quality cost is not minimized until quality of
Conformance approach 100% and defect rates get as
low as 1 in a million Units .
Others argue that eventually total quality cost increase
as the quality of Conformance increases or approaches
100% and defect rates are very processes that reduce
the Likelihood of defects and to continually monitor
processes using statistical process Control method.
QUALITY COSTS
These provide REPORTS
an estimate of the financial
Consequences of the company’s current level of
defects.
It details the prevention costs, approval costs, and
costs of Internal and external failure that arise from
the company’s current level of defective products and
services

Uses of quality cost information
Helps managers to see the financial significance of
defects as they may not be aware of the magnitude
since such costs cut across departmental lines and are
not normally tracked and accumulated by the cost
system.
It also helps managers identify the relative importance
of the quality problems faced by the firm i.e. the report
may show that scrap is a major quality problem or that
the company is having huge warranty costs giving
managers a better idea of where to focus efforts.
It also helps managers to see whether their quality
costs are poorly distributed. In general quality costs
should be distributed more towards prevention and
appraisal activities and less towards failures.
Limitations of cost of quality information
Simply measuring and reporting quality cost does not
solve quality problems
Results usually lag behind quality improvement
programs.
Total quality cost may even increase as quality control
system designed and installed. Decreases in the cost
may not begin to occur until the quality program has
been in effect for a year or more.
The most important quality cost, lost sales arising
from customers’ ill will, is normally omitted from the
quality cost report because it is difficult to quantify
International Aspect of Quality
The Japanese companies borrowed heavily from the
work of W. Edwards Deming and introduced quality
circles, JIT, the idea that quality is everyone’s
responsibility, and the emphasis on prevention rather
than an inspection.
In the 1980s, quality re-emerged as a pivotal factor in
the market and hence need to have a strong quality
program in place.
The I. S. O 9 000 standards
(international standards
organisation)
Is based in Geneva, Switzerland established quality
control guidelines.
To get certification producer must demonstrate that
A quality control system is in use, and the system
clearly defines an expected level of quality.
The system is fully operational and is backed up with
detailed documentation of quality control procedures.
The intended level of quality is being achieved on a
sustained; consistent basis
Documentation is important here, that is it should be
detailed precise that if all the employees in a company
were suddenly replaced, the new employees could us
the documentation to make the product exactly as it
was made by the old employees.
I.S.O certification is not limited to manufacturing
companies only.

*Give examples in Zimbabwe of C O.S that attained
I.S.O


Benefits of certification
Meet Customer Requirements
Many companies want ISO 9001 certification just to
satisfy one customer requirement.
The customer states that it will only do business with vendors
that are certified as ISO 9001 compliant, so to get (or keep)
the business they need that certification.
The problem with these companies is that they’re looking for
a short-term payoff.
They see nothing but that one benefit — we need money —
and ignore the long-term benefits, like “if we keep the
customer well satisfied, they will want to come back again
and again”.
They don’t embrace the concept of quality through
continual improvement.
They don’t understand that continued customer
satisfaction is the ultimate goal of a QMS.

In other words, these companies haven’t “bought into

the program”.
See, you may obtain a piece of paper (that ISO
certificate) that claims ISO 9001 certification without
seeing much actual quality or improvement.
Focusing only on that one benefit — your immediate
gain — without putting the customer in front will end
up costing you much more in the long run.

