acca p5 advanced perfomance mgt text

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Advanced Perform

ance Managem

ent Study Text

ACCA P5

For exams up to June 20

15

ACCA approved content providerBPP Learning Media is dedicated to supporting aspiring business professionals with top-quality learning material as they study for demanding professional exams, often whilst working full time. BPP Learning Medias commitment to student success is shown by our record of quality, innovation and market leadership in paper-based and e-learning materials. BPP Learning Medias study materials are written by professionally qualified specialists who know from personal experience the importance of top-quality materials for exam success.

Paper P5

Advanced Performance Management

This ACCA Study Text for Paper P5 Advanced Performance Management has been comprehensively reviewed by the ACCA examining team. This review guarantees appropriate depth and breadth of content and comprehensive syllabus coverage.

In addition to ACCA examining team reviewed material you get:

A user-friendly format for easy navigation Exam focus points describing what the examining team will want you to do Regular Fast Forward summaries emphasising the key points in each chapter Questions and quick quizzes to test your understanding A practice question bank containing exam- standard questions with answers A full index All you need in one book

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Paper P5Advanced Performance ManagementStudy Text for exams up to June 2015

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ACP5ST14 (HO).indd 1-3 27/05/2014 17:43



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File Attachment9781445367446.jpg

S T U D Y

T E X T

PAPER P5 ADVANCED PERFORMANCE MANAGEMENT

BPP Learning Media is an ACCA Approved Learning Partner content. This means we work closely with ACCA to ensure this Study Text contains the information you need to pass your exam.

In this, ACCA examination-team reviewed Study Text we:

Highlight the most important elements in the syllabus and the key skills you need Signpost how each chapter links to the syllabus and the study guide Provide lots of exam focus points demonstrating what is expected of you in the exam Emphasise key points in regular fast forward summaries Test your knowledge in quick quizzes Examine your understanding in our practice question bank Reference all the important topics in our full index

BPP's Practice & Revision Kit and i-Pass products also support this paper.

FOR EXAMS IN DECEMBER 2014 AND JUNE 2015



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ii

First edition 2007 Seventh edition June 2014

ISBN 9781 4727 1089 5 Previous ISBN 9781 4453 9657 6

eISBN 9781 4453 6744 6

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Published by

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd.

We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions. The suggested solutions in the practice answer bank have been prepared by BPP Learning Media Ltd, unless otherwise stated.

BPP Learning Media Ltd 2014



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Contents iii

Contents Page

Introduction Helping you to pass v Studying P5 vii The exam paper xii Syllabus and study guide xiii

Part A Strategic planning and control 1 Introduction to strategic management accounting ................................................................................................... 3 2 Performance management and control of the organisation .................................................................................... 43 3 Business structure, IT developments and other environmental and ethical issues ................................................. 59

Part B External influences on organisational performance 4 Changing business environment and external factors.......................................................................................... 123

Part C Performance measurement systems and design 5 Performance management information systems .................................................................................................. 153 6 Management information, recording and processing and management reports................................................... 187

Part D Strategic performance measurement 7 Performance hierarchy......................................................................................................................................... 223 8 Scope of strategic performance measures in the private sector ........................................................................... 257 9 Divisional performance and transfer pricing issues ............................................................................................. 307 10a Strategic performance measures in not-for-profit organisations.......................................................................... 335 10b Non-financial performance indicators.................................................................................................................. 359 11 The role of quality in management information and performance measurement

systems ............................................................................................................................................................... 379 12 Performance measurement: strategy, reward and behaviour ................................................................................ 429

Part E Performance evaluation and corporate failure 13 Alternative views of performance measurement and management ....................................................................... 469 14 Strategic performance issues in complex business structures............................................................................. 509 15 Predicting and preventing corporate failure ......................................................................................................... 541

Part F Current developments and emerging issues in performance management 16 Current developments, issues and trends............................................................................................................ 569

Mathematical tables 599

Practice question bank 603

Practice answer bank 621

Index 663

Review form



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iv

A note about copyright Dear Customer

What does the little mean and why does it matter?

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And what about outside the UK? BPP Learning Media strive to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them?



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Introduction v

Helping you to pass

BPP Learning Media Approved Learning Partner - content

As ACCAs Approved Learning Partner content, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examining team. By incorporating the examination teams comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Study Text provides excellent, ACCA-approved support for your studies.

The PER alert

Before you can qualify as an ACCA member, you not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the PER alert feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement.

Your achievement of the PER should now be recorded in your on-line My Experience record.

Tackling studying

Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success.

Developing exam awareness

Our Texts are completely focused on helping you pass your exam.

Our advice on Studying P5 outlines the content of the paper, the necessary skills you are expected to be able to demonstrate and any brought forward knowledge you are expected to have.

Exam focus points are included within the chapters to highlight when and how specific topics were examined, how they might be examined in the future, and how different topics within the syllabus fit together.

Using the Syllabus and Study Guide

You can find the syllabus and Study Guide on pages xiii xxi of this Study Text.

Testing what you can do

Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt.

We include Questions lots of them both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content.



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vi Introduction

Chapter features Each chapter contains a number of helpful features to guide you through each topic.

Topic list

Topic list Syllabus reference

What you will be studying in this chapter and the relevant section numbers, together with ACCA syllabus references.

Introduction Puts the chapter content in the context of the syllabus as a whole. Study Guide Links the chapter content with ACCA guidance.

Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. Knowledge brought forward from earlier studies

What you are assumed to know from previous studies/exams.

Summarises the content of main chapter headings, allowing you to preview and review each section easily.

Examples Demonstrate how to apply key knowledge and techniques.

Key terms Definitions of important concepts that can often earn you easy marks in exams.

Exam focus points When and how specific topics were examined, or how they may be examined in the future.

Formula to learn Formulae that are not given in the exam but which have to be learnt.

Gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER).

Question

Gives you essential practice of techniques covered in the chapter.

Case Study

Real world examples of theories and techniques.

Chapter Roundup

A full list of the Fast Forwards included in the chapter, providing an easy source of review.

Quick Quiz

A quick test of your knowledge of the main topics in the chapter.

Practice Question Bank

Found at the back of the Study Text with more comprehensive chapter questions. Cross referenced for easy navigation.

FAST FORWARD



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Introduction vii

Studying P5 As the name suggests, this paper examines advanced performance management topics and is particularly suited to those who are thinking about a career in management accountancy or are likely to be involved in strategic management decisions.

ACCA expects you to demonstrate a professional approach to all questions not just presenting information in a professional manner, but also integrating knowledge and understanding of topics from across the syllabus.

