ACCA - P5 Study text - Emile Woolf INT - 2010
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Chapter 6: Introduction to strategic management accounting
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Government policy on competition in markets affects some industries. Mergers
or takeovers that would create a monopoly in a market could be prevented,
because they are against the ‘public interest’.
Taxation policies of national governments could affect the decisions of
multinational companies about where to locate their operations. A government
might try to attract inward investment by offering subsidies to companies that
invest in the country. High taxation could persuade companies to re-locate in
another country.
4.2 Strategic objectives and customer satisfaction
In order to achieve their overall strategic objectives, it is argued that all entities –
both profit-making businesses and not-for-profit entities – need to meet the needs of
their customers, and provide customer satisfaction.
If an entity fails to satisfy its customers, it will also fail to achieve its overall strategic
objectives. This is because the long-term success of an entity depends on providing
customer satisfaction.
The concepts of customer satisfaction and adding value are therefore important for
strategic planning and control. Strategic management accounting systems should
also be capable of providing information about customer satisfaction and added
value.
4.3 Customer satisfaction
There are three ways in which a company might try to do business with its
customers: a product-driven approach, a sales-driven approach and a marketing-led
approach.
In a product-driven approach, the company manufactures a product or range of
products, and makes them available for customers to buy. It is assumed that
customers will want to buy the products, possibly because there are no
alternative products to buy.
In a sales-driven approach, the company manufactures a product or range of
products, and makes them available for customers to buy. However, the
company recognises that the customer might be unsure about whether or not to
buy the products. It therefore needs to make an effort to sell the products, using
a sales force, advertising or sales promotions. This approach is sometimes called
‘hard selling’.
In a marketing-led approach, the company recognises that the best way to
succeed is the make products that the customer wants to buy. Instead of making
products that might attract customers, and then trying to sell them, a company
learns as much as it can about what customers want and how much they would
be willing to pay for it. ‘What customers want’ is called ‘customer needs’.
Providing a product that meets these customer needs is called ‘customer
satisfaction’.
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Most companies in a competitive market environment adopt a marketing-led
approach. It is widely accepted that a company will sell a product much more
successfully if the product is designed and delivered in a form – and at a price – that
attracts customers and makes them want to buy it.
It is important to understand that what customers want from a product is not
simply a product that performs a particular function. There are several ways in
which customer needs can be met.
The product can be designed with features that are attractive to all customers or
to a particular group of customers. For example, all sunglasses should provide
users with some protection against the light from the sun. First-class travel is
offered to customers who want comfortable and luxurious travel arrangements.
Customers might want a product to be reliable or to last for a long time. On the
other hand, they might not be concerned if the product has only a short useful
life. For example, this is why some handkerchiefs are made from cloth and some
from tissue, and why some books have a hard back and some a paper back.
Customers sometimes want a product to be available in a convenient place,
where it can be purchased when they want it. For example, airports and railway
stations provide shops and stalls where travellers can buy food, drinks and other
items.
Customers might want a product to be available immediately or within a very
short time; otherwise they will not buy it.
The price that customers are willing to pay for a product or service depends on:
‐ whethertheproductmeetstheirneeds(‘satisfies’thecustomer’sneeds),and
‐ thevaluethatthecustomergivestothesatisfactionofthoseneeds.
4.4 Value and adding value
Customersatisfactionisalsolinkedtotheconceptofvalue.
‘Value’canbedefinedassomethingthataddstocustomersatisfaction.Valuemight
beprovided byanimprovementinproductquality,ornewfeatures(suchasgreater
reliabilityandalongerusefullife).Valuecanalsobecreatedbymakingtheproduct
availablemoreeasilyan
dconveniently,orbyprovidingaservicemorequicklyand
withfewermistakes.
When extra value is added to a product or service:
customers are more likely to want to buy it, or
customers will be prepared to pay a higher price to obtain it.
Adding value should therefore benefit the company – by selling more of the
product,orbysellingitatahigherprice.Companiesneedtoensure,however,that
thecosts ofproviding addedvalue donot exceedthe benefits fromthe extravalue
created.
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Theterm‘addingvalue’isalsousedtodescribemeasuresthatmakeaprocessmore
efficient. The customer gets the same product or service, but it is provided at a
lower cost. This means that the customer gets the same value, but it costs less.
Lower costs mean that the company can make higher prof
it margins, or they can
passonsomeofthebenefitstothecustomerintheformofalowersalesprice.
