STRATEGIC MANAGEMENT AND ACCOUNTING

1. STRATEGIC MANAGEMENT AND ACCOUNTING • Strategic Management • Stakeholder analysis • Corporate objectives • Sustainable competitive advantages • Strategic Management Accounting • Appropriate analysis • Long-term considerations • Nonfinancial data

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

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”

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.

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.

6. Porter’s Strategic Positions • Cost leadership • Product or service differentiation • Focus on market niche

7. DEVELOPING COMPETITIVE ADVANTAGE Differentiation with Cost Advantage Superior Differentiation Advantage Relative Differentiation Position Focus Low Cost Advantage Stuck-in-the Middle Inferior Inferior Superior Relative Cost Position

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.

9. Strategic Cost Management Strategic position analysis--an organization’s basic way of competing to sell products or services. Value chain analysis--the study of value-producing activities, stretching from basic raw materials to the final consumer of a product or service. Cost driver analysis--the study of factors that cause or influence costs.

10. BALANCED SCORECARD A multi-dimensional measurement system that translates an organization’s mission and strategy into performance measures

11. Financial Perspective How do we look to our shareholders? Customer Perspective Business Processes How do we look to our customers? What business processes are the value drivers? Organization Learning Are we able to sustain innovation, change and improvement Balanced Business Scorecard Vision & Strategy

12. Long Range Planning Historical continuity Periodic orientation Internal focus Optimistic Detailed financial terms “Management by Exception” Strategic Management Recognition of change Extended time horizons External focus Proactive but realistic Multiple data sources On-line analysis Entrepreneurial Global viewpoint LRP vs. STRATEGIC MANAGEMENT

13. STRATEGIC MANAGEMENTKey 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?

14. GROWTH-SHARE MATRIX High ? MARKET POTENTIAL Low High Low MARKET SHARE

15. Customer Need Identified PROCESS PERSPECTIVE Post- Sale Service Process Operations Process Innovation Process Create Product/ Service Offering Customer Need Satisfied Build the Products/Services Deliver the Products/ Services Service the Customer Identify the Market

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

17. VALUE CHAIN ANALYSISPAPER PRODUCTS INDUSTRY Timber Farming Competitor B Logging and Chipping Competitor C Pulp Manufacturing Competitor D Paper Manufacturing Competitor A Competitor G Converting Operations Competitor F Distribution Competitor E End-Use Customer

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

19. ESTABLISHMENT OF TARGET COSTS Estimated Market Price Market Research Define Product/ Customer Niche Target Cost Understand Customer Requirements Define Product Features Competitor Analysis Required Profit

20. ATTAINMENT OF TARGET COSTS Produce Compute Cost Gap Design Costs Out Perform Value Engineering Release Design to Production Initial Cost Estimates Compare to Target Cost Design Products/ Processes Estimate Achievable Cost Actual Cost Perform Cost Analysis Undertake Continuous Improvement

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

22. LIFE-CYCLE COST COMMITMENT 90 85 66 Product Planning Preliminary Design Detailed Design & Testing Production Logistics Support

23. LIFE-CYCLE COST COMMITMENT Life-cycle Cost 90 85 Cash Flow 66 Life-cycle cost ($) Matched Cost Product Planning Preliminary Design Detailed Design & Testing Production Logistics Support

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

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.

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

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

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

29. The Two-Dimensional ABM Model Cost Dimension Resources Process Dimension Driver Analysis Performance Measures Analysis What? Why? How Well? Product and Customers

30. PERFORMANCE MEASURESNew 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

31. 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 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 JIT OPERATIONS A Management Philosophy

32. Traditional Manufacturing Layout Dept 1 Dept 2 Dept 3 A Product A Product B A Finished A Finished B Lathes Grinding B Welding B JIT Manufacturing Layout Cell A Cell B Grinder Lathe Welding Lathe Welding Product A Finished A Product B Finished B

33. JIT OPERATIONSOther 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

34. JIT OPERATIONSCosts 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

35. JIT OPERATIONSService 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

36. INVENTORY MANAGEMENTEssential Questions • How much inventory must be ordered or produced? • How should the purchase order or internal production be managed?

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

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.

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

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

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

42. QUALITY OF DESIGN& CONFORMANCE Do right things right (Winner!) High Do right things wrong (failure) Quality of Design Do wrong things right (failure) Do wrong things wrong (failure) Low Low High Quality of Conformance

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”

44. COSTS OF QUALITYContinued 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!

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

46. DISTRIBUTION OF QUALITY COSTSTraditional View Total Quality Costs Cost Total Failure Costs Total Control Costs Percent Defects 100% Optimal (AQL)

47. QUALITY COSTSContemporary View Total Quality Costs Cost Total Failure Costs Total Control Costs 100% Percent Defects