Tài liệu ACCA mới nhất từ BPP môn P5

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Contents iii

Contents

Page

Introduction

Helping you to pass – the ONLY P5 Study Text reviewed by the examiner! v

Part A Strategic planning and control

1 Introduction to strategic management accounting 3

2 Performance management and control of the organisation 43

3 Business structure, IT developments and other environmental and ethical issues 59

Part B External influences on organisational performance 4 Changing business environment and external factors 125

Part C Performance measurement systems and design 5 Performance management information systems 153

6 Management information, recording and processing and management reports 185

Part D Strategic performance measurement 7 Performance hierarchy 221

8 Scope of strategic performance measures in the private sector 255

9 Divisional performance and transfer pricing issues 305

10a Strategic performance measures in not-for-profit organisations 333

10b Non-financial performance indicators 355

11 The role of quality in management information and performance measurement systems 375

12 Performance measurement: strategy, reward and behaviour 425

Part E Performance evaluation and corporate failure 13 Alternative views of performance measurement and management 459

14 Strategic performance issues in complex business structures 499

15 Predicting and preventing corporate failure 531

Part F Current developments and emerging issues in performance management 16 Current developments, issues and trends 559

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Introduction v

Helping you to pass – the ONLY P5 Study Text reviewed

by the examiner!

BPP Learning Media – the sole Platinum

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As ACCA’s sole Platinum Approved Learning Partner – content, BPP Learning Media gives you the

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The PER alert

Before you can qualify as an ACCA member, you do not only have to pass all your exams but also fulfil a three year practical experience requirement (PER) To help you to recognise areas of the syllabus that

you might be able to apply in the workplace to achieve different performance objectives, we have

introduced the ‘PER alert’ feature You will find this feature throughout the Study Text to remind you that

what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER

requirement

Your achievement of the PER should now be recorded in your on-line My Experience record

Tackling studying

Studying can be a daunting prospect, particularly when you have lots of other commitments The

different features of the text, the purposes of which are explained fully on the Chapter features page, will

help you whilst studying and improve your chances of exam success

Developing exam awareness

Our Texts are completely focused on helping you pass your exam

Our advice on Studying P5 outlines the content of the paper, the necessary skills the examiner expects

you to demonstrate and any brought forward knowledge you are expected to have

Exam focus points are included within the chapters to highlight when and how specific topics were

examined, or how they might be examined in the future

Using the Syllabus and Study Guide

You can find the syllabus and Study Guide on pages xi - xix of this Study Text

Testing what you can do

Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt

We include Questions – lots of them - both within chapters and in the Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content

vi Introduction

Chapter features

Each chapter contains a number of helpful features to guide you through each topic

Topic list

Topic list Syllabus reference What you will be studying in this chapter and the relevant

section numbers, together the ACCA syllabus references

Introduction Puts the chapter content in the context of the syllabus as a whole.Study Guide Links the chapter content with ACCA guidance

Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined.

Knowledge brought forward from earlier studies What you are assumed to know from previous

studies/exams

Summarises the content of main chapter headings, allowing you to preview and review each section easily

Examples Demonstrate how to apply key knowledge and techniques

Key terms Definitions of important concepts that can often earn you easy marks in exams Exam focus points When and how specific topics were examined, or how they may be examined in the future Formula to learn Formulae that are not given in the exam but which have to be learnt

Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER)

Question Gives you essential practice of techniques covered in the chapter Case Study Real world examples of theories and techniques

Chapter Roundup A full list of the Fast Forwards included in the chapter,

providing an easy source of review

Quick Quiz A quick test of your knowledge of the main topics in the

chapter

Question Bank Found at the back of the Study Text with more comprehensive chapter questions Cross referenced for

easy navigation

FAST FORWARD

Introduction vii

Studying P5

As the name suggests, this paper examines advanced performance management topics and is particularly suited to those who are thinking about a career in management accountancy or are likely to be involved in strategic management decisions

The P5 examiner

The examiner for this paper is Alex Watt He expects you to demonstrate a professional approach to all

questions – not just presenting information in a professional manner, but also integrating knowledge and understanding of topics from across the syllabus Dr Watt has stressed that topics in P5 will not be

examined in isolation One of the major skills you will be expected to demonstrate in the P5 exam is being able to draw on knowledge gained across your studies to date, in order to present complete solutions to relatively broad business issues or problems

The examiner is keen that students demonstrate evidence of wider reading and the ability to incorporate

aspects of real life examples into their answers where relevant and appropriate Dr Watt has written

several articles in Student Accountant, including one in the August 2010 issue, on how to approach the

paper Make sure you read this article to gain further insight into what the examiner is looking for

viii Introduction

1 What P5 is about

The syllabus for Paper P5 further develops key aspects and skills introduced in Paper F5, and it draws on

aspects of the material about strategic and operational planning and performance covered in Paper P3,

Business Analysis

However, whereas Paper P3 only assesses principles of management accounting as part of the wider analysis of a business situation, Paper P5 could examine aspects of management accounting – such as budgeting or costing techniques – in their own right

The stated aim of the P5 syllabus is:

‘To apply relevant knowledge, skills and exercise professional judgement in selecting and applying

strategic management accounting techniques in different business contexts and to contribute to the evaluation of the performance of an organisation and its strategic development.'