The examining team has stressed that candidates should not expect topics in P5 exams to be examined in isolation. One of the major skills you will be expected to demonstrate in the P5 exam is being able to draw on knowledge gained across your studies to date, in order to present complete solutions to relatively broad business issues or problems.

1 What P5 is about The syllabus for Paper P5 further develops key aspects and skills introduced in Paper F5, and it draws on aspects of the material about strategic and operational planning and performance covered in Paper P3, Business Analysis.

However, whereas Paper P3 only assesses principles of management accounting as part of the wider analysis of a business situation, Paper P5 could examine aspects of management accounting such as budgeting or costing techniques in their own right.

The stated aim of the P5 syllabus is:

To apply relevant knowledge, skills and exercise professional judgement in selecting and applying strategic management accounting techniques in different business contexts and to contribute to the evaluation of the performance of an organisation and its strategic development.'

Read this aim carefully. You are no longer just a 'number cruncher' drawing up budgets and producing calculations to include management reports. You are expected to understand the wider issues that affect organisations. These issues are often written about in newspapers and journals such as the Financial Times and the Economist, so it is important you read the financial press to help you identify how the issues you are studying in P5 relate to the real world context.

At this level in your studies, you also need to recognise how the subjects you previously studied begin to fit together. You need to begin to take a holistic view of an organisation, and to see how the various parts of it and various processes affect overall performance rather than looking at individual issues in isolation.

Importantly, the P5 exam is likely to also test your ability to assess different approaches to performance management, from a variety of perspectives. As well as knowing what the approaches are, you will also need to be able to compare them with one another in the context of a scenario; for example, the comparing the long-term and short-term issues affecting an organisations performance.

Snapshot of the syllabus

The syllabus expects you to understand how organisations set their strategy and the external influences that affect strategic plans and operational outcomes. You will be expected to evaluate different systems of performance management and apply strategic performance measurement techniques in evaluating and improving performance. You may also be expected to advise on strategic performance evaluation and the possibility of corporate failure. Finally you need to be aware of the current developments in management accounting and performance management as these affect organisations.



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viii Introduction

There are six parts to the syllabus, as summarised below:

(a) Use strategic planning and control models to plan and monitor organisational performance

(b) Assess and identify relevant macro-economic, fiscal and market factors and key external influences on organisational performance

(c) Identify and evaluate the design features of effective performance management information and monitoring systems

(d) Apply appropriate strategic performance measurement techniques in evaluating and improving organisational performance

(e) Advise clients and senior management on strategic business performance evaluation and on recognising vulnerability to corporate failure

(f) Identify and assess the impact of current developments in management accounting and performance management on measuring, evaluating and improving organisational performance

We expect most of these capabilities (if not all) to be tested to some extent in every P5 exam.

2 What skills are required? Look back at the action verbs in the six parts of the syllabus outlined above. You are expected to be able to assess, advise and evaluate, as well as to identify and monitor.

The need for these skills of assessing, advising and evaluating highlights that, at P5 level, you are expected to have moved beyond merely demonstrating your knowledge of a model or technique, and instead you have to apply that knowledge to practical situations. For example, the examiner will expect that, by the time you reach P5, you can already calculate basic financial ratios. In P5, though, the examiner will expect you to be able to interpret the information provided by those ratios to understand how an organisation is performing, and to make sensible suggestions (where appropriate) about how its performance could be improved.

The questions set in P5 exams will be based around case study scenarios which describe an organisation, its objectives and its business environment. You will need to relate your answers specifically to the scenario given in the question. There will be very few marks available for simply describing models or theories. Evidence from past exam sittings suggests that candidates who simply learn models and theories, but then do not apply their knowledge to the question scenarios, typically score between 20-30% in their P5 exams.

The P5 paper has a large written element, with well over half the marks being earned for written answers (discussion, analysis, evaluation) rather than calculations. Again, this is designed to reflect the position of a qualified accountant working in a business. The accountant can expect a number of the routine calculations and figures to be produced by their more junior colleagues, but the accountant should then expect to identify the issues or implications being identified by those figures.

We have summarised here the skills you are expected to demonstrate in P5.

(a) Core knowledge. The contents of Paper F5 Performance Management assumed knowledge brought forward for Paper P5.

(b) Numerical skills. Those skills demonstrated in Paper F5. You only learn a small number of new mathematical techniques in this paper, but, alongside these, you are also expected to remember those you learnt previously.

(c) Written skills These are key skills on this paper. You will be expected to write reports and notes explaining issues you encounter.

(d) Analysis and interpretation of question data or calculations. The examiner has stressed that candidates will be expected to analyse (not merely calculate) numerical data given in a scenario.

(e) Wider business awareness or application of skills in a practical context.



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Introduction ix

3 How to pass The examiner provides a lot of useful feedback in the Examiner's reports to past exams. This feedback highlights areas where students have struggled in exams, and also indicates the skills the examiner expects candidates to be able to demonstrate.

Looking at the post exam guidance can also be useful for reminding yourself about essential areas of exam technique. Therefore you are strongly recommended to read these guides which are available in the Qualification resources section of ACCAs website: http://www.accaglobal.com

The points highlighted in the Examiners reports include the following:

(a) Read questions very carefully and answer the question asked, not the question you hoped had been asked. In particular, if a question asks you to evaluate or assess the usefulness of a performance measure for assessing performance in an organisation, this is not asking you to evaluate or assess the organisations performance. Instead, the focus of your answer must be on the performance measure itself.

(b) Answers which consist of rote-learned definitions or explanations with no application to the scenario will score very few marks. It is vital that you apply your knowledge to the context described by the question scenario.

(c) Look at the mark allocation to help you manage your time allocation and plan your answer.

(d) Read all the parts of the question before you prepare your answer, so that you avoid repeating the same points in answering different parts of the question.

We recommend you read the P5 Examiner's approach article published in October 2012 and available on ACCAs website. This illustrates how some of the skills required to pass P5 have been tested in recent exam sittings, and provides some useful hints about how to approach the paper.

Approach to the exam In the article, the Examiner suggested that the best approach to the exam can be summarised as:

(a) Cover the whole syllabus Candidates often appear to over-concentrate on Section D of the syllabus (strategic performance measurement). However, it is important to understand how, for example the choice of performance measures fits with planning and control structures (Section A of the syllabus) or how well the measures chosen relate to external drivers of performance (Section B of the syllabus).

(b) Be prepared to apply your knowledge of syllabus topics to a business scenario answers which provide lists of rote-learned points (or rote-learned advantages and disadvantages for different techniques and approaches) will not earn sufficient marks to pass a question. Candidates will be expected to tailor their knowledge specifically to the situation given in the question scenario.

