ACCA 2016 BPP PASSCARD p5

Planning, control, decision-making and management information Corporate planning strategic and operationalPlanning and control: Multinationalaspects analysisSWOT The process of deciding

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Professional Paper P5 Advanced Performance Management

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First edition 2007, Ninth edition April 2015

ISBN 9781 4727 2709 1

e ISBN 9781 4727 2774 9

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the

British Library

Your learning materials, published by BPP Learning

Media Ltd, are printed on paper obtained from traceable

Wells Place Merstham RH1 3LG

All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media.

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Welcome to BPP Learning Media's ACCA Passcards for Professional Paper P5 Advanced Performance Management.

They focus on your exam and save you time.

They incorporate diagrams to kick start your memory.

They follow the overall structure of the BPP Learning Media's Study Texts, but BPP Learning Media's

ACCA Passcards are not just a condensed book Each card has been separately designed for clear

presentation Topics are self contained and can be g rasped visually

ACCA Passcards are still just the right size for pockets, briefcases and bags.

Run through the Passcards as often as you can during your final revision period The day before the exam, try

to go through the Passcards again! You will then be well on your way to passing your exams.

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information and performance

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1: Introduction to strategic management accounting

The chapter also explains how organisations set strategicplans and control their outcomes

However, it is important to remember that P5 is not pr imarily

a business strategy paper – its main focus is howorganisations can evaluate and improve their performance.Benchmarking could provide a useful way of comparingprocesses or performance between business units ororganisations, with a view to improving them in line withbest practice

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Planning, control, decision-making

and management information Corporate planning strategic and operationalPlanning and control: Multinationalaspects analysisSWOT

The process of deciding on the objectives of the

organisation, on changes to these objectives, on the

resources used to attain them, and on the policies

that are to govern the acquisition, use and disposal

of those resources

Long term and wide scope

Generally formulated in writing

Strategic decisions are long-term decisions,

characterised by wide scope, wide impact, relative

uncertainty and complexity

Most strategic decisions are unique, so the

information needed to support them is likely to be

ad-hoc and specially tailored to the decision

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Management control

The process by which managers ensure that

resources are obtained and used effectively and

efficiently in the accomplishment of the organisation's

objectives It is sometimes called tactics or tactical

planning.

Short-term and non-strategic

Management control planning activities include preparing annual sales budget

Management control activities include ensuring budget targets are achieved

Carried out in a series of routine and regular planning and comparison procedures

Management control information covers the whole organisation, is routinely collected/disseminated, is often quantitative and commonly expressed in money terms:

– Cash flow forecasts – Variance analysis reports – Staffing levels

Source of information likely to be endogenous (from

within the organisation)

Characteristics of management accounting

information

Management accounting information for

strategic planning and decision making

Incorporates forecasts/estimates/risk and

uncertainty analysis

Has an external orientation

Forward looking and outward looking

Helps to ensure goal congruence

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Long-term strategic plans can conflict with the shor ter-term objectives of management control

Performance measures/control measures do not take strategic direction into account

Strategic imperatives might not be properly communicated to middle management

Strategic planning information might be difficult to measure

Strategic planning and management control compared

Example

The decision to launch a new brand of frozen foods is a strategic plan, but the choice of ingredients for themeals is a management control decision

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Performance management

Activity designed to improve an

organisation's performance and ensure

that its goals are being met

Performance management systems

Plans, with set guidelines and targets, to helporganisations measure how efficiently goals are beingmet, and to identify areas where performance can beimproved

Organisation has to establish its goals and

objectives before it can assess whether they

are being met

Once performance targets have been set, an

organisation can measure whether its goals

and targets are being achieved

Often linked to employee reward programmes

so employees are rewarded for helping anorganisation reach its goals

Performance measurement is an important

control in an organisation

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Management control

v operational control

Operational control/planning

Short-term and non-strategic

Occurs in all aspects of anorganisation's activities andneeded for day to dayimplementation of plans

Often carried out at shortnotice

Information likely to have an

endogenous source, often

from detailed transaction data,

eg customer orders and cashreceipts

Management control decision

Sales quotas are assigned toeach sales territory

Operational control decision

Managers of sales territoriesspecify weekly targets for eachsales representative

Operational control decisions are

more narrowly focused, carried out

within a shorter time frame and taken

by managers less senior in the

organisation

Operational control focuses on

individual tasks whereas

management control is concerned

with the sum of all tasks

The process of ensuring that specific

tasks are carried out effectively and

efficiently

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Performance management systemsshould have clear links betweenperformance measures at the differenthierarchical levels of the organisation