Read this aim carefully You are no longer just a 'number cruncher' drawing up budgets and producing

management reports You are expected to understand the wider issues that affect organisations These issues are often written about in newspapers and journals such as the Financial Times and the Economist

So you do need to keep up to date with your professional reading and be aware of the world around you

At this high level, you also need to see how the subjects you previously studied begin to fit together and begin to take a birds-eye view of the organisation

Importantly, P5 will also test your ability to assess different approaches to performance management

from a variety of perspectives As well as knowing what the approaches are, you will also need to be able

to compare them with one another in the context of a scenario; for example, the comparing the long-term and short-term issues affecting an organisation’s performance

Snapshot of the syllabus The syllabus expects you to understand how organisations set their strategy

and the external influences that affect strategic plans and operational outcomes You are expected to evaluate different systems of performance management and apply strategic performance measurement techniques in evaluating and improving performance You are expected to advise on strategic performance evaluation and the possibility of corporate failure Finally you are expected to be aware of the current developments in management accounting and performance management as these affect organisations There are six parts to the syllabus and we outline these below

(a) Use strategic planning and control models to plan and monitor organisational performance

(b) Assess and identify relevant macro economic, fiscal and market factors and key external influences on organisational performance

(c) Identify and evaluate the design features of effective performance management information and monitoring systems

(d) Apply appropriate strategic performance measurement techniques in evaluating and improving

organisational performance (e) Advise clients and senior management on strategic business performance evaluation and on

recognising vulnerability to corporate failure

(f) Identify and assess the impact of current developments in management accounting and performance management on measuring, evaluating and improving organisational performance

We expect most of these capabilities (if not all) to be tested to some extent in every P5 exam

2 What skills are required?

Refer to the syllabus outline in part 1 above Look at the action verbs identified there You are expected to

be able to assess, advise and evaluate, as well as to identify and monitor

These are the skills that you are expected to demonstrate in the exam You have moved beyond merely demonstrating your knowledge of a model or technique For example, the examiner expects you to know

Introduction ix

financial ratios already He is looking at evidence of being able to apply this knowledge and come to

intelligent conclusions that you can communicate effectively

The questions set in P5 exams will be based around case study scenarios which describe an

organisation, its objectives and its business environment You will need to relate your answers specifically

to the scenario given in the question, and not simply describe models or theories

The paper has a large written element, with well over half the marks in P5 being earned for written

answers (discussion, analysis, evaluation) rather than calculations.

We have summarised here the skills you are expected to demonstrate in P5

(a) Core knowledge The contents of Paper F5 Performance Management

(b) Numerical skills Those skills demonstrated in Paper F5 You don't learn any new mathematical

techniques in this paper but you are expected to remember those you learnt previously

(c) Written skills These are key skills on this paper You will be expected to write reports and notes

explaining issues you encounter

(d) Analysis and interpretation of question data or calculations The examiner has stressed that

candidates will be expected to analyse (not merely calculate) numerical data given in a scenario (e) Wider business awareness or application of skills in a practical context

3 How to improve your chances of passing

The examiner provides a lot of useful feedback in his examiner's reports This feedback highlights areas where students have struggled in exams, and also indicates the skills the examiner expects candidates to

be able to demonstrate

Looking at the post exam guidance can also be useful for reminding yourself about essential areas of

exam technique Therefore you are strongly recommended to read these guides which are available on

ACCA’s website: http://www.accaglobal.com

The points highlighted in the post exam guide include the following:

(a) Read questions very carefully and answer the question asked, not the question you hoped had

been asked In particular, if a question asks you to ‘evaluate’ or ‘assess’ the usefulness of a

performance measure for assessing performance in an organisation, this is not asking you to

evaluate or assess the organisation’s performance Instead, the focus of your answer must be on the performance measure itself

(b) Answers which consist of rote-learned definitions or explanations with no application to the

scenario will score very few marks It is vital that you apply your knowledge to the context

described by the question scenario

(c) Look at the mark allocation to help you manage your time allocation and plan your answer

(d) Read all the parts of the question before you prepare your answer, so that you avoid repeating the same points in answering different parts of the question

We recommend you read the article ‘Updated examiner's approach to Paper P5’ published in February

2011 and available on ACCA’s website This illustrates how some of the skills required to pass P5 have

been tested in recent exam sittings, and provides some useful hints about how to approach the paper

Importantly, the examiner’s article also stresses that P5 is a paper about performance management, not

simply about performance measurement Whilst it is important for organisations to measure how well

they are performing, this performance measurement takes place within the wider context of strategic

planning and control, and is subject to both internal and external factors which can affect performance In Paper P5 you need to be aware of this context and its impact on performance, not simply how an

organisation can measure performance Performance management also considers how the management

of an organisation can be informed by the results of performance measurement; for example, through the way in which staff are rewarded for their performance

x Introduction

4 Brought forward knowledge

You will be expected to build on the skills and knowledge you acquired when you studied Paper F5,

Performance Management That paper introduces topics such as budgeting and pricing that continue into

the higher level syllabus Paper F5 also covers cost and management accounting techniques including

activity-based costing that you will encounter in this paper You will also be expected to draw on your knowledge of performance measurement and control techniques that were introduced in this earlier

paper, because candidates sitting P5 will be expected to have a thorough understanding of the F5 syllabus

In addition, you might also be expected to draw on topics covered in Paper P3, Business Analysis,

particularly in relation to aspects of strategic planning and control, and performance measurement

The exam paper Format of the paper

Paper P5 is examined in a three-hour paper consisting of two sections You will be given 15 minutes reading time before the three hours begins, to read the questions and begin planning your answers

Important note: The format of the exam paper has changed for exams in June 2013 onwards