(c) Read and answer the question set Candidates earn marks where their answers are technically correct and relevant to the question asked. However, candidates have a tendency to write answers to the question they wish had been asked, rather than the question the examiner actually set. This approach scores little or no credit though.

(d) Add value to the organisation that is being advised Candidates need to demonstrate their ability to add value by taking data already produced and identifying and analysis the key issues in that data and the commercial implications of it. Candidates need to be prepared to analyse numerical data given in a scenario, not merely to perform calculations on it.

Importantly, the Examiners article also stresses that P5 is a paper about performance management, not simply about performance measurement. Whilst it is important for an organisation to measure how well it is performing, this performance measurement takes place within the wider context of strategic planning and control, and is subject to both internal and external factors which can affect performance. In Paper P5 you need to be aware of this context and its impact on performance, not simply how an organisation can measure performance. Performance management also considers how the management of an organisation



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x Introduction

can be informed by the results of performance measurement; for example, through the way in which staff are rewarded for their performance.

Question practice

The importance of tailoring your answer to the question actually set, rather than simply rote-learning models and theories, also highlights the importance of question practice in preparing for your P5 exam.

You can develop application skills by attempting questions in the BPP Learning Media Practice and Revision Kit.

4 Brought forward knowledge You will be expected to build on the skills and knowledge you acquired when you studied Paper F5, Performance Management. That paper introduces topics such as budgeting and pricing that continue into the higher level syllabus. Paper F5 also covers cost and management accounting techniques including activity-based costing that you will encounter in this paper. You will also be expected to draw on your knowledge of performance measurement and control techniques that were introduced in this earlier paper, because candidates sitting P5 will be expected to have a thorough understanding of the F5 syllabus.

In addition, you might also be expected to draw on topics covered in Paper P3, Business Analysis, particularly in relation to aspects of strategic planning and control, and performance measurement.



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Introduction xi

Analysis of past papers The table below provides details of when each element of the syllabus has been examined and whether it was examined as part of a compulsory (C) or optional (O) question. Further details about questions can be found in the Exam Focus Points in the relevant chapters.

Text chapter

Dec 2013

June 2013

Dec 2012

June 2012

Dec 2011

June 2011

Dec 2010

June 2010

Dec2009

STRATEGIC PLANNING AND CONTROL

1 Introduction to strategic management accounting

O C

2 Performance management and control of the organisation

O C C C

3 Business structure, IT developments and other environmental and ethical issues

C C

EXTERNAL INFLUENCES ON ORGANISATIONAL PERFORMANCE

4 Changing business environment and external factors

C O O C O C O

PERFORMANCE MEASUREMENT SYSTEMS AND DESIGN

5 Performance management information systems

0 O, O C

6 Management information and reports

O C O

STRATEGIC PERFORMANCE MEASUREMENT

7 Performance hierarchy C C, O O

8 Scope of strategic performance measures in the private sector

C, O C C C

9 Divisional performance and transfer pricing issues

O C O O

10a Strategic performance measures in not-for-profit organisations

O O

10b Non-financial performance indicators

O C

11 The role of quality in management information and performance measurement systems

O O O

12 Performance measurement: strategy, reward and behaviour

O C C O O

PERFORMANCE EVALUATION AND CORPORATE FAILURE

13 Alternative views of performance measurement and management

O C O C C, O C, O O, O

14 Strategic performance issues in complex business structures

O O O

15 Predicting and preventing corporate failure

O O

CURRENT DEVELOPMENTS IN PERFORMANCE MANAGEMENT

16 Current developments, issues and trends

O O 0 O



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xii Introduction

The exam paper

Format of the paper

Paper P5 is examined in a three-hour paper consisting of two sections. You will be given 15 minutes reading time before the three hours begin, to read the questions and start planning your answers.

Important note: The format of the exam paper changed in June 2013. If you are looking at past exams (on ACCAs website) from 2012 or earlier, it is vital that you remember this point.

Section A

Section A will contain one compulsory question comprising 50 marks in total. This question will comprise several sub-sections, and will usually assess and link a range of subject areas from across the syllabus. The Section A question will require students to demonstrate high-level capabilities to evaluate, relate and apply the information in the case study to the question requirements.

Section B

You need to answer two questions in Section B, from a choice of three, comprising 25 marks each. Section B questions are more likely to assess a range of discrete subject areas from the main syllabus section headings. However, they will still require evaluation and synthesis of information contained within the case study scenarios, and will require the application of this information to the question requirements.

A small number of professional marks will be available. The examiner has emphasised that in order to gain the marks available, candidates must write in the specified format (such as a report or memo). Reports must have terms of reference, conclusion, appendices and appropriate headings. Make sure you are familiar with how different types of documents are constructed to improve your chances of gaining maximum professional marks.

Syllabus and Study Guide The P5 syllabus and study guide can be found on the following pages.



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Introduction xiii



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xiv Introduction



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Introduction xv



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xvi Introduction



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Introduction xvii



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xviii Introduction



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Introduction xix



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xx Introduction



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Introduction xxi



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xxii Introduction



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1

Strategic planning and control

P

A

R

T

A



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2



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3

Topic list Syllabus reference

1 Introduction to planning, control and decision making

A1

2 Management accounting information for strategic planning and control

A1(a)

3 Corporate planning and corporate objectives A1(b)

4 Planning and control at strategic and operational levels

A1(c)

5 Strategic management accounting in multinational companies

A1(d)

6 Strategic planning vs short-term localised decisions A1(e)

7 SWOT analysis and performance management A1(f)

8 Benchmarking A1(g)

Introduction to strategic management accounting

Introduction The syllabus for this paper develops key aspects introduced in Paper F5 Performance Management and draws on aspects of the material covered from a more strategic and operational planning perspective in Paper P3, Business Analysis.

The first three chapters of this text (Part A) look at strategic planning and control, which is the first part of the syllabus for the Advanced Performance Management paper. This chapter sets the scene by introducing strategic management accounting in the context of the organisation's planning and control process. It also introduces the process of strategic planning and control and some of the techniques employed. Finally it reviews factors that impact on strategic planning. Topics in the syllabus introduced initially in the Chapter and covered elsewhere are signposted here. You can then refer to the detail when you come to study later chapters. We advise you to read through this chapter once to get the main ideas and concentrate on the chapters referred to herein.

The syllabus outcome for this part of the syllabus states that candidates should be able to use strategic planning and control models to plan and monitor organisational performance.



