1. STRATEGIC MANAGEMENT AND ACCOUNTING
Stakeholder analysis
Corporate objectives
Sustainable competitive advantages
Strategic Management Accounting
Appropriate analysis
Long-term considerations
Nonfinancial data
This slide reviews the topics to be covered in this section
In addition to discussing new management/operating considerations (JIT, TQM, Benchmarking, etc.) we will place most of our emphasis on the information needed (primarily management accounting information) necessary for these techniques to succeed!
The major point is that accounting must become a “value-added” activity!!!
Note that activity-based-analysis will be touched briefly and then covered in detail at the end this section as an illustration

2. STRATEGIC MANAGEMENT AND ANALYSIS
Strategic considerations
Strategic Marketing Analysis
Total Value-Chain Analysis
Target Costing
Life-Cycle Management and Costing
Operational considerations
Activity Based Analysis
JIT Operations: A Management Philosophy
Total-Quality Management and Costing

3. STRATEGIC OBJECTIVES Primary Objectives Secondary Objectives
What the shareowners expect from their participation in the organization
“Increase in shareowner value”
Secondary Objectives
What the organization expects to give to and receive from each stakeholder group other than its owners
“Increase in social value”

4. STRATEGIC MANAGEMENT
“The fundamental idea of strategic planning is quite simple: Continuously reassess what customers want, what competitors are doing, and other relevant environmental elements (such as emerging technology and trends in government legislation); size up these environmental changes; and use, or develop, available resources to turn these changes into advantages.
Obviously, carrying out strategic planning successfully is a lot more difficult than understanding what it is.”
Notice the EXTERNAL FOCUS of strategic management
* This is in contrast to the traditional management approaches
that were largely internally focused (standard costing,
variance analysis, incremental budgeting, etc.)
Emphasis on a PROACTIVE approach
In summary, this approach deals with the critical resource allocation questions on which top management must concentrate
Atkinson, Anthony A., Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young,
Management Accounting, Prentice Hall, Inc., 1995, p. 471.

5. WHAT IS STRATEGY?
“Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value.
… the essence of strategy is in the activities -- choosing to perform activities differently or to perform different activities than rivals. “
Porter, Michael E., “What is Strategy?,” Harvard Business Review, November-December, 1996.

6. Porter’s Strategic Positions
Cost leadership
Product or service differentiation
Focus on market niche
Porter says these are approaches to obtaining “sustainable competitive advantages”

7. DEVELOPING COMPETITIVE ADVANTAGE
Differentiation
with Cost
Advantage
Superior
Differentiation
Advantage
Relative
Differentiation
Position
Focus
Low
Cost
Advantage
Stuck-in-the
Middle
Inferior
Inferior
Superior
Relative Cost Position

8. STRATEGIC MANAGEMENT ACCOUNTING
“Accounting exists within an business primarily to facilitate the development and implementation of business strategy...
Three important generalizations emerge from this way of viewing management accounting:
Accounting is not an end in itself, but only a means to help achieve business success
Specific accounting techniques or systems must be considered in terms of the role they are intended to play
In evaluating the overall accounting system... the key question is whether the overall fit with strategy is appropriate.”
Shank, John K. and Vijay Govindarajan, Strategic Cost Management, The Free Press, Macmillan, Inc., 1993, pp. 6-7.
These ideas represent the true, “VALUE-ADDED” aspects of management accounting
We must help management achieve the objectives of the entity!!!

9. Strategic Cost Management
Strategic position analysis--an organization’s basic way of competing to sell products or services.
Value chain analysis--the study of value-producing activities, stretching from basic raw materials to the final consumer of a product or service.
Participation in the decision-making process involving the organization’s strategy, value-chain, and strategic positioning
Especially important to the allocation of limited resources
Cost driver analysis--the study of factors that cause or influence costs.

10. BALANCED SCORECARD
A multi-dimensional measurement system that translates an organization’s mission and strategy into performance measures

11. Financial Perspective
Balanced Business Scorecard
Financial Perspective
How do we look to our shareholders?
Specific performance measures identified (LIMITED)
Comparative reports prepared
Financial = Oper. Income; Sales growth; ROI
Customer = Customer satisf.; # complaints; Mkt share;
On-time delivery
Internal processes = Efficiency meas.; mfg. Lead
times; % of defective units
Innovation & learning = New products; New patents;
Time to market; # of employee
suggestions adopted
Customer Perspective
How do we look to our customers?
Business Processes
What business processes are the value drivers?
Vision & Strategy
Organization Learning
Are we able to sustain innovation, change and improvement

12. LRP vs. STRATEGIC MANAGEMENT
Long Range Planning
Historical continuity
Periodic orientation
Internal focus
Optimistic
Detailed financial terms
“Management by Exception”
Strategic Management
Recognition of change
Extended time horizons
External focus
Proactive but realistic
Multiple data sources
On-line analysis
Entrepreneurial
Global viewpoint

13. STRATEGIC MANAGEMENT Key Questions
In what markets will we compete?
How will we position ourselves within these markets?
What will the basis of our competitive advantage?
What specific people, processes, other resources are necessary to successfully compete?