Get More Revenue and Business from New Customers
Once you earn your ISO 9001 certification, you can advertise
your quality certification and respond to requests for quotes
(RFQ) from companies that make ISO 9001 certification a “must-
have”. ISO 9001 certification can open up new markets you were
virtually unable to do business with before your certification.
Improve Company and Product Quality
A quality management system standard is all about quality
(really!) so, of course, one result of adopting a QMS should be an
improved level of quality for the entire organization —
every process, and every product.
 Philip Crosby and Joseph Juran provides two of the best. Crosby
defined it as “conformance to requirements”;
 Juran called it “fitness for use”. A well-designed, effectively
implemented ISO 9001 Quality Management System will put
your company on the Road to Quality.
Increase Customer Satisfaction with your Products
Quality means whatever you produce will work as your customers
expect.
Quality also means far fewer complaints and doing a better job of
resolving those you do.
 If your quality management system is working correctly, you should
know what your customers expect and you should be providing it,
resulting in increased customer satisfaction.
5. Describe, Understand, and Communicate Your Company
Processes
The ISO 9001 QMS standard requires that you identify and describe
your processes using business metrics, the purpose of which is to better
manage and control your business processes.
Quality objectives form the center of your system.
 Metrics are used to understand and communicate your system’s
performance relative to your quality objectives.
 If you make an honest attempt to conform to the requirements of
getting ISO 9001 certification, you’ll learn more about your business.
Improve the Consistency of Your Operations
What is consistency? Well, one way to think of it is
“decreased variation”.
Reducing the variation in your processes is the definition
of consistency.
Is your customer better served by you supplying them with
a consistent product — same dimensions, same weight,
same tolerances, same output every time — or by your
products being unpredictable and “all over the place”?
 Increase control of your processes! Control comes from
having a clear target to shoot for (objective), collecting
data on the process (metrics), and understanding how to
adjust the process (procedures and work instructions) to
maintain the target output.

Focus Management and Employees
The ISO 9001 QMS has a way to ensure the company
stays focused, and that’s quality auditing.
Internal audits, registration (and surveillance) audits,
and self-process audits.
 ISO 9001 certification requires that the company
periodically audit its quality processes.
Regular process audits and as-needed audits, when
done correctly, provide the objective feedback needed
to correct any deviations from the quality path and
keep the company
Develop a Professional Culture and Better
Employee Morale
Implementing an ISO 9001 Quality Management
System can empower employees.
Your QMS will provide them with clear expectations
(quality objectives and job descriptions), the tools to
do their job (procedures and work instructions), and
prompt, actionable feedback on their performance
(process metrics).
The result? An improved company culture and a more
professional staff!
Improve Efficiency, Reduce Waste, and Save Money
An ISO 9001 Quality Management System isn’t perfect; no
process and no one is perfect.
A well-run QMS does enable your company
to approach perfection.
 As your processes improve, become more consistent, and you
achieve your target objectives with greater regularity, you will
see tangible results.
Your process waste will decrease, for one.
Waste is money lost forever. Waste results from poor quality
and inefficiency.
Inefficiency results from variation and inconsistent processes.
Reduce variation, improve consistency, and you’ll have less
waste…and more money.
Achieve International Quality Recognition
ISO 9001 is a worldwide standard administered by the
International Organization for Standardization (ISO),
based in Switzerland.
 ISO 9001 is currently in use by over one
million organizations around the world!
 It is truly a world wide standard for quality!
Obtaining ISO 9001 certification puts your company
in a very select group.
Total Quality Management and
it’s implications for
Management Accountants
Total quality management (TQM), as an approach, has
its foundations in Japan. It is based on the writings of a
few insightful individuals, such as Demming and
Juran, who identified that an important aspect of
success was delivering quality products and services to
customers. To achieve this, a quality focus must
permeate throughout the entire organisation and not
just in a few areas.
TQM has many elements and it is not an easy
approach to implement as it can be expensive and
require many organizational changes. Some of these
elements are:

Customer involvement – Quality is defined by the
customer, not by the company. As a result, to be
quality focused, it is essential to find out what the
customer wants and try to deliver this in a cost-
effective way. This involves eliminating items that are
not valued and concentrating on those that are.