Section A

Section A will contain one compulsory question comprising 50 marks in total This question will

comprise several sub-sections, and will usually assess and link a range of subject areas from across the syllabus The Section A question will require students to demonstrate high-level capabilities to evaluate, relate and apply the information in the case study to the question requirements

Section B

You need to answer two questions in Section B, from a choice of three, comprising 25 marks each

Section B questions are more likely to assess a range of discrete subject areas from the main syllabus section headings However, they will still require evaluation and synthesis of information contained within the case study scenarios, and will require the application of this information to the question requirements

A small number of professional marks will be available The examiner has emphasised that in order to

gain the marks available, candidates must write in the specified format (such as a report or memo) Reports must have terms of reference, conclusion, appendices and appropriate headings Make sure you are familiar with how different types of documents are constructed to improve your chances of gaining maximum professional marks

Syllabus and Study Guide

The P5 syllabus and study guide can be found on the following page

Introduction xi

xii Introduction

Introduction xiii

xiv Introduction

Introduction xv

xvi Introduction

Introduction xvii

xviii Introduction

Introduction xix

xx Introduction

Analysis of past papers

The table below provides details of when each element of the syllabus has been examined and the question number in which it appeared Further details about questions can be found in the Exam Focus Points in the relevant chapters

Text chapter

EXTERNAL INFLUENCES ON ORGANISATIONAL PERFORMANCE

4 Changing business environment and external factors

1 4 2 4 2 3 3

PERFORMANCE MEASUREMENT SYSTEMS AND DESIGN

5 Performance management information systems

11 The role of quality in management information and performance measurement systems

16 Current developments, issues and trends

Strategic planning and control

P A R T A

2

1 Introduction to planning, control and decision

making

A (1)

2 Management accounting information for strategic

planning and control

A1(a)

4 Planning and control at strategic and operational

5 Strategic management accounting in multinational

6 Strategic planning vs short-term localised decisions A1(e)

The syllabus for this paper develops key aspects introduced in Paper F5

Performance Management and draws on aspects of the material covered from

a more strategic and operational planning perspective in Paper P3, Business

Analysis

The first three chapters of this text (Part A) look at strategic planning and

control, which is the first part of the syllabus for the Advanced Performance

Management paper This chapter sets the scene by introducing strategic

management accounting in the context of the organisation's planning and

control process It also introduces the process of strategic planning and control

and some of the techniques employed Finally it reviews factors that impact on

strategic planning Topics in the syllabus introduced initially in the Chapter and

covered elsewhere are signposted here You can then refer to the detail when

you come to study later chapters We advise you to read through this chapter

once to get the main ideas and concentrate on the chapters referred to herein

The syllabus outcome for this part of the syllabus states that candidates should

be able to use strategic planning and control models to plan and monitor

organisational performance

4 1: Introduction to strategic management accounting  Part A Strategic planning and control

Study guide

Intellectual level

A1 Introduction to strategic management accounting

(a) Explain the role of strategic management accounting in strategic planning

(b) Discuss the role of corporate planning in clarifying corporate objectives,

making strategic decisions and checking progress towards the objectives 2 (c) Compare planning and control between the strategic and operational levels

(d) Assess the use of strategic management accounting in the context of

(e) Discuss the scope for potential conflict between strategic business plans

(f) Evaluate how SWOT analysis may assist in the performance management

There are some key ideas to keep in mind when studying this syllabus Firstly, we look at the organisation

as a hierarchy from the top where plans are made, to the bottom where these are acted out Robert

Anthony describes this well in his hierarchy of information for planning, control and decision making We

look at this later on in the chapter

Secondly, we refer to the rational planning model This is a strategy model that gives a framework for

making strategy through analysis, choice and implementation Although this model is by no means

perfect, it is an useful tool for guiding organisations

One of the competences you require to fulfil performance objective 12 of the PER is providing an analysis

of performance against financial key performance measures We look at this in section 9 when we consider benchmarking against best comparators and targets

1 Introduction to planning, control and decision making

Strategic planning is the process of deciding on objectives of the organisation, on changes in these

objectives, on the resources to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources

Management control is the process by which managers assure 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

Operational control (or operational planning) is the process of assuring that specific tasks are carried

out effectively and efficiently

FAST FORWARD

Part A Strategic planning and control  1: Introduction to strategic management accounting 5

Within, and at all levels of the organisation, information is continually flowing back and forth, being used

by people to formulate plans and take decisions, and to draw attention to the need for control action,

when the plans and decisions don't work as intended

Planning means formulating ways of proceeding Decision making means choosing between various

alternatives These two terms are virtually inseparable: you decide to plan in the first place and the plan you make is a collection of decisions

Strategic decisions are long-term decisions and are characterised by their wide scope, wide impact,

relative uncertainty and complexity

Control is used in the sense of monitoring something so as to keep it on course, like the 'controls' of a

car, not (or not merely) in the sense of imposing restraints or exercising tyrannical power over something

We have more to say about control later in this Study Text

This simple scenario may help you to understand how these terms are interrelated

Mr and Mrs Average need to go to a supermarket to buy food and other household items They make a list beforehand that sets out all the things they need As they go round the supermarket they tick off the items

on the list If a particular item is not available they choose an alternative from the range on the shelves They also buy a bottle of wine and two bars of chocolate These were not on their original list

(a) What part or parts of this activity would you describe as planning?

(b) There are several examples of decision making in this story Identify three of them

(c) What part or parts of this activity would you describe as control?