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4 1: Introduction to strategic management accounting Part A Strategic planning and control

Study guide Intellectual level

A1 Introduction to strategic management accounting

(a) Explain the role of strategic management accounting in strategic planning and control

2

(b) Discuss the role of corporate planning in clarifying corporate objectives, making strategic decisions and checking progress towards the objectives

2

(c) Compare planning and control between the strategic and operational levels within a business entity

3

(d) Assess the use of strategic management accounting in the context of multinational companies

3

(e) Discuss the scope for potential conflict between strategic business plans and short-term localised decisions

2

(f) Evaluate how SWOT analysis may assist in the performance management process

2

(g) Evaluate the methods of benchmarking performance 3

Exam guide This paper is a higher-level paper and so there is an emphasis on application and evaluation. You will be expected to know the models and techniques introduced in this chapter and to comment on their use in specific circumstances. Supplement your studies with reading a good quality financial paper to get examples of organisations to use in the exam.

There are some key ideas to keep in mind when studying this syllabus. Firstly, we look at the organisation as a hierarchy from the top where plans are made, to the bottom where these are acted out. Robert Anthony describes this in his hierarchy of information for planning, control and decision making. We look at this later on in the chapter.

Secondly, we refer to the rational planning model. This is a strategy model that gives a framework for making strategy through analysis, choice and implementation. Although this model is by no means perfect, it is an useful tool for guiding organisations.

Performance objective 12 requires that you need to be able to Prepare financial information for management.

Two activities which would be relevant in demonstrating this performance objective are: (i) providing analysis of performance against financial key performance indicators (KPIs); and (ii) preparing management information to assist with decision making.

Both of these are likely to be core components of the work of a strategic management accountant, and in this chapter we look at the use of management accounting information for strategic planning and control.

The context of analysing performance against KPIs could also link to ideas of benchmarking how does an organisations performance in these key areas compare to that of other organisations, for example. We look at these issues in section 8 of this chapter when we consider benchmarking against best comparators and targets.



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Part A Strategic planning and control 1: Introduction to strategic management accounting 5

1 Introduction to planning, control and decision making

Strategic planning is the process of deciding on objectives of the organisation, on changes in these objectives, on the resources to attain these objectives, and on the policies that are to govern the acquisition, use and disposal of these resources.

Management control is the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation's objectives. It is sometimes called tactics or tactical planning.

Operational control (or operational planning) is the process of assuring that specific tasks are carried out effectively and efficiently.

Within, and at all levels of the organisation, information is continually flowing back and forth, being used by people to formulate plans and take decisions, and to draw attention to the need for control action, when the plans and decisions don't work as intended.

Planning means formulating ways of proceeding. Decision making means choosing between various alternatives. These two terms are virtually inseparable: you decide to plan in the first place and the plan you make is a collection of decisions.

Strategic decisions are long-term decisions and are characterised by their wide scope, wide impact, relative uncertainty and complexity.

Control is used in the sense of monitoring something so as to keep it on course, like the 'controls' of a car, not (or not merely) in the sense of imposing restraints or exercising power over something.

Question Planning, control and decision making

This simple scenario may help you to understand how these terms are interrelated.

Mr and Mrs Average need to go to a supermarket to buy food and other household items. They make a list beforehand that sets out all the things they need. As they go round the supermarket they tick off the items on the list. If a particular item is not available they choose an alternative from the range on the shelves. They also buy a bottle of wine and two bars of chocolate. These were not on their original list.

(a) What part or parts of this activity would you describe as planning? (b) There are several examples of decision making in this story. Identify three of them. (c) What part or parts of this activity would you describe as control?

Answer

We would describe making the list as planning, but it could also be an example of decision making because Mr and Mrs Average have to decide what items will go on the list. Ticking off the items is control and choosing alternatives is 'control action' involving further decision making.

You should be able to answer the various parts of this question without further help.

1.1 Information for planning, control and decision making Robert Anthony, a leading writer on organisational control, suggested what has become a widely used hierarchy, classifying the information used at different management levels for planning, control and decision making into three tiers: strategic planning, management control and operational control.

In this chapter, we cover strategic and operational planning.

Key terms

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We will look at the idea of a hierarchy between strategic and operational levels again in Chapter 5 of this Study Text in the context of describing the characteristics and requirements of management accounting and information systems.

Anthony's hierarchy also underpins other topics covered including strategic performance management.

Strategic planning. The process of deciding on objectives of the organisation, on changes in these objectives, on the resources used to attain these objectives, and on the strategies that are to govern the acquisition, use and disposition of these resources.

Management control. The process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation's objectives. It is sometimes called tactics or tactical planning.

Operational control (or operational planning). The process of assuring that specific tasks are carried out effectively and efficiently.

2 Management accounting information for strategic planning and control

This section introduces strategic management accounting and explains how it is used to assist in the strategic planning and control process. Strategic planning is explained in more detail in section 3 of this chapter and strategic control in section 4. You may want to read the relevant sections in tandem with this introductory section.

Management accounting information is explored in more detail in Chapters 5 and 6 later in this Study Text. We look at management accounting and information systems in detail in Chapter 5, and then we consider internal and external sources of information in Chapter 6. We also review the IT environment and what users want from management reports in Chapter 6.

Management accounting information can be used to support strategic planning and control, providing it displays an external orientation and a future orientation.

2.1 Future uncertainty Much strategic planning is uncertain.

(a) Strategic plans may cover a long period into the future, perhaps five to ten years ahead or even longer.

(b) Many strategic plans involve big changes and new ventures, such as capacity expansion decisions, decisions to develop into new product areas and new markets, and so on.

Inevitably, management accounting information for strategic planning will be based on incomplete data and will use forecasts and estimates.

(a) It follows that management accounting information is unlikely to give clear guidelines for management decisions and should incorporate some risk and uncertainty analysis (eg sensitivity analysis).

(b) For longer term plans, discounted cash flow techniques ought to be used in financial evaluation.

(c) The management accountant will be involved in the following.

(i) Project evaluation (ii) Managing cash and operational matters (iii) Reviewing the outcome of the project (post implementation review)

Key terms

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2.2 External and competitor orientation Much management accounting information has been devised for internal consumption.

However, it is important to balance this with a consideration of external factors.

(a) Strategic planning and control decisions involve environmental considerations. (b) A strategy is pursued in relation to competitors.

2.3 The challenge for management accountants Traditional accounting systems have had a number of perceived failings.

(a) Direction towards financial reporting. Historical costs are necessary to report to shareholders, but the classifications of transactions for reporting purposes are not necessarily relevant to decision-making.

