APM – Chapter 1: Strategic planning and control
Strategic planning and control
Key Points to Highlight in Chapter 1
Strategic Planning:
- Definition: Developing long-term goals and objectives to achieve organizational success.
- Process: Involves analyzing the external environment, assessing internal capabilities, and formulating strategies for competitive advantage.
- Objective: Guide the organization towards its desired future state.
Strategic Control:
- Definition: Evaluating the effectiveness of strategic plans.
- Purpose: Monitor implementation progress, identify deviations, and take corrective actions.
- Tools: Balanced scorecard, strategic control systems.
Strategic Planning Tools:
- SWOT Analysis: Identifies Strengths, Weaknesses, Opportunities, and Threats.
- Balanced Scorecard: Measures performance across financial, customer, internal processes, and learning and growth perspectives.
- Key Performance Indicators (KPIs): Metrics aligned with strategic objectives to assess performance.
Budgeting Approaches:
- Incremental Budgeting: Adjusts past performance for expected changes to set targets.
- Zero-Based Budgeting: Requires justifying all expenses from scratch each cycle.
- Activity-Based Budgeting: Allocates resources based on cost drivers and activities.
- Beyond Budgeting: Emphasizes flexibility and adaptive planning over rigid targets.
Performance Measures:
- Types: Financial and non-financial indicators.
- Characteristics of Effective Measures: Relevant, objective, understandable, reliable, and timely.
- Balanced Scorecard: Evaluates performance from multiple perspectives beyond financial outcomes.
Variance Analysis:
- Purpose: Compares actual performance against budgeted expectations.
- Types of Variances: Sales volume, labor rate, labor efficiency, overhead efficiency.
- Flexible Variance Analysis: Compares actual performance against flexible budgets based on actual activity levels.
Standard Costing:
- Purpose: Establishes benchmark performance standards for various activities or processes.
- Use: Compares actual costs against standard costs to identify variances and improve cost management.
This document provides comprehensive notes on Strategic planning and control, covering the specified topics with detailed explanations, theories, and illustrations.
Topic 1: Strategic Management Accounting
A) Role of Strategic Performance Management in Strategic Planning and Control:
Strategic Performance Management (SPM) bridges the gap between strategic planning and control. It involves:
- Setting strategic objectives: Translating the organization’s vision and mission into measurable goals.
- Developing performance measures: Tracking progress towards strategic objectives.
- Monitoring and evaluating performance: Analyzing data to identify deviations and assess success.
- Taking corrective action: Adjusting strategies or resource allocation based on performance evaluation.
SPM ensures strategic goals are realistic, implemented effectively, and continuously monitored.
B) Performance Measurement in Checking Progress towards Corporate Objectives:
Performance measurement compares actual results with strategic objectives. Key metrics include:
- Financial measures (profitability, ROI)
- Customer measures (customer satisfaction, market share)
- Internal process measures (efficiency, quality)
- Innovation and learning measures (R&D, employee development)
Effective performance measurement provides insights for strategic decision-making and course correction.
C) Planning and Control between Strategic and Operational Levels:
- Strategic Level: Focuses on long-term goals, external environment, and resource allocation. Planning dominates control activities.
- Operational Level: Focuses on short-term efficiency, resource utilization, and daily operations. Control activities are more prominent.
These levels are interconnected. Strategic plans guide operational activities, while operational performance feedback informs strategic adjustments.
D) Potential Conflict between Strategic Plans and Short-Term Decisions:
Short-term pressures can lead to decisions that undermine long-term strategic goals. Examples:
- Focusing on short-term profits: Reducing R&D or marketing expenses at the cost of long-term growth.
- Meeting quarterly targets: Prioritizing sales volume over product quality, damaging customer loyalty.
Management should balance short-term needs with long-term strategic objectives.
E) Models for Performance Management:
- SWOT Analysis:
Evaluates Strengths, Weaknesses, Opportunities, and Threats to the organization.
- PEST Analysis:
Analyzes Political, Economic, Social, and Technological factors impacting the organization.
- BCG Matrix:
Classifies businesses based on market growth and market share (Stars, Cash Cows, Dogs, Question Marks).
- Balanced Scorecard:
Measures performance across financial, customer, internal process, and learning & growth perspectives.
- Porter’s Generic Strategies: Describes three strategies for competitive advantage (Cost Leadership, Differentiation, Focus).
- Porter’s 5 Forces:
Analyzes the competitive landscape (Threat of New Entrants, Bargaining Power of Suppliers, Bargaining Power of Buyers, Threat of Substitutes, Competitive Rivalry).
These models provide frameworks for strategic analysis, decision-making, and performance evaluation.
F) Benchmarking Performance:
Benchmarking compares an organization’s performance with industry leaders or best practices. Techniques include:
- Internal Benchmarking: Comparing performance across different departments or units within the organization.
- Competitive Benchmarking: Comparing performance with direct competitors.
- Functional Benchmarking: Comparing specific processes or functions with best practices across industries.