Answer

We would describe making the list as planning, but it could also be an example of decision making because Mr and Mrs Average have to decide what items will go on the list Ticking off the items is control and choosing alternatives is 'control action' involving further decision making

You should be able to answer the various parts of this question without further help

1.1 Information for planning, control and decision making

Robert Anthony, a leading writer on organisational control, suggested what has become a widely used

hierarchy, classifying the information used at different management levels for planning, control and decision making into three tiers: strategic planning, management control and operational control

In this chapter, we cover strategic and operational planning

Chapter 5 of this Study Text uses this hierarchy when describing the characteristics and requirements of management accounting and information systems

Anthony's hierarchy also underpins other topics covered including strategic performance management

Strategic planning The process of deciding on objectives of the organisation, on changes in these

objectives, on the resources used to attain these objectives, and on the policies that are to govern the acquisition, use and disposition of these resources

Management control The process by which managers assure 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

Operational control (or operational planning) The process of assuring that specific tasks are carried out

effectively and efficiently

Key terms

Key terms

6 1: Introduction to strategic management accounting  Part A Strategic planning and control

2 Management accounting information for strategic planning and control

This section introduces strategic management accounting and explains how it is used to assist in the strategic planning and control process Strategic planning is explained in more detail in section 3 of this chapter and strategic control in section 4 You may want to read the relevant sections in tandem with this introductory section

Management accounting information is explored in more detail in Chapters 5 and 6 later in this Study

Text We look at management accounting and information systems in detail in Chapter 5, and then we consider internal and external sources of information in Chapter 6 We also review the IT environment and what users want from management reports in Chapter 6

Management accounting information can be used to support strategic planning and control, providing it displays an external orientation and a future orientation

2.1 Future uncertainty

Much strategic planning is uncertain

(a) Strategic plans may cover a long period into the future, perhaps five to ten years ahead or even

longer

(b) Many strategic plans involve big changes and new ventures, such as capacity expansion decisions,

decisions to develop into new product areas and new markets, and so on

Inevitably, management accounting information for strategic planning will be based on incomplete data and will use forecasts and estimates

(a) It follows that management accounting information is unlikely to give clear guidelines for management decisions and should incorporate some risk and uncertainty analysis (eg sensitivity

analysis)

(b) For longer term plans, discounted cash flow techniques ought to be used in financial evaluation

(c) The management accountant will be involved in the following

(i) Project evaluation (ii) Managing cash and operational matters (iii) Reviewing the outcome of the project (post implementation review)

2.2 External and competitor orientation

Much management accounting information has been devised for internal consumption

However, it is important to balance this with a consideration of external factors

(a) Strategic planning and control decisions involve environmental considerations

(b) A strategy is pursued in relation to competitors

2.3 The challenge for management accountants

Traditional accounting systems have had a number of perceived failings

(a) Direction towards financial reporting Historical costs are necessary to report to shareholders, but

the classifications of transactions for reporting purposes are not necessarily relevant to making

decision-(b) Misleading information – particularly with regard to overhead absorption

(c) Neatness rather than usefulness

FAST FORWARD

Part A Strategic planning and control  1: Introduction to strategic management accounting 7

(d) Internal focus Management accounting information has been too inward looking, (for example

focusing on achieving internal performance targets, like budgets) However, organisations also need to focus on customers and competition

(e) Inflexibility and an inability to cope with change

The challenge lies in providing more relevant information for strategic planning, control and decision making Traditional management accounting systems may not always provide this

(a) Historical costs are not necessarily the best guide to decision making However, management

accounting information is often criticised for focusing on the past rather than the future

(b) Strategic issues are not easily detected by management accounting systems

(c) Financial models of some sophistication are needed to enable management accountants to

provide useful information

2.4 What is strategic management accounting?

The aim of strategic management accounting is to provide information that is relevant to the process of strategic planning and control

Strategic management accounting is a form of management accounting in which emphasis is placed on

information about factors which are external to the organisation, as well as non-financial and generated information

internally-2.4.1 External orientation The important fact, which distinguishes strategic management accounting from other management accounting activities, is its external orientation, towards customers and competitors, suppliers and

perhaps other stakeholders For example, whereas a traditional management accountant would report on

an organisation’s own revenues, the strategic management would report on market share or trends in market size and growth

(a) Competitive advantage is relative Understanding competitors is therefore of prime importance

For example, knowledge of competitors’ costs, as well as a firm’s own costs, could help inform strategic choices: a firm would be unwise to pursue a cost leadership strategy without first analysing its costs in relation to the cost structures of other firms in the industry

(b) Customers determine if a firm has competitive advantage

2.4.2 Future orientation

A criticism of traditional management accounts is that they are backward looking

(a) Decision making is a forward– and outward-looking process

(b) Accounts are based on costs, whereas decision making is concerned with values

Strategic management accountants will use relevant costs (ie incremental costs and opportunity costs)

for decision making We return to this topic later in this Study Text

2.4.3 Goal congruence Business strategy involves the activities of many different functions, including marketing, production and human resource management The strategic management accounting system will require inputs from many areas of the business

Key term

8 1: Introduction to strategic management accounting  Part A Strategic planning and control

(a) Strategic management accounting translates the consequences of different strategies into a

common accounting language for comparison

(b) It relates business operations to financial performance, and therefore helps ensure that business activities are focused on shareholders' needs for profit In not-for-profit organisations this will

not apply as they do not focus on shareholder profitability (We look at not-for-profit organisations

in more detail later in this Study Text.)

