APM - Strategic planning and

control
Contents
Rational Model / Mission / Mendelow .................................................................................. 2
PRIORITISING STAKEHOLDERS: ........................................................................................... 2
MISSION STATEMENT: ........................................................................................................ 3
RATIONAL MODEL: ............................................................................................................. 3
THE ROLE OF FINANCE PROFESSIONAL: ............................................................................. 4
Organisation’s Vision and Mission: ........................................................................................ 5
GOALS AND CRITICAL SUCCESS FACTORS:.......................................................................... 5
KPIs: .................................................................................................................................... 6
SUMMARY: ......................................................................................................................... 6
Strategic Management Accounting, Benchmarking and Gap Analysis .................................. 7
STRATEGIC MANAGEMENT ACCOUNTING: ........................................................................ 7
BENCHMARKING: ................................................................................................................ 8
Impact of Business Structure, and Service Businesses ........................................................ 10
FUNCTIONAL STRUCTURE:................................................................................................ 10
DIVISIONAL STRUCTURE: .................................................................................................. 11
JOINT VENTURES: ............................................................................................................. 12
SERVICE BUSINESS: ........................................................................................................... 12
Behavioural Aspects of Budgeting ....................................................................................... 13
MANAGEMENT STYLES (HOPWOOD): .............................................................................. 13

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Rational Model / Mission / Mendelow
PRIORITISING STAKEHOLDERS:

Organisations have a long list of stakeholders:

- Employees; - Lenders;
- Managers; - Pressure groups;
- Customers; - Local community;
- Suppliers; - Government;
- Shareholders; - Other stakeholders.

Sometimes there can be conflicts amongst different stakeholders, for example:

 Shareholders may want a higher dividend, but employees may want higher salaries;
 Suppliers may like to be paid more for the goods they supply, but customers would
prefer to pay less.

Compromises need to be made, and priorities need to be set. To do this, we can use
Mendelow’s stakeholder map:

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MISSION STATEMENT:

Mission statement is the starting point for strategy formulation. Decision-makers can use it
to help them decide what to do next. However, too often mission statements are a public
relations exercise and they are ignored as they cannot be used to help formulate strategy.
As a result, the head of finance struggles to define what good performance is, and hence
struggles to measure performance and manage it.

A well worded mission statement should:

 Capture the purpose of an organisation;

 Serve as a guiding light for decision-making in the organisation;
 Communicate the values and priorities as well as objectives of the organisation;
 Serve to attract like-minded stakeholders- Investors, customers, suppliers and
employees.

According to Campbell et al., a mission statement should address four specific areas:

1. Strategy;

2. Purpose;

3. People and behaviour standards;

4. Values.

RATIONAL MODEL:

The rational model is an example of detailed planning in advance:

1) At the strategic analysis stage, benchmarking to the competition can highlight

organisational strengths and weaknesses, and any gap between desired and expected
performance will be quantified.

2) At the strategic choice stage, finance can be involved in quantifying the likely impact of
any ideas to see if they are suitable and feasible.

3) At the strategic implementation stage, finance can turn strategic choice into detail plans
and budgets, define key performance indicators and benchmark what level should be

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 achieved, as well as track progress with the performance measurement system and
recommend performance management actions that need to be taken to keep the
strategy on track.

Note: Some organisations don’t plan at all if they feel that the environment is fundamentally
unpredictable. This approach is known as freewheeling opportunism.

THE ROLE OF FINANCE PROFESSIONAL:

The finance professional can help with every stage of the rational planning process:

a) At the strategic analysis stage:

 Carrying out a benchmarking to the competition which can highlight organisational

strengths and weaknesses;
 Quantifying the size of any gap between desired and expected performance.

b) At the strategic choice stage:

 Quantifying the likely impact of any ideas to see if they are suitable and feasible;

c) At the strategic implementation stage:

 Turning a strategic choice into detailed plans and budgets;

 Defining key performance indicators and benchmarks;
 Tracking progress with the performance measurement system;
 Recommending performance management actions that need to be taken to keep the
strategy on track.

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Organisation’s Vision and Mission:
Vision is a very vague statement expressing a desired future state. Mission should in theory
be a little bit more specific and therefore useful to us as decision makers. Once mission has
been decided, the planning can begin.

An organisation needs to plan at three levels:

1) Strategic planning, which sets out the long-term direction of the business:

 It considers the organisations strengths and weaknesses and positions them

against the environment in which the organisation operates;
 It considers the direction of the whole organisation into the longer term;
 It defines the industries in which the organisation operates, and how the
organisation positions itself against the competition.

