2016 BPP Passcard p5

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ACCA Passcards
Paper P5
Advanced Performance
Management
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Professional Paper P5
Advanced Performance Management
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Preface Contents
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.
Good luck!
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Preface Contents
Page Page
1 Introduction to strategic management 10a Strategic performance measures
accounting 1 in not-for-profit organisations 101
2 Performance management and control of 10b Non-financial performance indicators 107
the organisation 17 11 The role of quality in management
3 Business structure, IT developments and information and performance
other environmental and ethical issues 25 measurement systems 111
4 Changing business environment and 12 Performance measurement: strategy,
external factors 41 reward and behaviour 127
5 Performance management information
13 Alternative views of performance
systems 51
measurement and management 141
6 Management information, recording and
processing and management reports 63 14 Strategic performance issues in complex
business structures 151
7 Performance hierarchy 71
8 Scope of strategic performance measures 15 Predicting and preventing corporate
in the private sector 81 failure 155
9 Divisional performance and transfer 16 Current developments, issues and trends 163
pricing issues 91
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1: Introduction to strategic management

accounting
Topic List This chapter introduces strategic management accounting

and how it fits into the planning and control process of an
organisation.
Planning, control, decision-making and The chapter also explains how organisations set strategic
management information plans and control their outcomes.
Corporate planning However, it is important to remember that P5 is not pr imarily
Planning and control: strategic and a business strategy paper its main focus is how
operational organisations can evaluate and improve their performance.
Multinational aspects Benchmarking could provide a useful way of comparing
SWOT analysis processes or performance between business units or
organisations, with a view to improving them in line with
Benchmarking best practice.
Planning, control, decision-making Corporate Planning and control: Multinational SWOT Benchmarking
and management information planning strategic and operational aspects analysis
Strategic planning Characteristics of strategic information
The process of deciding on the objectives of the

organisation, on changes to these objectives, on the Long term and wide scope
resources used to attain them, and on the policies Generally formulated in writing
that are to govern the acquisition, use and disposal
of those resources. Widely circulated
Doesn't trigger direct action, but a series of
more detailed (tactical, operational) plans
Strategic decisions Includes selection of products, purchase of non-
Strategic decisions are long-term decisions, current assets, required levels of company profit
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.
Management control Characteristics of management accounting

information
The process by which managers ensure that
resources are obtained and used effectively and Short-term and non-strategic
efficiently in the accomplishment of the organisation's Management control planning activities include
objectives. It is sometimes called tactics or tactical preparing annual sales budget
planning. Management control activities include ensuring budget
targets are achieved
Carried out in a series of routine and regular planning
Management accounting information for
and comparison procedures
Management control information covers the whole
strategic planning and decision making organisation, is routinely collected/disseminated, is
often quantitative and commonly expressed in money
Incorporates forecasts/estimates/risk and terms:
uncertainty analysis Cash flow forecasts
Has an external orientation Variance analysis reports
Forward looking and outward looking Staffing levels
Source of information likely to be endogenous (from
Helps to ensure goal congruence within the organisation)
Page 3 1: Introduction to strategic management accounting

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 the
meals is a management control decision.
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
Performance management Performance management systems

Activity designed to improve an Plans, with set guidelines and targets, to help
organisation's performance and ensure organisations measure how efficiently goals are being
that its goals are being met met, and to identify areas where performance can be
improved
Organisation has to establish its goals and Often linked to employee reward programmes
objectives before it can assess whether they so employees are rewarded for helping an
are being met organisation reach its goals
Once performance targets have been set, an
organisation can measure whether its goals Performance measurement is an important
and targets are being achieved control in an organisation.

Operational control/planning Example Characteristics of operational

The process of ensuring that specific control
tasks are carried out effectively and Strategic plan
efficiently. Senior management decide Short-term and non-strategic
sales should increase by 5% pa Occurs in all aspects of an
Management control for at least five years.
Management control decision
organisation's activities and
needed for day to day
v operational control Sales quotas are assigned to implementation of plans
each sales territory. Often carried out at short
Operational control decisions are notice
more narrowly focused, carried out Operational control decision
within a shorter time frame and taken Managers of sales territories Information likely to have an
by managers less senior in the specify weekly targets for each endogenous source, often
organisation. sales representative. from detailed transaction data,
eg customer orders and cash
Operational control focuses on receipts
individual tasks whereas
management control is concerned
with the sum of all tasks.
Anthony hierarchy Performance management systems

should have clear links between
performance measures at the different
hierarchical levels of the organisation
Strategic planning Means all departments and divisions will

be working towards the same ultimate
goal
Illustrated by performance pyramid (see
Chapter 13)
Managment control
Operational control

Overall strategic and/or Business's

stance MISSION
underlying values
Why the business exists at all
What the business is
Strategic GOALS
The relevance of the mission to
different stakeholders Often the same
analysis OBJECTIVES
Terms used interchangeably
How the mission can be achieved

Desirable outcomes of corporate
activity
ENVIRONMENTAL ANALYSIS CORPORATE APPRAISAL POSITION AUDIT

eg Strengths, Weaknesses, Company's internal resources and
eg PEST factors, competitive forces, Opportunities, Threats,
turbulence capabilities: current performance,
Gap analysis comparatives
CORPORATE STRATEGIC CHOICE

Strategic 1 Options generation
choice 2 Options evaluation
3 Choice
STRATEGY IMPLEMENTATION REVIEW & CONTROL

Strategic eg Marketing strategies, production Assess actual performance in the
implementation
strategies light of plans etc
TACTICS ACTUAL PERFORMANCE

Levels of strategy
Corporate Covers business as a whole
Strategy Issues such as: diversifying or restricting activities
acquisitions or major capital projects
survival or growth
Business level How an organisation approaches a par ticular market

Strategy Choice of generic strategies: cost leadership
differentiation
focus
Involves decisions made at operational level

Operational/functional eg product pricing; personnel and recruitment
Strategies
Operational strategies are crucial in implementing
corporate and business level strategies successfully
Linking strategy and Strategic planning and control versus operational planning and control
operations
Strategic Operational
The achievement of long-term 'Broad brush' targets Detailed
goals will require strategic Whole organisation Activities of department
planning which is linked to short-
term operational planning ... If External input Mainly internal information
there is no link between strategic External focus Internal focus, on actual procedures
and operational planning, the Future orientated, feedforward More concerned with monitoring
result is likely to be unrealistic control current performance against plan
plans, inconsistent goals, poor
communication and Potential for double loop Mainly single loop feedback
inadequate performance feedback (ie opportunity to (performance must change, not the
measurement. change the plan) plan)
Long term Short term

Strategic control To encourage the measurement of the

right things, organisations can institute
Desirable features of strategic
performance measures
The key to strategic control is formal or informal systems of strategic
ensuring that the right things control. Formal systems require the
get measured. identification of milestones of Focus on what matters in the
performance (strategic objectives). long term
False alarms
Identify and communicate
motivate managers to
Influences on strategic drivers of success
improve areas where there
control systems Support organisational learning
are few benefits to the
Provide a basis for reward
organisation
Measurable
Gaps are important areas Time-lag between control Meaningful
that are neglected (eg measures and financial results Acceptable
customer satisfaction) Linkages with other businesses in Described by strategy and
a group relevant to it
Different measures apply Risks a business faces Consistently measured
to different industries
Sources of competitive advantage Re-evaluated regularly
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 Differences between domestic and international

Problems of performance measurement businesses
Establishing realistic standards Cultural factors (eg international has

Determining controllable cash flows fragmented, diverse markets)
Currency conversion Economic factors (eg international has
Bases of comparison (like for like?) multiple (unstable?) environments)
Competitive factors (eg little information
Examples of problems when setting objectives
about many more competitors in
Exchange rate fluctuations Risk international business)
Cost structure Accounting policies Political factors (often significant in
Transfer prices Workforce international businesses)
Government policy Life cycle Technological factors (eg training problems
Level of domestic competition in international businesses)

SWOT analysis How SWOT can guide strategy formulation

A critical appraisal of the strengths and
weaknesses, opportunities and threats in Strengths Weaknesses
relation to the internal and external Internal to
environmental factors affecting an
Matching
the company Conversion
organisation, in order to establish its condition
prior to the preparation of a long-term plan.
Exist Conversion
SWOT and performance management independently
of the Opportunities Threats
Identify weaknesses which need to be company
addressed
Identify key aspects of performance
(CSFs) which need to be measured
(through KPIs) Match strengths Convert weaknesses into
Help set targets (eg to take advantage of 1 with market 2 strengths and threats into
opportunities)
Determine information needs (eg to opportunities. opportunities.
report on KPIs)
Internal Comparing one operating unit or function with

Benchmarking another in the same industry
The establishment,
Types of Functional
Comparing an internal function with the best external
practitioners, regardless of industry
through data benc h- Comparing performance to direct competitors. But
collection, of targets Competitor will competitors be willing to share commercially
and comparators, marking sensitive information?
which will allow Non-competitor Particularly relevant for not-for-profit organisations.
relative levels of Compare against organisations in the same industr y
performance (and although they are not competitors
particularly areas of Advantages Disadvantages
underperformance)
to be identified. By Provides basis for establishing Implies one best way of doing things
adopting identified standards of performance Primarily a catching-up exercise
best practices, it is Sets targets that are Potential negative side effects of 'what gets
hoped that achievable measured gets done'
performance will Can be a spur to innovation
improve. Impact on motivation for staff whose
functions appear to be performing poorly

Stages of a benchmarking exercise

1 Set objectives of the benchmarking exercise and determine areas to benchmark
2 Identify key performance indicators or performance drivers to measure during the benchmarking
exercise
3 Select comparators: departments or organisations to compare performance against
4 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
5 organisations being compared against
6 Design and implement an improvement programme to close the performance gaps
7 Monitor improvements
2: Performance management and control

of the organisation
Topic List Budgets are short-term plans which provide short-term

targets within the framework of the longer-term strategic
plans (covered in Chapter 1). Some of the contents of
Budgeting this chapter are brought forward from earlier studies and
will provide background to exam problems on higher-level
Not-for-profit organisations budgeting issues.
'Beyond budgeting' Not-for-profit organisations and their specific budget
issues are considered, before we look at the concept of
'beyond budgeting' which tries to address some of the
problems faced in traditional budgeting.
Budgeting Not-for-profit 'Beyond

organisations budgeting'
As a budget has different purposes, it might

Uses of budgeting Prior knowledge
mean different things to different people.
Ensures organisation's objectives Forecast You should know the detail

Yardstick
are achieved behind the following points.
Target
Compels planning
Means of allocating resources Long-term plan
Communicates ideas and plans
Limiting factor
Coordinates activities
Budget manual
Allocates resources
Sales budget
Authorises expenditure
Production capacity
Provides a framework for Alternative budget systems Functional budgets
responsibility accounting
Discretionary costs
Establishes a system of control
Incremental Consolidation and
Provides a means of performance
Flexible coordination
evaluation
Zero based Cash budget
Motivates employees to improve
Rolling Master budget
performance
Activity based
Strengths and weaknesses

Incremental budging Zero-based Rolling budget
budgeting Pros Cons
Pros Cons Pros Cons Reduces uncertainty Time
Easy to Encourages in an unstable consuming
Responds to Time
prepare slack environment Not necessary
changes in consuming
Can be Doesn't look environment Most recent in a stable
Needs
flexed to to improve plans used environment
Reviews cost training
actual performance Managers
behaviourclosely Needs a Budgets always
levels Assumes several months may not see
Improves participative
3E's in place ahead value of
efficiency of approach
continuous
resource allocation
updating
Flexible budgeting ABB

Pros Cons Pros Cons
Identifies Prone to error if standards Identifies critical Time consuming
spare incorrect success factors Difficult to identify
capacity Irrelevant in a mainly fixed Looks at activity in depth responsibility and
cost environment accountability for
activities
Page 19 2: Performance management and control of the organisation


Not-for-profit organisation
An organisation whose ... prime goal is not assessed by
economic measures. Bois
Funding Planning
Funding comes from government rather than users The political system affects planning. Changes in
and is a political decision. So no clear link priorities and funding can be imposed at will.
between providing more service and funding.
Limited control is offered over funding.
Poor performance can lead to higher levels of
funding
Budgeting in public sector
Characterised by incremental, short-term (one
year) bid budgets.