It helps to ensure goal congruence, again by translating business activities into the common language of

finance Goal congruence is achieved when individuals or groups in an organisation take actions which are in their self-interest and also in the best interest of the organisation as a whole

2.5 What information could strategic management accounting provide?

We look at some examples of strategic management accounting in Chapter 5, but examples of strategic management accounting information could include: competitors' costs, product profitability or customer profitability

2.6 How performance management fits into strategic planning and control

As business environments become increasingly dynamic and competitive, it is increasingly important for managers to develop coherent business strategies and to have tools and processes in place which provide relevant and reliable information to support strategic decision-making, planning and control (These are covered in Section 3)

This need for information is linked to the importance of performance management in strategic planning and control Performance management is a way of trying to direct and support the performance of

employees and departments within an organisation, so that they work as efficiently and effectively as possible Performance management is also a way of trying to ensure that individual goals are aligned with the organisation's overall goals and business strategy

Performance management is essentially a set of management processes, often supported by technology, that enable organisations to define and execute their strategies and to measure and analyse

performance in order to inform strategic decision-making The central premise of performance

management is to improve an organisation's performance

Performance management systems are plans, with set guidelines and targets, to help organisations

measure how efficiently goals are being met, and identify areas where performance can be improved Performance management systems can also be linked to reward programmes, such that employees are rewarded for helping an organisation to reach its goals (for example through profit related pay schemes) Historically, performance management has tended to focus on either people management (eg performance appraisals) or performance monitoring (eg reporting on key performance indicators) However, the concept of performance management is now much wider and includes: strategic planning (covered in Section 3), performance measurement and monitoring, business intelligence, analytics, people management (Chapter 12), financial planning and budgeting, data warehousing (Chapter 3), risk management (Chapter 4), business process re-engineering (Chapter 3), knowledge management, dashboards and scorecards (Chapters 13 and 14), and key performance indicators (KPIs) (Chapter 7) The reference to KPIs indicates how performance management plays a crucial role in checking an organisation's progress towards its objectives KPIs should monitor how well a business is performing against its critical success factors (CSFs) In turn, the CSFs are the aspects of an organisation's activity which are central to its future success

A performance management system should be derived from the company's strategic objectives so that it supports those objectives It should also change over time as the strategies of the organisation change

and should be flexible enough to remain coherent with the objectives of the organisation (Tangen, 2004)

Part A Strategic planning and control  1: Introduction to strategic management accounting 9

A performance management system should have clear links between performance measures at the

different hierarchical levels of the organisation so that all departments and areas strive toward the same

goals Examples of models of measurement that seek to capture this alignment include the performance pyramid and the balanced scorecard These two models are considered later in the text in Chapter 13 but

we will look briefly here at how they link the organisation's strategies to its operations and reporting using

a performance management system

The performance pyramid is a model of performance management that sets out to relate strategies to

operations by translating objectives from the top down and measures from the bottom up, the aim being that these are co-ordinated and support each other At the top is corporate vision which moves down

through market and financial objectives at business unit level eventually becoming specific operational

criteria including quality and delivery at the department and work centre level The operational measures are reported upward

The balanced scorecard allows top management to review the organisation using four perspectives which

provide information on four strategic issues The financial perspective seeks to resolve how the

organisation creates value for its shareholders The innovation and learning perspective answers the

question of how the organisation can continue to improve and create value The customer perspective

looks at what customers value from the organisation and finally the internal perspective considers what internal processes the organisation must do well at to achieve the financial and customer objectives

Under each perspective goals are set such as manufacturing excellence and specific measures used to

monitor outcomes

2.6.1 The link between performance management, and strategic planning and

control

Performance management can be defined as any activity designed to improve an organisation’s

performance and ensure that its goals are being met

However, this highlights the fact that an organisation must first have established its goals and objectives,

in order that it can then assess whether they are being met

In this respect, strategic planning (establishing an organisation’s mission, objectives and goals) is

necessary before any performance management can take place Once an organisation’s goals have been set, and then its operational performance targets have been set, an organisation can begin to measure

whether these goals and targets are being achieved

In this way, performance measurement is an important control in the organisation However, performance

also needs to be managed via judicious target setting that reinforces strategic goals and objectives

Case Study

Tesco

The supermarket giant, Tesco, has a seven part strategy which aims to broaden the scope of its business, and enable it to deliver strong, sustainable long-term growth

The seven parts of the strategy are:

(1) To grow the UK core

(2) To be an outstanding international retailer in stores and online

(3) To be as strong in everything we sell as we are in food

(4) To grow retail services in all our markets

(5) To put our responsibilities to the communities we serve at the heart of what we do

(6) To be a creator of highly valued brands

(7) To build our team so that we create more value

www.tescoplc.com

10 1: Introduction to strategic management accounting  Part A Strategic planning and control

However, beneath these overall strategic objectives, Tesco sets more specific targets which it monitors via the ‘Steering wheel’ which is Tesco’s own version of the Balanced Scorecard

Targets are defined under five separate headings: Customers, Community, Operations, People and Finance; and these headings allow performance to be monitored with due regard for all the key stakeholders

Customer The staff are great; I don’t queue; The prices are good; I can get what I

want; The aisles are clear; Earn lifetime loyalty Community Actively supporting local communities; Buying and selling our products

responsibly; Caring for the environment; Providing customers with healthy choices; Creating good jobs and careers

Operations We try to get it right first time; We deliver consistently every day; We

make our jobs easier to do; We know how vital our jobs are; We always try to save time and money

People An opportunity to get on; An interesting job; A manager who helps me;

To be treated with respect

Finance Grow sales; Maximise profit; Manage our investment Tesco recognises that good financial performance is the outcome of good performance in the other areas

of customers, community, operations and people (staff) The remuneration of the executive directors is closely linked to performance against targets