Benchmarking helps identify improvement areas and set ambitious but achievable performance goals.
G) Role of Risk and Uncertainty:
Risk and uncertainty significantly impact planning, decision-making, and performance reporting:
- Planning: Requires considering potential risks and uncertainties to develop robust strategies.
- Decision-Making: Involves weighing potential risks and rewards of different options.
- Reporting: Performance should be reported alongside explanations for deviations caused by unforeseen risks.
Different stakeholder risk appetites require careful consideration. Management accountants should communicate risks effectively to stakeholders.
Topic 2: Performance Hierarchy
A) Mission Statement and Performance Management:
A clear and concise mission statement defines the organization’s purpose, values, and target customers. It impacts performance management by:
- Guiding strategic objectives: The mission statement translates into specific, measurable goals.
- Influencing performance measures: Measures should reflect the mission statement’s focus (e.g., social impact for a mission-driven organization).
B) Cascading Strategic Objectives:
Strategic objectives are broken down into subsidiary objectives for lower levels:
- Top-level objectives: Align with the organization’s overall mission and vision.
- Departmental objectives: Support the achievement of top-level objectives.
- Individual objectives: Contribute to departmental and organizational objectives.
This cascading process ensures all levels are aligned towards achieving the overall strategic goals.
C) Critical Success Factor (CSF) Analysis:
CSF analysis identifies factors crucial for achieving strategic objectives. It involves:
- Identifying key objectives: What must be achieved to meet strategic objectives?
- Brainstorming factors: Identifying internal and external factors critical for achieving those objectives.
- Evaluating and prioritizing factors: Assessing the relative importance of each factor.
Once identified, CSFs become the basis for developing performance metrics to track progress and identify potential issues.
D) Characteristics of Operational Performance:
Operational performance focuses on efficiency, effectiveness, and quality in day-to-day operations. Key characteristics include:
- Short-term focus: Measured over shorter time frames than strategic performance.
- Process-oriented: Concerned with how efficiently and effectively tasks are performed.
- Quantitative and qualitative measures: Includes data on production volume, cycle time, error rates, and customer satisfaction.
Operational performance data is critical for identifying areas for improvement and ensuring smooth execution of strategic plans.
E) Planning vs. Controlling at Different Levels:
- Strategic Level: Planning dominates as strategies are formulated and long-term goals are set. Control activities focus on ensuring resources are allocated towards achieving strategic objectives.
- Operational Level: Control activities are more prominent, monitoring daily operations and ensuring adherence to plans. Planning involves setting short-term operational targets aligned with strategic goals.
There’s a constant interplay between planning and control at all levels.
F) Performance Planning Gap:
The performance planning gap refers to the difference between planned performance and actual performance. It can arise due to:
- Unrealistic expectations: Overly ambitious plans not considering risks or limitations.
- Poor communication: Lack of clarity regarding goals and expectations among employees.
- Changes in the environment: Unforeseen market shifts or economic fluctuations.
Strategies to bridge the gap include:
- Setting realistic and achievable goals.
- Effective communication and goal setting at all levels.
- Continuous monitoring and performance feedback.
- Flexibility in adapting plans to changing circumstances.
Topic 3: Performance Management and Control of the Organization
A) Budgeting Models:
Budgeting helps allocate resources, monitor performance, and motivate employees. Common models include:
- Fixed Budgets: Set at the beginning of the period and remain unchanged. Can be inflexible and demotivating if circumstances change.
- Flexible Budgets: Adjusted based on changes in activity levels. More realistic but requires accurate activity forecasting.
- Rolling Budgets: Continuously updated for a future period, providing a dynamic view of resource allocation.
- Activity-Based Budgeting (ABB):
Allocates costs to activities rather than departments, providing more granular insights.
- Zero-Based Budgeting (ZBB):
Requires justifying all expenses from scratch each period, promoting cost-consciousness.
- Incremental Budgeting: Increases or decreases budget based on last period’s budget plus/minus a percentage. Simplest method but may not account for significant changes.
Choosing the best model depends on the organization’s size, complexity, and industry.
B) Budget Variances:
Budget variances analyze the difference between budgeted and actual results. Common variances include:
- Price Variance: Difference between budgeted and actual price of a resource.
- Quantity Variance: Difference between budgeted and actual quantity of a resource used.
- Revenue Variance: Difference between budgeted and actual revenue.
- Expense Variance: Difference between budgeted and actual total expenses.
Analyzing variances helps identify areas for improvement and take corrective action.
C) Non-traditional Performance Measures:
Organizations are increasingly using non-traditional measures alongside financial data:
- Customer Satisfaction: Surveys, Net Promoter Score (NPS)
- Employee Engagement: Surveys, absenteeism rates
- Quality Measures: Defect rates, customer complaints
- Innovation Measures: Number of new product launches, R&D expenditure
Topic 4: Changes in Business Structure and Management Accounting
A) Information Needs and Performance Management:
- Functional Structure: Focuses on specialized functions (e.g., production, marketing, finance). Performance information should track functional efficiency and effectiveness.