2) Tactical planning, which lays down the medium-term intentions of the business.
An organisation may have a three year strategic plan that it breaks down into
annual budgets with monthly reporting on progress towards hitting those
budgetary targets. These annual targets and monthly reports would be
considered a tactical information.

3) Operational planning, which is a a short-term, highly detailed planning made by

management to achieve tactical objectives.

GOALS AND CRITICAL SUCCESS FACTORS:

The organisation’s mission won’t usually contain any actual targets and goals are
therefore identified. Performance in relation to goals are often expressed as objectives,
which should be:

 Specific;
 Measurable;
 Achievable;
 Relevant;
 Time bound.

Once an organisation has decided on its objectives, it needs to identify critical success
factors. They can come from many sources including:

1. The structure of the industry;

2. Competitive strategy;

3. Geographical location;

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4. Industry position;

5. Environmental factors;

6. Temporal factors;

7. Functional area of the business.

KPIs:

KPIs are the measures we put in place to monitor our performance in relation to CSF. KPIs
should flow from CSFs. KPIs can then be further broken down if desired, and eventually
become targets for individual performance.

SUMMARY:

Vision => Mission => Strategy => Objectives => CSF => KPI

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Strategic Management Accounting, Benchmarking and Gap
Analysis
STRATEGIC MANAGEMENT ACCOUNTING:

Years ago the role of the management accountant was preoccupied with the production of
data, predominantly relating to cost. Much of the accountant’s time was spent maintaining
and reviewing manual ledgers. Accounting systems were manual and very labour intensive.

The role of the accountant has changed significantly since those times. Burns and Scapens
concluded that there were three major driving forces behind these changes:

1) Technology. Much accounting information is produced automatically in the

modern world;

2) Management structure. Organisations have become increasingly delayed with

management empowered and responsible for their own area of the business;

3) Competition. Information technology makes marketplaces global and highly

responsive. Organisations can no longer ignore the environment when trying to
measure or manage their performance.

The modern role of the management accountant has been given the title of strategic
management accounting which tends to mean the accountant is:

a) Externally focused;

b) Forward-looking, i.e. considering what drives future performance in priority to

measuring past performance;

c) Considers financial and nonfinancial data;

d) Helps to formulate the strategy as well as measuring the quality of its

execution.

The strategic management accountant is a business partner with commercial focus:

 They can asst the isboard at every step in the strategic planning process;
 They can help the board analyse and understand the environment;
 They can help the board and make strategic choices. For example, by
informing their views as to whether alternatives are suitable, acceptable and
feasible.

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BENCHMARKING:

Benchmarking provides information required for assessing the performance of a company.

There are three types benchmarking:

1) Internal - comparing one branch to another branch within the same business;

2) Competitive - comparing your performance with your immediate competitor;

3) Functional, process or activity - comparing of activity in your business with a similar

activity elsewhere.

The process of benchmarking is as follows:

1) Set objectives, i.e. decide what you’re going to benchmark;

2) Identify the key performance indicators that you feel best reflect the measurement of
performance in relation to those objectives;

3) Select your benchmarking partner. They should be sufficiently similar to you for you to
learn from them;

4) Measure your performance and measure their performance. This can be difficult with
competitive benchmarking, when the use of publicly available information will need to
be the focus;

5) Identify the size of any gap between your performance and theirs;

6) Brainstorm ideas and create a plan for bridging the gap;

7) Roll that plan out;

8) Revisit the benchmarking exercise frequently.

Benchmarking has lots of advantages:

 It should be motivational as it is self-evident that improvements can be

made;
 It is a healthy exercise and encourages rethinking operations to improve
performance;
 It is learning from the environment;
 It should discourage complacency if revisited frequently.

The disadvantages of benchmarking are:

 It takes time, money, and the focus of management;

 Is encouraging us to copy others rather than do something different to beat
them;

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  It gives no answers as it only shows that improvements can be made, not
how to make those improvements.

GAP ANALYSIS:

Strategic management accountants can also get involved in measuring gaps between
anticipated and desired performance. They produce information formally in what is known
as a gap analysis.

When ideas are floated to close the gaps the strategic management accounting can be
involved in quantifying how successful those ideas might be in doing so.

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Impact of Business Structure, and Service Businesses
FUNCTIONAL STRUCTURE:

Many businesses start off as a small entrepreneurial unit. It is highly dependent on

particular individual, limited to the skills and time available of the entrepreneur. Information
systems are largely informal for these businesses and often reside in the head of the
entrepreneur.

the business grows and struggles with size, the entrepreneur may start to delegate certain
functional areas of responsibility to more specialist individuals. As this process develops, a
functional business divided into specialist departments emerges:

Special
deparments

Human Information
Finance Marketing Operations
resource technology

This has many benefits:

 It facilitates growth - as decisions are now being taken in many places, the
organisation can grow beyond the capacity of the entrepreneur;
 It improves quality - employing specialists can improve the outputs.