Consequently, through its ‘Steering wheel,’ Tesco has also created a specific system for controlling and managing performance

3 Corporate planning and corporate objectives

In the previous section, we identified the importance of strategic planning as an important element of strategic management We can now look at strategic planning in more detail, in relation to the rational model of strategic planning

You should be familiar with the rational model of strategic planning from your studies of P3 – Business Analysis You will not be expected to reproduce the rational model diagram in the P5 exam, but it

provides a useful framework to use for our review of strategic planning

Use the diagram of the rational model in this Section to help you follow the discussion here As you work

through the Study Text you will encounter many of the key tools, models and techniques mentioned in Section 3.2 below You may want to look back at this section as you encounter each model It will help you see how these fit into the overall framework of strategic planning and performance analysis We have noted chapter numbers in the tables and on the diagram so you are clear where there are syllabus links

Strategic/corporate/long-range planning involves formulating, evaluating and selecting strategies to

enable the preparation of a long-term plan of action to attain objectives

Corporate objectives concern the business as a whole, and focus on the desired performance and results

that the business intends to achieve

3.1 Strategic planning model

To develop a business strategy, an organisation has to decide the following

(a) What it is good at (b) How the market might change Key terms

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Part A Strategic planning and control  1: Introduction to strategic management accounting 11

(c) How customer satisfaction can be delivered (d) What might constrain realisation of the plan (e) What should be done to minimise risk (f) What actions should be put in place

Johnson, Scholes and Whittington in their text Exploring Corporate Strategy define strategy as follows:

'Strategy is the direction and scope of an organisation over the long term which achieves advantage in a changing environment, through its configuration of resources and competences with the aims of fulfilling stakeholder expectations.'

Therefore, the test of a good strategy is whether it enables an organisation to use its resources, competences and capabilities advantageously in the context of a changing environment which it cannot necessarily predict

3.2 The structure of strategic planning

The rational model of strategic planning involves strategic analysis, strategic choice and implementation

Such an approach can be too rigid and can result in opportunities being missed We consider the problems of an inflexible approach when we look at freewheeling opportunism later on

The rational model of strategic planning divides into a number of different stages: strategic analysis,

strategic choice and implementation This is illustrated in the diagram on the following page

However, Johnson, Scholes and Whittington note that the three elements (analysis, choice,

implementation) do not follow on necessarily in this order Rather, the elements are interlinked and feed back on each other For example, when an organisation starts to implement a strategy, it may discover things about its environment or capabilities that may in turn help it with future strategic analysis and choices

Equally, Johnson, Scholes and Whittington also note that strategic management is not a 'neat and tidy

path' and often not 'tidy' in practice Nonetheless, the general idea of the rational model, and the three aspects of strategic analysis, choice and implementation can still provide us with a useful framework in which to look at strategic planning within organisations

3.2.1 Strategic analysis

Step 1 Mission and/or

Step 3 Objectives Quantified embodiments of mission  Measures such as

profitability, time scale, deadlines

12 1: Introduction to strategic management accounting  Part A Strategic planning and control

3.2.2 Strategic choice

Strategic options generation

Come up with new ideas on how to compete (competitive advantage), where to compete and method of growth

 Value chain analysis.Chapter 3

 Scenario building

 Acquisition vs organic growth

Strategic options evaluation

Normally, each strategy has to be evaluated on the basis of

 Acceptability

 Suitability

 Feasibility

 Environmental fit

 Stakeholder analysis Chapter 3

 Risk analysis (Chapter 4 + knowledge b/f from F5).Techniques for risk

analysis include scenario analysis, sensitivity analysis and financial ratio analysis

 Decision-making tools such as decision trees, matrices, ranking and scoring methods (Knowledge b/f from F5)

 Financial measures (eg ROCE, DCF)

Chapter 8

Strategy selection Involves choosing between the

alternative strategies

 Competitive strategies are the

generic strategies for competitive advantage an organisation will pursue (which determine how you

compete)

 Product-market strategies (which

markets you should enter or leave) determine where you compete and

the direction of growth

 Institutional strategies (ie

relationships with other organisations) determine the

method of growth

Chapters 7 and 14

Part A Strategic planning and control  1: Introduction to strategic management accounting 13

MISSION

OBJECTIVES

CORPORATE APPRAISAL POSITIONAUDIT

CORPORATE STRATEGIC CHOICE

STRATEGY IMPLEMENTATION REVIEW &

CONTROL

ENVIRONMENTAL ANALYSIS

Why the business exists at all.

What the business is.

The relevance

of the mission

to different stakeholders.

ACTUAL PERFORMANCE

OVERALL STRATEGIC STANCE

BUSINESS'S UNDERLYING VALUES AND/OR

eg Strengths, Weaknesses, Opportunities, Threats;

Gap analysis

eg Marketing strategies, production strategies

Assess actual performance

in the light of plans etc

Company's internal resources and facilities: current performance, comparatives

TACTICS

eg PEST factors Competitive forces Turbulence

GOALS

(1) Optionsgeneration(2) Optionsevaluation(3) Choice

(Chapters 4,

7, 8, 14)

(Chapter 7)

14 1: Introduction to strategic management accounting  Part A Strategic planning and control

3.2.3 Strategy implementation Strategy implementation is the conversion of the strategy into detailed plans or objectives for operating

units

The planning of implementation has several aspects The strategic planning process is thus

multi-layered

(a) Resource planning (ie finance, personnel) involves assessing the key tasks that need to be carried

out and determining the timing of them

(b) Operations planning looks at the systems employed to manage the organisation

(c) Organisation structure and control systems may need to be changed

3.3 Types of strategy

Corporate strategy is the most general level of strategy in an organisation, the strategy for the business as

a whole It involves issues such as:

(a) Diversifying or limiting activities (b) Investing

(c) Surviving

Business-level strategy is concerned with how an organisation approaches a particular market, or the

activity of a particular business unit An example of a business strategy is the decision by Mercedes-Benz

to expand its product range to include four wheel drive vehicles

This level of strategy involves a choice between being the lowest cost producer (cost leadership), making

the product different from competitors' products in some way (differentiation) or specialising on a

segment of the market (focus, by addressing that segment by a strategy of cost leadership or

differentiation)

Porter believes that a firm must choose one of these or be stuck-in-the-middle You should have studied

Porter’s strategies in more detailed in Paper P3 Business Analysis, so we will confine ourselves to a reminder of the three strategies here, and then also highlight the significance of the different strategies to

management accounting techniques

3.3.1 Cost leadership Cost leadership means being the lowest cost producer in the industry as a whole By producing at the lowest cost, the manufacturer can compete on price with every other producer in the industry, and earn the highest unit profits, if the manufacturer so chooses

The focus on cost means that management accounting techniques would be used to monitor and control costs The organisation’s focus will be on financial control and assessing costs There is also likely to be

a focus on reducing waste in business processes (to help reduce costs)

Production facilities are likely to be set up to obtain economies of scale and manufacturers would try to

mass produce goods wherever possible Overhead costs would be minimised and long run economies of scale sought from industries dependent on labour skills for product design and production methods, by exploiting the learning curve effect By producing more items than any other competitor, a firm can

benefit more from the learning curve, and achieve lower average costs The focus on cost means that techniques such as activity-based target costing will be important for firms, as will benchmarking their costs against other firms

3.3.2 Differentiation

A differentiation strategy seeks to earn competitive advantage through the particular characteristics of a

firm's products or service which offer greater value to customers than competitors’ products or services

Performance management will still need to consider cost issues but it will also need to look at the way the firm creates value through the effective use of resources and through innovation

Part A Strategic planning and control  1: Introduction to strategic management accounting 15

Many firms seek to differentiate their products through focussing on quality This means they must

employ quality techniques in the production process. However, as threshold values of quality have

improved in most firms this requires an increasing level of quality in firms that choose quality as a differentiating characteristic. Firms employing differentiation strategies should also seek to exploit other

activities of the value chain (for example, quality of after-sales service or speed of delivery) As a result of this, such firms should also have to consider non-financial performance measures: for example,

customer satisfaction (at the level of service they have received)

Nonetheless, firms employing differentiation strategies do still need to monitor and control their costs, so techniques such as target costing will still be valuable for firms employing these strategies

3.3.3 Focus

Focus involves a restriction of activities to only part of the market (a segment) In a focus strategy, a firm

concentrates its attention on one or more particular segments or niches of the market, and does not try to serve the entire market with a single product Management accounting would focus on monitoring the activity either concentrating on cost as above, or on:

 Providing goods and/or services at lower cost (cost-focus)

 Providing a differentiated product or service (differentiation-focus)

Operational and functional strategies involve decisions which are made at operational level These

decisions include product pricing, investment in plant, personnel policy and so forth The contributions of these different functions determine the success of the strategy

4 Planning and control at strategic and operational levels

This section starts with a summary of the main differences between strategic and operational planning It then looks at the problems that arise when strategic planning and operational planning aren't linked The section concludes with a detailed look at strategic control

At strategic and operational levels, planning and control differ in terms of the nature of feedback

(double loop vs single loop), orientation (future vs present) and scope (organisation as a whole vs limited set of processes within it)

4.1 Summary of principal differences

We can contrast briefly the differences between planning and control at corporate strategic and at

operational levels as in the table below

Future-orientated feed-forward control More concerned with monitoring current

performance against plan Potential for double loop feedback, ie the

opportunity to change the plan

Mainly single loop feedback; performance must change, not the plan

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16 1: Introduction to strategic management accounting  Part A Strategic planning and control

One of the key challenges that organisations face is linking their (long term) strategy to their day-to-day operations For example, a strategic plan might set revenue growth targets for an organisation over the next five years, but the operational plan will need to consider what practical steps will be taken to generate these revenue increases; in effect creating a road map that defines the detail of how the overall strategies are going to be put into action

Case Study

At the end of 2007, BMW Group took on a new strategic direction BMW Group announced that, up to the year 2020, it intended to strengthen its position within the global motor vehicle market by increasing sales

to more than two million automobiles per year

In addition to striving to grow its existing business, the Group also intends to develop new and profitable areas of activity, and it will look to invest in future technologies, new vehicle concepts and pioneering driving systems

This new strategy has been given the name ‘Number ONE’ – which stands for ‘New Opportunities’ and

‘New Efficiency’ This means making the best use of new opportunities and becoming more efficient, in order to ensure BMW’s competitive success against its competitors

The period referred to by BMW’s strategic plan (2007 to 2020) highlights the long-term nature of strategic planning, and it also highlights the way strategic plans relate to the whole organisation However, this long-term, group-wide goal is unlikely to have much relevance for the operational staff at each of BMW’s

25 manufacturing sites Their focus is more likely to be on the short-term operational issues which affect the number and quality of cars they can produce, and therefore their ability to meet more short-term customer demands and market requirements

4.2 Linking strategy and operations

An ACCA examiner of a past syllabus paper similar to Paper P5 wrote an article on this topic The article

includes a case study of a fictional company that adopts new management ideas like TQM, JIT and ABC as its strategy for dealing with a high level of customer complaints The company is trying to improve quality

and speed of delivery while controlling costs, but it faces a number of problems

'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 planning and operational planning the

result is likely to be unrealistic plans, inconsistent goals, poor communication and inadequate

performance measurement.'