Means all departments and divisions will

be working towards the same ultimategoal

Illustrated by performance pyramid (see

Chapter 13)Strategic planning

Operational control

Anthony hierarchy

Managment control

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Benchmarking Planning, control, decision-making

and management information Corporate planning strategic and operationalPlanning and control: Multinationalaspects analysisSWOT

OBJECTIVES

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CORPORATE STRATEGIC CHOICE

1 2 3

eg Marketing strategies, production strategies

STRATEGY IMPLEMENTATION

Assess actual performance in the light of plans etc

REVIEW & CONTROL

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and management information Corporate planning strategic and operationalPlanning and control: Multinationalaspects analysisSWOT

Corporate Strategy

Involves decisions made at operational level

eg product pricing; personnel and recruitmentOperational strategies are crucial in implementingcorporate and business level strategies successfully

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and management information Corporate planning Multinationalaspects analysisSWOT

Planning and control:

strategic and operational

Linking strategy and

operations

The achievement of long-term

goals will require strategic

planning which is linked to

short-term operational planning If

there is no link between strategic

and operational planning, the

result is likely to be unrealistic

plans, inconsistent goals, poor

Potential for double loopfeedback (ie opportunity tochange the plan)

Long term

Operational

DetailedActivities of departmentMainly internal informationInternal focus, on actual proceduresMore concerned with monitoringcurrent performance against planMainly single loop feedback(performance must change, not theplan)

Short term

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and management information Corporate planning strategic and operational Planning and control: Multinationalaspects analysisSWOT

Strategic control To encourage the measurement of the

right things, organisations can institute

formal or informal systems of strategic

control Formal systems require theidentification of milestones of performance (strategic objectives). Focus on what matters in the

long term

Identify and communicatedrivers of success

Support organisational learning

Provide a basis for reward

Time-lag between control

measures and financial results

Linkages with other businesses in

a group

Risks a business faces

Sources of competitive advantage

Influences on strategic control systems

The key to strategic control is

ensuring that the right things

get measured

False alarms

motivate managers to

improve areas where there

are few benefits to the

organisation

Gaps are important areas

that are neglected (eg

customer satisfaction)

Different measures apply

to different industries

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and management information Corporate planning strategic and operationalPlanning and control: Multinational aspects analysisSWOT

Political factors (often significant ininternational businesses)

Technological factors (eg training problems

in international businesses)

Differences between domestic and international

businesses

Establishing realistic standards

Determining controllable cash flows

Currency conversion

Bases of comparison (like for like?)

Problems of performance measurement

Exchange rate fluctuations Risk

Level of domestic competition

Examples of problems when setting objectives

Potential issues in managing foreign subsidiaries

Planning: is strategic planning co-ordinated by corporate centre or at national level?

Control: is control centralised or do foreign subsidiaries have autonomy?

Performance measurement

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and management information Corporate planning strategic and operationalPlanning and control: Multinationalaspects analysis SWOT

A critical appraisal of the strengths and

weaknesses, opportunities and threats in

relation to the internal and external

environmental factors affecting an

organisation, in order to establish its condition

prior to the preparation of a long-term plan

Identify weaknesses which need to be

addressed

Identify key aspects of performance

(CSFs) which need to be measured

2 Convert weaknesses intostrengths and threats intoopportunities

ConversionConversion

Internal to the company

Existindependently

of thecompany

SWOT and performance management

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Planning, control, decision-making

and management information Corporate planning strategic and operationalPlanning and control: Multinationalaspects analysisSWOT

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Functional

Internal Comparing one operating unit or function with

another in the same industryComparing an internal function with the best externalpractitioners, regardless of industry

Competitor Comparing performance to direct competitors Butwill competitors be willing to share commercially

sensitive information?

