Strategic management: Accounting and the balanced scorecard Flashcards
What two main sections does management tend to include?
- Strategy (top-down managerial requirements)
* Control (goal-related feedback and adjustments)
What has been the rise in strategy?
• Reform to strategic management thinking from the 1990s
Who can be credited with the move to more strategic management? and state aim of papers
- Michael Porter and his competitive strategy texts
- Adapting a firm to its competitive environment and trying to gain a competitive advantage
- Two types of competitive advantage- lower cost and differentiation
What is strategy?
The determination of the basic long term goals of a firm and the adoption of courses of action and the allocation of resources necessary to carry out these goals
What is the strategic planning framework?
- Step 1-Establish mission, vision and objectives
- Step 2-Undertake a position analysis (internal capabilities)
- Step 3- Identify and assess the strategic options
- Step 4- Select strategic options and formulate plans
- Step 5- Perform review and control
What are some strategic options that may need to be decided upon in the framework?
• Product differentiation or cost leadership (Porter)
Miles and Snow:
• Defender position-limited product range(leading on cost, quality, service)
• Prospector position- new product innovation, market development e,g, apple
What parts of the Strategic planning framework can management accountants have the most impactful input?
• Steps 4+5 mainly but can input in the others as well
What do management accountants need to be more concerned with to facilitate a strategic planning process?
- The external environment
- Developing methods to help outperform competitors
- Monitoring and successfully implementing business strategies
What is the strategic management accounting definition by CIMA? despite no comprehensive framework for SMA
“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, 2005)
How many SMA tool is there and give one example. What must all these tools have?
- 12 tools inc Balanced scorecard BSC
* Tools must have an environmental (market) orientation, focus on competitors, long term and forward-looking
What are the similarities and differences between traditional and strategic MA?
• Both: set out obj, quantify into specified actions/plans and have systems devised to measure and control actions
• Differences : -internally formed obj compared with plans vs performance and targets based on competitors
-financial vs financial and non-financial
What is the issue with traditional Performace 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 e.g., customer satisfaction
- Measures are often used for punishment rather than for learning e.g. no promotion if sales target not met
What is a Performance Measurement system?
A process of assessing progress toward achieving predetermined goals
What are traditional financial indicators?
Return on Investment (ROI), Residual Income (RI), Economic Value Added (EVA), and profit
What is the issue with traditional financial indicators?
- Tendency to rely on short term views
- Distorted perception- historical data used to make future plans and decision making and controlling
- Time lag from preparation to use - Management accounting needs timely data
- Qualitative information not taken into account therefore unbalanced perceptions
How created the BSC?
Kaplan and Norton in 1992
What are the aims of the BSC?
- Designed to combat short-termism of traditional accounting systems
- Links short-term performance & long-term strategy-and turn this into operational terms
- Different companies will have different scorecards owing to different strategies
- Applicable to both for-profit and not-for-profit organisations- mostly used in healthcare and manufacturing
What is the BSC?
A strategic planning and management system used to align business activities to the vision and strategy of the firm by monitoring performance against strategic goals
What are the benefits of a BSC?
- Improve organizational performance if successfully implemented (CIMA) by measuring what matters
- Increase focus on strategy and results-all metrics in one place
- Align organization strategy with workers on a day-to-day basis- something to work towards
- Focus on the drivers key to future performance
- Improve communication of the organization’s vision and strategy to all employees
- Flexible model
What are the main original components of the BSC?
- Financial- how to create value for shareholders
- Customers- how to create customer value
- Internal business perspective- what processes to excel at to drive value
- Learning and growth- how to sustain innovation and create future value
What are the stages in constructing a BSC?
- Answering the questions of the 4 components
- Leads to the determination of critical success factors
- Measured through critical measurements (KPIs)
Explain the critical success factors (goals)?
- 4 goals/ targets per component e.g. customers
- Stretch targets are hard but achievable
- e.g. internal business target of having satisfied employees measured by critical measurement of 5% staff turnover
What are the interconnections between the 4 components?
•Upward chain of cause and effect
-Improvements in learning and growth (e.g. Employee
Skills )lead to
- Improved internal business practices (process quality and process cycle time) leading to
- Improved customer satisfaction (on-time delivery and satisfaction) leading to
- Improved financial performance (ROCE)
How is the financial perspecitve measured?
3 main areas to measure are:
•Revenue growth: Increase number of new products
• Cost reduction: Cut back on labour, materials, overheads, etc
• Asset utilization: Increase usage of assets
How is 1) revenue growth, 2) cost reduction and 3) asset utilisation measure?