(b) Misleading information particularly with regard to overhead absorption. (c) Neatness rather than usefulness. (d) Internal focus. Management accounting information has been too inward looking, (for example

focusing on achieving internal performance targets, like budgets). However, organisations also need to focus on customers and competition.

(e) Inflexibility and an inability to cope with change.

The challenge lies in providing more relevant information for strategic planning, control and decision making. Traditional management accounting systems may not always provide this.

(a) Historical costs are not necessarily the best guide to decision making. However, management accounting information is often criticised for focusing on the past rather than the future.

(b) Strategic issues are not easily detected by management accounting systems. (c) Financial models of some sophistication are needed to enable management accountants to

provide useful information.

2.4 What is strategic management accounting?

The aim of strategic management accounting is to provide information that is relevant to the process of strategic planning and control.

Strategic management accounting is a form of management accounting in which emphasis is placed on information about factors which are external to the organisation, as well as non-financial and internally-generated information.

2.4.1 External orientation The important fact, which distinguishes strategic management accounting from other management accounting activities, is its external orientation, towards customers and competitors, suppliers and perhaps other stakeholders. For example, whereas a traditional management accountant would report on an organisations own revenues, the strategic management would report on market share or trends in market size and growth.

(a) Competitive advantage is relative. Understanding competitors is therefore of prime importance.

For example, knowledge of competitors costs, as well as a firms own costs, could help inform strategic choices: a firm would be unwise to pursue a cost leadership strategy without first analysing its costs in relation to the cost structures of other firms in the industry.

(b) Customers determine if a firm has competitive advantage.

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2.4.2 Future orientation

A criticism of traditional management accounts is that they are backward looking.

(a) Decision making is a forward and outward-looking process. (b) Accounts are based on costs, whereas decision making is concerned with values.

Strategic management accountants will use relevant costs (ie incremental costs and opportunity costs) for decision making. We return to this topic later in this Study Text.

2.4.3 Goal congruence

Business strategy involves the activities of many different functions, including marketing, production and human resource management. The strategic management accounting system will require inputs from many areas of the business.

(a) Strategic management accounting translates the consequences of different strategies into a common accounting language for comparison.

(b) It relates business operations to financial performance, and therefore helps ensure that business activities are focused on shareholders' needs for profit. In not-for-profit organisations this will not apply as they do not focus on shareholder profitability. (We look at not-for-profit organisations in more detail later in this Study Text.)

It helps to ensure goal congruence, again by translating business activities into the common language of finance. Goal congruence is achieved when individuals or groups in an organisation take actions which are in their self-interest and also in the best interest of the organisation as a whole.

2.5 What information could strategic management accounting provide? We look at some examples of strategic management accounting in Chapter 5, but examples of strategic management accounting information could include: competitors' costs, product profitability or customer profitability.

2.6 How performance management fits into strategic planning and control

As business environments become increasingly dynamic and competitive, it is increasingly important for managers to develop coherent business strategies and to have tools and processes in place which provide relevant and reliable information to support strategic decision-making, planning and control. (These are covered in Section 3).

This need for information is linked to the importance of performance management in strategic planning and control. Performance management is a way of trying to direct and support the performance of employees and departments within an organisation, so that they work as efficiently and effectively as possible. Performance management is also a way of trying to ensure that individual goals are aligned with the organisation's overall goals and business strategy.

Performance management is essentially a set of management processes, often supported by technology, that enable organisations to define and execute their strategies and to measure and analyse performance in order to inform strategic decision-making. The central premise of performance management is to improve an organisation's performance.

Performance management systems are plans, with set guidelines and targets, to help organisations measure how efficiently goals are being met, and identify areas where performance can be improved. Performance management systems can also be linked to reward programmes, such that employees are rewarded for helping an organisation to reach its goals (for example through profit related pay schemes).

Historically, performance management has tended to focus on either people management (eg performance appraisals) or performance monitoring (eg reporting on key performance indicators). However, the concept of performance management is now much wider and includes: strategic planning (covered in



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Section 3), performance measurement and monitoring, business intelligence, analytics, people management (Chapter 12), financial planning and budgeting, data warehousing (Chapter 3), risk management (Chapter 4), business process re-engineering (Chapter 3), knowledge management, dashboards and scorecards (Chapters 13 and 14), and key performance indicators (KPIs) (Chapter 7).

The reference to KPIs indicates how performance management plays a crucial role in checking an organisation's progress towards its objectives. KPIs should monitor how well a business is performing against its critical success factors (CSFs). In turn, the CSFs are the aspects of an organisation's activity which are central to its future success.

A performance management system should be derived from the company's strategic objectives so that it supports those objectives. It should also change over time as the strategies of the organisation change and should be flexible enough to remain coherent with the objectives of the organisation.

A performance management system should have clear links between performance measures at the different hierarchical levels of the organisation so that all departments and areas strive toward the same goals. Examples of models of measurement that seek to capture this alignment include the performance pyramid and the balanced scorecard. These two models are considered later in the text in Chapter 13 but we will look briefly here at how they link the organisation's strategies to its operations and reporting using a performance management system.

The performance pyramid is a model of performance management that sets out to relate strategies to operations by translating objectives from the top down and measures from the bottom up, the aim being that these are co-ordinated and support each other. At the top is corporate vision which moves down through market and financial objectives at business unit level eventually becoming specific operational criteria including quality and delivery at the department and work centre level. The operational measures are reported upward.

The balanced scorecard allows top management to review the organisation using four perspectives which provide information on four strategic issues. The financial perspective seeks to resolve how the organisation creates value for its shareholders. The innovation and learning perspective answers the question of how the organisation can continue to improve and create value. The customer perspective looks at what customers value from the organisation and finally the internal perspective considers what internal processes the organisation must do well at to achieve the financial and customer objectives. Under each perspective goals are set such as manufacturing excellence and specific measures used to monitor outcomes.

2.6.1 The link between performance management, and strategic planning and control

Performance management can be defined as any activity designed to improve an organisations performance and ensure that its goals are being met.

However, this highlights the fact that an organisation must first have established its goals and objectives, in order that it can then assess whether they are being met.

In this respect, strategic planning (establishing an organisations mission, objectives and goals) is necessary before any performance management can take place. Once an organisations goals have been set, and then its operational performance targets have been set, an organisation can begin to measure whether these goals and targets are being achieved.

In this way, performance measurement is an important control in the organisation. However, performance also needs to be managed via judicious target setting that reinforces strategic goals and objectives.

Case Study

Tesco

The supermarket giant, Tesco, has a seven part strategy which aims to broaden the scope of its business, and enable it to deliver strong, sustainable long-term growth.