Develop long term supplier relationships
– TQM, on one level, looks beyond the company, but
also requires us to look backwards as well.
 To make a quality product requires quality inputs and
this is helped through close working with suppliers.
This can involve helping suppliers to implement TQM
in their own organisation, identifying ways of saving
money and assisting with training.
 The incentive for the supplier is a long term contract
– the incentive for the recipient is targeted cost
reductions as part of the contract.
Empowering employees – TQM requires a culture
change in many Western businesses, where the
employees are given considerable power and authority.
We rely on employees to be their own quality
controllers and give them the ability to stop
production if problems arise – this requires trust.
 Quality circles are formed, where teams of employees
are given the freedom to find solutions to problems
and to come up with their own methods.
Clearly, much of TQM is production-based as can be
seen by some of the elements above
The changes that TQM brings results in amendments
to processes and products and how the factory
operates.
However, TQM is much more than this – it is a ‘whole-
company’ philosophy, meaning that all functions must
embrace the approach and thinking for it to work.
 For example, there is no point in production having
top quality products coming out if the after-sales
service is of poor quality and discourages customers
from purchasing.
As with other functions, management accountants
(MA) are affected by TQM being implemented.
It is essential for MA’s to be involved in the
implementation process itself so that the final system
allows them to perform their key duty of providing
management information their key duty of providing
management information.
Otherwise, MA’s risk being marginalised. In fact, a
well devised system, using IT, can make information
provision easier and allow the MA to involve
themselves in more analysis i.e. interpreting the data,
rather than just reporting it.
The performance measures under TQM are quite
different to those applied by traditional companies.
 While profit and return on investment continue to be
highly relevant, actual measures of quality (which are
components of profit anyway) must be taken and
reported.
 The measurements themselves may be automated or
taken by others such as production or marketing, but
many companies require the MA to consolidate this
information into management reports.
This allows for better comparison across measures,
such that discrepancies in one may be explained by
differences in another.
 Examples of such measures would be vendor
performance (frequency of defects, time to deliver)
and customer satisfaction (customer surveys, time to
resolve complaints).

The MA attempts to express these measures of quality
in quantitative form to make them more
understandable and unbiased.
This also means that, where low measures are found (for
example, slow delivery or low satisfaction ratings), the
profit impact can be quickly determined of making (or
not making) a change.

Cost of quality reports are a key aspect of TQM and are
often used as a basis for deciding on whether to
implement the approach or not.
 These reports are prepared by the MA from
information from many different departments and show
how much the company will need to spend if it tries to:
Prevent quality problems – implementing TQM,
equipment change, training
Resolve issues through Appraisal – ‘inspecting in’
quality by testing incoming materials and finished
goods
Ignore problems and allow products to Fail – scrap
and rework lost contribution and reputation
This is a wide-ranging and holistic investigation and
looks at all
. It is an important task for the MA to perform as the
discipline and ability to deal with numbers are
important traits of accountants.

Benchmarking ‘world-class’ companies to establish
and implement best practices is another element of
TQM and the MA needs to be involved here.
 The MA can assist in the research process to establish
if such practices are viable and cost-effective – this is
referred to as a ‘Cost-Benefit Analysis’.
 Indeed, this is an important overall exercise that goes
beyond the Cost of Quality report (which is more to do
with ongoing/running costs).
Implementing TQM is likely to require considerable
capital investment (to update machinery and amend
factory layout to facilitate easy movement) and
training (at all levels) and this can be very expensive,
particularly as training may be required for quite some
time before full implementation has been achieved.
 Resistance can be expected and it is important for the
MA to be able to demonstrate that, if it is the case,
TQM implementation will recover the investment in it
As the above illustrates, TQM is a complex and wide-
ranging philosophy that has implications for the entire
organisation.
 The effect that TQM implementation has on the role
and function of the MA can be both short-term (CBA)
and long-term (change in reporting) and this makes it
important for us, as MA’s, to be fully aware of what
TQM is and how its arrival can change what we do – if
this is for the good, we embrace; if this is for the bad,
we make our voice heard so that we are properly
considered)
Author: Chris O'Riordan ACA MBA, Lecturer in
Accounting, Waterford Institute of Technology .
(ACCA 2010 ADOPTED
STRATEGIC MANAGEMENT ACCOUNTING
STRATEGY ISSUES
WHAT IS STRATEGY
Strategy describes how an organisation matches its own
capabilities with the opportunities in the market place to
accomplish its overal objectives.
In formulating its strategy an organisation must throughly
understand the industry in which it operates.
Strategic choice means that companies can choose which
industries and products they want to compete in but it
also means that different companies in the same industry
may decide to adopt different strategies with quite
different implications for management accounting and
control

Strategic management accounting(SMA) is the process of

provision and analysis of management accounting data
about a business and its competitors for use in developing
and monitoring business strategy.

