Group 5 - Chapter 6
Group 5 - Chapter 6
Group 5 - Chapter 6
VI. STRATEGIC
MANAGEMENT
GROUP 5
MEET THE TOPIC PRESENTORS
OBJECTIVES
At the end of this module, student should be able to:
1. Explain the importance of strategic management Philosophies and
techniques.
2. Discuss the principles of modern management.
3. Elaborate the differences between the two viewpoints of instituting
quality environment in an organization.
4. Explain the concept of Just-in-time (JIT) management.
5. Discuss the Activity-based management (ABM) process.
6. Prepare a quality cost report.
7. Elaborate the other management techniques.
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RECENT DEVELOPMENT AND
EMERGING BUSINESS PRACTICES
The continuing advancement in technology and
changes in management philosophy have paved
the way for the introduction of holistic
management accounting systems used to
03
generate information for management decisions
which brought into the forefront the importance of
Strategic Management Accounting
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
THE MODERN BUSINESS ENVIRONMENT
The influential developments in technological
revolution, especially in the fields of electronics
and biogenetic engineering, coupled with new
and more sophisticated needs and wants of
customers have permanently refaced
organizational structures, standards, processes,
and practices.
Internal External
WHAT IS
5S’S?
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5S’S
1 2 2 3 3 5
1 2 3 5
4 5
1 2 3 5
If you want
QUALITY
1 2 3 5
Instituting quality environment in an
organization involves the complete
participation of the top management
who will show the way towards
attaining it. In the process of producing,
non-conformance costs are incurred.
CONFORMANCE COSTS
1 2 3 5
1 2 3 5
*Conformance connotes precision. And
precision means an error-free environment.
And the best way to avoid errors is to prevent
it. Preventing errors should be done at the
very start.
NON-CONFORMANCE COSTS
1 2 3 5
include the internal failure costs and external
failure costs. The major sources and specific
activity costs of these quality costs are
identified in Table 4 shown in the following
page.
1 2 3 5
1 2 3 5
Design
1 2 3 5
The original source of wants and needs is the
customer. So, listen to what the customer
says and make a design based on it.
Design
1 2 3 5
becomes a very powerful tool in manufacturing and other
business activities. Designing is not the domain of only one
person. The process of designing should be participated by
people from marketing, manufacturing, distribution, finance,
legal services, human resources, purchasing, supply chain, and
representatives from the customer‟s chain. Once the design is
done, suppliers are evaluated as to their reliability and credibility,
employees are trained, and equipment and machineries are
prepared, mounted, installed, and maintained.
Suppliers’ management
1 2 3 5
1 2 3 5
Quality Costs Report
1 2 3 5
Quality costs are accumulated from the initial point of
research and development through the post-customer
services phase. Conformance and non-conformance costs
are to be accumulated per activity, batch, and plant.
Normally, if conformance costs are given more budget, the
costs of non-conformance consequently decline. An
example of a Cost of Quality Report is shown in Table 6
below.
1 2 3 5
1 2 3 5
1 2 3 5
1 2 3 5
Total
1 quality cost is the sum of conformance (e.g., prevention and
2 3 5
detection) costs and nonconformance (or failure) costs.
Increasing conformance costs would reduce nonconformance
costs. The objective is to reduce the cost of errors and customer
complaints and dissatisfactions. As the failure costs start
declining, efforts should be directed to intensify prevention costs
than appraisal costs. Errors are less costly when prevented rather
than when detected and remedied.
Life-cycle analysis
Quality costs are tranced and managed over the life cycle of an
1 activity or process. 2The life cycle has the 3following stages: 5
infancy, growth, expansion, and maturity/decline.
1 Process mapping
2 (i.e., input to output)
3 5
Throughput time (or manufacturing time) is the sum of all activities from
input to output which includes the process time, wait time, move time, and
inspection time.
Business Process Re-engineering
Process (re-engineering is a macro-approach to process
1improvement. It needs
2 a new paradigm (i.e.,
3 mental frame) of doing
5
the process. Process re-engineering is revolutionary, makes an
overhaul of the process (i.e., paradigm shift), and needs the
involvement and commitment of the top management. For example, a
mental shift happens when the seller listens first before serving
customers instead of assuming what they need. Such is the major
change in the way managers are conducting businesses now. Process
re-engineering creates a new standards, beliefs, goals, practices,
procedures, and systems of doing things.