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The seven parts of the strategy are:

(1) To grow the UK core (2) To be an outstanding international retailer in stores and online (3) To be as strong in everything we sell as we are in food (4) To grow retail services in all our markets (5) To put our responsibilities to the communities we serve at the heart of what we do (6) To be a creator of highly valued brands (7) To build our team so that we create more value.

www.tescoplc.com

However, beneath these overall strategic objectives, Tesco sets more specific targets which it monitors via the Steering wheel which is Tescos own version of the balanced scorecard.

Targets are defined under five separate headings: Customers, Community, Operations, People and Finance; and these headings allow performance to be monitored with due regard for all the key stakeholders.

Heading Desired aspects of performance

Customer The staff are great; I dont queue; The prices are good; I can get what I want; The aisles are clear; Earn lifetime loyalty

Community Actively supporting local communities; Buying and selling our products responsibly; Caring for the environment; Providing customers with healthy choices; Creating good jobs and careers

Operations We try to get it right first time; We deliver consistently every day; We make our jobs easier to do; We know how vital our jobs are; We always try to save time and money

People An opportunity to get on; An interesting job; A manager who helps me; To be treated with respect

Finance Grow sales; Maximise profit; Manage our investment

Tesco recognises that good financial performance is the outcome of good performance in the other areas of customers, community, operations and people (staff).

Consequently, Tesco also measures its non-financial performance against key performance indicators (KPIs) for each of the headings, to give it a more balanced view of performance than could be achieved by using financial data alone.

The remuneration of the executive directors is closely linked to performance against a range of targets.

Consequently, through its Steering wheel, Tesco has also created a specific system for controlling and managing performance.

3 Corporate planning and corporate objectives In the previous section, we identified the importance of strategic planning as an important element of strategic management. We can now look at strategic planning in more detail, in relation to the rational model of strategic planning.

You should be familiar with the rational model of strategic planning from your studies of P3 Business Analysis. You will not be expected to reproduce the rational model diagram in the P5 exam, but it provides a useful framework to use for our review of strategic planning.

In particular, it also highlights the distinction between planning activities (which occur predominantly at the start of the strategic management process) and review and control activities (which occur predominantly at the end of the process).

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Note, however, that Anthony also argues that planning and control are so closely interlinked in organisations that it is not helpful to think of them separately from each other. Anthonys point is that control must reflect plans; and planning must precede control.

Use the diagram of the rational model in this Section to help you follow the discussion here. As you work through the Study Text you will encounter many of the key tools, models and techniques mentioned in Section 3.2 below. You may want to look back at this section as you encounter each model. It will help you see how these fit into the overall framework of strategic planning and performance analysis. We have noted chapter numbers in the tables and on the diagram so you are clear where there are syllabus links.

Strategic/corporate/long-range planning involves formulating, evaluating and selecting strategies to enable the preparation of a long-term plan of action to attain objectives.

Corporate objectives concern the business as a whole, and focus on the desired performance and results that the business intends to achieve.

3.1 Strategic planning model To develop a business strategy, an organisation has to decide the following.

(a) What it is good at (b) How the market might change (c) How customer satisfaction can be delivered (d) What might constrain realisation of the plan (e) What should be done to minimise risk (f) What actions should be put in place

Johnson, Scholes and Whittington in their text Exploring Corporate Strategy define strategy as follows:

'Strategy is the direction and scope of an organisation over the long term which achieves advantage in a changing environment, through its configuration of resources and competences with the aims of fulfilling stakeholder expectations.'

Therefore, the test of a good strategy is whether it enables an organisation to use its resources, competences and capabilities advantageously in the context of a changing environment which it cannot necessarily predict.

3.2 The structure of strategic planning

The rational model of strategic planning involves strategic analysis, strategic choice and implementation. Such an approach can be too rigid and can result in opportunities being missed. We consider the problems of an inflexible approach when we look at freewheeling opportunism later on.

The rational model of strategic planning divides into a number of different stages: strategic analysis, strategic choice and implementation. This is illustrated in the diagram on the following page.

However, Johnson, Scholes and Whittington note that the three elements (analysis, choice, implementation) do not follow on necessarily in this order. Rather, the elements are interlinked and feed back on each other. For example, when an organisation starts to implement a strategy, it may discover things about its environment or capabilities that may in turn help it with future strategic analysis and choices.

Equally, Johnson, Scholes and Whittington also note that strategic management is not a 'neat and tidy path' and often not 'tidy' in practice. Nonetheless, the general idea of the rational model, and the three aspects of strategic analysis, choice and implementation can still provide us with a useful framework in which to look at strategic planning within organisations.

Key terms

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3.2.1 Strategic analysis

Stage Comment Key tools, models, techniques

Step 1 Mission and/or vision

Mission denotes values, the business's rationale for existing; vision refers to where the organisation intends to be in a few years time

Mission See Chapter 7

Step 2 Goals Interpret the mission to different stakeholders

Stakeholder analysis See Chapter 7

Step 3 Objectives Quantified embodiments of mission Measures such as profitability, time scale, deadlines See Chapter 7

Step 4 Corporate appraisal

Identify opportunities and threats, strengths and weaknesses

SWOT analysis (Chapter 1)

Step 5 Gap analysis Compares outcomes of Step 4 with Step 3

Gap analysis See Chapter 7

3.2.2 Strategic choice Stage Comment Key tools, models, techniques

Strategic options generation

Come up with new ideas on how to compete (competitive advantage), where to compete and method of growth

Value chain analysis. Chapter 3 Scenario building Acquisition vs organic growth

Strategic options evaluation

Normally, each strategy has to be evaluated on the basis of

Acceptability Suitability Feasibility Environmental fit

Stakeholder analysis. Chapter 3 Risk analysis (Chapter 4 + knowledge

b/f from F5).Techniques for risk analysis include scenario analysis, sensitivity analysis and financial ratio analysis.

Decision-making tools such as decision trees, matrices, ranking and scoring methods (Knowledge b/f from F5)

Financial measures (eg ROCE, DCF). Chapter 8

Strategy selection Involves choosing between the alternative strategies.

Competitive strategies are the generic strategies for competitive advantage an organisation will pursue (which determine how you compete)

Product-market strategies (which markets you should enter or leave) determine where you compete and the direction of growth

Institutional strategies (ie relationships with other organisations) determine the method of growth

Chapters 7 and 14



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MISSION

OBJECTIVES

CORPORATEAPPRAISAL

POSITIONAUDIT

CORPORATESTRATEGIC

CHOICE

STRATEGYIMPLEMENTATION

REVIEW & CONTROL

ENVIRONMENTALANALYSIS

Why the business

exists at all.What the

business is.