- Divisional Structure: Organizes by product, market, or customer. Performance information should track divisional profitability and market share.
- Network Structure: Relies on outsourcing and partnerships. Performance information should track collaboration effectiveness and cost management across the network.
Management accounting systems need to adapt to provide relevant information for each structure.
B) Management Accounting for Service Businesses vs. Manufacturing:
- Manufacturing: Focuses on production costs, inventory management, and cost-volume-profit (CVP) analysis.
- Service Businesses: Focuses on customer service quality, employee productivity, and activity-based costing (ABC) for accurate cost allocation.
Management accounting systems should reflect these differences to support strategic decision-making.
C) Business Process Re-engineering (BPR):
BPR involves fundamentally redesigning business processes to improve efficiency, effectiveness, and customer satisfaction. Management accounting plays a crucial role by:
- Identifying processes for improvement: Cost and performance data helps pinpoint inefficient processes.
- Developing performance measures: Track the impact of BPR on key metrics.
- Costing and budgeting: Estimate costs associated with BPR implementation.
Effective use of management accounting data is critical for successful BPR initiatives.
D) Performance Management Systems and Business Integration:
Performance management systems can facilitate business integration by:
- Value Chain Analysis:
Identifies value-adding activities across the organization. Performance measures track efficiency and effectiveness of each stage.
- McKinsey’s 7S Framework:
Analyzes seven key elements (Strategy, Structure, Systems, Skills, Style, Shared Values, Staff) influencing organizational effectiveness. Performance measures assess alignment between these elements.
These models help ensure different departments and functions work together towards achieving strategic goals.
E) Impact of Change on Performance Measurement:
Changes in structure, culture, and strategy influence performance measurement methods:
- Structure Changes: May require new performance measures specific to the new structure.
- Culture Changes: Performance measures should reflect the desired cultural values (e.g., innovation, customer focus).
- Strategy Changes: New measures aligning with the revised strategy become necessary.
Performance measurement systems should be adaptable to accommodate organizational changes.
F) Continuous Refinement of Management Accounting Systems:
In a competitive global market, organizations need to continuously improve their management accounting systems to:
- Maintain performance: Effective systems provide insights for cost reduction, efficiency gains, and value creation.
- Improve performance: Regularly evaluate and refine systems to identify new performance improvement opportunities.
- Gain a competitive advantage: Robust management accounting systems provide valuable data for strategic decision-making.
Organizations that invest in continuous improvement of their management accounting systems will be better positioned for long-term success.
Topic 5: Environmental, Social and Governance (ESG) Factors
A) Stakeholder Groups and Performance Management:
Stakeholder groups with varying interests influence performance measurement and management. Mendelow’s Matrix helps prioritize stakeholders based on their power and legitimacy:
- High Power, High Legitimacy: (e.g., Customers, Investors) – Performance measures should address their key concerns (e.g., customer satisfaction, financial returns).
- Low Power, High Legitimacy: (e.g., Local communities) – Performance measures may reflect social and environmental impact on these stakeholders.
- High Power, Low Legitimacy: (e.g., Activists) – Performance measures may track progress on addressing their specific concerns.
- Low Power, Low Legitimacy: (e.g., Fringe groups) – May have less influence on performance measurement systems.
Understanding stakeholder needs helps design performance measures that consider a broader range of perspectives.
B) Social and Ethical Issues in Strategy Formulation:
Social and ethical issues can impact strategy and performance measurement:
- Environmental sustainability: Measures may track carbon footprint, energy consumption, or waste reduction.
- Labor practices: Measures may track employee diversity, safety rates, or fair labor standards compliance.
- Community engagement: Measures may track charitable contributions, community development projects, or local employment rates.
Effective performance measurement incorporates social and ethical considerations for broader sustainability.
C) Environmental Management Accounting (EMA):
EMA focuses on measuring and managing the environmental impact of organizational activities. Techniques include:
- Life Cycle Costing (LCC):
Considers environmental costs throughout a product’s life cycle (from resource extraction to disposal).
- Input-Output Analysis: Tracks the flow of materials and energy within the organization and across its supply chain.
- Activity-Based Costing (ABC):
Identifies and assigns environmental costs to specific activities, aiding in pollution prevention strategies.
EMA helps organizations make informed decisions that are environmentally responsible and contribute to achieving sustainability goals.
Additional Notes:
- It’s important to consider the limitations of performance measurement systems. They can be complex, expensive to implement, and susceptible to manipulation.
- Effective performance management requires a culture of continuous improvement, open communication, and employee buy-in.
- The use of technology, such as data analytics and artificial intelligence, is increasingly important for advanced performance management practices.
Conclusion:
Strategic performance management plays a vital role in ensuring an organization achieves its strategic objectives. By understanding the various theories, models, and techniques discussed in this document, management accountants can contribute significantly to effective performance management and control within an organization.