14. GROWTH-SHARE MATRIX
High ?
MARKET
POTENTIAL
Low
High
Low
MARKET SHARE

15. Post- Sale Service Process
PROCESS PERSPECTIVE
Post- Sale Service Process
Innovation Process
Operations Process
Customer Need Identified
Create Product/ Service Offering
Build the Products/Services
Deliver the Products/ Services
Service the Customer
Customer Need Satisfied
Identify the Market

16. VALUE CHAIN ANALYSIS Focus of the analysis Steps in the analysis
External vs. Internal (traditional)
Highlights profit improvement areas
Linkages with suppliers
Linkages with customers
Process linkages within a business unit
Linkages across business units
Steps in the analysis
Identify an industry’s value chain
Assign costs, revenues, and assets to value activities
Diagnose cost drivers
Develop sustainable competitive advantages

17. VALUE CHAIN ANALYSIS PAPER PRODUCTS INDUSTRY
Timber Farming
Competitor B
Logging and Chipping
Competitor C
Goal of any organization = maximize value while minimizing the cost of a product or service to final customer.
Work backward from final product or service to basic raw materials
Internal vs. External value chains
Internal (value-added) within one entity
External entire industry
Uses of value chain perspective
Look for linkages (view suppliers and customers as partners) – involve them in decisions
Allows an entity to focus on core competencies (outsourcing where appropriate)
Focus on processes NOT departments (avoid across board budget cuts)
Continuous improvement
Process reengineering = redesign of process
Benchmarking = identifying “best practices” and
utilize where possible
Pulp Manufacturing
Competitor D
Paper Manufacturing
Competitor A
Converting Operations
Competitor G
Competitor F
Distribution
Competitor E
End-Use Customer

18. VALUE-CHAIN & STRATEGIC MANAGEMENT
Integration with sustainable competitive advantages
Low cost
Differentiation
Management relative to competitors
Better value for equivalent cost
Equivalent value for lower cost
Placement in the value chain
Each firm is only a part of the total chain
Overall value chain for each firm is unique

19. ESTABLISHMENT OF TARGET COSTS
Estimated
Market
Price
Market
Research
Define
Product/
Customer
Niche
Target
Cost
Understand
Customer
Requirements
Define
Product
Features
Competitor
Analysis
Required
Profit

20. ATTAINMENT OF TARGET COSTS
Compute Cost Gap
Design Costs Out
Produce
Perform
Value
Engineering
Release
Design to
Production
Initial
Cost
Estimates
Compare
to Target
Cost
Design
Products/
Processes
Estimate
Achievable
Cost
Actual
Cost
Perform
Cost
Analysis
Undertake
Continuous
Improvement

21. LIFE-CYCLE MANAGEMENT AND ACCOUNTING
Cost commitment vs. incurrance
Product life cycle
Life-cycle costs
Whole-life costs
Management of life-cycle costs
Strategic implications
Product life cycle = the time a product exists, from conception to abandonment
Life-cycle costs = all costs associated with the product for its entire life cycle
Whole-life costs = life-cycle costs of a product + postpurchase costs incurred by the buyer (includes all items through disposal)
Some argue this is an expanded defin. Of “life-cycle costs” but more from a customer’s perspective

22. LIFE-CYCLE COST COMMITMENT90 85 66
Product
Planning
Preliminary
Design
Detailed
Design &
Testing
Production
Logistics
Support

23. LIFE-CYCLE COST COMMITMENT90 85
Cash
Flow 66
Life-cycle
cost ($)
Matched
Cost
Product
Planning
Preliminary
Design
Detailed
Design &
Testing
Production
Logistics
Support

24. LIFE-CYCLE COST MANAGEMENT
Management of activities throughout a product’s entire life-cycle so that a long-term competitive advantage is created
Consideration of the total value-chain of the product is essential to life-cycle management
Specific considerations
Relation to target costing
Identification of development stage costs
Cost reduction and control

25. ACTIVITY BASED ANALYSIS
Activity Based Costing
A costing system focused on ESSENTIAL ACTIVITIES comprising a firm’s operations.
Costs are first traced to these activities and then to products/services.
Activity Based Management
A system-wide, integrated approach which focuses attention on activities performed by the firm and assessing their value,
The objective is to identify and continue only those activities that add value.
Both ABC and ABM are part of this broader concept
Analysis of activities is the key to both of these concepts
ABC involves the more mechanical aspects, but it is more than
just a multiplication of overhead rates
ABC attempts to get closer to the “cause-and-effect relationships
that exist within the organization
BE SURE TO DISTINGUISH THE IDEA OF VALUE-ADDED USED IN THE ACTIVITY-BASED LITERATURE FROM THE CONCEPT OF SHAREHOLDER VALUE!!
IN THIS SITUATION WE ARE FOCUSING ON THE OPERATIONAL AND STRATEGIC CONCEPTS OF VALUE-ADDED!!