'Beyond budgeting' 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 Adds little value
decentralised decision making, personal Wastes valuable management time
responsibility, maximising value and adaptability to
change. Can result in dysfunctional behaviour
Conflict between communicating corporate
goals and financial control
Often based on bargaining and not the best
model of resource consumption
Two fundamental concepts underlie the 'beyond Incompatible with a drive towards continuous
budgeting' approach: improvement
Adaptive management processes Insufficient external focus
Devolved organisation and decision making


Guiding principles of 'Beyond budgeting'

Governance and transparency Goals and rewards
Bind people to a common cause, not a central plan Set ambitious medium-terms goals, not fixed
short-term targets (eg annual budgets)
Govern through shared values, not detailed rules
and regulations Base rewards around relative performance
rather than on meeting fixed targets
Make information open and transparent; don't
restrict and control it
Planning and controls
Accountable teams Planning is a continuous and inclusive process;
not a top-down, annual event
Structure organisation as a network of accountable
teams, not around centralised functions Co-ordinate cross-company interactions
dynamically; not through annual budgets
Trust teams to regulate their own performance;
don't micro-manage them Make resources available on a just-in-time
basis, not a just-in-case basis
Base accountability on holistic criteria and peer
reviews, not on hierarchical relationships Based controls on fast, frequent feedback, not
budget variances
Traditional budgeting and 'beyond budgeting' compared

Factor Traditional budgeting 'Beyond budgeting'
Time frame Short-term focus Longer-term focus
Focus on individual departments Organisation viewed as one team.
Basis of rewards
and divisions; self-interest Focus on learning and innovation
Company-led approach to strategic Customer-led approach to strategic
Strategic planning
management management
Allocated to strategic initiatives
Resource allocation To operating units or departments
rather than departments
Link functional budgets to one Determined by requirements to
Co-ordination
another meet customer needs
Primarily based on historical, Multi-faceted, multi-level information.
Performance reports
financial indicators Forward looking as well as historical.

Notes
3: Business structure, IT developments and

other environmental and ethical issues
Topic List In this chapter we look at the way businesses are

structured and how they co-ordinate their resources.
We also look at how data systems and MIS provide
Business structure/information information on changes happening in the organisation.
Business process re-engineering Then we look at stakeholders, their roles and effect on
the organisation.
Business integration
Finally, we consider ethics, which is a vital component of
Teamwork and empowerment modern organisational behaviour.
Data and MIS
Stakeholders and ethics
Business Business process Business Teamwork and Data and Stakeholders

structure/information re-engineering integration empowerment MIS and ethics
Business structure
Organisations vary in the way they arrange their activities. Differences in organisational structure affect information needs
and how performance is measured.
Information needs Implications for performance measurement
Functional Vertical flow Can benefit from economies of scale
form Functions tend to be isolated Hard to identify results for individual products or
markets
People don't understand how business works as a
whole
Divisional Autonomy lower down the organisation Divisional managers have greater authority, but also
form Formal communication between centre and greater accountability to head office
divisions Tendency for centre usurp divisional profits
Use of transfer prices to set performance Divisional performance not direclty assessed by
standards markets
Network Lateral communication Outsourcing of personnel and assets is common
form Information and advice are given, rather than Impact on mix of fixed and variable costs; eg
instructions and commands freelance staff are a variable cost while full-time staff
Levels of information need: operational, are a fixed cost
financial, management information Functions and services shared between organisations

Principles of BPR which influence systems

Business process re-engineering development
The fundamental rethinking and radical Processes should be designed to achieve a desired
redesign of business processes to achieve outcome (rather than focus on existing tasks)
dramatic improvements in critical Personnel who use output from a process should
contemporary measures of performance such perform the process
as cost, quality, service and speed. There is no differentiation between information
gathering and information processing
Geographically-dispersed resources should be
A process is a collection of activities that tak es treated as if they were centralised
one or more kinds of input and creates an
Parallel activities should be linked, not integrated
output.
There is no distinction between workers and
managers
Information should be captured once, at source
Page 27 3: Business structure, IT developments and other environmental and ethical issues

Business process re-engineering

Performance Measures must be built around processes not
measurement departments. This may affect the design of responsibility
accounting systems.
Implications Reporting There will be a need to identify where v alue is being

added.
of BPR f or Activity ABC might be used to model the b usiness processes.
accounting
systems Structure Complexity of the reporting system will depend on
organisational structure.
Variances New variance analyses may need to be developed.


Business integration McKinsey's 7S's model

McKinsey's 7S's model describes the links between the organisation's
All aspects of a business must
behaviour and the behaviour of individuals within it.
be aligned to secure the most
efficient use of the organisation's
resources to achieve its STRUCTURE
objectives effectively. 'Hard'
STRATEGY SYSTEMS
SHARED
Four particular aspects of linkage VALUES
highlighted in the P5 syllabus:
SKILLS STYLE 'Soft'
People
Operations STAFF
Strategy
Technology

People implement the strategy

and enable the organisation to
People Strategy
Linkage between people,

pursue its mission: human
resources; motivation
operations, strategy and People must

be trained to use
ble
na ons
y e pti
log gic o ed
s
Strategy is made or broken
technology
n o u at operational level
technology effectively ch ate rs
Te str e pu
w
ne to b
Technology Operations:
Technology facilitates Most people
operations work here
THE CUSTOMER
INTERFACE
People issues Strategy issues

Quantity Motivation Direction
Skills level Deployment Implications for resources
Technology issues Operations issues

Equipment Information Procedures Customer relations
Work organisation Empowerment Quality
Value chain
The value chain is another model for looking at The ultimate value a firm creates is measured by the
business integration. It provides an overall perspective amount customers are willing to pay for its
of the activities of the business, which might otherwise products/services above the cost of carrying out
be seen in isolation in functional depar tments. value activities.
FIRM INFRASTRUCTURE
ACTIVITIES
SUPPORT
HUMAN RESOURCE MANAGEMENT
MA
TECHNOLOGY DEVELOPMENT To be successful, an
RG
organisation needs to
IN
PROCUREMENT
ensure that the
characteristics of all of
MA
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
RG
its activities are
IN
LOGISTICS LOGISTICS & SALES
consistent with each
other.
PRIMARY ACTIVITIES

Characteristics of information needs of a team-based/empowered organisation
Mixture of financial and non-financial Relevance

information. Teams carry out activities but may Aggregation. It should still be possible to obtain
not know the financial implications a broad view of how the organisation is doing
Transparency and immediacy. Teams need Responsibility centres. A budget for each team
information quickly if they are to work flexibly might be required, as determined by the
Common data definitions. These are necessary activities in which it is involved
to enable comparison between teams
Information must be disseminated throughout the organisation r ather than

Impact of handed down through the hierarchy.
empowerment
Employees need to be given responsibility and the authority to make decisions
on mana g ement within defined parameters.
accounting Rather than issue orders, managers must be able to create conditions in which
systems the organisation can prosper and front line staff m ust be able to deliver
appropriate customer service.

Consideration of information needs for Characteristics that distinguish services from

manufacturing business manufacturing
Cost behaviour Innovation Perishability Inseparability/simultaneity

Quality Valuation Intangibility Variability/heterogeneity
Time No transfer of ownership
Small service businesses, whose expenses are The information required may vary
mainly overheads, provide a model in miniature of depending on whether the
Information for the requirements of activity based costing (ABC). organisation offers mass services
service Service industries in particular rely on their staff
or personal services.
businesses and so management information must include

intangible factors such as how customers feel
Operational information is likely to
be largely qualitative.
about the service, as well as the key drivers of
service costs (eg repeat business, churn rate).

Remote input of data Instant access to data

A number of data capture techniques allow staff to Via distribution of data
input data to the organisation's system whether or

not they are in the office. Word processing
Electronic schedules
Laptop computers
Bar coding and EPoS devices

Desktop databases
Web publishing Office
automation

Voicemail
E-mail systems
Via sharing of data

Software that can be used by collaborative work groups (messaging, 'views' of an information
Groupware
database, public folders).
Intranets Internal networks used to share information. Remote access is quick and easy.
Network accessible to authorised outsiders. A popular means for business partners to
Extranets
exchange information.
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.
Database
management Software systems which organise the storage of data in a database in the most appropr iate
systems way.
(DBMS)
Data Contain data from a range of internal and external sources. Query and reporting tools facilitate
warehouses management reporting and analysis.
Software which looks for different (sometimes previously unknown) patterns in groups of data
Data mining (eg retail companies can find customers with common interests).
Enterprise Packages which aim to integrate all of an organisation's applications (including man ufacturing,
resource distribution, inventory, invoicing, accounting, HRM, marketing) to give a single point of access.
planning Link business processes and financial control, so can suppor t management tools such as the
(ERPS) Balanced Scorecard.

Management information system (MIS) Consequences of MIS development without

formal planning
A system to convert data from internal and external
sources into information and to communicate that Not all information will be collected and processed
information, in an appropriate form, to managers at (but will be kept in managers' heads)
all levels in all functions to enable them to make Information will not be disseminated to appropr iate
timely and effective decisions for planning, directing managers
and controlling the activities for which they are Communication of information will not be timely
responsible.
Consequences of a poor MIS
Essential characteristics of an MIS
Dissatisfaction among employees who believe they
Definition of functions of individuals and their areas should be told more
of responsibility in achieving objectives Lack of understanding of what targets to achie ve are
Definition of areas of control within the organisation Lack of information about how well work is being
Information required for an area of control should carried out
flow to the manager responsible for it
Management accounting systems
Factors to consider when setting up a management accounting system (just one par t of an overall MIS):
Output required (identify the information needs of managers)
When the output is required
Sources of input information
Examples of impact of increasing competition
More competition requires better competitor intelligence Modelling systems

Faster response means information must be produced
quickly and be up to date Decision support systems
Expert systems
Examples of impact of increasing globalisation Executive information systems
Increasing competition as above

Behavioural impact on management accounting system
of operating in different markets

Stakeholders Stakeholder mapping

Groups or individuals whose interests are Stakeholders' interests are likely to conflict. Stakeholder mapping helps the
directly affected by the organisation's organisation to establish its priorities and set up its system of cor porate
activities governance.
A: Minimal effort
Example Level of interest B: Keep informed; little
Internal Employees, management Low High direct influence but may
Connected Owners, investors, influence more powerful
suppliers, customers, stakeholders
lenders Low A B C: Treat with care; often
External Government, local passive but capable of
Power moving to segment D;
communities, pressure
groups, unions keep satisfied
High C D D: Key players strategy
must be acceptable to
them, at least
Remember: Relationship between stakeholders and organisation is two-way. Stakeholders can influence an organisation's
performance, but an organisation's performance also affects its stakeholders.
Stakeholders and business performance

Employees and management Shareholders
Organisations should seek to align the interests of Shareholders often take a short-term view of their
their staff with those of the organisation (eg through involvement in an organisation.
reward systems).
Suppliers
Consumer groups Can influence the cost and quality of goods and
Consumerism reflects the increased impor tance services.
and power of consumers. Highlights that consumer
satisfaction is likely to be crucial to long-term
profitability. Government
Central government sets the regulatory framework.
Local government has devolved powers and local
influence (eg local taxes).

Ethics are ideas about right and wrong that set standards for conduct. Ethics are important to business because
society considers such things impor tant. There are also rules of professional conduct to consider. Ideas of right and
wrong have become more fluid and less absolute. As a result there is a g reater scrutiny of organisations' behaviour
since it is likely to be less subject to definitive internal rules.
Ethical stance Ethical dilemmas

The extent to which an organisation will exceed its Conflicting views of the organisation's responsibilities
minimum obligation to stakeholders. (Johnson, Scholes & create ethical dilemmas for managers at all levels.
Whittington)
Dealing with corrupt or unpleasant regimes
Short-term stakeholder interest: obey the letter of the Honesty in advertising
law Employees cost or asset?
Long-term stakeholder interest: behave ethically to
enhance image and reduce pressure for regulation Corrupt payments to officials extortion, bribery or
Multiple stakeholder obligations: the expectations of gift? The local culture must be considered
other groups of stakeholders may be considered, as well Corporate ethics
as any right they may have
Shaper of society: ensuring society benefits from Has three contexts: interaction with society, effects of
actions is more important than financial and other routine operations, behaviour of the individuals.
stakeholder interests (eg for public sector organisations)
4: Changing business environment and

external factors
Topic List In this chapter, we look at the economic, fiscal and

environmental factors which affect strategic
management. The external factors which affect
Changing business environment organisations can be analysed using the 'PEST'
framework.
Risk and uncertainty
Businesses need to consider the r isks and uncertainty
Factors to consider when assessing from these external factors in their strategic decision-
performance making, and we also look at some aspects of r isk and
Government regulation uncertainty in this chapter.
Changing business Risk and Factors to consider when Government

environment uncertainty assessing performance regulation
Changing competitive environment

Then Now
Manufacturing Pre 1970s, there was little international There is massive international
organisations competition, costs were passed on to competition, and global networks
customers, minimal efforts were made to for acquiring raw materials and
maximise efficiency, reduce costs, or improve distributing high quality, low-priced
management practices. goods.
Service organisations Pre 1980s, many were government-owned Privatisation and deregulation has
monopolies or protected by highly regulated, resulted in intense competition, an
non-competitive environments. Cost increasing product range and a
increases were covered by increasing prices. need for sophisticated costing
Cost systems were not deemed necessary. systems.
Product life cycles Organisations could rely on years of high Competitive environment,
demand for products. technological innovation and
discriminating and sophisticated
customer demand require continual
product redesign and quick time to
market.
Changing customer requirements Changing manufacturing systems

Successful organisations make customer satisfaction
their priority. Traditional manufacturing systems
Jobbing industries
New management Batch processing
Key success factors approaches Mass/flow production
Recent developments
Continuous
improvement Group technology/repetitive manufacturing
Cost efficiency
Employee Dedicated cell layout
Quality
empowerment
Time Manufacturing processes must be sufficiently
Total value chain
Innovation analysis flexible both to accommodate new product
design and to satisfy the demand for greater
product diversity.
Page 43 4: Changing business environment and external factors