Non-competitor Particularly relevant for not-for-profit organisations

Compare against organisations in the same industr yalthough they are not competitors

Types of benchmarking

Implies one best way of doing things

Primarily a catching-up exercise

Potential negative side effects of 'what getsmeasured gets done'

Impact on motivation for staff whosefunctions appear to be performing poorly

Disadvantages

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Planning, control, decision-making

and management information Corporate planning strategic and operationalPlanning and control: Multinationalaspects analysisSWOT

Stages of a benchmarking exercise

1

2

3

Set objectives of the benchmarking exercise and determine areas to benchmark

Identify key performance indicators or performance drivers to measure during the benchmarking

exercise

Select comparators: departments or organisations to compare performance against

Measure own and others' performance, using the measures identified in Stage 2

Compare performance, and identify gaps between own performance and those of the depar tments or

organisations being compared against

Design and implement an improvement programme to close the performance gaps

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2: Performance management and control

Not-for-profit organisations and their specific budgetissues are considered, before we look at the concept of'beyond budgeting' which tries to address some of theproblems faced in traditional budgeting

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Not-for-profit organisations budgeting''Beyond

Ensures organisation's objectives

Establishes a system of control

Provides a means of performance

evaluation

Motivates employees to improve

performance

Uses of budgeting As a budget has different purposes, it might

mean different things to different people

Cash budget

Master budget

Prior knowledge

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2: Performance management and control of the organisation

Assumes

3E's in place

Responds to changes in environment

Reviews cost behaviourclosely

Improves efficiency of resource allocation

Time consuming

Needs training

Needs a participative approach

Pros

Reduces uncertainty

in an unstable environment

Most recent plans used

Budgets always several months ahead

Looks at activity in depth

Cons

Time consuming

Difficult to identify responsibility and accountability for activities

Incremental budging

Time consuming

Not necessary

in a stable environment

Managers may not see value of continuous updating

Prone to error if standards incorrect

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Not-for-profit organisations budgeting''Beyond

Budgeting

Not-for-profit organisation

An organisation whose prime goal is not assessed by

Funding comes from government rather than users

and is a political decision So no clear link

between providing more service and funding

Poor performance can lead to higher levels of

funding

The political system affects planning Changes in priorities and funding can be imposed at will Limited control is offered over funding.

Budgeting in public sector

Characterised by incremental, short-term (one year) bid budgets.

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'Beyond budgeting'

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Not-for-profit organisations Budgeting

Two fundamental concepts underlie the 'beyond

budgeting' approach:

Adaptive management processes

Devolved organisation and decision making

Adds little value

Wastes valuable management time

Can result in dysfunctional behaviour

Conflict between communicating corporategoals and financial control

Often based on bargaining and not the bestmodel of resource consumption

Incompatible with a drive towards continuousimprovement

Insufficient external focus

Criticisms of traditional budgeting (Hope and Fraser)

'Beyond budgeting' is a set of guiding pr inciples that

propose abandoning traditional budgets in favour of an

alternative general management model based on

decentralised decision making, personal

responsibility, maximising value and adaptability to

change.

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Not-for-profit organisations

Budgeting

Guiding principles of 'Beyond budgeting'

Bind people to a common cause, not a central plan

Govern through shared values, not detailed rules

and regulations

Make information open and transparent; don't

restrict and control it

Governance and transparency

Set ambitious medium-terms goals, not fixedshort-term targets (eg annual budgets)

Base rewards around relative performancerather than on meeting fixed targets

Goals and rewards

Structure organisation as a network of accountable

teams, not around centralised functions

Trust teams to regulate their own performance;

don't micro-manage them

Base accountability on holistic criteria and peer

reviews, not on hierarchical relationships

Accountable teams Planning is a continuous and inclusive process;

not a top-down, annual event

Co-ordinate cross-company interactionsdynamically; not through annual budgets

Make resources available on a just-in-timebasis, not a just-in-case basis

Based controls on fast, frequent feedback, notbudget variances

Planning and controls

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Basis of rewards Focus on individual departments and divisions; self-interest Organisation viewed as one team.Focus on learning and innovationStrategic planning Company-led approach to strategicmanagement Customer-led approach to strategic managementResource allocation To operating units or departments Allocated to strategic initiatives rather than departmentsCo-ordination Link functional budgets to one another Determined by requirements to meet customer needsPerformance reports Primarily based on historical, financial indicators Multi-faceted, multi-level information.Forward looking as well as historical.

Traditional budgeting and 'beyond budgeting' compared

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3: Business structure, IT developments and other environmental and ethical issues

Topic List

Business structure/information

Business process re-engineering

Business integration

Teamwork and empowerment

Data and MIS

Stakeholders and ethics

In this chapter we look at the way businesses arestructured and how they co-ordinate their resources

We also look at how data systems and MIS provideinformation on changes happening in the organisation.Then we look at stakeholders, their roles and effect onthe organisation

Finally, we consider ethics, which is a vital component ofmodern organisational behaviour

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form

Data and MIS

Business

structure/information Business processre-engineering integrationBusiness Teamwork andempowerment