26. VALUE-ADDED ACTIVITIES
Those necessary to remain in business
Required - comply with legal requirements
Discretionary
Produces a desired state of change in product or service
Not achievable by other activities
Enables other activities to be performed
VALUE-ADDED COSTS
Costs to perform value-added activities with perfect efficiency

27. NONVALUE-ADDED ACTIVITIES
Activities that are either unnecessary or are necessary but inefficiently performed and can be improved
Nonvalue-added activities = Nonvalue-added costs
From THE CUSTOMER’S PERSPECTIVE (within strategic constraints)
Examples of nonvalue-added activities
Scheduling
Moving
Waiting
Inspecting
Useless accounting reports

28. OBJECTIVES OF ACTIVITY BASED MANAGEMENT
Elimination of all unnecessary activities
Increase efficiency of necessary activities
Improving operating functions
Improving combination of activities
Sharing necessary activities
ADD, NEW , VALUE-ADDED ACTIVITIES
Eliminate unnecessary activities - short term goal may be
reduction
Increase efficiency of necessary activities
Improving operating functions
Kaplan (Mgt. Acctg., Nov. 1992) ...”by determining the process drivers for critical activities, employees and operators are given SPECIFIC targets for day-to-day improvement activities.”
Example: ABM goal = to reduce cost of material movements
Approach: Identify and communicate the drivers of the
materials handling process, e.g., handling
distances, number of inventory stocking points,
material stops between successive operations
Appropriate combination of activities
Sharing necessary activities = economies of scale
ADDING NEW VALUE-ADDING ACTIVITIES IS EXTREMELY IMPORTANT, BUT OFTEN OVERLOOKED - REQUIRES CREATIVITY!!

29. The Two-Dimensional ABM Model
Cost Dimension
Resources
Process Dimension
Driver
Analysis
Performance
Measures
Analysis
Why?
What?
How Well?
Product
and
Customers 6

30. PERFORMANCE MEASURES New Competitive Environment
Performance standards
Ideal standards
Goals for operating level personnel
Continuous improvement philosophy
Basis for trend evaluation
Currently attainable standards
Reported to top management
Relates to current resource management
Directly correlates to ABM

31. JIT OPERATIONS A Management Philosophy
Demand-Pull System
Focused Operations
Reduce Setup Time: Enables production of small batches (generates “economies of scope”)
Insignificant Inventories
Total Quality Management
Interdisciplinary Labor
Decentralized Support Services
Traditional Operations
Production-Push System
Functional Departments
Produce Large Batches: Reduces total setup time (generates “economies of scale”)
Significant Inventories
Acceptable Quality Levels
Specialized Labor
Centralized Support Services
JIT is NOT an inventory system!!! It is an OPERATING PHILOSOPHY tied to overall strategic objectives!
* Improved firm profitability
* Improved competitive position
The real reason for implementing such a system should the strategic need to meet customer demands:
* Improved delivery capability
* Flexible production of diverse products
* Speed new products to market (a key competitive factor)
Suppose you are trying to become the first major
distributor of a “recordable CD”
* Total quality management may be a key competitive issue
* Improved price position due to lower operating costs

32. Traditional Manufacturing Layout
Dept 1
Dept 2
Dept 3 A
Product A
Product B A
Finished A
Finished B
Lathes
Grinding B
Welding B
JIT Manufacturing Layout
Cell A
Cell B
Grinder
Lathe
Welding
Lathe
Welding
Product A
Finished A
Product B
Finished B

33. JIT OPERATIONS Other Considerations
Reduction in Setup Time
Key to competitive advantages
Optimum batch of “ONE”
Flexibility and diversity
Direct cost identification
Reduction in labor costs
Guide for automation
Proactive approach
Need for operational measures
Simplified accounting
Reduction in setup time:
* Simplify operations
* Eliminate non-value added activities
* In concept, the target is to eliminate setup costs resulting in
an optimum batch of ONE!
* This approach is based on the idea of “continuous
improvement” not IMMEDIATE ACHIEVEMENT!
* Allows flexibility and diversity (ECONOMIES OF SCOPE)
Direct cost identification results from focused operations
Reduction in labor costs and transformation of many to fixed costs
Impact on automation:
* Improve quality
* Then consider automation - above steps may indicate where!
Simplified accounting = “Backflush Costing”