SMA allows managers freedom to choose which industry

they operate in, technology used and how organisation is
organised unlike the traditional approach. SMA is also
concerned with the implementation of chosen strategies
setting up control systems that drive through the chosen
Innes(1998) defines strategic management accounting
as the provision of information to support strategic
decisions in organisations.
Cooper and Kaplan(1988) supports the view by stating
that Strategic accounting techniques are designed to
support the overall competitive strategy of the
organisation ,principally by the power of using
information technology to develop more fined
products and service costs.
Broomwich(1990)defined it as the provision and
analysis of financial information on the firm’s product
markets and competitors in those markets over a
number of periods
Lord(1996)in summary identified the following stands
as characterising management accounting.
The extension of traditional management accounting’s
internal focus to include external information about
competitors.
The relationship between the strategic position
chosen by a firm and the expected emphasis an
management accounting(ie accounting in relation to
strategic positioning).
Having competitive advantage by analysing ways to
decrease costs and/ or enhance the differentiation of a
firm’s products through exploiting linkages in the
value chain and optimizing cost drivers
STRATEGIC POSITIONING
ACCOUNTING IN RELATION TO STRATEGIC
POSITIONING

Porter’s Generic Models
Porter suggests that competitive advantage arises from
the selection of a generic strategy which best fits the
organisation‘s environment and then organizing value
adding activities to support the chosen strategy.
 COMPETITIVE STANCE

broad scope
Cost leadership differentiation
targets whole
market
STRATEGIC narrow scope
SCOPE targets one
FOCUS
segment
Cost leadership --basically being the lowest cost
producer in a particular industry.
Differentiation--- this is creation of a customer
perception that the product is superior to that of
competitors so that a premium can be charged (that is
it is different) .
Focus ---this involves utilising either of the above in a
narrow profile of market segments or “niching”
Porter argues that organisations need to address two
key questions namely:
*should the strategy be one of differentiation or cost
leadership?
*should scope be wide or narrow?
He argues that organisations that can run trying to
satisfy all ,end up being ‘stuck in the middle”
The implication is that Porter advocates that
organisations need to make a basic competitive
decision early on in the strategic determination
process.
Cost Leadership Strategy
This is based on the view that the business be the
lowest cost producer.
Potential Benefits
Business can earn higher profits by charging the same
price or even moving to undercut where demand is
elastic.
Enables Company to build defense against price wars.
Allows price penetration entry strategy into new
markets.
It enhances barrier to entry
Allows development of new market segments.
Value Chain
Is central analysiswhere cost saving can be made
to identifying
at various stages in the value chain. Attainment
depends upon arranging value chain activities so as to:
Reduce cost by copying rather than originating
designs, using cheaper material and other cheaper
resources, producing products with “no frills”,
reducing labour costs and increasing labour
productivity.
Achieving economics of scale by high volume sales
allowing fixed costs to be spread over a wider
production base.

Use high-volume purchasing to obtain discounts for

bulk purchases.

Locating in areas where cost advantage exists or

government aid is possible (growth points, mining)
Obtaining learning and experience curve benefits
Differentiation strategy
It is based upon the idea of pursuing customers that a
product is superior to that offered by competitors

Differentiation can be based on product features or

creating/altering consumer perception.
 It can also be based upon process as well as product. It
is usually used to justify a higher price.
 BENEFITS.
Products command a premium price so higher
margins
Demand becomes less price elastic and so avoids
costly competitor price wars.
Life cycle extends as branding becomes possible hence
strengthening the barriers to entry.
Value chain analysis can identify the points at which
these can be achieved by
Value chain analysis can identify the points at which
these can be achieved by:

Creating products which are superior to competitors

by virtue of design, technology, performance etc.
marketing spend becomes important.

Offering superior after sales service by superior

distribution, perhaps in prime location.

Creating brand strength.

Augmenting the product i.e. adding to it
Packaging the product.

Ensuring an innovative culture exists within the

company.
 FOCUS STRATEGY

This aimed at a segment of the market rather than the

whole market.
 A particular group of consumers are identified with
similar needs, possibly based upon age, sex, lifestyle,
and income or geographical and then the company
will either differentiate or cost focus in that area.
 BENEFITS
Smaller segments and so smaller investments in
marketing operations:

Allow specialization.