However, a functional structure does have drawbacks:

 Communication - there is a temptation for departments to act in isolation of one

another;
 Struggle with complexity - the growth of a functional structure is limited by the
scope and complexity of the activities of the business;
 Decision-making can be slow due to the chain of command and the need for
coordination.

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DIVISIONAL STRUCTURE:

As the organisation continues to grow, a functional structure will suffer and struggle to cope
with complexity. At this point it makes sense to break down the business into smaller
businesses within a business, which is known as a divisional structure. Each division will
have its own functional structure to support it.

Sometimes functions are shared by divisions, which is known as “internal outsourcing” or a

“shared service centre”.

An organisation can be divisionalised:

a) By product;

b) By geography;

c) By customer type.

Divisional structure has advantages, including:

 Divisional structures make a complex business more manageable at a local level;

 Management time is freed up at head office to enable them to concentrate on
more strategic matters.

However divisional structures have their problems:

 Many roles are duplicated and this can add to cost;

 The same problem can be solved in different ways reducing the coherence of the
group;
 There is a risk that divisional managers act in a dysfunctional way that suits their
division, but is bad for the group as a whole.

Performance measurement involves monitoring external parties and includes concepts such
as Return on investment, Residual income and Economic value add.

A network organisation or virtual organisation is one that outsources some or all of its core
functions. Things that can’t be outsourced:

 Responsibility for strategy;

 Contract negotiations;
 Monitoring.

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JOINT VENTURES:

A joint venture is an external entity with two separate businesses involved in the operation
management. Information needs to be shared between the business partners in a sensitive
way. Performance measurement includes the following steps:

Identify strategic objectives of the joint-venture

Identify critical success factors

Identify key performance indicators

SERVICE BUSINESS:

Service businesses provide more challenges because services are often immensely different
to tangible products. The differences between tangible products and service can be
remembered using the word “ship”:

 Simultaneity – production and consumption coincides;

 Heterogeneity - in some cases the service provided different every time it is
provided;
 Intangibility - intangible aspects such as professionalism are difficult to capture in
performance measurement;
 Perishability - the organisation needs to be more productive in busy times and be
able to scale down in quiet times.

Remember: Fitzgerald and Moon’s “results and determinants framework” helps us to

identify what should be measured in service businesses.

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Behavioural Aspects of Budgeting
MANAGEMENT STYLES (HOPWOOD):

Hopwood looked at different management styles and approaches to budgeting. Different

individuals react and respond to different budgetary controls differently. Most commonly
associated behavioural problems associated with budgeting are dysfunctional decision
making and budgetary slack.

Hopwood carried out a research in 1973, focusing on the manufacturing division of US

steelworks, Hopwood identified three distinct styles of using budgetary information to
evaluate performance. These are:

1. Budget constrained:
A budget constrained manager will see each line of a budget as an absolute limit and will
strive to stick within each aspect of the budget. This zealous approach may sometimes
lead to frustrating decisions.

For example, suppose the training budget has been spent for the year, but there is an
unexpected change in tax legislation that everyone needs training on so they can do
their jobs. A budget constrained manager may say ‘you can’t have the training, we don't
have the budget’. This can lead to frustration amongst staff, poor staff relations and
poor motivation.

Hopwood also suggested that the budget constrained manager is also more likely to
‘massage’ reports, manipulate information to ensure they ‘look good’ in relation to the
budget.

At times, however, it might be necessary to adopt this style, for example with
dangerously low cash flows, and so overspending may threaten the survival of the
organisation.

2. Profit conscious:
A profit conscious style, in a sense, is a little more relaxed and balanced. The profit
conscious manager makes decisions that are good for profits overall.

In the previous example of a change in tax legislation, they would probably authorise the
training on the basis that it is good for profits overall.

Staff relations and motivation tend to be better with this style, and the manager
themselves is less likely to manipulate reports comparing budget to actual performance.

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3. Non-accounting style:
A non-accounting style focusses on ‘doing a good job’. The ethos here is that ‘If I do the
best job I can, whatever the profits are, they are the best they could have been’. This
type of manager doesn’t particularly use budgets to guide decisions.

Staff relations may generally be good, but motivation may not be as focused on targeted
performance as perhaps it should be.

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