Business structure

Vertical flow

Functions tend to be isolated

Functional

Hard to identify results for individual products or markets

People don't understand how business works as a whole

Lateral communication

Information and advice are given, rather than

instructions and commands

Levels of information need: operational,

financial, management information

Divisional managers have greater authority, but also greater accountability to head office

Tendency for centre usurp divisional profits

Divisional performance not direclty assessed by markets

Outsourcing of personnel and assets is common

Impact on mix of fixed and variable costs; eg freelance staff are a variable cost while full-time staff are a fixed cost

Functions and services shared between organisations

Divisional

form Autonomy lower down the organisation

Formal communication between centre and

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Data and MIS

Business

structure/information Business process re-engineering integrationBusiness Teamwork andempowerment

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Business process re-engineering

The fundamental rethinking and radical

redesign of business processes to achieve

dramatic improvements in critical

contemporary measures of performance such

as cost, quality, service and speed

Processes should be designed to achieve a desiredoutcome (rather than focus on existing tasks)

Personnel who use output from a process shouldperform the process

There is no differentiation between informationgathering and information processing

Geographically-dispersed resources should betreated as if they were centralised

Parallel activities should be linked, not integrated

There is no distinction between workers andmanagers

Information should be captured once, at source

Principles of BPR which influence systems

development

A process is a collection of activities that tak es

one or more kinds of input and creates an

output

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Data and MIS

Business

structure/information integrationBusiness Teamwork andempowerment

Measures must be built around processes notdepartments This may affect the design of responsibilityaccounting systems

Reporting There will be a need to identify where v alue is being

added

Activity ABC might be used to model the b usiness processes

Structure Complexity of the reporting system will depend on

organisational structure

Variances New variance analyses may need to be developed

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Data and MIS

Business

structure/information Business processre-engineering integration Business Teamwork andempowerment

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Business integration

All aspects of a business must

be aligned to secure the most

efficient use of the organisation's

resources to achieve its

STAFF

STYLE

SYSTEMS STRATEGY

SKILLS

Four particular aspects of linkage

highlighted in the P5 syllabus:

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Data and MIS

Business

structure/information Teamwork andempowerment

Business integration

Operations:

Most people work here

THE CUSTOMER INTERFACE

Strategy People

Technology Technologyfacilitates

operations

People must

be to use technology effectivelytrained

Strategy is made or broken

at operational level

People implement the strategy pursue its mission: human resources; motivation

Technology enablesnewstrategicoptions

to be pursued

Linkage between people,

operations, strategy and

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Value chain

The value chain is another model for looking at

business integration It provides an overall perspective

of the activities of the business, which might otherwise

be seen in isolation in functional depar tments

The ultimate value a firm creates is measured by theamount customers are willing to pay for its

products/services above the cost of carrying outvalue activities

HUMAN RESOURCE MANAGEMENT FIRM INFRASTRUCTURE

PROCUREMENT

INBOUND LOGISTICS OPERATIONS OUTBOUNDLOGISTICS MARKETING& SALES SERVICE

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Data and MIS

Business

structure/information

Teamwork and empowerment

Business integration

Characteristics of information needs of a team-based/empowered organisation

Mixture of financial and non-financial

information Teams carry out activities but may

not know the financial implications

Transparency and immediacy Teams need

information quickly if they are to work flexibly

Common data definitions These are necessary

to enable comparison between teams

Relevance

Aggregation It should still be possible to obtain

a broad view of how the organisation is doing

Responsibility centres A budget for each teammight be required, as determined by theactivities in which it is involved

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Data and MIS

Business

structure/information Business processre-engineering integrationBusiness Teamwork andempowerment

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Consideration of information needs for

manufacturing business Characteristics that distinguish services from manufacturing

Service industries in particular rely on their staffand so management information must includeintangible factors such as how customers feelabout the service, as well as the key drivers ofservice costs (eg repeat business, churn rate)

The information required may varydepending on whether theorganisation offers mass services

or personal services.

Operational information is likely to

be largely qualitative

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Data and MIS

Business

structure/information Business processre-engineering integrationBusiness Teamwork andempowerment

Via distribution of data

Via sharing of data

Internal networks used to share information Remote access is quick and easy

Network accessible to authorised outsiders A popular means for business partners toexchange information

A number of data capture techniques allow staff to

input data to the organisation's system whether or

not they are in the office

Laptop computers

Bar coding and EPoS devices

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Databases Provide comprehensive files of data for a number of different users Avoid data redundancy and

wastage of space, and reduce errors/inconsistencies from multiple data input

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