The key words here are fundamental, radical, dramatic, and process.
Fundamental and radical that BPR starts by asking basic question such
as “why do we do what we do”, without making any assumptions or
looking back to what has always been done in the past.
1 Processes should be
2 designed to achieve 3
a desired outcome rather
5
than focusing on existing tasks.
Personnel who use the output from a process should perform the
process. For example, a company could set-up a database of
approved suppliers, this would allow personnel who require supplies
to order from themselves, perhaps using on-line technology,
thereby eliminating the need for a separate purchasing function.
Information processing should be included in the work which
produces the information. This eliminates the differentiation
between information gathering and information processing.
According to Hammer, the principles of BPR are:
Geographically dispersed resources should be treated as if
1 they are centralized. This allows the benefits of centralization 5
to be obtained, for example, economies of scale through
negotiation of supply contracts, without losing the benefits of
decentralization, such as flexibility and responsiveness.
Parallel activities should be linked rather than integrated. This
would involve, for example, coordination between team
working on different aspects of a single process.
Doers should be allowed to be self-managing. The traditional
distinction between workers and managers can be abolished.
Decisions aids such as expert systems can be provided where
they are required.
Information should be captured once at source.
Most business organizations that have adopted BPR have
developed the following key characteristics:
The application of the activity-based costing (ABC) has been driven by the
based management (ABM) model. The terms activity-based management
activity-based cost management (ABCM) are used to describe the cost
management of ABC.
Process time (ie., production time, performance time) in which the actual transformation of
materials and other production input are made to produce the ordered goods or services.
Inspection time where errors, inefficiencies, and breakdowns are monitored, reported, and
remedied.
Wait time (i.e., idle time, storage time) where men, machines, materials, and money are held in
inertia either in a standstill or waiting fashion without creating value in the process of producing
goods or services.
Move time (i.e., transfer time) where men, materials and other factors of production are moved
from one place to another without necessarily contributing to the quality of the goods or services
to be delivered.
The ABM process
Area of Evaluation
Explanation
evaluation measures
It refers to the number of units produced or
services rendered indicating the capacity Manufacturing velocity,
utilization and throughput time; it may also service velocity,
Volume refer to speed in producing goods or
delivering services and the number of times manufacturing cycle, and
the same goods or services are delivered in partial productivity rates
a period (eg., a year).
Area of Evaluation
Explanation
evaluation measures
Number of, or
This relates to the level by which customers
orders, wants and needs are satisfied by percentage in terms of,
receiving repeat orders or initiating orders customer complaints,
Quality from new customers; quality may also be late deliveries, sales
manifested by customers responses such returns, repeat orders,
as return orders and complaints
new orders, etc.
Financial measures such as in terms of cost per Cost driver rates such
driver should be established to assess financial
as per set-up, per number
Cost effectiveness and to properly communicate to
managers on possible techniques of managing
of parts, per order
activity costs. processes, etc.
Once the environment has been
converted into the ABM systems, people
should be continuously encouraged to
identify areas, and suggest possible
mechanisms for improvements.
Processes should be continuously
analyzed and mapped out, activities
set the should be carefully managed and
culture for controlled, and chains and linkages
should be improved to increase
continuous
productivity, savings, speed in response
improvements
time, the systems accuracy, all in the
name of increasing the shareholders’
value.
OTHER ISSUES IN ABM
ABM also integrates into its systems the principles of benchmarking,
business process re-engineering, customer profitability analysis,
pricing and product mix decisions using activity-based costing.
BALANCE
Goal
SCORECARD
(BS) A goal is an abstract expression of the enterprise‟s
desired situation or things to accomplish in each period.
An enterprise goal may be expressed in many ways, such
as to be the leading provider of technology, the best
producer of appropriately skilled manpower, the most
efficient distributor of health products, or the least-cost
provider of retail services. In business terms, all these
goals should be geared towards an enterprise‟s objective
of increasing shareholders value and wealth.
Strategy
Strategy may be developed by
zeroing on in the statement of profit
or loss of an enterprise, and on its
BALANCE statement of financial position or
statement of cash flows. If the
SCORECARD enterprise focuses on its statement of
(BS) profit or loss, its strategy may be
“product differentiation” or “cost
leadership”. Other strategies are
“confrontational strategy” and “quick-
response strategy”.