To compete, organisations Production management strategies

need to...... The traditional approach to determining materials
requirements is to monitor the level of inventories constantly
Be innovative and flexible so that once they fall to a preset level they can be re-ordered.
Be able to deal with shor t product life cycles This ignores relationships between different inventory lines
Be able to offer product variety whilst maintaining (demand for a particular item is dependent on demand for
or reducing costs assemblies/subassemblies of which it forms a part).
Reduce set-up times and inventories Modern computer techniques integrate such relationships
Have the greatest possible manufacturing flexibility into the inventory ordering process.
Advanced manufacturing technology (AMT) Production management strategies linked to

AMT
helps them to do this.
Materials requirement planning (MRPI)
Computer-aided design (CAD) Manufacturing resource planning (MRPII)
Computer-aided manufacturing (CAM) Enterprise resource planning (ERP)
Flexible manufacturing systems (FMS) Optimised production technology (OPT)
Electronic data interchange (EDI) Just-in-time (JIT)

Risk and uncertainty

Strategic planning deals with future events: the future
cannot be predicted.
Strategic planning is therefore susceptible to risk and
uncertainty, much of which is exogenous.
Types of risk and uncertainty
Physical (eg earthquakes, fire, equipment breakdown)

Economic (not even government forecasts are perfect)
Business (eg new competitors)
Product life cycle (different risks exist at different stages)
Political (eg sanctions)
Financial (eg risk to stakeholders caused by debt
finance)


Expected values Decision-makers' attitudes to risk can also influence

The expected value (EV) of a decision is calculated as the way they analyse potential business decisions.
EV = px Decision-makers have to consider the potential
where 'p' = the probability of an outcome occurr ing, upsides and downsides of a particular course of
and 'x' = the value (profit or cost) of that outcome. action.
Their attitude to risk can determine the decision-
Risk preference making criteria they think are most appropriate:
Decisions will be influenced by stakeholders' appetites Maximin (Maximising the minimum profits)
for risk and their attitude to r isk. Maximax (Maximising the maximum profits)
Minimax regret (Minimising the regret from
making the wrong decision)
Risk seeker Risk neutral Risk averse

The main factors in the macro-environment which can The level of competition in an industr y affects the
affect an organisation's performance can be identified industry's ability to sustain profits.
using PEST analysis:
The level of competition is determined by:
Political
Economic Five competitive forces
Socio-cultural The threat of new entrants

Technological The threat of substitute products or ser vices
The bargaining power of customers
Collectively, these factors represent opportunities The bargaining power of suppliers
and threats an organisation could face. The rivalry amongst current competitors in the
industry


Examples
Economic Consider local economic trends interest and exchange rates and inflation.
Inflation Is inflation driving up wage rates or being caused by pay settlements?
Legal Consider the impact of employment law or industry regulators.
Political Is government policy affecting competition? Are incentives being offered to locate in a
particular area?
EU Think about product standards and labour costs.
Cultural These can affect the motivation and satisfaction of employees, the adaptability of the
organisation and its image.
Business
cycle Is the economy booming or in recession?
When comparing performance across different countries, consider problems such as distance and remoteness
of divisions from head office, transfer pricing difficulties, currency exchange rate fluctuations and variation in
management and worker skills.

Types of organisation under government regulation

Types of regulations by regulators
Business eg US Postal Service Regulation of supply

operates on a commercial Regulation of quality
basis although it is a
Regulation of prices
government agency
Free at delivery eg NHS in the UK
Purpose of regulations
Public good National security
Promote competition
Privatised utility eg Water firms in the UK are Protect customer welfare
still, effectively, monopolies Use private cash to enhance quality
Privatised utility eg BT in the UK Reduce public spending
with competition Ensure government subsidies are well spent

Notes
5: Performance management information

systems
Topic List This chapter introduces management accounting and

information systems, and how they could be used to
measure performance.
Accounting information needs Remember that we looked at strategic planning,
Management accounting information management control and operational control information
in Chapter 1.
Management accounting systems
A variety of topics are considered, including the type of
organisation and the objectives of management
accounting information.
Accounting Management Management

information needs accounting information accounting systems
Management accounting Examples of strategic management accounting

information can be used to suppor t
strategic planning, control and
decision making. Analysis of competitors' costs
Strategic management accounting Product profitability
differs from traditional management Customer profitability
accounting because it has an
external orientation and a future Pricing decisions
orientation. Cost/benefits of capacity expansion
Analysis of decisions to enter (or leave) a business area
Brand values (and brand loyalty)
Shareholder wealth
Impact of acquisitions and mergers
Analysis of competitors' potential reactions to a str ategy
Characteristics of management control

Management control
The process by which managers ensure that resources Short-term and non-strategic
are obtained and used effectively and efficiently in the Management control planning activities include
preparing annual sales budget
accomplishment of the organisation's objectives. It is
Management control activities include ensuring
sometimes called tactics or tactical planning. budget targets are (at least) reached
Carried out in a series of routine and regular
planning and comparison procedures
Management control decisions need to Management control information covers the
whole organisation, is routinely
support an organisation's strategic plans. collected/disseminated, is often quantitative and
commonly expressed in money terms
Cash flow forecasts
Variance analysis reports
Staffing levels
Sources of information likely to be endogenous
(from within the organisation)
Page 53 5: Performance management information systems


Operational control/planning Example

The process of ensuring that specific tasks are carr ied Strategic plan
out effectively and efficiently. Senior management decide
sales should increase by 5% pa
for at least five years.
Management control v operational control Management control decision
Sales quotas are assigned to
Operational control decisions are more narrowly each sales territory.
focused, carried out within a shor ter time frame and
taken by managers less senior in the organisation. Operational control decision
Operational control focuses on individual tasks Managers of sales territories
whereas management control is concerned with the specify weekly targets for each
sum of all tasks. sales representative.
Information requirements vary considerably between different types of structure:
Structure Information requirements

Divisional How well each division is performing
eg. ROI for each division
Functional Operational efficiency of each of the functions
Network organisations How each of the network partners is performing;
performance against goals and targets, for example
as set in a service level agreement
Virtual organisations Integration of IT systems so that information is
communicated equally to all members across the
virtual organisation


Good information What management accounting information helps managers to do

(its objectives)
Relevant to users' needs
Complete Measure performance Plan for the future
Accurate Control the business Make decisions
Clear Management accounting information is used for score keeping, problem
Usable with confidence solving and attention directing.
Appropriately
communicated (to the Features that characterise management accounting information in
right person using the particular
correct method) Forward looking
Manageable volume Neutral (free from bias)
Timely Financial, non-financial, quantitative or qualitative
Cost effective
Information requirements vary significantly across different types of
organisational structure (eg functional basis vs network organisation).

Open and closed systems Enterprise Resource Planning Systems (ERPS)

A closed system is isolated and shut off from the Management accounting systems do not exist in
environment, is unaffected by the environment, and isolation, but are part of the wider information systems
cannot influence the environment. in an organisation; exemplified by ERPS.
An open system is connected to and interacts with ERPS are software systems designed to suppor t and
the environment and is influenced by it. automate the business processes of medium-sized and
large organisations. They aid the flow of information
between business functions within an organisation, and
Implications for performance management can manage connections to outside suppliers.
Organisations should adopt an open systems All departments that are involved in operations or
approach to performance management. production are integrated in one system. As a result,
organisations are more agile in the way they use
Eg organisational performance could be affected by information, can process information better, and can
competitors' actions. Also, performance often cannot integrate it into business procedures and decision-
be attributed to one single issue, but needs to be making more effectively.
viewed as the combined effect of many variables.


Lean management information systems Application of 'lean' to MI systems

Key characteristics of 'lean' systems: Lean can:
Continuous improvement Enhance the value of data in the system:
Increased productivity how it is organised, exchanged and retrieved
Improved quality Add value to information through the way it
Improved management is organised and presented (eg exclude
unnecessary detail)
Lean principles 5 'S's concept Enable information to flow to users more
Structurise Introduce order where possible efficiently
Systemise Arrange items so that they can be
accessed quickly and efficiently But note: to be successful, 'lean' techniques
Sanitise Keep the working environment clear and tidy must involve a commitment to adding value and
Standardise Maintain consistent standards and ways eliminating waste. They can't be used simply as
of working a justification for cost-cutting.
Self-discipline Ensure continuous improvement by
using the previous four stages, and sustain via
motivation, eg performance audits
Contingency approach
The contingency approach to management accounting is based on the premise that there is no univ ersally
appropriate accounting system applicable to all organisations in all circumstances. Efficient systems depend
on awareness by the system designer of the specific en vironmental factors which influence their creation.
Contingent factor the environment Contingent factor organisation Contingent factor technology
structure
Predictability (stability) vs Size Nature of production process

unpredictability (dynamism) Interdependence of parts Complexity of production
Level of competition faced Degree of decentralisation process
Number of different product markets Availability of resources Task variety
Hostility of competitors


Issues for management accountants:

Impact of human behaviour. heuristic/holistic
processing
Dual process framework
Management accounting systems have to develop analytical/
ways of overcoming the problems of human systematic
behaviour. processing
Ways of presenting information:

Written format
Methods Tables
Graphs or charts
Allocating responsibility Dashboards
Encouraging participation in decision making Interactive reports
Devising ways of measuring and rewarding
behaviour that contribute to organisational
objectives
Responsibility accounting Responsibility accounting

Role of management accountant A system of accounting that segregates revenues
and costs into areas of personal responsibility in
Learn from managers of responsibility centres
order to monitor and assess the performance of each
what information they need, in what forms and
part of an organisation.
what intervals
Design a system that enables this information to
be provided (using different responsibility centres Responsibility centre
(cost, profit and so on))
Any part of an organisation which is headed b y a
manager who has direct responsibility for its
Responsibility accounting is based on the performance.
principle of controllability.
Important to distinguish between division's
But in practice is it always possible to split performance and manager's performance. Can only
impacts on performance into controllable and evaluate manager's performance on factors he or
uncontrollable categories? she can control.

Notes
6: Management information, recording and

processing and management reports
External information is vital for strategic planning and
performance feedback but is rarely directly input into the
Topic List management accounting system.
Internal information provides the input data for the
management accounting system and is vital for management
Internal sources of information control and operational control. Control is dependent on the
receipt and processing of information.
External sources of information
Also, the way in which information is presented is impor tant. If
Recording and processing methods, the outputs from a management information system are not
systems and data accessible to the relevant people, the usefulness of the
information is severely reduced.
Controls and security You are likely to encounter issues about controls and secur ity
Output reports over data in your own workplace, but it's worth reminding you
about them here anyway.
Internal sources External sources Recording and processing Controls and Output reports
of information of information methods, systems and data security
Costs of the collection, processing and production Principal internal sources of management
of internal data accounting information
Direct data capture costs Financial accounting records

Systems of control over transactions
eg use of barcoding
(eg EPoS tills, inventory control systems)
Payroll, production records, timesheets
Processing costs Staff (collected formally or informally)
eg inputting data to the MIS
Cost of inefficient use of information In today's competitive environment, where the

pace of change in information systems and
eg information disseminated more widely technology is rapid, organisations must be
than needed flexible enough to adapt to change quickly and
must plan for expansion, growth and innovation
within information systems.
External information is used to different degrees Common external sources of information

depending on the level and type of decision.
Business directories
EXTERNAL Associations
INTERNAL Government agancies
Consumer panels
Customers
Operational Tactical Strategic Suppliers
Internet
External information can contribute to planning
Databases
(eg market research informing sales budgets),
Market research
decision-making (eg through competitor research)
Data warehouses (external + internal sources)
and control (eg from benchmarking).
External information is used in the management accounting system depending on its quality . Quantitative
data is easier to use. Benchmarking uses external information to help set targets.
Page 65 6: Management information, recording and processing and management repor ts

Costs associated with external sources of data Disadvantages
Direct search costs May not be entirely relevant

eg subscriptions to magazines Bias: who produced the data?
Accuracy should be questioned
Indirect access costs May not be available in correct form, or in
eg spurious accuracy relation to specific products or mar kets
Age: is it still valid, or is it out of date no w?
Management costs
eg wasted time on excessive processing Note that the costs of mar ket research can be
considerable and that the internet can significantly
Infrastructure costs reduce search time and search costs.
eg maintenance of computer server
Advantages
Time theft
eg information overload Save time and money as secondary data is
cheaper than primary research
Different types of business will require different recording and processing methods but
the methods used should suit the volume of data (eg batch processing at the end of General rule: any information that is
the day for a small bookshop), the level of accuracy required and the speed with which needed should be recorded and stored
the information is required (eg EPoS devices, and real-time inventory updating in in such a way that it can be readily
supermarkets). retrieved.
IT developments which have influenced recording and processing

systems Qualitative data
Given that qualitative data is
Spreadsheet packages WiFi subjective and judgmental, its
Database packages Radio-frequency identification recording is likely to be
Software packages (RFID) problematic. The number of sales
E-mail systems ERPS made is easy to record; the
Computer Telephony Electronic data interchange (EDI) reasons why sales are lost is not.
Integration (CTI)
. . . But: beware the dangers of information overload given the volume of potential information available.

