L9 - Strategic Management Accounting and The Balanced Scorecard Flashcards
Who caused the rise of strategic management?
- •One of the major reforms since the 1990s has been the move to strategic management thinking
- •This revolution in management has been largely credited to the work of Professor Michael Porter
- American academic at Havard
- Wrote Competitive Strategy in 1980 - voted 9th most influential management text by the academy of management
- Prior to 1960s strategy was used in the setting of war not business
- •Strategic management has many different dimensions; there is more emphasis on managing interactions with the external world
How does Chandler define strategy?
the determination of the long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out those goals
Example of a strategic planning framework?
- Establish mission, vision and objective
- Undertake a position analysis
- Internal capability and standing against competitors
- Identify and assess the strategic options
- Porter advanced two generic strategies for competitive advantage:
- Cost leadership - lowest cost producer in the industry
- Differentiation
- Miles and Snow gave two strategic positions:
- Defender - in a stable market, limited product range - compete on cost, quality and service leadership
- prospector - new product innovation and market innovations e.g. apple
- Porter advanced two generic strategies for competitive advantage:
- Select strategic options and formulate plans
- Perform review and control
What is Strategic Management Accounting concerned with?
To support the strategic planning process, management accounting must become more concerned with:
- The external environment
- Developing a method to help outperform competitors
- monitoring and successfully implementing business strategies - long- term and forward-looking in orientation
What is Strategic Management Accounting?
- There is no comprehensive conceptual framework on what constitutes Strategic Management Accounting (SMA)
- “Strategic management accounting is an emerging field whose boundaries are loose and, as yet, there is no unified view of what it is or how it might develop. The existing literature in the field is both disparate and disjointed.” (Coad, 1996: 392)
- CIMA defines SMA as:
“A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information.” (CIMA Official Terminology, 2005: 54)
What is Traditional Management Accounting like in comparison to strategic management accounting?
- Similar in respect to:
- need to set basic objectives
- then quantified into actions and plans
- then set up systems to measure performance and control activities
What is the Balanced Scorecard?
- it is an advance on traditional performance measurement systems that tend to be financial in nature
Prior to the 1980s traditional measurement systems:
- Measurements are not in tune with strategic objectives
- Measurements are not customer driven
- Financial measures are too late for any corrective action and encourage a short term focus
- Many key non-financial performance indicators are ignored
- Measures are often used for punishment rather than for learning –> affect promotion and bonuses prospects
Examples of Financial Indicators and their problems?
•Example: ROI, RI (residual income), EVA, and profit
Problems with financial indicators:
- •Problems with reliance on traditional financial indicators
- Different depreciation methods give different levels of profits
- •Tendency to rely on short term views
- •Distorted perception due to use of historical data to make future plans and decision making and controlling
- What factors determine profits, not just the data of profits
- •Time lag from preparation to use - Management Accounting needs timely data
•Qualitative information cannot be obtained therefore unbalanced perceptions
When was the Balanced scorecard method developed?
- First proposed by Kaplan and Norton in 1992
- Designed to combat short-termism of traditional accounting systems
- Links short-term performance & long-term strategy
The balance between internal and external perspective
A Balance between financial and non-financial measures
- Different companies will have different scorecards owing to different strategies
- Applicable to both for-profit and not-for-profit organisations
What is a Balanced Scorecard?
The Balanced Scorecard is a strategic planning and management system used to align business activities to the vision and strategy of the organization by monitoring performance against strategic goals
Why used a balanced scorecard?
- Improve organizational performance by measuring what matters
- Increase focus on strategy and results over the long-term –> makes profits sustainable
- Align organization strategy with workers on a day-to-day basis
- Focus on the drivers key to future performance
- Improve communication of the organization’s vision and strategy
What are the 4 quadrants the original balanced scorecard broken performance measure and management’s vision into?
- Financial
- Customers
- Internal Business processes
- Learning and growth
although these can be changed if it better suits the organisation e.g. learning and innovation
How is a Balanced Scorecard constructed?
- Critical Success factors also mean goals –> meant to have 4 goals for each perspective
- Keep the amount of information at a manageable level
- Need to measure performance
- The measure also needs to be stretch targets that are achievable with efficient work
What is the cause and effect relationship between the different quadrants of the balanced scorecard?
- improvement in learning and growth will automatically improve internal business processes –> if a organisation innovates and promotes autonomy it will improve key business processes
What are some examples of the Financial Perspective?
- also coveys any final impact from expected results from the other perspectives
- Revenue and mix –> new products, reaching new customer, repricing products
What are some examples of the Customer Perspective?
- Manager identify the customers and market segments they will compete in and measure their performance in them
- Can criticise the different perspectives:
- Dropping the price to 0 and generating 0 profits will increase customer notification but you will never meet your financial goals - cause and effect relationship isn’t held
- Focus on the attribute that are particularly appreciated by customers
What are some examples of the Internal Business Process Perspective?
- Measure and minimise errors
- Average job completion time
What are some delivery performance measures as part of the internal business process perspective?
- Time between when an order is received and when it is shifted –> delivery cycle time
- The throughput time is how long it takes to manufacture a product and shift it
- The processing time is the only value-added time
- Want to reduce the wait time and queue time (time a product is waiting to be worked on in the production process)
Manufacturing cycle efficiency = Value-added time/ Manufacturing cycle time
The higher the better
What are some examples of the Learning and Growth perspective?
Chains of Cause and effect relationship in the Balanced Scorecard?
ROCE is an outcome measure
- A well-balanced scorecard will have a balance between outcome or lag indicators and performance drivers also know as lead indicators. (these are included in the different perspectives of the balance scorecard)
What is a strategy map?
- Development onto of the original balanced score card
- •A framework for describing and implementing strategy – a ‘management system’
- •Based on the 4 perspectives of the BSC
- •Describes the cause – and – effect linkages of a particular strategy, using the BSC –> help visual the different links between them
- •Starts from the top (destination) and works down
Can help close the gap between the strategic visions and operation activity –> help show the strategy and what can be done to achieve it
What are the Benefits of the Balanced ScoreCard?
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