The concept of customer satisfaction and adding value has extended from the
products and services sold by companies to services provided by not‐for‐profit
entities,suchasho
spitals,state‐ownedschoolsandthefireservice.In not‐for‐profit
entities, the purpose of adding value and meeting customer needs is to deliver a
better service, and in doing so achieve the strategic objectives of the entity more
successfully.
The‘valuechain’and‘valueanalysis’,whichwillbe describedinmoredetaillater,
relatetothe
seconceptsofvalueandprovidingcustomersatisfaction.
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The effect of IT on management accounting
IT systems and management accounting
IT systems for providers of services
IT systems and competitive advantage
Enterprise resource planning systems
5 The effect of IT on management accounting
5.1 IT systems and management accounting
Management accounting systems are information systems, and the development of
information technology (IT) continues to have a significant impact on management
accounting and on:
collecting data
storing data and information: (Note: data is unprocessed, whereas information is
data that has been processed into something that has meaning or purpose)
the ability to process data into valuable information
access to information
communication of information.
In many traditional management accounting systems, data was input to the
computer system by specialist staff. There was often a high rate of input errors, and
data validation checks were included in the software to reduce the error rate. In
many systems, the process of collecting data and input to a computer system was
fairly slow.
Many modern IT systems provide for automatic input of data by non-finance
operating staff, often with minimal risk of errors. One example is the automatic
input of sales data and inventory data at check-out points in stores and
supermarkets, using bar codes and automatic bar code readers. Information is
available about sales and reductions in inventory at the exact moment that the items
are being sold.
IT systems also provide for access to external sources of data and information.
External data can be obtained from the Internet, either:
free of charge, for example, from the web sites of government departments and
public news agencies, or
through subscription (payments to an external information provider).
Another significant feature of many IT systems is instant access to information.
Information might be held on a central database, and accessible to all authorised
personnel through a network connection. Instant access means that managers do not
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have to wait for information to come to them, for example in routine reports. They
can search for and obtain the information they want at any time.
A wide range of complex data analysis can be performed with computer software.
Many managers can use models for planning and forecasting, including the
application of sensitivity analysis to plans and forecasts.
5.2 IT systems for providers of services
For companies that provide services (rather than manufacturing goods), IT systems
can make substantial improvements in the quality of service provision. A key
feature of many services is the contact between a representative of the company (the
service provider) and the customer. This may be face-to-face contact, or contact by
telephone or even e-mail or text message.
IT systems can improve the quality of service in a number of different ways.
The service provider has instant access to the customer’s files or to other key
information. Instant access means that a customer’s requests can be dealt with
immediately. This makes it possible, for example, to sell and renew insurance
policies by telephone.
In some cases, the customer is given the opportunity to take control over his own
service provision. For example, customers can book seats on air flights and at
theatres using the Internet and the service provider’s web site.
Some services can be provided through IT systems. For example, customers can
download media items (music and film) through the Internet.
Immediate service provision, made possible by IT systems, is likely to increase
customer satisfaction with the service.
The Internet often makes it possible for customers to compare the products or
services of different suppliers, and to make an informed choice about which
supplier to buy from. It may therefore be important for companies to provide
extensive information to customers on their web site, to help them make their
purchase decisions.
5.3 IT systems and competitive advantage
IT systems may be able to give one business a strategic advantage (competitive
advantage) over its rivals. The efficiency of IT systems can improve the quality of
administration, production and service to customers – and so provide better value
for customers, for example by reducing costs or providing a faster service.
‘Bespoke’ IT systems, written for the specific requirements of a particular entity,
may provide competitive advantage because of their uniqueness.
Purchased software (‘off the shelf’) is unlikely to provide competitive advantage
because it is available to anyone.
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Even if an IT system does not provide a competitive advantage, however, a business
may need to have efficient systems to avoid being at a competitive disadvantage. A
business needs to invest in IT to keep up with what rivals are doing.
Significantly, IT systems can create a competitive advantage by providing
management with better information. In this respect, a well-designed management
accounting system will provide a competitive advantage.
Management should keep their IT systems under continual review, and:
be aware of new developments in IT systems and new opportunities for
exploiting IT
review existing systems to ensure that they are of a high quality and are
operating effectively and efficiently
monitor the use of IT systems by competitors, and be prepared to respond to any
initiatives in IT that competitors introduce.
Quality in software
An entity should seek to have good quality in its IT systems and system software.
The following factors may be used by management to assess the ‘quality’ of new
‘bespoke’ software systems.