34. JIT OPERATIONS Costs and Limitations
Commitment from employers and employees
Continuous improvement
Empowerment of employees
Changed relations with suppliers
Long-term agreements
Stipulated prices
Guaranteed quality
Delivery assured
Same for many customers
Reorientation of operations
JIT is not for everyone
JIT is not for everyone:
* Tremendous uncertainty of demand makes JIT very difficult
to use effectively
* Seasonal production may be necessary (agricultural products)
* One-product facilities may not achieve the same percentage
of change, but some improvements may be possible!

35. JIT OPERATIONS Service Organizations
Essential Concepts Similar
Demand-Pull
Focused Operations
Reduced Cycle Time
Simplification of Activities
Continuous Improvement
Total Quality Operations
Multidisciplined labor force
Decentralized support services
Examples
Loan application process at banks
Processing of claims by insurance companies
Registration process at universities
The major point is that the same competitive advantages related to
flexibility, diversity, quality, price, and overall customer satisfaction
present for a product company also apply to service organizations.

36. INVENTORY MANAGEMENT Essential Questions
How much inventory must be ordered or produced?
How should the purchase order or internal production be managed?

37. WHY IS INVENTORY NEEDED? Traditional View
Balance ordering (or setup) costs and carrying costs
Satisfy customer demand and avoid stock-out costs
Avoid operating shut-downs
Buffer against unreliable production processes
Take advantage of purchase discounts
Hedge against future price increases

38. INVENTORY COSTS Ordering - costs of placing and receiving an order
Clerical costs, documents, insurance, unloading
Carrying - costs of keeping inventory
Insurance, taxes, obsolescence, opportunity cost, storage
Stockout - costs of not having enough inventory
Lost sales, cost of expediting, cost of interrupted production
Setup - costs of preparing operating facilities to produce a particular product or service
Setup labor, lost revenue (during setup) test runs, etc.

39. JIT & INVENTORY MANAGEMENT
Setup & Carrying Costs
Costs of acquiring inventory reduced
Significant reductions in setup time
Using long-term purchase contracts
Carrying costs reduced because of lower inventories
Due-Date Performance
Lead times reduced for quick response
Focused manufacturing
Reduction in setup time
Improved quality

40. JIT & INVENTORY MANAGEMENT
Avoidance of Shutdown
Preventive maintenance
Quality control to reduce defects
Good supplier relationships for availability of materials
Discounts and Price Increases
Careful vendor selection
Long-term agreements
Prices
Quality
Reduction in order costs

41. TOTAL QUALITY MANAGEMENT
Management philosophy that attempts to eliminate all defects, waste, and activities that do not add value to customers
Nature of Quality
The degree of excellence
Quality product/service is one that conforms to customer expectations
Types of Quality
Quality of design
Quality of conformance
Costs of Quality

42. QUALITY OF DESIGN & CONFORMANCE
Do right
things right
(Winner!)
High
Do right
things wrong
(failure)
Quality of
Design
Do wrong
things right
(failure)
Do wrong
things wrong
(failure)
Low
Low
High
Quality of Conformance

43. COSTS OF QUALITY
Prevention costs
Incurred to prevent defects in products or services being produced
Quality engineering, quality training programs, quality planning and reporting, supplier evaluations, quality audits, quality circles, design reviews, etc.
Appraisal costs
Incurred to determine whether products or services are conforming to specifications
Inspection and testing of raw materials, packaging inspection, supervising appraisal activities, product and process acceptance, supplier verification, and field testing
“The objective is to prevent nonconforming goods from being shipped to customers”

44. COSTS OF QUALITY Continued
Internal failure costs
Incurred because nonconforming products and services are detected prior to being shipped to outside parties (detected by appraisal activities)
Scrap, rework, downtime due to defects, reinspection, retesting, and design changes
External failure costs
Incurred because products/services fail to conform to requirements after being delivered to customers
Returns, Warranties, Repairs, Product liability, Compliant adjustments, and LOST SALES!

45. MANAGEMENT OF QUALITY Traditional View World Class View
Balance between prevention/appraisal costs and internal/external failure costs
Identification of an optimal level of defects
World Class View
Zero defects approach

46. DISTRIBUTION OF QUALITY COSTS Traditional View
Total
Quality
Costs
Cost
Total
Failure
Costs
Total
Control
Costs
Optimal
(AQL)
Percent Defects
100%

47. QUALITY COSTS Contemporary View
Total
Quality
Costs
Cost
Total
Failure
Costs
Total
Control
Costs
100%
Percent Defects