Less competition

Entry is cheaper and easier

Requires
Reliable segment identification

Consumer/customer needs to be reliably identified-

research becomes even more crucial.

Segment to be sufficiently large to enable a return to

be earned in the long run.

Competition analysis- given to small market, the

competition, if any, needs to be fully understood.
Direct focus of product to consumer needs

Niching can be done via specialization by:

Location
Type of end user, quality, price, size of customs’,
product feature.

If done properly can avoid confrontation and

competition yet still be profitable.
 The attractiveness of the market niche is influenced
by the following
The niche must be large enough in terms of potential
buyers.

The niche must have growth potential and

predictability.

The niche must be of negligible interest to major

competitors.

The firm must have strategic capability to enable

effective service of the niche.
PRACTICAL QUESTION
The concept of generic strategies was established by
Professor Michael Porter during the 1980s . He stated
that a company must choose one of these strategies in
order to compete and gain sustainable competitive
advantage. In addition to assessing the source of
competitive advantage . Porter also explained that it was
necessary to identify the target for the organisation’s
products or services. This involved distinguishing
between whether the target was broad and covered the
majority of the overall market ,or narrow and
concentrated on a small but profitable part of it.
Requirements ;
a)critically appraise the value of Porter’s Generic
Strategy Model for strategic planning purposes.
(10marks)
B)explain how the theoretical principles of the
Experience Curve may be applied to determine a
generic strategy for a company.(10marks)
(25 marks)
 BALANCED SCORECARD (BSC)

Was developed by Kaplan and Norton(1961)

Kaplan and Norton (1996) noted that the Balanced

Scorecard provides managers with the instrumentation
they need to navigate to future competitive success.

It translates an organisation‘s mission and strategy into

a comprehensive set of performance measures that
provide the framework for a strategic measurement
and management system.
It retains an emphasis on achieving financial
objectives whilst including performance drivers of
these financial objectives thereby also monitoring
progress in building the capabilities and acquiring the
intangible assets they need for future growth.

NB. Balanced score card is therefore a system of

performance measurements that organisations uses to
track performance on its primary and secondary
objectives.
The organisation‘s planning and strategy defines what
relationship s the organisation must develop with
employees, its suppliers and the community to be
successful with its targeted customers, defines the
focus and scope of the balanced scorecard.

According to Atkinson,Banker,Kaplan and Mark

Young(1997) BSC should meet two requirements:
The organisation‘s planning and strategy defines what
relationship s the organisation must develop with
employees, its suppliers and the community to be
successful with its targeted customers, defines the
focus and scope of the balanced scorecard.

According to Atkinson,Banker,Kaplan and Mark

Young(1997) BSC should meet two requirements:
PERSPECTIVES IN BALANCE D
SCORECARD

BSC is a set of performance targets and results relating

to four dimensions of performance namely: Financial,
Customer, Internal process, and innovation/learning
and growth.


The Financial Perspective
Common measures at business unit level are the
operating profit, return on investment, residual
income and economic value added.

Other measures include relevant growth, cost
reduction, asset utilization.

Financial performance measures provide a common

language for analyzing and comparing companies
thereby providing an aggregate view of an
organisation’s success
However, financial measures by themselves do not
provide incentives for success.

These tell a story about the past, but not the future
and hence do not guide performance in creating value.
THE LEARNING AND GROWTH
PERSPECTIVES

It is the perspective that identifies the infrastructure

that the business must build to create long-term growth
and improvements.

Emphasis investing for the future in areas other than

investing in assets and new product research and
development as these are included in internal business
process.
So organisations must invest in ,people ,systems and
organisation procedures to achieve their long term
financial objectives:

Key measures identified by Kaplan

Employee capabilities

Information system capabilities

Motivation, Empowerment and alignment

 EMPLOYEE CAPABILITIES

Core measurements are employee satisfaction employee

satisfaction, employee retention, employee productivity.

Employee satisfaction can be measured by surveys looking

at involvement in decision making, creativness etc.

Employee retention can be measured by annual percentage

key staff turnover or employee productivity.

INFORMATION SYSTEM CAPABILITIES
Availability of information on customers, internal
processes and financial consequences enhances
competitive capabilities.