Controls required over the generation of Procedures to ensure the security of highly confidential
internal information information that is not for external consumption
In routine reports
eg consistent format to ensure Passwords Firewalls
accuracy Logical access systems Encryption
Database controls Authentication
In ad-hoc reports inference controls Anti-virus and anti-spyware
eg ensure information does not passwords software
already exist in another format Personnel security planning
Over distributing internal information
eg procedures manuals
Over information held on servers Also consider importance of back ups so that
eg passwords data is not lost.
Other controls
eg email policy
As the volume of data available to

business increase, it is important that
Dashboards
they ensure this data is 'fit for Dashboards are executive information systems which illustrate how
purpose.' a business is performing and help managers make better decisions,
through showing current data, pictures, graphs and tables, thereby
'Fitness for purpose' involves data reducing the numbers (and size) of paper reports which have to be
being accurate and relevant without produced.
being overwhelming.
Similarly it is important that output Drill-down reports
reports are timely, accurate and
tailored to the user. Drill-down reports allow users to look at increasingly detailed
data about a situation.
Beware of the dangers of
! information overload.
Exception reports
One way of reducing the amount of information being presented
(thereby preventing overload) is through using exception reports.
Reports are only triggered when a situation is unusual or
requires management action.
Recap: Overview of management information systems
INPUT PROCESSING OUTPUT
STORAGE
FEEDBACK
Feedback is crucial for control, eg through comparing actual results to plan, and identifying v ariances.
7: Performance hierarchy
Topic List In this chapter we start looking at strategic performance

measurement techniques and the issues relating to
strategic performance measurement.
Mission statements and vision Although we will look at some impor tant aspects of
Goals and objectives strategy in this chapter, please remember that the focus
of paper P5 is on performance (performance
Short term and long term measurement, and performance management) rather
Filling the planning gap than strategy itself.
Planning/controlling at different levels

Mission statements Goals and objectives Short term and Filling the Planning/controlling
and vision long term planning gap at different levels
Mission Mission statement

Describes the organisation's basic function in society, A formal statement of an organisation's mission.
in terms of the products and ser vices it produces for
its clients. Explains what the business is for. There is no standard format but mission statements
should be brief, flexible, distinct and open-ended.
Elements of mission
Factors to incorporate in a mission statement
Purpose Policies and standards of behaviour
Strategy Values and culture
Business areas in which the organisation will
Vision
operate
Organisation's reason for existence
If a mission answers the question 'What is the
Stakeholder groups served by the organisation
business for?', a vision answers the question 'Where
is the business going?'
A vision gives a general sense of direction to the
company.
Goals are derived from an organisation's vision and mission. Operational goals can be expressed as quantified,
SMART (Specific, Measurable, Attainable, Relevant, Time-bounded) objectives.
Example
A mission might be to deliver a quality service, a goal to enhance manufacturing quality and an objective to
reduce the number of defects to one part per million over the next year.
Corporate objectives Strategic objectives Subsidiary objectives

These primary objectives These combine to ensure the These are developed beneath strategic
concern the organisation as a achievement of the primary objectives.
whole (eg profitability, industrial corporate objective.
To ensure co-ordination, the various functional
relations) and are set as par t of
objectives must be interlocked vertically,
the corporate planning process.
Example horizontally and over time.
If a primary objective is growth
Unit objectives in profits, strategies by which Ranking objectives
the primary objective can be
These are specific to individual achieved (eg for growth in Multiple objectives can clash so strategic
units of an organisation. sales) must be developed. management must ensure goal congruence.
Page 73 7: Performance hierarchy

Hierarchy of objectives Social and ethical obligations

Mission
To internal stakeholders (employees, management)
To connected stakeholders (shareholders, customers,
Goals suppliers, financiers)
Increasing To external stakeholders (the community, government,
Objectives coverage pressure groups)
of aspects Whereas social responsibility deals with the organisation's
Strategy of the general stance towards society, and affects the activities the
organisation organisation chooses to do, ethics relates more to how an
organisation conducts individual transactions.
Tactics
Corporate codes of conduct contain statements setting out
company values and responsibility toward stakeholders.
Operational plans
Each level of the hierarchy derives its objectives from the level above, so ultimately all are founded in the mission.
Objectives therefore cascade down the hierarchy so that, for example, strategies are set to achieve objectives,
and provide targets for tactics. Again, this highlights the impor tance of goal congruence across different levels.
Objectives, CSFs and KPIs

Objectives
CSFs are the key factors and processes an organisation needs to

Critical success factors (CSFs) excel at in order to achieve its objectives.
Key performance indicators (KPIs) KPIs measure how well an organisation is performing against its
CSFs.
Impact on information systems

CSFs identify the areas of performance which managers need information about. Therefore it is important that
information systems can provide managers with this information (eg the systems can provide information for
KPIs).

Sources of CSFs Monitoring vs building CSFs

CSFs don't relate solely to inter nal processes or Two types of CSF: monitoring and building
performance
Monitoring
External analysis (eg Porter's five forces; PEST
analysis) can be important when identifying CSFs just Relatively short-term focus
as internal aspects can (eg cost control, product/process Focus on existing situations
quality, inventory/supply chain management). Likely to be used by operational managers to
Factors which affect choice of CSFs: check how well their areas of a business are
Industry different factors are important in performing (eg analysis of actual performance
1 different industries vs budget)
2 Company's position in industry (eg market leader

vs small company; generic strategy Building
3 External environment eg economic conditions;

consumer trends
Longer term focus
Future oriented
Current issues areas where an organisation is Focus on factors which will underpin the success
4 currently underperforming, or where there are of new initiatives
specific causes for concern (eg new laws or Likely to be used at senior executive level rather
regulations) than operational level
S/L trade-off
Refers to the balance of organisational activities aiming to achie ve long-term and short-term objectives when
they are in conflict or where resources are scarce
Decisions which involve the sacrifice of longer-term objectives How to control short termism
for short-term benefit
Make short-term targets realistic

Postpone/abandon capital expenditure
Provide sufficient information to
Cut R&D expenditure allow managers to see what S/L
trade-offs they are making
Reduce quality control
Evaluate managerial performance
Reduce the level of customer service in terms of contribution to long-
term as well as short-term
Cut training costs/recruitment objectives

Planning gap How to fill the gap
The planning gap is the gap betw een the forecast position from Incremental improvements
continuing with current activities, and the forecast of the desired position. to current activities
(eg cost reduction)
Combination of market
Target profit penetration, market
Profit ($)
Diversification development, product
development and
Product and/or market
development diversification (Ansoff's
Market penetration
matrix)
Withdrawing from a business
Efficiency gap: improved profits
of current products and markets
(if it is loss-making);
Projection (F0 forecast) divestment
Acquisition
Time Internally-generated (organic)
growth
Ansoff's growth vector matrix

Product - market strategies
Identifies possible
strategies which Lowest risk, but lowest
could be used to Market penetration : current product, current market growth potential
close 'profit gaps' Product development: new product, existing market
identified in gap Market development : existing product, new market
analysis. Diversification : new product, new market Highest risk, but
highest growth potential
Caution
Defining market can be difficult

Model is broad brush and strategic in focus, so
can lack precision

Level Plans Controls

Corporate/strategic Focused on overall performance Exercised by external stakeholders
Influenced by external environment and/or the market
Set plans/targets for units/departments Double-loop feedback (ie relatively free
Sometimes qualitative to change targets)
Aggregate Often feedforward elements
Operational Based on objectives about 'what' to Exercised internally by management or
achieve staff in empowered teams
Specific Immediate or rapid feedback
Little immediate environmental influence Single loop feedback (ie little authority
Likely to be quantitative to change plans or targets)
Detailed specifications
Based on 'how' something is achieved
Short time horizons
Operational performance is customer-facing (in services), specialised, more likely to be routine, limited in
scope, characterised by short time horizons and easier to automate than some management tasks .
8: Scope of strategic performance measures

in the private sector
Topic List The profit-making or private sector tends to favour

financial performance measures whereas the public
Shareholders, survival and growth sector favours non-financial indicators. There are four
main groups of financial performance measures: growth,
Profitability profitability, gearing and liquidity.
Gearing You also need to be clear about the distinction betw een
Liquidity short-run and long-run performance measures.
Performance and share value

Comparisons
Shareholders, Profitability Gearing Liquidity Performance and Comparisons

survival and growth share value
Why are shareholders important? Survival and growth

Problems in attaining goal congruence The clearest measure of success for a business is continued
are often due to difficulties in satisfying existence and expansion.
differing objectives of the organisation's
various stakeholder groups. Share Growth requires profits
options are one way of aligning Growth produces profits
shareholder and managerial goals. Growth without profits no survival*
Profit-making organisations tend to

focus on financial performance in
general and on the interests of An organisation must make sustainable profits.
shareholders in particular. The argument
for this is that shareholders are the legal Other ways of measuring growth
owners, the company belongs to them
and so their interests are paramount. Revenue Number of employees
ROI Number of products
Market share Cash flow
* But beware there could be conflicts between a business strategy aimed at growth and a strategy aimed at survival.

Sales margin EPS

Shows how well the shareholder is doing
Calculated as (gross profit/turnover) 100%
(where gross profit = sales cost of sales) Calculated as (profit after tax, MI, extraordinary
items and pref div)/number of equity shares
Influenced by the level of fixed costs
Not useful for comparing different industries Must be seen in context as on its own it does not
impart much information
Easily manipulated by changes in accounting
EBITDA policies/mergers/acquisitions (especially for
bonuses)
Earnings before interest, tax, depreciation and
amortisation. ROCE
It is a good proxy for cash flow from operations and so can be
used as a measure of under lying performance. Calculated as (PBIT/capital employed)
Tax and interest are not relevant to an organisation's 100%
underlying success. Capital employed = share capital and reser ves
Depreciation is not relevant to performance in a particular year. + long-term liabilities and debt capital
It is easy to calculate and understand. ROCE = profit margin asset tur nover
Page 83 8: Scope of strategic performance measures in the private sector


ROI Problems with the use of ROI NPV/IRR/MIRR

ROI is a form of ROCE used for Focus on future cash
investment centres. Definition/valuation of assets
flows and allow for risk
It is calculated as (PBIT/ Fair performance comparisons with other (through use of
operations management capital centres discount factors)
employed) 100%.
It can give a false impression of improving
performance over time
MIRR distinguishes
RI It can discourage new investment between investment
It is calculated as Group target returns may be unsuitable for phrase and return
profit imputed interest (where the entire group phase of a project, to
imputed interest is capital overcome the flawed
employed cost of capital). Target returns can produce a lack of goal assumption made in
congruence, short termism and IRR that cash flows
It overcomes some of the dysfunctional decision making are reinvested at the
problems of ROI but it has its own
disadvantages. project's IRR over the
life of the project.
MIRR MIRR with different rates for returns and investment phases
Calculating MIRR The distinction between the return and investment phases becomes
crucial if an organisation applies different discount rates for each
phase. It means there is no longer one single cost of capital which
can be applied to work out the rate of return.
MIRR formula has to be changed:
Where:
1
PVR is the present value of the return Fv
(n 1)
phase (cash inflows) MIRR = 1

Pv
PVI is the present value of the
Where:
investment phase (cash outflows)
re is the cost of capital Fv is the future value of cash inflows (the return phase)
Pv is the net present value of cash outflows (the investment phase)
n is the life of the project
n is the number of time periods


Economic value added (EVA) Key differences between EVA and RI

EVA is similar to RI because it is an absolute
performance measure calculated by subtracting EVA is based an economic profit which is not the
an imputed interest charge from the profit same as accounting profit:
earned by a company or division.
Value-building expenditure (eg R&D; advertising)
EVA = net operating profit after tax (NOPAT) is added back to profit
less capital charge.
Non-cash items are eliminated
Capital charge = weighted average cost of One-off, unusual items are excluded
capital net assets.
Charge for accounting depreciation is added back to
However, EVA looks to measure specifically profit (under EVA) and a charge for economic
how well companies are maximising the depreciation made instead
wealth of their shareholders. Argues that
traditional profit-based measurement do not do Capital charge uses different bases for net assets.
this. EVA usually uses replacement cost of assets

Financial gearing
A high level of debt creates financial r isk in a company's capital structure.
Financial risk from different points of view
The company: if debts can't be paid it may be forced into liquidation
Suppliers: they are unlikely to recover in full the money they are owed
Shareholders: they can expect lower or non-existent dividends if high interest payments are made
Gearing measures the relationship between shareholders' capital plus reserves, and either prior charge capital or
borrowings or both.
Measures of financial gearing Operating gearing

Prior charge capital Operating gearing is concerned with the relationship
Equity capital (incl reserves) between the variable cost/fixed cost operating structure
and profitability.
Prior charge capital
Total capital employed Gearing ratio = Contribution/PBIT


A company must be liquid so that it can meet Ratios to assess liquidity

its debts when they fall due.
Current ratio
Liquid funds consist of cash and shor t-term Current assets current liabilities
investments for which there is a ready mar ket + Should be greater than 1
fixed-term bank/building society deposits + trade
receivables + bills of exchange receivable. Quick/acid test ratio
Some assets are more liquid than others.
Non-current assets are not liquid assets. (Current assets inventory) current liabilities
Liquid assets = all current assets or all current Can be less than 1 if inventory turnover is fast
assets with the exception of inventory.
Turnover periods
A company can be profitable but at the same
Those for inventory and receivables give an
time have cash flow problems.
indication of liquidity.

