P5: Advanced Performance Management

Section A: Strategic Planning and Control A1. Introduction to strategic management accounting A2. Performance management and control of the organisation A3. Changes in business structure and management accounting A4. Effect of Information Technology (IT) on strategic management accounting Designed to give you knowledge and application of:

 Explain the role of strategic management accounting in strategic planning and control. [2]  Discuss the role of corporate planning in clarifying corporate objectives, making strategic decisions and checking progress towards the objectives. [2]  Compare planning and control at the strategic and operational levels within a business entity. [2]  Assess the use of strategic management accounting in the context of multinational companies. [3]  Discuss the scope for potential conflict between strategic business plans and short-term localised decisions. [2]  Evaluate how SWOT analysis may assist in the performance management process. [2]  Evaluate the methods of benchmarking performance. [3] Introduction to strategic management accounting Learning Outcomes

Role of strategic management accounting (SMA) in strategic planning & control SMA Uses management accounting information for strategy implementation, management planning & control Considers the relationship of the organisation with its external business environment Features of SMA External orientation  Competitor information  Suppliers & customers Long-term process  Focuses on qualitative & quantitative information in strategy formulation Forward-looking  Provides information about potential changes in market, competition, consumer preferences, supplier profiles etc. Holistic approach  Collects all relevant information whether external or internal which will impact the business

Techniques of SMA Competitive position monitoring Competitor performance appraisal based on public financial statements Integrated performance measurement Quality costing Strategic pricing Value chain costing Attribute costing Benchmarking Competitor cost assessment Customer accounting Life cycle costing Strategic costing Target costing Activity-based costing Techniques of SMA

Strategic planning & control SWOT PEST Defining strategy or direction Making decision about allocation of resources Techniques used: Strategic planning Goal based Determines future course of action Focuses on entire organisation Models used: Issue based Strategic planning Goal based

Role of SMA in strategic planning & control Generates both qualitative & quantitative information Ensures information that helps organisation to attain sustainable competitive advantage Helps to quickly detect changes in the market environment Provides relevant & reliable information Refer to Test Yourself 1 on page A1.8 Strategic control tracks strategy as it is implemented detects any problem areas makes adjustments, if necessary

Role of corporate planning in clarifying corporate objectives, making strategic decisions and checking progress towards the objectives Factors to be considered for corporate planning Strategic framework:  Mission statement  Values  Strategies Risk:  Identification  Evaluation  Impact of results  Managing risks Control:  Objectives  Indicators  Key factors for success Operational plans:  Line of action  Budget  Indicators Role of corporate planning  helps to identify corporate objectives  ensures strategic decisions are taken at corporate level based on SWOT & Gap analysis  indicates long-term direction & scope  helps in devising workable action plan to achieve corporate objectives  includes not only decision-making but also control of actual performance  considers future resources along with existing resources

Operational plan  Budgeting  Investment strategy  Financial strategy  Marketing strategy The data base Past performanceCurrent situation Forecasts Expectations from outside constituents Expectations from people inside the company Corporate plan Position analysis (SWOT) Identify the organisation’s mission & corporate objectives Identify the gap & analyse the reason for it Overall corporate strategy (to close the gap)

Comparing planning & control at the strategic and operational level Strategic levelOperational level Plan does not go into detail (holistic approach)Plan is made in detail Forward looking (feed forward control)Involves comparison of current performance with operational plan Externally orientedInternally oriented Considers both external & internal informationConsiders mostly internal information Considers long term planning (5 years or more)Considers short term planning (1 year or less) Plan may be modifiedPlan normally remains unaltered Compare planning & control at strategic & operational levels within a business entity Planning & control Operational level Strategic level  Improved internal coordination  Communication  Motivation towards overall organisational goals  Specific, discrete task  Process of ensuring efficiency & effectiveness in completing those tasks

Use of strategic management accounting (SMA) in the context of multinational companies Multi national company (MNC): has operating subsidiaries, branches or affiliates located in foreign countries and a central headquarters in another country Strategy formulation & usage of SMA depend on: Complexities of businessneed to plan for appropriate financial & administrative control by measuring performance against budget & targets Geographic solutionstability of national environment & maturity of company can decide strategies for foreign subsidiaries Fund positioningpositioning funds to provide sufficient working capital or for expansion of business Transfer pricingchanging prices for goods according to economy of country to maximise profits & reduce costs to facilitate movement of money Exchange rate fluctuationneed to manage foreign exchange exposure to maximise profitability, net cash flow & market value of firm SMA provides all material information to management of MNC in order to formulate appropriate business strategies Refer to Test Yourself 4 on page 13

Scope for potential conflict between strategic business plans and short-term localised decisions Refer to Test Yourself 5 on page 14 Conflict between strategic business plans & short-term decisions Top-down approach Localised decision  May lead to conflict in organisations where divisional autonomy & employee empowerment is practised  Strategic planning is normally made annually or for a longer period  Routine localised decision cannot wait for subsequent strategic plan even if inconsistent with it Decision flexibility of an organisation  Organisation not able to respond to changes in environment at the right time & acts only according to strategic plan  Discourages creativity and strategic thinking Rigid strategic plans Freewheeling opportunism  Exploiting opportunites: more advantageous than following only strategic planning

Evaluate how SWOT analysis may assist in the performance management process SWOT Used in strategic planning To evaluate strengths, weaknesses, opportunities & threats that might affect business strategy Identifying relevance of strength & weaknesses to the opportunities & threats Specifying objectives Identifying favourable / unfavourable factors involves: SWOT analysis Focuses on future choices & extent to which the organisation is capable of supporting strategies

Danger in undertaking a SWOT analysis Can generate very long lists of apparent strengths, weaknesses, opportunities & threats Danger of over-generalisation S W O T Strengths Opportunities Threats Weaknesses Useful To achieving the objectives Detrimental To achieving the objectives External origin (attributes of the environment) Internal origin (attributes of the organisation)

Benchmarking process Defining the objectives Identifying the performance gap Compiling information & data on performance Identifying best practices of benchmarked entity Preparing a report and implementing the steps necessary to close the performance gap Evaluating the results of the benchmarking process

RECAP  Explain the role of strategic management accounting in strategic planning and control. [2]  Discuss the role of corporate planning in clarifying corporate objectives, making strategic decisions and checking progress towards the objectives. [2]  Compare planning and control at the strategic and operational levels within a business entity. [2]  Assess the use of strategic management accounting in the context of multinational companies. [3]  Discuss the scope for potential conflict between strategic business plans and short-term localised decisions. [2]  Evaluate how SWOT analysis may assist in the performance management process. [2]  Evaluate the methods of benchmarking performance. [3]