Ideally, new software systems that have been written and developed for an
entity should be error-free. It is difficult to avoid all errors in new systems, in
spite of testing, but errors can be major or minor. Quality software should be
free from major errors and the number of minor errors should be very low.
The software itself and also the procedures and processes used for its
development and testing (and documentation) should meet the international
quality standards (ISO Standards) for IT.
The software must meet the specifications agreed with the ‘customer’.
The software should be delivered on time.
The software should be capable of being updated, and not necessarily by the
original developers of the software. This is one of the reasons why using ISO
Standards is so important.
5.4 Enterprise resource planning systems
An enterprise resource planning (ERP) system is a company-wide computer
software system, used by many medium-sized and large businesses. It is an IT
system for automating a range of different processes within the business, using
shared data files.
The processes that may be supported by an ERP system include:
the supply chain activities: purchasing, manufacturing, and distribution
operations
warehouse management systems
customer relationship management (CRM) systems
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human resources management systems
project management systems
financial and management accounting systems, including book-keeping, costing
and credit management.
It runs on an internal network, and is accessible by users throughout the
organisation.
ERP systems have a strong accounting focus, and are used to plan the resources
required throughout the business for processing, delivering and accounting for
customer orders. Typically an ERM system is a modular system, so that the user can
select which aspects of the system to buy and implement. Additional modules can
be added (or modules can be removed) as required.
ERP systems evolved initially from manufacturing resource planning systems
(called MRP II systems), which were specific to manufacturing businesses. They are
now available for all types of entity, including non-manufacturing businesses, not-
for-profit entities and government departments.
A key feature of ERP systems is that they integrate the IT requirements of different
users throughout the organisation. Different users share their input and their data.
So when an ERP system is introduced for the first time, it can have important
practical implications. IT system users, who have previously been used to working
with their own dedicated IT system, are now required to work with shared systems.
Introducing an ERP system for the first time
ERP systems are generally large and complex, and they usually involve major
changes on staff working practices. Implementing ERP systems is often far too
complex for a company’s in-house staff to achieve on their own and it is usual to
hire external IT consultancy firms to assist with consultation, customisation of the
system to the user’s requirement and support services. The length of time required
to implement a new ERP system depends on the size of the business, the number of
modules, the extent to which the system has been customised (re-written), the scope
of the changes in processes and procedures required and the willingness of the
‘customer’ (and its management) to take ownership for the project.
For management accountants, the implications of introducing ERP systems are that:
they share accounting information with management in other departments:
‘management accounting’ is no longer a separate IT system over which the
management accountants have a monopoly
management accountants now have access to non-financial data produced by
other departments.
ERP systems and the work of the management accountant
The introduction of an ERP system is likely to remove the need for much of the
‘traditional’ work of the management accountant. Instead of asking for reports from
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the management accountant, operational managers will be able to obtain the
information themselves from the IT system. If managers need help in obtaining
information, they will go to ERP system specialists (either within or external to the
company) who are able to assist with the maintenance as well as the
implementation of the new system.
Although the traditional role of the management accountant will be reduced, there
should be some scope for the management accountant to become involved in the
operation of an ERP system:
through control and/or audit of data input to the system
with analysis of information provided as output from the system
by becoming ‘information specialists’, providing information about a range of
non-financial as well as financial performance. ERP systems can make it easier to
develop performance reporting systems that provide non-financial operating
data as well as financial performance reports.
In other words, the role of the management accountant will change, but by adapting
to the new IT environment, it is probably that management accountants will remain
as information ‘experts’ for their organisation.
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Paper P5
Advanced performance management
CHAPTER
7
Strategic planning techniques
Contents
1 Product life cycle and life cycle costing
2 SWOT analysis
3 Value chain analysis
4 Benchmarking
This chapter describes a variety of strategic planning concepts and
techniques. A strategic management accounting system must be able to
provide the information that is needed in order to use the techniques in
practice.
The relevant information is obtained from a combination of internal
and external sources.
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Product life cycle and life cycle costing
The product life cycle
Financial aspects of the product life cycle
Strategic significance of the product life cycle
Product life cycle costing
Why is life cycle costing significant?
The product life cycle and the need for management information
The product life cycle and key financial performance measures
Strategic aspects of the product life cycle
1 Product life cycle and life cycle costing
1.1 The product life cycle
Many products have a life cycle. A ‘normal’ life cycle has four phases:
Introduction
Growth
Maturity
Decline.
Introduction
Growth
Stages
Maturity
Decline
Profit/loss
Revenue
Time