The relevanceof the mission

to differentstakeholders.

ACTUAL PERFORMANCE

OVERALLSTRATEGIC

STANCE

BUSINESS'S UNDERLYING

VALUESAND/OR

eg Strengths, Weaknesses, Opportunities, Threats; Gap analysis

eg Marketing strategies, production

strategies

Assess actualperformancein the light ofplans etc

Company'sinternal resources andfacilities: currentperformance,comparatives

TACTICS

eg PEST factorsCompetitive forcesTurbulence

GOALS

(1) Optionsgeneration(2) Optionsevaluation(3) Choice

Strategic Analysis

Strategic choice

Strategic Implementation(Chapters 4,

7, 8, 14)

Often thesame (Terms used interchangeably)

(Chapters 4, 7, 8, 14)

(Chapter 7)



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3.2.3 Strategy implementation Strategy implementation is the conversion of the strategy into detailed plans or objectives for operating units.

The planning of implementation has several aspects. The strategic planning process is thus multi-layered.

(a) Resource planning (ie finance, personnel) involves assessing the key tasks that need to be carried out and determining the timing of them.

(b) Operations planning looks at the systems employed to manage the organisation.

(c) Organisation structure and control systems may need to be changed.

3.3 Types of strategy Corporate strategy is the most general level of strategy in an organisation, the strategy for the business as a whole. It involves issues such as:

(a) Diversifying or limiting activities (b) Investing (c) Surviving

Business-level strategy is concerned with how an organisation approaches a particular market, or the activity of a particular business unit. An example of a business strategy is the decision by Mercedes-Benz to expand its product range to include four wheel drive vehicles.

This level of strategy involves a choice between being the lowest cost producer (cost leadership), making the product different from competitors' products in some way (differentiation) or specialising on a segment of the market (focus, by addressing that segment by a strategy of cost leadership or differentiation).

Porter believes that a firm must choose one of these or be stuck-in-the-middle. You should have studied Porters strategies in more detailed in Paper P3 Business Analysis, so we will confine ourselves to a reminder of the three strategies here, and then also highlight the significance of the different strategies to management accounting techniques.

3.3.1 Cost leadership Cost leadership means being the lowest cost producer in the industry as a whole. By producing at the lowest cost, the manufacturer can compete on price with every other producer in the industry, and earn the highest unit profits, if the manufacturer so chooses.

The focus on cost means that management accounting techniques would be used to monitor and control costs. The organisations focus will be on financial control and assessing costs. There is also likely to be a focus on reducing waste in business processes (to help reduce costs).

Production facilities are likely to be set up to obtain economies of scale and manufacturers would try to mass produce goods wherever possible. Overhead costs would be minimised and long run economies of scale sought from industries dependent on labour skills for product design and production methods, by exploiting the learning curve effect. By producing more items than any other competitor, a firm can benefit more from the learning curve, and achieve lower average costs. The focus on cost means that techniques such as activity-based target costing will be important for firms, as will benchmarking their costs against other firms.

3.3.2 Differentiation A differentiation strategy seeks to earn competitive advantage through the particular characteristics of a firm's products or service which offer greater value to customers than competitors products or services.

Performance management will still need to consider cost issues but it will also need to look at the way the firm creates value through the effective use of resources and through innovation.



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Many firms seek to differentiate their products through focussing on quality. This means they must employ quality techniques in the production process. However, as threshold values of quality have improved in most firms this requires an increasing level of quality in firms that choose quality as a differentiating characteristic. Firms employing differentiation strategies should also seek to exploit other activities of the value chain (for example, quality of after-sales service or speed of delivery). As a result of this, such firms should also have to consider non-financial performance measures: for example, customer satisfaction (at the level of service they have received).

Nonetheless, firms employing differentiation strategies do still need to monitor and control their costs, so techniques such as target costing will still be valuable for firms employing these strategies.

3.3.3 Focus Focus involves a restriction of activities to only part of the market (a segment). In a focus strategy, a firm concentrates its attention on one or more particular segments or niches of the market, and does not try to serve the entire market with a single product. Management accounting would focus on monitoring the activity either concentrating on cost as above, or on:

Providing goods and/or services at lower cost (cost-focus) Providing a differentiated product or service (differentiation-focus) Operational and functional strategies involve decisions which are made at operational level. These decisions include product pricing, investment in plant, personnel policy and so forth. The contributions of these different functions determine the success of the strategy.

4 Planning and control at strategic and operational levels

This section starts with a summary of the main differences between strategic and operational levels of management in an organisation. It then looks at the problems that arise when strategic planning and operational planning are not properly linked or aligned. The section concludes with a detailed look at strategic control.

Strategic planning is the overall process of deciding the goals of an organisation, and the strategies for attaining those goals.

Strategic control then focuses on questions of whether the strategy is being implemented as planned, and whether the results produced by the strategy are those intended. In both cases, though, strategic control focuses on high level performance, rather than the detail of an organisations performance. In effect, strategic control is concerned with evaluating the accuracy of a strategic decision has the decision been justified or not by subsequent performance?

By contrast, operational control models tend to be much more precise. Operational control and operational performance measurement tends to focus on much more detailed information, and on a much shorter time period.

Operational control systems should be designed to ensure that day-to-day actions are consistent with an organisations overall goals and objectives.

Similarly, operational planning needs to be much more systematic and detailed than strategic planning. Operational plans should contain clear objectives, details of activities to be delivered, quality standards, desired outcomes, resource requirements and timetables.



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Anthonys hierarchy highlights the different levels of decision making and control in an organisation. However, as well as thinking about the characteristics of each level in its own right, it is also important to think how the different levels are interlinked most importantly, through the way in which an organisations operational performance helps it achieve its strategic goals.

This idea is also very important in relation to performance measurement, and is emphasised by the performance pyramid which we will look at in Chapter 13 later in this Study Text.

If the performance criteria which are being measured and controlled at operational level are not properly aligned to an organisations overall strategic objectives, this is likely to have an adverse effect on the organisations ability to achieve those objectives.

At strategic and operational levels, planning and control differ in terms of the nature of feedback (double loop vs single loop), orientation (future vs present) and scope (organisation as a whole vs limited set of processes within it).

4.1 Differences between strategic and operational We can contrast briefly the differences between planning and control at strategic (corporate) and at operational levels as in the table below.