Short-run v long-run performance Internet companies

Managers have a personal interest in the long-ter m survival of the Fuelled by what appeared to be
business and shareholders want a long-term increase in their wealth from unrivalled opportunities for
investment in the business. But managers' performance is often measured growth and increasing returns to
on short-term results and even investors are under pressure to maximise scale, share prices of internet
the growth in the value of their portfolios in a particular period. companies rose dramatically
during 1999/2000.
P/E ratio Despite exciting websites and
huge marketing expenditure,
Calculated as: internet companies were made
or broken on issues of logistics
Market value in cents
__________________ or Total MV of equity
_______________ and distribution. Many were
EPS in cents Total earnings unable to avoid the traditional
Reflects the market's appraisal of the shares' future prospects need for profits and positive cash
flow to survive.
Assuming the P/E ratio will not vary much over time, if the EPS
goes up/down, the share price should move up/down too.


Results of the same company over Different organisations in the same industry
successive accounting periods If they are in the same broad industr y even though
not direct competitors, might still expect broadly
They give some indication of progress but there are similar performance in terms of growth.
weaknesses in such a comparison. If they are direct competitors, comparisons could be
The effect of inflation should not be forgotten. particularly useful. Which has better sales growth,
or profit growth? Which has better liquidity or
The organisation's progress needs to be put into the working capital position?
context of what other organisations have done
and/or special environmental/economic influences. Between organisations in different industries
Investors might want to know:
Benchmarking Growth comparisons
ROCE comparisons
Allows comparisons at different levels to be made
between firms and inside the firm. P/E ratio and dividend yield comparisons
9: Divisional performance and transfer

pricing issues
Topic List Ensure that you understand the organisational context of

transfer pricing ie why transfer prices are necessary and
when they are set.
Divisionalisation Then consider how prices are set. Also look at the wider
Setting transfer prices context eg taxes and EU legislation.
Short supply of intermediate products

Negotiated transfer prices
Multinational transfer pricing
Divisionalisation Setting Short supply of Negotiated Multinational

transfer prices intermediate products transfer prices transfer pricing
There are two common ways of structuring organisations. Functionally

Divisionally
In general, a divisional structure will lead to decentralisation of the decision-making process.
Advantages of divisionalisation Disadvantages of divisionalisation
It can improve the decision-making process in two ways. Dysfunctional decision making (a
Quality balance has to be kept between
Speed decentralisation of authority to provide
The authority to act to improve performance should incentives and motivation, and
motivate divisional managers retaining centralised authority to
Top management are freed from detailed involvement in ensure goal congruence)
day-to-day operations and can devote more time to Increase in costs of activities common
strategic planning to all divisions
Divisions provide valuable training grounds for future Loss of control by top management
members of top management
Measuring divisional performance

Measure Pros Cons
ROI Can compare divisions of Short-term perspective
different sizes Lack of goal congruence
Aggregation is easy Valuation of assets
Does not account for different risk
RI Can compare investments with Can't compare divisions directly
different risk characteristics Valuation of assets
Doesn't relate size of divisional income to
size of investment
EVA Real wealth for shareholders Short-term perspective
Less distortion by accounting Depends on historic data
policies Adjustments to data
Absolute value Comparison of like with like
Page 93 9: Divisional performance and transfer pricing issues


Aims of transfer pricing Transfer prices based on market price

Where a perfect external market exists and unit variable
Preserve goal congruence costs and selling prices are constant, the ideal transfer price
Allow managers to retain autonomy (ie the opportunity cost of transfer) will be one of the following.
Enable performance evaluation of External market price
divisions External market price less savings in selling costs
Transfer prices based on How to set transfer prices

opportunity costs 1 Recognise the levels of output, external sales and
internal transfers that are best for the company as a
Transfer price per unit = standard whole.
variable cost in the transferring division +
opportunity cost to the organisation as a 2 Arrive at a transfer price that ensures all divisions
whole for supplying the unit internally. maximise their profits at this same level of output (ie
there should not be a more profitable opportunity for
individual divisions).
Transfer prices based on cost

If there is no external market, the transfer price has to be based on cost.
1 Standard or actual? The use of standard costs is fairer because if actual costs are used the
transferring division has no incentive to control its costs it can pass on its
inefficiencies to the receiving division.
2 Variable cost? The transferring division does not cover its fixed costs (although this problem
can be overcome by central decisions or by some form of dual pricing or two-
part charging system).
3 Full cost? The transferring division makes no profit.
4 Full cost plus? What margin will all par ties perceive as fair?
Goal congruent decisions will be made if the transf er price is set in the rang e where:
variable cost in the transferring division net marginal revenue in the receiving division


One resource in short supply

If only one resource is in shor t supply you
Example
D Division E .
can use the technique of ranking options Cost of material M $6 Unknown
according to contribution per unit of External selling price per kg $13 $16
scarce resource. Production capacity (kg) 5,000 7,000
P1 P2
Kg of material M needed per unit 3 2
G produces two products, P1 and P2. $ $
Selling price 40.00 32
Both products use material M Conversion costs 10.00
_____ ___8
Material M can be obtained from D Division Contribution before material costs 30.00 24
of G or from E, an external supplier Transferring material from D Division 6.00
_____ ___6
Contribution 24.00
_____ 18
___
Both sources of supply can also sell M on _____ ___
Contribution per unit of scarce resource ( 3 or 2) 8.00 ___9
the external market _____
_____ ___
Contribution before material costs 30.00 24
The best policy is to transfer internally-produced Buying material from E 16.00
_____ 16
___
M to product P2 production. Externally-bought M Contribution 14.00
_____
_____ ___8
___
should be used to make P1. Contribution per unit of scarce resource ( 3 or 2) 4.66
_____
_____ ___4
___
A range of limiting factors

In such circumstances you need to be able to formulate (but not solve) a linear programming model.
1 Work out contribution or profit from each product
2 Formulate objective function
3 Define constraints
Shadow price and transfer prices

The opportunity cost of the scarce resource
Shadow prices replace opportunity cost in
The amount of benefit foregone by not having the extra the transfer price formula (transfer price =
resource variable cost of the intermediate product +
opportunity cost of making the transfer)
The maximum extra amount it would be worth paying to
when there are constraints on production.
obtain one extra unit of the scare resource


Negotiated transfer prices

When authority is decentralised to the extent that More imposition by head office of its own
divisional managers negotiate transfer prices with decisions
each other, the agreed price may be finalised from a
mixture of accounting arithmetic, politics and
compromise.
Possibility 1: Market value minus reduction to allow
for internal nature of the transaction
Possibility 2: For a near-finished product, market Less decentralisation of authority
value of the end product minus an
amount for finishing work
Disputes about transfer prices are likely to arise,
however, and head office may either impose a price
which maximises company profits or may ensure
negotiations continue until a transfer price is Less effective in motivating divisional managers
agreed.

Factors affecting transfer prices in multinationals

Exchange rate fluctuations The value of transfers is affected.
Taxation in different countries Manipulation of profits is possible by raising/lowering transfer prices.
Import tariffs It is possible to minimise costs by minimising transfer prices.
Exchange controls Restrictions on the transfer of profits can be overcome if head office
provides goods/services to the subsidiary and charges exorbitantly high
prices.
Anti-dumping legislation A government might insist on fair market value as a transfer price.
Competitive pressures Transfer pricing can be used to enable divisions to match/undercut local
competitors.
Transfer pricing is often abused by multinational organisations to evade tax payments.

Notes
(010a)ACP5PC14_CH10a.qxp 3/27/2015 2:29 PM Page 101
10a: Strategic performance measures

in not-for-profit organisations
Topic List Increasingly there is little difference between performance

measurement in profit-seeking and not-for-profit seeking
organisations: The commercial sector's new focus on
customers and quality has much in common with the aims
Not-for-profit organisations of non-profit seeking organisations. Conversely, non-profit
Performance measurement seeking organisations (particularly parts of the public
sector) have been forced to face up to elements of
The public sector and politics competition and market forces.
Value for money
Not-for-profit Performance The public sector Value for

organisations measurement and politics money
Not-for-profit organisation Objectives
An organisation whose attainment of its pr imary

Difficult to define
goal is not assessed by economic measures,
although in pursuit of that goal it ma y undertake Often have multiple objectives (and hence
profit-making activities, and then use any surplus difficult to decide which is overriding)
funds to help pursue its goal.
Difficult to judge if non-quantitative objectives
have been met
A crucial distinction between non-profit
organisations (NFPs) and commercial Public sector organisations have limited control over
organisations is that NFPs do not have an over- the level of funding they receive and hence, to an
riding objective to maximise the profits they extent, the objectives they can achieve.
generate for shareholders.
There is not necessarily a link between providing
more service and obtaining more funds.

Commercial organisations generally have market

Why assess performance?
competition and the profit motive to guide the process of
managing resources economically, efficiently and effectively.
Non-profit seeking organisations cannot by definition be To make efficient resource allocations
judged primarily by profitability and in this respect do not To assess effectiveness and efficiency
generally have to be successful against competition in the To make comparisons
same way that commercial organisations do. For government and/or providers of funds
Problems with performance measurement

Solutions
Multiple objectives
How to measure outputs Assess performance in terms
of inputs and outputs
Lack of profit measure
Difficulty in defining a cost unit for services Use judgement
See 'value for Make comparisons
provided money' eg benchmarking
Financial constraints
Quantitative measures
Political, social and legal considerations
Page 103 10a: Strategic performance measures in not-for-profit organisations


Performance indicators
Publication of performance indicators try to Traditional difficulties in measuring
overcome these difficulties and enable interested performance in the public
parties to secure control of public sector resources. sector
It cannot be judged by success against

League tables competition or by profitability
Different stakeholders hold different (potentially
Provide a readily-available data source for user of conflicting) expectations of public sector
public services by ranking not-for-profit organisations organisations
on a range of measures, such as exam pass rates
(for schools) or mortality rates (for hospitals). Long-term organisational objectives v short-term
political gains
But is there a danger that league tab les lead to
tunnel vision or sub-optimisation? Performance measures are difficult to define

Value for money Example 1

Economy Spending money frugally Dishwasher
ECONOMY
Attaining the appropriate More clean plates per $ of oper ation
quantity/ quality of inputs at EFFICIENCY
lowest cost More clean plates per cycle
Efficiency Getting out as much as EFFECTIVENESS
Plates as clean as they should be
possible for what goes in
The relationship between
inputs and outputs
Example 2
Building a new school
Effectiveness Getting done, by means of INPUTS
economy and efficiency, what Costs of building the school
was supposed to be done OUTPUTS (results of an activity)
School building itself
The relationship between an
organisation's outputs and its IMPACTS (effects of outputs in terms of achieving
objectives)
objectives Effect of new school on education in the area
Page 105 10a: Strategic performance measures in not-for-profit organisations

Notes
(010b)ACP5PC14_CH10b.qxp 3/27/2015 2:29 PM Page 107
10b: Non-financial performance indicators
Topic List So far we have looked at performance mainly in terms of

financial performance.
However, qualitative and non-financial measures of
NFPIs performance are becoming increasingly popular in
organisations as they seek to capture more comprehensive
Qualitative issues data about different aspects of performance.
NFPIs Qualitative
issues
If organisations focus solely on financial performance indicators,

In practice, managers should look at a
other important goals and factors may get overlooked.
combination of financial and non-financial
Non-financial measures can deal more directly with customer indicators.
requirements, competitors and other longer-term strategic
goals than measures looking at financial performance. Two approaches which explicitly combine
Examples of non-financial performance measures: financial and non-financial performance
Area Example indicators are:
Service quality Number of complaints 1 Balanced scorecard (financial;

Number of repeat bookings customer; internal business; learning
perspectives)
Production Output per employee
Number of defects requiring reworking 2 Results and determinants analysis:
Marketing Treads in market share Results (competitive performance;
effectiveness Number of customers financial performance)
Brand awareness
Determinants (quality of service;
Personnel Staff turnover flexibility; resource utilisation;
Training time per employee innovation)
Advantages of NFPIs NFPIs in relation to employees

Can be provided quickly Traditional performance measurement systems
Easier for non-financial managers to understand and do not measure skills, morale and training of the
use workforce.
More suitable given recent changes in cost str uctures
and manufacturing and competitive environments NFPIs in relation to product/service quality
In a TQM environment, NFPIs should cover
Disadvantages of NFPIs three areas.
Measuring quality of incoming supplies
Financial aspect of performance cannot be ignored Measuring work done as it proceeds
Risk of manipulation Measuring customer satisfaction
Pursuit of detailed operational goals may blind Quality of service and customer satisfaction can
managers to overall strategy be assessed using customer surveys.
Page 109 10b: Non-financial performance indicators

NFPIs Qualitative
issues
Issues in interpreting qualitative data

Impact of subjectivity can be reduced by
looking at trends in performance rather
Based on people's opinions and judgements; therefore than one-off metrics.
subjective
How much are they influenced by personal preference
and taste? What impact does branding have on
people's opinions and judgements?
How is qualitative data recorded and processed?
Use of scoring systems in surveys to capture data