Measures include percentage of process with real time
quality, cycle time and cost feedback available, percentage
of customer facing employees having online information
about customers.

Measures seek to provide indications of the availability of

internal process information to front line employees.
MOTIVATION, EMPOWERMENT AND
ALIGNMENT
Outcomes of improvements per employee in relation
to motivation and empowerment are key.

Measures are percentage of employee with personal

goals aligned to balanced scorecard and the
percentage of employees who achieve personal goals.
THE CUSTOMER PERSPECTIVE
This enables managers to identify the customer and
market segments in which the business unit will
compete.
Target segments include existing and potential
customers.
Managers should then develop performance measures
that track the business unit’s ability to create satisfied
and loyal customers in targeted segments.
The perspectives include core and genuine measures
that relate to customer loyalty.

Measures relate to market share, customer retention,

new customer acquisition, customer satisfaction and
customer profitability.
MEASURING VALUE PROPOSITIONS
Value propositions are attributes that supplying
Companies provide through their products and
services to create loyalty and satisfaction in targeted
customer segments.
Common attributes despite variations in industries
are:
Product or service attributes.
Customer satisfaction/relationship
Image and reputation/market share
Customer profitability
Product and service attributes encompass desirable
product or service features, price and quality.

The customer relationship dimension includes

delivery of the product or service to customer
including the response and delivery time, how the
customer feels about the buying experience.

The image and reputation dimension reflects the

intangible factors that attract a customer to a
company.
THE INTERNAL BUSINESS
PERSPECTIVE
In this perspective ,managers identify the critical
internal process for which the organisation must excel
in implementing its strategy.
The internal business process measures should focus
on internal processes that will have greatest impact on
customer satisfaction and achieving the organisation’s
financial objectives.
Kaplan and Norton identify three principal internal
business processes namely:

Innovation

Operation processes

Post-service sales processes

 INNOVATION
In this process ,managers research needs of customers
and then create the products or services that will meet
those needs.
Companies identify markets, new customers and the
emerging and the latent needs of existing customers.
They then design and develop new products and
services that enable them to reach these new markets
and customers.
Research to establish market size ,customer
preferences and the price sensitivity for targeted
product and service has be done.
The major problems with research and development is
that the benefits are enjoyed after a long time.
Kaplan and Norton point out that typical develop
process in the electronics industry could have two to
five years of sales.
Kaplan and Norton further highlight some of the
innovation measures they observed in organisations
as:
Percentage of sales from new products.
New product introduction versus competitors/new
product introduction versus plan.
Time to develop next generation of the products
Number of key items in which the company is the first
or second to the market.
Break even time.
OPERATION PROCESS
This process starts with the receipt of a customer order
and finishes with the delivery of the product or service
to the customer.
The major aim here is to deliver efficient ,consistent
and timely delivery of existing products and services to
customers.

the emergence of the global competitive environment
and the need to make customer satisfaction an
overriding priority has resulted in many companies
supplementing their financial measures with measures
of quality ,reliability ,delivery etc create value for
customers.
Thus many organisations now focus on measures that
relates to achieving excellence in terms of time, quality
and cost.
CYCLE TIME MEASURES
Total cycle time measures the length of time required
from placing of an order by a customer to the delivery
of the product or service to the customer.
In manufacturing organisations cycle time measures
the time it takes from starting to finishing the
production process.
Cycle times should be measured and monitored and
trends observed
Total manufacturing time consist of the sum of
processing time, inspection time, wait time and move
time.
Only process time adds value and the remaining
activities are non –value adding activities .
The aim is to reduce time spent on non value added
activities and thus minimizing the manufacturing
cycle time.
ThusMCE = process time
 process time +inspection time wait time
move time.
QUALITY MEASURES
These includes measures such as:
Process parts –per million(ppm) defect rates
Yields (ratio of good items produced to good items
entering the process.
First pass yields
Waste
Scrap
Rework
Returns
Percentage of process under statistical process control .
POST-SALES SERVICE PROCESSES
This is the last category relating to the internal
business process perspective which includes warranty
and repairs activities ,treatment of defects and returns
and the process and administration of customer
payments.
Excellent community relationship is vital strategic
objective for ensuring continuity community support.