- % revenue increase from new products
- % reduction in cost per unit produced
- Return on investment
How can the financial perspective be applied to an organisation?
ADD
What are the main objectives and measures of the customer perspective?
- Increase customer satisfaction- Customer survey satisfaction ratings
- Improve delivery times- Percentage of on-time deliveries
- Increase customer retention- % growth in business from existing customers
- Increase market share- % of market share
- Increase customer profitability- Customer profitability analysis
What needs to occur in the customer perspective
•
•
What are the key objectives and measures of the in ternal business perspective?
•Innovation: % of sales from new markets
-Develop new markets and customers
•Operations: Relationship between inputs and outputs(measure error rate e.g. in tax returns)
-Increase process efficiency
•Post-sales service: % of customer requests handled with a single call
-Increase service quality
What are the delivery performance measures?
• Delivery cycle time-wait time plus throughput time
• Throughput time- time to convert raw materials to completed products
-Queue time-time it takes to be worked on
-process time-only value-adding time
-inspection time
-move time
•wait time -time to get production started from order
What is the calculation for manufacturing cycle efficiency? and meaning of values
=Value-added time/ manufacturing cycle time
• The higher the value the btter
• < 1 means there are non-value added time aspects in the production process
What is looked at in the learning and growth perspective?
- Focuses on what infrastructure the business needs in order to create long-term growth and improvement
- Business unlikely to meet long term targets using today’s tech and capabilities
- L&D comes people, systems and firm procedures
What are the main objectives of L&D?
- Improve employee capabilties
- Improve information systems
- Motivation and empowerment
What are the measures of 1) Improve employee capabilties, 2) improve information systems and 3)motivation and empowerment?
1) -Training courses
- Employee satisfaction surveys
- Sales revenue generated per employee
2) % of customer-facing staff having on-line access to customer and product information
3) -% of employees achieving personal goals
-Number of suggestions implemented per
Employee
What is a strategy map?
A newer framework for describing and implementing strategy – a ‘management system’
Explain a strategy map?
- Based on the 4 perspectives of the BSC
- Describes the cause – and – effect linkages of a particular strategy, using the BSC-said to aid strategy by visualising the relationships between quadrants
- Starts from the top (destination) and works down
What are the Kaplan and Norton five guiding principles for implementing the BSC ?
1• Translate strategy into operational terms
2• Align the organization to the strategy-rather than too many objectives
3• Make strategy everyone’s job-employees in all departments
4• Make strategy a continual process – strategy management meetings and the learning process-adapting the BSC with the environment
5• Mobilising change through executive leadership
What are the four key benefits of the BSC?
- Translating the vision
- Feedback and learning
- Business planning
- Communicating and linking
What is the ‘translating the vision’ benefit of the BSC?
- Clarifying the vision into specific goals/ terms
* Gaining consensus
What is the feedback and learning benefit of the BSC?
- Articulating the shared vision0seeing how one element impacts another
- Supplying strategic feedback
- Facilitating strategy review & learning
What are the business planning benefits of the BSC?
- Setting targets and applying specific measures
- Aligning strategic initiatives
- Allocating resources to the right places
- Establishing milestones
What are the communicating and linkages benefits of the BSC?
- communicating & educating
- setting goals
- linking rewards to performance measures
What are the limitations of the BSC?
- Assumes cause and effect in an intuitive way but unproven-AAA hasn’t yet found relationship
- Relative importance of different perspectives is unclear-how to balance the different needs
- Implies a multiple stakeholder perspectives but in reality shareholder interests remain dominant
- Non-financial measures are not evaluated in monetary terms-can be difficult for financially centred managers but also a positive change
What are the potential pitfalls of the BSC?
- Lack of well-defined strategy
- Too much focus on the lagging measures
- Use of generic measures
- Self-serving managers
Explain the pitfall of a lack of a well-defined strategy?
- BSC relies on a well-defined strategy and understanding of linkages between strategic objections and metrics.
- Without this, the strategy could fail
Explain the pitfall of too much focus on the lagging measures?
Focusing on only the lagging measures may cause a lack of priority or opportunity for the leading measures.
Explain the pitfall of use of Generic Metrics?
Do not just copy metrics from another firm. Identify the measures that apply to your strategy and competitive position. e.g. tesco implemented a successful BSC
Explain the pitfall of Self-serving managers
Managers whose goal is to achieve a desired result in order to obtain a bonus or other self-reward so ignore the BSC??