(eg ranking customer satisfaction on scale of '1' to '5') But these can still be subjective.
11: The role of quality in management

information and performance
measurement systems
Topic List This chapter examines modern approaches to quality

management. Delivering consistent and satisfactory
Modern Japanese techniques quality is a vital feature of successfully implementing a
Terminology strategy.
ISO 9000:2000 and 2008 standards
The quality management system
Information systems development
Qualities of good information
Six Sigma
Modern Japanese Terminology ISO 9000:2000 The quality Information

techniques and 2008 standards management system systems development
Total Quality Management (TQM) Measuring and controlling quality

1 Quality assurance (supplier guarantees quality)
The process of focusing on quality in the
management of all resources and relationships 2 Inspection of output (at various key stages)
within the organisation 3 Monitoring customer reaction
Employees and quality

Two basic principles of TQM Workers are empowered and encouraged to become
Getting things right first time, on the basis that multiskilled.
the cost of correcting mistakes is greater than the Workers are encouraged to take responsibility for
cost of preventing them from happening in the first their work.
place
Internal customers and suppliers
Continuous improvement the belief that it is
To satisfy external customers' expectations, the
always possible to improve, no matter how high
expectations of internal customers at each stage of the
quality may be already
overall operation must be satisfied. Internal customers
are therefore linked in quality chains.
JIT systems
Traditional responses to the problems of improving
Aims of JIT
manufacturing capacity and reducing unit costs of
production:
Minimise warehousing and storage
Longer production runs
costs
Economic batch quantities
Fewer products in the product range Eliminate waste by maintaining
More overtime control over quality of inventories
Reduced time on preventative maintenance, to keep input to the production process
production flowing
Reduce the amount of raw materials
Just-in-time systems challenge such 'traditional' views. and WIP carried as working capital
through more effective production
Although often described as a technique, JIT is more of a
planning
philosophy since it encompasses a commitment to
continuous improvement and a search for excellence in the Reduce the amount of finished
design and operation of the production management system. goods held as working capital
Page 113 11: The role of quality in management information and performance measurement systems

Elimination of waste, involvement of all staff and continuous improve-

ment are the three key elements of the JIT philosophy.
JIT techniques and methodologies A kanban control system controls the flow of
materials between one stage of a process and the
Work standards Use several, small, next.
Flexibility in simple machines
responsibilities Work floor layout and Problems with JIT
Equality of all staff work flow
Autonomy Total productive
maintenance Can be difficult to predict patter ns of demand
Development of
personnel Set-up reductions Makes the organisation vulnerable to
Quality of working life Total people disruptions in the supply chain
Creativity involvement Difficult to operate over a wide geographical
Visibility spread
Design for
manufacture JIT purchasing
Life cycle costing Target costing

Traditional management accounting systems tend The target costing process
to report costs at the physical production stage of Determine currently- Determine product
the life cycle only and do not accumulate costs achievable cost concept
over the entire life cycle, assessing product
profitability on a periodic basis instead.
Establish target
Life cycle costing tracks and accumulates costs price Establish
and revenues over the entire product life cycle, desired profit
from the design stage, through development to margin
market launch, production and sales, to the Set target
eventual withdrawal from the market. This means cost
that a product's total profitability can be
Calculate cost gap
determined.
Try to close the gap

Kaizen costing
Focuses on obtaining small incremental cost reductions dur ing the production stage of
the product life cycle using various tools such as value analysis and functional analysis
Kaizen costing process Standard costing v Kaizen costing
Used for ... Cost control Cost reduction

Focus is on ... Standard costs based Actual costs
on static conditions assuming dynamic
conditions
Standards/cost Every 612 months Monthly
reduction targets are
set ...
Costs are Using variance By implementing

controlled ... analysis continuous
improvement
Employees are ... The cause of The source of
problems solutions
Continuous improvement (CI) Essential factors for CI

The ongoing process which involves a continuous
search to reduce costs, eliminate waste, and improve Commitment from senior management
the quality and performance of activities which increase Opportunity for all employees to contribute
customer value or satisfaction.
Information about the organisation's environment
Employees' awareness of their role
Basic concepts of CI
Management of the performance and contribution of
Quality (defined by the needs of both inter nal and employees
external customers)
Good communications
Process improvements (through technology and
Recognised quality management systems and
innovative ideas)
standards
Team work (in the form of quality circles and group
Measurement and evaluation of progress against key
problemsolving activities)
performance indicators and benchmarks

Cost of prevention Examples

Costs incurred prior to or during production
in order to prevent substandard or defective Cost of prevention
Cost of quality products/services from being produced Training in quality control
The difference between Cost of appraisal
the actual cost of Costs incurred in order to ensure that Cost of appraisal
producing, selling and outputs produced meet required quality Inspection of goods inwards
supporting products/ standards
services and the
equivalent cost if there Cost of internal failure
Costs arising from inadequate quality which Cost of internal failure
were no failures during Losses due to lower selling
are identified before the transfer of
production/usage prices for sub-quality goods
ownership from supplier to purchaser
Cost of external failure
Costs arising from inadequate quality Cost of external failure
discovered after the transfer of ownership Cost of customer service
from supplier to purchaser section
Traditional view of quality costs

The costs of conformance (cost of achieving specified quality standards) is a discretionar y cost incurred
with the intention of eliminating non-conformance costs (cost of failure to deliver the required standard of
quality). The cost of non-conformance can only be reduced by increasing the cost of conformance. The optimal
investment in conformance costs is when total costs of quality reach a minim um (which may be below 100%
quality conformance).
Alternative view of quality costs

It is inappropriate to think of an optimal level of quality at which some failures will occur, and the inevitability of
errors is not something that an organisation should accept. It is better to spend more on pre vention as this will
eventually lead to lower total quality costs, because appraisal, internal and external failure costs will be reduced.
The emphasis should be on 'getting things r ight first time' and designing in quality to the product or ser vice.
Cost of quality reports

Such reports show how much is being spent on each of the categor ies (prevention, appraisal etc)
They indicate how total cost can be reduced by more sensible division of costs between the categories
Non-financial measures (eg number of warranty claims) may be more appropriate for lower-level managers

Definitions
Quality is 'the degree to which a set of inherent char acteristics fulfils requirements' (ISO definition).
A quality management system (QMS) is the organisational structure of responsibilities, activities, resources
and events that together provide procedures and methods of implementation to ensure the capability of an
organisation to meet quality requirements.
Quality assurance is the 'part of quality management focused on providing confidence that quality
requirements will be fulfilled'. Quality assurance is therefore concerned with the things that make quality control
systems and activities effective.
Quality control is the 'part of quality management focused on fulfilling quality requirements'.
Quality certification is an externally provided, objective acknowledgement that the QMS is adequate in its
provisions and its operation.
Exam focus point

Note the distinction between quality control and quality assurance: quality control is primarily about detecting
errors whereas quality assurance is about preventing them.

The ISO 9000:2000 and 2008 series consists of four primary standards.
1 ISO 9000:2005 is fundamentals and ter minology. 3 SO 9004:2009 provides guidelines for
performance improvement.
2 ISO 9001:2000 and 2008 specifies essential 4 ISO 19011 covers quality auditing standards.
features of quality management systems.
In addition, ISO 14001 relates to environmental management systems, covering issues such as: use and source
of raw materials, waste, noise, energy use, and emissions.
Four important principles in ISO 9000:2000:
1 Quality management should be customer-focused.
2 Quality performance should be measured both in terms of process performance and customer satisfaction.
3 Quality management should be improvement driven.
4 Senior management must demonstrate commitment to improving management systems.

QMS should incorporate the eight quality management principles in ISO 9001:2005.
1 Customer focus
2 Leadership
3 Involvement of people
4 Process approach (managing related activities and resources as integ rated processes)
5 Systems approach to management (managing groups of related processes as integrated systems)
6 Continual improvement
7 Factual approach to decisions
8 Mutually beneficial supplier relations
A quality manual is a 'document specifying the quality mana gement system of an

organisation.' (ISO 9000:2005)
The quality manual contains practical details and instructions and provides quality assurance to external
stakeholders. It will contain a wide range of material and must be kept up to date.
Policies relating to quality
The organisation structure that relates to quality management
Full details of quality procedures
Quality policies formally define the organisation's approach to quality. They may include a mission statement, a
corporate policy statement and process specific polices.
A quality process is a set of activities which tr ansform inputs into outputs.
A quality procedure is the specified way to carry out a quality process.
There are two types of quality process: core business processes and supporting processes. Both must be
fully documented.

Four aspects of quality are particularly important in software.

1 Functionality it performs the tasks expected of it
2 Reliability keeps working, and produces reliable outputs
3 Usability is easy to use effectively
4 Build quality flexibility, expandability, portability between platforms, ease of maintenance
Low quality in IS development produces systems that are difficult to use , maintain and enhance. This leads to
costs (correcting defects etc), a loss of user confidence, and a reduction in business efficiency.
Qualities of good Six Sigma

information
As well as ensuring it has good quality Qualities of good information

information systems, an organisation also has
to ensure it produces good quality A ccurate
management information.
'Good' management information is information
C omplete
which adds to management's understanding
of performance or of an issue, and thereby
C ost-beneficial (ie benefits from it outweigh costs of
producing it)
helps them control their business.
U ser-targeted
R elevant
A uthoritative (eg sources are reliable)
T imely
E asy to use
Qualities of good Six Sigma

information
Six Sigma is a quality management system that g rew out of statistical quality techniques. It has developed into a
widely applicable system for process improvement. The overall aim is a very high and consistent standard of quality
output. It tends to take the form of specific improvement projects that follow a standard five phase pattern (DMAIC).
1 Define customer requirements establish precise customer requirements
2 Measure existing performance concentrate on things that are impor tant to the customer, that the customer is
not satisfied with, and that can be impro ved
3 Analyse the existing process produce a list of prob lem causes and areas for improvement
4 Improve the process creativity and planning are required. Consider cost and resource consequences of any
plans
5 Control the new process a continuing management role consider cost of monitor ing
Key themes in Six Sigma include:

Genuine focus on the customer Processes as being crucial to success
Data- and fact-drive management (rather than Proactive management
intuition) Perfectionism (combined with a tolerance of failure)
12: Performance measurement: strategy,

reward and behaviour
If people know that their performance is being measured

Topic List this will affect the standard of their performance,
particularly if they know they will be rewarded for
Human resource management achieving a certain level of performance. In this respect,
Appraisal and performance appraisals and reward management are practical aspects
management of management that can have a direct impact on
Reward management performance.
Accountability
Benefits and problems
Reward schemes
Management styles
Human resource Appraisal and Reward Accountability Benefits Reward Management

management performance management management and problems schemes styles
Human Resource Management

'A strategic approach to managing employement relations, which emphasises that leveraging people's
capabilities is critical to achieving sustainable competitive advantage, this being achieved through a distinctive
set of integrated employment policies, programmes and practices.' [Bratton & Gold]
Leadership
Staff development
Selection Performance Appraisal
Rewards
Job design
Fombrun, Tichy & Devanna's Model of Human Resource Management


Performance management Appraisal wider aspects

Integrates HRM with strategy using cybernetic model of feedback and control Instrument Aspirational
of control model of HRM?
1 Goals set (derived) 3 Control actions taken
from overall strategy (to correct shortfall) Psychological
contract
2 Performance measured
and compared with target
4 Goals adjusted
in light of experience Practical aspects of appraisal
Judgement VS Development
Approach to measuring performance Pay Development needs
Inputs or personal qualities. Accuracy in assessing traits depends Promotion Current progress
on skilled psychometry. Managers often introduce subjective bias. Responsibility Opportunities
Results and outcomes. Measurement against quantified work Uncomfortable for Supports performance
targets and competence frameworks can work well. Supports quality all concerned improvement
management programmes and BPR.
Behaviour-anchored rating scales provide examples of a range of
Effects
Criticism has negative effect on performance
behaviour for each aspect of performance.
Praise has little effect
Behaviour observation scales: appraisees are scored on actual Specific goals improve performance
frequency of performing such activities. Participative goal-setting helps results
Page 129 12: Performance measurement: strategy, reward and behaviour

Reward Reward and the organisation Bratton: Model of reward

management based on 5
Reward is 'all of the monetar y, elements:
non-monetary and psychological Reward system should support
payments that an organisation 1 Strategic perspective
overall strategy
provides for its employees in 2 Reward objectives
exchange for the work they Reward is a vital par t of the
perform'. (Bratton) 'psychological contract' between 3 Reward options
employer and employee
Rewards are EXTRINSIC (derive 4 Reward techniques
It influences the success of
from the job context) or INTRINSIC 5 Reward competitiveness
(derive from the job content).
recruitment and retention policies
For example, PAY is an extrinsic It must conform with the law
reward and may be divided into three Rewards must be affordable (for Strategic perspective
categories base pay (reward for organisation) Reward policy and practice
time spent), performance pay (to must support overall strategy
Reward system affects motivation
incentivise and encourage and be linked to the cascade of
teamwork) and indirect pay
and performance management
subordinate goals and
(benefits). objectives.
Reward objectives
Support recruitment and retention. Must be competitive externally, equitably structured internally, and
must compensate for poor working conditions, if they exist.
Motivation. Reward system should motivate employees to higher levels of performance. Despite
prevalence of incentive and performance related pay, its effectiveness is still disputed.
Compliance. Pay system signals valued behaviour and workplace expectations.
Reward options
Base pay. Related to value of work overall as estimated, measured or set by the market.
Performance-related pay. Rewards performance, learning or experience. Can support teamworking and
commitment to organisational goals. Profit sharing supports overall organisational performance. But
'success' of PRP depends on the performance measures and targets actually set.
Indirect pay. Benefits of various kinds (eg health care, pensions, car allowance).
Share options. Provide the right to purchase shares in a company at a specified exercise price after a
specified period of time. Can encourage directors to be more concer ned with longer-term success of the
company, not just short-term performance.