Strategic Operational

'Broad brush' targets Detailed

Whole organisation Departmental activities

External inputs, with a wide variety of data types from a wide range of sources

Mainly internal information, with less variety of data and from fewer sources

External focus Internal focus, on actual procedures

Future-orientated, feed-forward control More concerned with monitoring current performance against plan

Potential for double loop feedback, ie the opportunity to change the plan

Mainly single loop feedback; performance must change, not the plan

Long term Short term

One of the key challenges that organisations face is linking their (long term) strategy to their day-to-day operations. For example, a strategic plan might set revenue growth targets for an organisation over the next five years, but the operational plan will need to consider what practical steps will be taken to generate these revenue increases; in effect creating a road map that defines the detail of how the overall strategies are going to be put into action.

Case Study

At the end of 2007, BMW Group took on a new strategic direction, which it called Strategy Number ONE (standing for New Opportunities and New Efficiency).

Strategy Number ONE placed an emphasis on profitability and long-term value growth. BMWs activities were to remain firmly focused on the premium segments of the international car market, and its mission statement up to the year 2020 was clearly defined: that BMW Group should be the worlds leading provider of premium products and premium services for individual mobility.

However, alongside profitability, Strategy Number ONE emphasised BMW Groups intention to look to invest in future technologies, new vehicle concepts and pioneering driving systems.

The Report of the Supervisory Board in BMW Groups 2012 Annual Report notes that the Board met for a two-day meeting primarily devoted to corporate and product strategy on the one hand, and to the long-term business forecast on the other.

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One important issue the Board discussed was the strategic planning of worldwide production capacities. In addition to the expansion of existing plans within Germany, BMWs Board of Management also presented plans for future production facilities in other locations. The Supervisory Board agreed that It supported the Board of Management in its endeavours to exploit growth opportunities in specific regions, whilst at the same time maintaining a well-balanced distribution of sales and value added across the worlds markets.

The Supervisory Board also discussed a number of vehicle projects as part of their discussions on product strategy. These included the Groups activities and customers needs in relation to electric vehicles (electro-mobility), for example in relation to the charging of batteries at home and on the road.

The Board also discussed the latest advances being made in the field of emissions reduction, and the technical and regulatory challenges posed by regulatory requirements and customer expectations with regard to clean and sustainable urban transport.

These discussions demonstrate the Boards commitment to the intention made in Strategy Number ONE to invest in future technologies and new vehicle concepts.

However, the period referred to by Strategy Number ONE and the mission statement (from 2007 to 2020) highlights the long-term nature of strategic planning. Similarly, the nature of the Boards discussions relate to the plans and activities for BMW Group as a whole.

Yet, these long-term, group-wide goals and plans are unlikely to have immediate relevance for the operational staff at each of BMWs manufacturing and production sites. Their focus is more likely to be on the short-term operational issues which affect the number and quality of cars they can produce, and therefore their ability to meet more short-term customer demands and market requirements.

The need to link strategy and operations is also an important idea behind the balanced scorecard (which we will look at in Chapter 13 later in this Study Text).

Kaplan & Norton who developed the Scorecard argue that one of the key challenges organisations face is how to align operational improvement activities to strategic priorities.

In other words, there is little point improving an operational process through Total Quality Management, Six Sigma, Business Process Re-engineering or any other method if that process improvement does not translate into tangible results. Instead, organisations should prioritise their operational improvements in the areas which have the largest impact on the organisations ability to implement its strategy effectively.

4.2 Linking strategy and operations A member of the examining team for a past syllabus paper similar to Paper P5 wrote an article on this topic. The article included a case study of a fictional company that adopted new management ideas like TQM, JIT and ABC as its strategy for dealing with a high level of customer complaints. The company was trying to improve quality and speed of delivery while controlling costs, but it faced a number of problems.

'The achievement of long-term goals will require strategic planning which is linked to short-term operational planning ... . If there is no link between strategic planning and operational planning the result is likely to be unrealistic plans, inconsistent goals, poor communication and inadequate performance measurement.'

(George Brown, 'Management Accounting and Strategic Management', ACCA Students' Newsletter, March 1994)

4.2.1 Unrealistic plans

Unrealistic operational plans will force staff to try too hard with too few resources. Mistakes and failure are almost inevitable. This means poor quality products: costs include lost sales, arranging for returns, and time wasted dealing with complaints.

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Over-ambitious plans may also mean that more inventories are produced than an organisation could realistically expect to sell (so costs of write-offs, opportunity costs of wasted resources, and unnecessary inventory holding costs are incurred).

4.2.2 Inconsistent goals

Inconsistent strategic planning and operational planning goals may mean additional costs are incurred. An operational plan may require additional inspection points in a production process to ensure quality products are delivered to customers. The resulting extra costs will be at odds with the strategic planning goal of minimum cost.

4.2.3 Poor communication

Poor communication between senior management who set strategic goals and lower-level operational management could mean that operational managers are unaware of the strategic planning goal, say to sustain competitive advantage at minimum cost through speedy delivery of quality products to customers.

Some operational managers may therefore choose to focus on quality of product while others attempt to produce as many products as possible as quickly as they can; still others will simply keep their heads down and do as little as possible. This will lead to lack of co-ordination: there will be bottlenecks in some operational areas, needing expensive extra resources in the short term, and wasteful idle time in other areas.

4.2.4 Inadequate performance measurement

Inadequate performance measurement will mean that an organisation has little idea of which areas are performing well and which need to improve. If quality of product and speed of delivery are the main sources of competitive advantage a business needs to know how good it is at these things.

For example, if an organisation measures only conventional accounting results it will know how much inventory it has and how much it has spent, say, on 'carriage out', but it will not know the opportunity cost of cancelled sales through not having inventory available when needed, or not being able to deliver it on time. Equally the quality of products needs to be measured in terms not only of sales achieved, but also in terms of customer complaints and feedback: again the cost is the opportunity cost of lost sales.

4.3 Strategic control Control at a strategic level means asking the question: 'is the organisation on target to meet its overall objectives and is control action needed to improve performance?'

Strategic control measures might require complicated trade-offs between current financial performance and longer-term competitive position, and between different desirable ways of building competitive strength.

4.4 Gaps and false alarms

Strategic control depends on avoiding 'gaps' and 'false alarms' and on identifying milestones of performance.

Many firms measure the wrong things and often fail to measure the right things.

(a) False alarms motivate managers to improve areas where there are few benefits to the organisation.

(i) Over-emphasis on direct costs is foolish when most costs are overheads. (ii) Labour efficiency measures are easily manipulated and ignore labour effectiveness. (iii) Machine standard hours are irrelevant, as long as the firm has enough capacity.

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