(George Brown, 'Management Accounting and Strategic Management', ACCA Students' Newsletter, March

1994) 4.2.1 Unrealistic plans Unrealistic operational plans will force staff to try too hard with too few resources Mistakes and failure

are almost inevitable This means poor quality products: costs include lost sales, arranging for returns, and time wasted dealing with complaints

Over-ambitious plans may also mean that more inventories are produced than an organisation could

realistically expect to sell (so costs of write-offs, opportunity costs of wasted resources, and unnecessary inventory holding costs are incurred)

4.2.2 Inconsistent goals Inconsistent strategic planning and operational planning goals may mean additional costs are incurred

An operational plan may require additional inspection points in a production process to ensure quality products are delivered to customers The resulting extra costs will be at odds with the strategic planning goal of minimum cost

Part A Strategic planning and control  1: Introduction to strategic management accounting 17

4.2.3 Poor communication

Poor communication between senior management who set strategic goals and lower-level operational

management could mean that operational managers are unaware of the strategic planning goal, say to

sustain competitive advantage at minimum cost through speedy delivery of quality products to customers Some operational managers may therefore choose to focus on quality of product while others attempt to produce as many products as possible as quickly as they can; still others will simply keep their heads down and do as little as possible This will lead to lack of co-ordination: there will be bottlenecks in some

operational areas, needing expensive extra resources in the short term, and wasteful idle time in other areas

4.2.4 Inadequate performance measurement Inadequate performance measurement will mean that an organisation has little idea of which areas are performing well and which need to improve If quality of product and speed of delivery are the main

sources of competitive advantage a business needs to know how good it is at these things

For example, if an organisation measures only conventional accounting results it will know how much

inventory it has and how much it has spent, say, on 'carriage out', but it will not know the opportunity cost

of cancelled sales through not having inventory available when needed, or not being able to deliver it on time Equally the quality of products needs to be measured in terms not only of sales achieved, but also in

terms of customer complaints and feedback: again the cost is the opportunity cost of lost sales

4.3 Strategic control

Control at a strategic level means asking the question: 'is the organisation on target to meet its overall objectives and is control action needed to improve performance?'

Strategic control measures might require complicated trade-offs between current financial performance

and longer-term competitive position, and between different desirable ways of building competitive strength

4.4 Gaps and false alarms

Strategic control depends on avoiding 'gaps' and 'false alarms' and on identifying milestones of

performance

Many firms measure the wrong things and often fail to measure the right things

(a) False alarms motivate managers to improve areas where there are few benefits to the

organisation

(i) Over-emphasis on direct costs is foolish when most costs are overheads (ii) Labour efficiency measures are easily manipulated and ignore labour effectiveness

(iii) Machine standard hours are irrelevant, as long as the firm has enough capacity

(b) Gaps are important areas that are neglected

(i) New product introduction (ii) Customer satisfaction (iii) Employee involvement (c) Different measures apply to different industries In continuous processes, such as chemicals,

throughput time is not important as there will always be buffer inventory However, it is important

in consumer electronics

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18 1: Introduction to strategic management accounting  Part A Strategic planning and control

4.5 Strategic control systems

To encourage the measurement of the right things, firms can institute formal or informal systems of strategic control There are four influences on a strategic control system

(a) The time-lag between strategic control measures and financial results

(b) The linkages with the other businesses in a group

(c) The risks the business faces

(d) The sources of competitive advantage

4.5.1 Formal systems of strategic control One of the questions in the December 2010 exam looked at a company which produced films for cinema release and DVDs The company’s stated mission is to ‘produce fantastic films that have mass appeal’ but its aims are primarily concerned with commercial success rather than artistic considerations

The question highlighted that the company has identified a number of critical success factors, but it then goes on to raise concern that the CSFs chosen do not capture all the factors affecting the business performance

The question also highlighted that there can be two different types of CSFs: monitoring CSFs (which can

be used for monitoring the performance of ongoing operations) and building CSFs (which look at the

future of the organisation and its development, for example the launch of new products or the development of new markets)

The examiner commented that students did not appear to be familiar with the distinction between these two different types of CSF (monitoring vs building)

Critical success factors are those aspects of a product or service particularly valued by customers and

therefore the business must do well in these areas to outperform competitors When the business draws

up performance measures from its objectives it must make sure these include measures of the critical success factors it has identified as crucial to success We revisit critical success factors in Chapter 7 Step 1 Strategy review Review the progress of strategy

Step 2 Identify milestones of performance (strategic objectives), both quantitative and qualitative

(eg market share, quality, innovation, customer satisfaction)

 Milestones are identified after critical success factors have been outlined

 Milestones are short-term steps towards long-term goals

 Milestones enable managers to monitor actions (eg whether a new product has been launched) and results (eg the success of the launch)

Step 3 Set target achievement levels These need not be exclusively quantitative

 Targets must be reasonably precise

 Targets should suggest strategies and tactics

 Competitive benchmarks are targets set relative to the competition

Step 4 Formal monitoring of the strategic process Reporting is less frequent than for financial

reporting

Step 5 Reward For most systems, there is little relationship between the achievement of strategic

objectives and the reward system, although some companies are beginning to use measures of strategic performance as part of the annual bonus calculations

Exam focus

point