Reward techniques
The reward system must support external competitiveness, but must also achieve internal equity so that the
overall structure is fair. There are three techniques that help achieve internal equity:
Job analysis. Produces a detailed description of the tasks, responsibilities and context of a job. Also
useful in quality schemes, redesign and adoption of e-business.
Job evaluation. Determines relative worth of jobs. However is hampered by subjective judgement, politics
and the qualities of the current job holder.
Performance appraisal. Discussed earlier potential issues with 'judgement' vs. 'development.'
Reward competitiveness Pay levels

In reality, pay levels will be subject to In practice, pay levels will be affected by:
external factors: Survey data Relative power of trade unions
The local labour market Need for flexibility Economic conditions
Pressure for cost efficiency Government influence Subjective judgement
Legislation, such as minimum wage (by managers)
rules
Ideally performance measures should reward behaviour that maximises the corporate good (in both long ter m
and short term). But:
Management/staff will concentrate only upon what they know is being measured. Idea that "What gets
measured, gets done"
Good performance that satisfies management's/staff's own sense of what is impor tant will not necessary
work towards the corporate good (problem of goal congruence)
It is easy to assess a manager as an emplo yee
Problems in measuring managerial (eg days absent) but ability as a manager
performance requires assessment in relation to area of
responsibility
Segregating managerial performance from
the economic performance of the department/
division
But:
Including in performance measures only those
items directly controllable by the manager in There are different degrees of controllability
question There are reasons for holding managers
accountable for factors beyond their control

Accountability Steps to accountability

1 Hard accountability (financial and 1 Choose and publicise accepted performance
measures.
quantitative information) which covers three
areas 2 Identify the benefits of the measures.
Counting (converting activities and 3 Identify and understand problems in their use.
outcomes into numbers)
Ensuring that numbers are accounted for 4 Consider how to counter perceived problems.
(how and why an outcome occurred)
Being held accountable (for accounting
and for the underlying circumstances)
2 Soft accountability (the human impact on
the system and its role in shaping, e valuating
and implementing goals)
Accountability and controls Selecting approriate control mechanisms

Three broad categories of control mechanisms: Control systems need to be appropr iate for the
organisation or the task at hand.
1 Behavioural (or action) control Ouchi: the type of control which is most appropr iate
2 Personnel and cultural control in any situation depends on:
Ability to measure output
3 Output (or results) control
Knowledge of the transformation process
required to produce that output
Knowledge of the transformation process
Perfect Imperfect
High Behavioural or Output control

Ability to output controls
measure
output Low Behavioural Personnel
controls control


Benefits of performance measures Problems of performance measurement
Clarify organisational objectives Tunnel vision undue focus on aspects of performance being
Develop agreed measures of activity measured at the expense of other aspects of performance
Greater understanding of processes Sub-optimisation focus on specific objectives means that other
Facilitate comparison of the performance of are not achieved even though they would be beneficial
different organisations Myopia focus on short-term goals at the expense of longer-
Facilitate target setting (for the organisation and term objectives
managers) Measure fixation measures and indicators being focused on
Promote accountability of the organisation to its may not be effective. Focus is on the indicators themselves, rather
stakeholders than underlying performance.
Misrepresentation manipulation of data to make results appear
better than they actually are
Misinterpretation misunderstanding the performance data
Gaming deliberate distortion of performance to secure some
These problems highlight the issue of congruence strategic advantage
between the goals of individuals and the goals of the Ossification overly rigid systems; reluctance to change
organisation. measures once established

Benefits of linking reward schemes and Problems associated with reward schemes
performance
Encourage dysfunctional behaviour
Provides an incentive to achieve good Schemes to combat short-termism may not motivate
performance Employees will concentrate on what is measured
Attracts and keeps valuable employees Higher output achieved at the expense of quality
Use of share schemes motivates Undervalue intrinsic rewards
managers to act in the organisation's long- Lack of goal congruence
term interests (increase market value)
Creates an organisation focused on
continuous improvement Characteristics of effective performance
Makes employees aware of what creates standards/targets
organisational success
Fitzgerald & Moon (Building Block model) three key
characteristics:
Fairness (equity)
Ownership
Achievability

Styles of management Hopwood

Styles of management
Budget- Profit- Non-
Effects constrained conscious accounting
Involvement with costs High High Low
Job-related tension High Medium Medium
Manipulation of accounting reports Extensive Little Little
Relations with supervisor Poor Good Good
Relations with colleague Poor Good Good
Importance of context
The context in which management styles are used can be as impor tant as the style which is used.
eg: Budget-constrained style may be appropriate in a business with cash flow problems, or a mature business where
management have to focus on cost control
Profit-conscious style may be more appropriate for a business in its growth phase, where longer term
performance objectives are more important than short term profit
Non-accounting style can often be appropr iate for public sector or not-for-profit organisations, where financial
parameters are less important than non-financial ones
Aligning cultures and strategy

Need to align culture and management styles in an organisation with the str ategy it is pursuing.
Financial Control Culture Excellence/Service Culture
Organisation's success depends on efficiency Success depends on achieving high levels of customer
Management Information systems need to satisfaction
support cost planning and control systems Organisation needs to understand customers' needs, and
Managerial structure is hierarchical, top-down; continually improve the value it provides them
'command and control' philosophy Management promotes autonomous, customer-
Fundamental objective for departments is to orientated teams, which are accountable for customer
achieve annual budget targets profitability
Emphasis on financial performance, in Authority and decision making are delegated to
particular short-run interests of shareholders operational managers (who are closer to customers)
Performance measures focus on maximising Intangible assets, knowledge systems and brands (rather
efficiency of asset usage, eg through use of than short-term profits) are all seen as cr itical to success
profitability measures such as ROCE Performance is evaluated through benchmarking and peer
review (not against annual budget targets)
Primary focus is on 'managing the business' not simply
'managing the numbers'

Notes
13: Alternative views of performance

measurement and management
Topic List
In this chapter we look at six models or techniques which
can be used to measure performance. These models
Balanced scorecard offer a contrast to the approaches for measuring financial
performance we looked at in earlier chapters.
Performance pyramid
However, note that the P5 syllabus requires you to
Building blocks evaluate these models rather than just describing them.
Performance prism What are the strengths and weaknesses of the different
models? (Refer back to Chapter 13 of the Study Text if
Activity-based management you need to remind yourself of these.)
Value-based management
Balanced Performance Building Performance Activity-based Value-based

scorecard pyramid blocks prism management management
Key features Perspectives and examples of goals and measures
Covers all relevant areas of performance

Financial perspective
Looks internally and externally
Survive Cashflow
Related to the key elements of an
Prosper Increased market share
organisation's strategy
Customer perspective
Links financial and non-financial measures
Responsive supply On-time delivery
'Balanced', thereby preventing
Quality % of returns
improvement in one area at the expense of
Internal processes perspective
another
Manufacturing excellence Cycle time
Problems Design productivity Engineering efficiency
Innovation and learning perspective
Conflicting measures Time to market New product introduction
Selection of measures v competition
Lack of familiarity with certain perspectives Technology leadership Time to develop next
Inability to interpret in terms of all four generation of products
perspectives
Strategy maps
Could be used to help implement the scorecard more successfully:
(a) Identify objectives. Identify the key objectives of the organisation.
(b) Value creation. In the light of these key objectives, determine the main ways the organisation
creates value.
(c) Financial perspective. Identify financial strategies to support the overall objectives and strategy.
(d) Customer perspective. Clarify customer-orientated strategies to support the overall strategy.
(e) Internal processes. Identify how internal processess support the strategy and help to create value.
(f) Innovation and learning. Identify the skills and competences needed to suppor t the overall strategy
and achieve the objectives.
Page 143 13: Alternative views of performance measurement and management


The sequence of these stages also suggests there is a hierarchy among the different perspectives. The
financial perspective is the highest level perspective, and the measures and goals from the other perspectiv es
should help an organisation achieve its financial goals.
Perspectives Measures
Financial ROCE: Shareholder value
Customer Relationships and loyalty; timeliness of service
Internal business Quality, efficiency and timeliness processes
Innovation and learning Employee skills


The performance pyramid links the overall strategic

view of management with day to day operations.
Corporate
Vision
At corporate level, financial and market
1 objectives are set and actioned by ...
Market Financial
... strategies developed at the strategic satisfaction measures
2 business unit level, which in turn are
supported by ... Customer Flexibility Productivity
satisfaction
... specific criteria at the operational level
3
Quality Delivery Process
Waste
time
Objectives for external effectiveness and Operations

internal efficiency are achieved through
measures at the three levels. External effectiveness Internal efficiency


Performance
measurement in service Dimensions
business can be difficult Improvement of
Quality of service determinants
due to characteristics of:
Resource utilisation leads to
Simultaneity Flexibility*
Perishability Innovation
Heterogenity Financial performance improvement of
Intangibility Competitive performance results
No transfer of
ownership Standards Rewards
Building block model was Ownership Clarity
devised as a way of Achievability Motivation
measuring performances Equity Controllability
in service businesses.
*: Three aspects of flexibility: speed of delivery; response to customer specifications; coping with demand

Neely & Adams: Organisations have become obsessed with measurement and have lost sight of the strategic
side of management as a result. Performance prism aims to help managers manage their
business without resorting to measuring everyting.
Performance prism
Aims to unify various explanations of organisational performance. There are five facets, which affect
performance:
1 Stakeholder satisfaction organisation needs to identify key stakeholders and what they want
2 Strategies to be pursued to ensure value delivered to stakeholders by satisfying their needs

and wants
3
Processes required to deliver strategies
4 Capabilities required to operate and enhance the processes
5 Stakeholder contribution what contributions are required from stakeholders in order to

maintain and develop capabilities?

Goal of ABM is to enable customer needs to be satisfied while making f ewer demands on organisational
resources.
Aspects of ABM
Cost reduction (by controlling/reducing cost driver incidence) and process improvement
Activity analysis
Value-added and non-value added Core/pr imary, support and diversionary/discretionary
Design decisions (provide cost driver information to ensure the production of low cost products meeting
customers' requirements)
Cost driver analysis
Unit level costs Batch level costs Product/process level costs Organisational/facility costs
Continuous improvement (eliminate non-value-added activities)
Performance evaluation
Volume measures Time measures Quality measures Cost driver rates

Value-based management (VBM) Value driver

Any variable affecting the value of the company.
The value of a company is measured by its Three types are:
discounted cash flows. Generic Grass roots
Business unit
VBM extends this idea to align all strategic,
operational and management processes. Management processes
Organisations should set goals, targets
There are four management processes that run in order.
and performance measures based on
discounted cash flow. 1 Organisation develops a strategy to maximise
value
Value mindset 2 Strategy becomes performance targets
Management are aware that their ultimate 3 Then action plans and budgets to meet these
financial objective is maximising value. targets
4 Performance measures and incentive systems to
monitor performance to target

Notes
14: Strategic performance issues in complex

business structures
Topic List In this chapter, we will look at three models that can be
used to plan and assess business performance.
While they can be useful to organisations, the models
Strategic models also have their drawbacks, so make sure you are clear
Performance management and about these too.
business models The chapter finishes by considering performance
management issues in different business structures. We
look at joint ventures, strategic alliances and the supply
chain. What issues for performance management do
these different types of structure have?
Strategic Performance management

models and business models
Porter's five forces* Boston Consulting Group Portfolio matrix

The level of sustainable profit in an industry is Analysis of market growth and relative market share gives four
determined by five forces categories of product during lifecycle and
four strategies
Product Strategy
Threat of new entrants
Threat from substitute products Stars Build
Bargaining power of buyers Cash cow Hold/harvest
Bargaining power of suppliers Question marks Build/harvest
Rivalry between existing competitors Dogs Divest/hold
Caution Caution
Defining market can be difficult Defining market can be difficult
Assumes market structures are Collection of data needed
relatively static, but they may not be Classifications too simplistic
Links between products ignored
*: Analysing the forces can also help to identify CSFs or aspects of perf ormance which are important to measure.