Strategy
Product differentiation relates to
producing products where the
enterprise can dictate leadership
BALANCE through branding, unique customer
service, strategic pricing, technology
SCORECARD orientation, and product innovations.
(BS) This strategy normally applies in a
technology-driven market, high-end
market, and other markets where
buyers have significant economic
power to buy the products offered.
Strategy
Cost leadership relates to the enterprise‟s
awareness and efforts to reduce its costs
and expenses through means and
measures that would result to the least
BALANCE possible cost of producing goods and
SCORECARD services. This may be done through
employment of skilled and productive
(BS) personnel, efficient machines, effective
alignment of duties and rewards systems,
and properly maintaining beneficial
business relationships with suppliers,
customers, and government regulators.
Strategy
Strategy describes how an organization
matches its own capabilities with the
opportunities in the marketplace to
BALANCE accomplish its overall objectives. In
developing a strategy, industry analysis
SCORECARD should be focus with respect to
(BS) competitors, potential entrants into the
market, equivalent products, bargaining
power of customers, and bargaining
power of input suppliers.
Once the strategy is developed, the next step is to
“operationalize” it. This is where the importance of
balanced scorecard comes into play.
Perspective
Goals Measures
s
Technology capability Manufacturing configuration vs. competition
The applications of the balanced scorecard have the following advantages and
disadvantages:
Table 12. Balanced Scorecard Pros and Cons
Advantages Disadvantages
CIM involves designing products using computer-aided design (CAD), testing design using
computer-aided engineering (CAE), manufacturing products using computer-aided
manufacturing (CAM), and integrating all components with a computerized information
system.
Materials Requirements Planning
• Build. It is used to turn a question mark product into a star. This involves sacrificing short-term
profit with the objective of increasing market share. Penetration pricing (i.e., offering lower prices),
increasing investment to create quality and brand loyalty are employed to pursue long-term
growth.
• Hold. This involves preserving market share as a star or a cash cow. It also ensures that cash cows
remain as is to enjoy product liquidity and profitability. Additional investment in customer retention
through competitive pricing and marketing may be required.
• Harvest. This involves using the cash generated by the cash cows to support product with star
potential or sustain the performance of star products.
• Divest. It involves eliminating underperforming products that normally belong in the dog and
question mark categories.
Contingency Theory
Contingency theory in management accounting simply states that the design of the accounting information
system depends on the need of the management using it.
To illustrate the use of contingency theory in management accounting, let us consider the following:
ABC Corporation has been producing three products in the last five years with almost no competition in the
rubber industry. Out of this business environment, the management has been casually receiving monthly
operating reports with consolidated totals of all its products. In the last two quarters, XYZ Corporation,
another company, has entered the market, vigorously promoted its product, and prices while gaining
significant market share along the way. This development prompted ABC Corporation management to
instruct the management accountant to make a detail analysis of the costing of each product, provide
operating results on a per product basis, and submit reports on a weekly basis.
Emmanuel. Otley, and Merchant in their book Accounting for Management Control have identified
the following major factors observed to have been affecting the design of management
accounting systems:
•The environment
Its degree of predictability
The degree of competition faced.
The number of different product markets faced
The degree of hostility exhibited by competing
• Organizational structure
Size
Interdependence of parts
Degree of decentralization
Availability of resources
• Technology
The nature of the production process
The routineness/complexity of the production process
How well the relationship between ends (finished output) and means (production process) is
understood
The amount of variety or complexity in each that has to be performed
Mckinsey 7S Model
The Mckinsey 7s Model described the link between the organization's behavior and the
behavior of the individuals within it. There are three (3) hard elements and four (4) soft
elements of business behavior and their interrelationships are depicted as follows:
Fig. 6. The Mckinsey 7S Model
The hard elements are easily quantified and defined, and deal with facts and rules. All
elements, both hard and soft, must pull in the same direction for the organization to
be effective.
The use of this model would have strong implications to the management accounting
systems and processes employed by the enterprise.
A tabulated discussion on the elements of the Mckinsey &S Model follows:
Table 14. Comments on Mckinsey 7S Model
Elements 7S Comments