Joint ventures Multinationals

Performance management issues Performance measurement issues from comparing subsidiaries
in different countries:
Establishing realistic standards
JV partners may have different goals Establishing controllable cash from and profits
Ensuring smooth co-ordination and control amongst Impact of currency conversion rates
venture partners Procedures used to obtain performance information (eg
Sharing information and intellectual property style and frequency of repor ts, common language and
Establishing trust between venture partners currency)
Strategic alliances Virtual organisations

Performances management issues
Issues
Controlling and monitoring performance of remote

Success depends on communication and collaboration workers (eg timeliness, quantity and quality of goods or
rather than formal goals and objectives service delivered)
Number of stakeholder organisations contribute to success Importance of establishing service level agreements
Page 153 14: Strategic performance issues in complex business structures


Supply chain management

Looks at the supply chain as a whole , and ways the
organisations in the supply chain collaborate to
produce value for the end customer.
Move away from traditional arms' length supplier-
purchaser relationship to develop stronger
relationships between organisations in the supply
chain.
Use of technology in supply chain:
Impact on business models?
'seamless' supply chain, and closer relationship
Value chain: customer = external to value
between producers and consumers (eg collaboration
creation process
with consumer on product design; and joint
But now customer = integrated into
development projects)
value creation process
15: Predicting and preventing corporate

failure
Topic List The chapter looks at some of the models y ou could apply
to asses whether a business is facing failure, and also
looks at some of the performance improvement
Business failure strategies which can be used to tr y to prevent corporate
failure. Measures of failure can be financial and non-
Performance improvement strategies financial.
Organisation lifecycle and survival You also need to look at the long-ter m lifecycle of the
business as this affects decisions on whether to invest or
divest products and divisions.
Business Performance Organisation

failure improvement strategies lifecycle and survival
Business failure can be predicted by quantitative models (such as Z-scores) or qualitative models (such as Argenti's
'A' score).
Z score (Altman)
Altman identified five key indicators of likelihood Z=1.2X1+1.4X2+3.3X3+0.6X4+1.0X5
of the failure or non-failure of businesses: X1 = working capital/total assets (liquidity)
Liquidity X2 = retained earnings/total assets (profitability)
Profitability X3 = EBIT/total assets (activity/efficiency)
Activity/efficiency X4 = Market value of equity/Book value of total debt (leverage)
Leverage
X5 = Sales/total assets (solvency)
Solvency
Z scores below 1.8 indicate a strong possibility of insolv ency.
These five indicators were then used to derive a
Z score. Z scores above 3.0 suggest financial safety.
Z scores within the range 1.8 2.7 suggest a r isk of going
bankrupt unless dramatic action is taken to ensure an
organisation's survival.
'A' scores (Argenti)
1. Defects 2. Mistakes
Autocratic chief executive High gearing
CEO also chairman Overtrading
Passive, imbalanced board Failure of big project
Lack of strong FD 3. Symptoms
Poor management team Deteriorating financial indicators
No budget control Creative accounting
No cashflow forecasts Non-financial signs (eg lack of cleaning,
No costing system rumour, high staff turnover)
Poor response to change; eg out-dated Declining morale
product or processes
The 'A' score model assigns a score f or each problem area. Maximum acceptable score is 25 overall,
with 10 and 15 being the maxim um acceptable scores for 'defects' and 'mistakes' respectively.
Any score in symptoms indicates that organisation is at r isk.
Page 157 15: Predicting and preventing corporate failure

Declining companies
Slatter identifies four stages in the crisis:
1. Crisis denial. Managers are complacent. They ignore warning signs or do not understand them.
2. Hidden crisis. Crisis signs are explained away by managers to protect their positions.
3. Disintegration. Action is taken too late and too little. Management becomes more autocratic.
4. Collapse. Effective action becomes impossible. There are power struggles and able managers leave.
The Icarus paradox (Miller)

Strategic drift can follow success if the organisation becomes over-confident. The business model comes to
revolve around what worked in the past, hampering innovation and reducing flexibility. Strategy rests on
unchallenged assumptions and drifts away from environmental fit. It can be difficult to distinguish core
competences from obsolete assumptions.
Slatter: 10 symptoms of corporate decline: Other signs

1 Decrease in company's profitability
Difficulties indicated in chairman's report
2 Decrease in sales volume
Adverse press coverage
3 Increase in gearing New legislation
4 Decrease in liquidity Increased competition
5 Restrictions on dividend policy Worsening economic situation
6 Financial engineering
Note: Failure can be caused by internal factors (eg
7 Top management fear lack of innovation; inappropriate marketing strategy) or
external factors (eg recession; industry lifecycle) or a
8 Frequent changes in senior management combination of both.
9 Falling market share
10 Evidence of lack of planning


Ross and Kami: 10 commandments for avoiding business failure
1 You must have a strategy 6 Keep informed of, and react to, change
2 You must have controls 7 Customer is king
3 The Board must participate 8 Do not misuse IT
4 Avoid one-man rule 9 Do not manipulate accounts
5 Management in depth 10 Organise to meet employee's needs
Three stages in turning a company round
Contraction to cut the cost base while maintaining re venue

Reinvestment in capability and efficiency
Rebuilding with an emphasis on innovation

The life cycle and long-term survival

Although not all products inevitably go into decline, organisations need to be aware of life cycle issues, so that
their products generate enough cash to allow for investment in new products.
Stages of lifecycle: Introduction Growth Maturity Decline
Ideally organisations should have a number of different products at different stages in the life cycle.
New products at introduction/ growth stages, which will mature and generate cash (Question marks in
BCG matrix)
Mature products already generating cash for new investment (Cash cows)
Products in decline to be harvested (Dogs)
Importantly though, critical success factors, KPIs and information needs also vary through the life cycle.

Notes
16: Current developments, issues and

trends
This final chapter covers current developments and

Topic List emerging issues in performance management (section F
of the syllabus.) We look at a range of discrete topics
here but they could all easily be examined in your P5
Environmental management exams.
accounting
One of the key capabilities P5 candidates are expected to
Public sector performance demonstrate is their ability to identify and assess the
Changing role of management impact of current developments in management
accountant accounting and performance measurement on measuring,
evaluating and improving organisational performance.
Contemporary issues
Integrated reporting
Environmental Public sector Changing role of Contemporary Integrated

management accounting performance management accountant issues reporting
Environmental management accounting

'The generation and analysis of both financial and non-financial inf ormation in order to suppor t internal
environmental management processes'.
Underestimates cost of poor environmental behaviour
Traditional Poor management
management Underestimates benefits of improvements
decision making
accounting Distorts and misrepresents environmental issues Managers are unaware of
Classifies environmental costs as general overheads these costs, have no
information with which to
EMA attempts to make all relevant, significant costs visible so that they can be manage them and no
considered in business decision making using: incentive to reduce them.
Input/output analysis Product pricing
Flow cost accounting Budgeting
for the purposes of
Environmental ABC Investment appraisal
Life cycle costing Setting performance targets

Issues to consider
Benchmarking and league tables Can motivate organisations to improve performance. But how
reliable are league tables, what measures to use? Could lead
to concentration on achieving specific benchmarks whilst
neglecting others
Level of comparison Are league tables looking at organisation as a whole (str ategic
view) or looking at individual operational issues? Potential
conflict between strategic and operational focus?
Private sector comparators Who to compare against, validity of comparisons
Targets VFM, efficiency and effectiveness, qualitative measures. But

which areas of performance are selected for measurement?
Wide range of stakeholders, each with different (possibly
conflicting) objectives
Page 165 16: Current developments, issues and trends


Traditional view of the management accountant

Separation from operational aspects of the organisation to allow independence and objective judgement.
Trigger for
change
Technology Management structure Competition
Access to IT and MIS Shift in responsibility for budgeting to Competitive economic situation has led
across the organisation operational management who prepare to strategic focus and commercial
and monitor their own budgets. orientation.
Modern view of the management accountant

Hybrid accountant with accounting knowledge and in-depth awareness of operational/commercial processes
of the organisation. Increasingly integrated into the operations of the organisation.

Four main performance issues requiring management Performance measures chosen

attention should:
Linking performance to strategy Measure effectiveness of all

processes
Setting performance standards and targets
Measure efficiency of resource
Linking rewards and performance
utilisation
Considering benefits and problems of performance
measures Include mix of qualitative and
quantitative methods
Source: The pyramids and pitfalls of
performance measurement, ACCA P5 Look at both long-term and short-
Technical Article term performance
Be flexible and adaptable to
changing business environment


Integrated Report Six categories of capital

Category Characteristics
'A concise Financial Funds available for use in the production of goods or the
communication about provision of services
how an organisation's
strategy, governance, Manufactured Buildings, equipment or infrastructure used in the production of
performance and goods or the provision of services
prospects, in the
Human Skills, experience and motivation to innovate
context of its
commercial, social and Intellectual Intangible assets providing competitive advantage (eg patents,
environmental context, copyrights, brand and reputation)
leads to the creation
and enchancement of Natural Inputs to goods and services, and natural environment on
value over the short, which organisation's activities have an impact (eg water, land,
medium and long term.' minerals, eco-systems)
(IIRC) Social Institutions and relationships between stakeholders groups to
enchance individual and collective well-being. Includes an
organisation's social licence to operate
IIRC: Seven guiding principles of IR

Key questions to address in an
1 Strategic focus and future orientation insight into Integrated Report
strategy and how it relates to the use of the six capitals
2 Connectivity holistic picture of relationships and Purpose of organisation and context in which it
dependencies operates
3 Stakeholder relationships provide insight into the nature Governance structure and how it supports
and quality of relationships, and how an organisation organisation's ability to create value
recognises and responds to stakeholders' interests Opportunities and risks facing the organisation and
how it is responding to them
4 Materiality only focus on matters which substantively
affect organisation's ability to creat value Strategy and resource allocation
Business model and how resilient it is to threats from
5 Reliability and completeness present information in a the external environment
balanced way, including negative matters as well as positive Performance how well has the organisation achieved
ones its strategic objectives, and what effect has this had on
6 Conciseness report should be concise the six capitals?
Future outlook what challenges and uncer tainties is
7 Consistency and comparability to enable comparison the organisation likely to face and what are the potential
with other organisations implications for these on its future performance?


Implications of IR for the management accountant

Requirement for forward-looking information as well as historical
Insights into an organisation's prospects and future perf ormance
But ... how much future information can/should an organisation provide?
Long-term performance and business sustainability
Evaluate performance on a long-term basis as well as in the shor t-term
Performance measures need to promote a balance betw een long-term and short-term performance
Use of non-financial performance indicators
Value generation
Focus on value generation (rather then narrow financial goals)
Increased use of non-financial data to gain a better understanding of perf ormance
Insight into strategy
Need to highlight the significance of figures, rather than simply reporting figures
Focus on key aspects of performance
Guiding principle of conciseness: focus on aspects of performance which are truly key to the organisation's future success
(critical success factors)
Impact of IR on management account information

Stategic information needs to be more strategic; not just about historical, internal, financial performance
External information need information on external environment to highlight opportunities and threats
Requirement for non-financial information
Can organisation's information systems supply the range of information stakeholders want to see?
Will systems need to be improved in order to enable the non-financial information to be collected?
Can the accountant ensure that non-financial information is reliable?
What assurance is there over non-financial information in a report?

Notes

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1: Introduction to strategic management

Topic List This chapter introduces strategic management accounting

Strategic planning Characteristics of strategic information

The process of deciding on the objectives of the

Management control Characteristics of management accounting

Page 3 1: Introduction to strategic management accounting

Strategic planning and management control compared

Performance management Performance management systems

Page 5 1: Introduction to strategic management accounting

Operational control/planning Example Characteristics of operational

Anthony hierarchy Performance management systems

Strategic planning Means all departments and divisions will

Page 7 1: Introduction to strategic management accounting

Overall strategic and/or Business's

How the mission can be achieved

ENVIRONMENTAL ANALYSIS CORPORATE APPRAISAL POSITION AUDIT

CORPORATE STRATEGIC CHOICE

choice 2 Options evaluation

STRATEGY IMPLEMENTATION REVIEW & CONTROL

TACTICS ACTUAL PERFORMANCE

Page 9 1: Introduction to strategic management accounting

Business level How an organisation approaches a par ticular market

Involves decisions made at operational level

Page 11 1: Introduction to strategic management accounting

Strategic control To encourage the measurement of the

Potential issues in managing foreign subsidiaries

Performance measurement Differences between domestic and international

Establishing realistic standards Cultural factors (eg international has

Page 13 1: Introduction to strategic management accounting

SWOT analysis How SWOT can guide strategy formulation

Internal Comparing one operating unit or function with

Page 15 1: Introduction to strategic management accounting

Stages of a benchmarking exercise

3 Select comparators: departments or organisations to compare performance against

6 Design and implement an improvement programme to close the performance gaps

2: Performance management and control

Topic List Budgets are short-term plans which provide short-term

Budgeting Not-for-profit 'Beyond

As a budget has different purposes, it might

Ensures organisation's objectives Forecast You should know the detail

Strengths and weaknesses

Flexible budgeting ABB

Page 19 2: Performance management and control of the organisation

Budgeting Not-for-profit 'Beyond

Budgeting Not-for-profit 'Beyond

'Beyond budgeting' Criticisms of traditional budgeting

Page 21 2: Performance management and control of the organisation

Budgeting Not-for-profit 'Beyond

Guiding principles of 'Beyond budgeting'

Traditional budgeting and 'beyond budgeting' compared

Page 23 2: Performance management and control of the organisation

3: Business structure, IT developments and

Topic List In this chapter we look at the way businesses are

Business Business process Business Teamwork and Data and Stakeholders

Business Business process Business Teamwork and Data and Stakeholders

Principles of BPR which influence systems

Business Business process Business Teamwork and Data and Stakeholders

Business process re-engineering

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

Variances New variance analyses may need to be developed.