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Statements on
Management
AccountingStatement Number 4MM
March 2000
Practices and Techniques:
Designing an Integrated
Cost Management Systemfor Driving Profit and
Organizational Performance
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In accordance with the charge to the Management Accounting
Committee (MAC) to issue statements on ma nagement a ccounting
and financial management principles and practices, Statements
on Management Accounting are promulgated to reflect official
positions of the Institute of M anagement Accountants (IM A). The
work of the MAC is based on a framework for management
accounting, w hose principal categories are:
1. O bjectives
2. Terminology3. C oncepts
4. Practices and Techniques
5. M anagement of Accounting Activities
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Statement on M anagement Accounting
Sta tement No. 4MM
March 2000
D esigning an Integra ted
C ost Management System
for D riving Profitand O rganizat iona l Performance
Institute of Management Accountants
Arthur Andersen LLP
Consortium for Advanced Manufacturing-International
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Publ ished by
Institute of Management Accountants
10 Paragon Drive
Montvale, NJ 07645-1760
htt p://w w w .ima net.o rg
C opyright 2000 in the United Stat es of America
by Institute of Management Accountants
and Arthur Andersen LLPAll rights reserved
IMA Publication Number 00351
ISBN 0-86641-287-5
ACKNOWLEDGMENTS
Statement 4MM, Designing an Integrated Cost Management System for
D riving Profit and Organizational Performance, w as approved for issu-
ance as a Statement on Management Accounting by the Management
Accounting C ommittee (M AC ) of the Institute of M anagement Accoun-
tants (IMA). IMA appreciates the collaborative efforts of the Finance
Business Solutions Center at Arthur Andersen LLP and the w ork of Dr. C .
J. M cNair, C M A, of Babson Co llege, w ho dra fted the manuscript.
Special thanks go to Ra ndolf Holst, CM A (Canada ), Mana ger of Know l-
edge Creation at Arthur Andersen, for his continuing oversight during the
development of the Sta tement. IM A thanks the Consort ium for Advanced
M anufa cturing-Internat iona l (C AM -I) for their support in the develop-
ment o f this SMA. IM A is also gra teful to the members of the Ma nage-
ment Accounting C ommittee for their contributions to this effort.
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TABLE OF CONTENTSParagraph
I. Ra t iona le . .. .. .. .. ... .. .. .. .. .. .. ... .. .. .. .. .. .. ... .. .. .. .. .. .. ... .. .. .. .. . 1
II. Scope . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 6
III. Key Principles Underlying the ICM S Framew ork . .. .. 10
IV. Defining the ICM S Framew ork . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .17
V. Uses and Benefits of the ICM S Framew ork . .. .. .. .. .. .. .31
VI. The Role of Management Accounting . .. .. .. .. .. .. .. .. .. .. .39
VII. Elements of the ICM S Framew ork . .. .. .. .. .. .. .. .. .. .. .. .. .. 41
Information and
Decision-M aking Requirements ............ ......... 42
Design of the ICMS............................................47Stra tegic M ana gement Processes ............ ........... 59
D ecision D omains .............................................. 64
VIII . Conclusion .. .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 170
Bibliography
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TABLE OF EXHIBITSFollowing
Paragraph
Exhibit 1: CAM-I Stra tegic M anagement
Process Model ............................................... 18Exhibit 2: The SMPs and Process Design . .. .. .. .. .. .. .. .. .. .. .. 28
Exhibit 3: The Migration of Information Systems . .. .. .. .. . 34
Exhibit 4: The Decision Domains and the SMPs . .. .. .. .. .. . 38
A. C ustomer/M arket Decision D omain
B. Product D ecision Domain
C . Process D ecision D omainD . Resource D ecision D omain
Exhibit 5: D ecision Flow Analysis . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 49
Exhibit 6: Value-Based Customer Segmentation .. .. . .. . .. . .. 68
Exhibit 7: SMPs and Value Segmentation . .. .. .. .. .. .. .. .. .. .. . 71
Exhibit 8: Segment Analysis and Choice .. .. . .. . .. .. . .. . .. . .. . .. 75
Exhibit 9: Eva lua t ion and Contro l w ithin
the C ustomer/M arket D omain ............. .......... 87
Exhibit 10: The Product D esign Decision ... .. . . .. . . .. . . .. . . .. . . 100
Exhibit 11: SMP Information Flows
and Strategic Partnering .............................. 115
Exhibit 12: Abandonment and C reating the Future .. .. . .. . 124
Exhibit 13: Ongoing Process Ma nagement . . .. . .. . .. . .. . .. . .. . 147
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I. RATIONALE
1 Over the last 15 years cost management pract ices have been
revolutionized. Spurred on by the criticisms voiced by Thoma sJohnson and Robert Kaplan in Relevance L ost: The Rise and Fall
of M anagement Account ing, a ccounting practitioners and academics
have joined forces to create new forms of cost management that
provide decision-relevant information. Beginning with activity-based
costing in the late 1980s, the list of new cost management techniques
has grown to include activity-based management, activity-based
budgeting, ta rget cost ma nagement, life cycle costing, capacity cost
management, investment management, and strategic cost
mana gement, to na me just a few . Efforts have also been made to
link cost ma nagement to other key performa nce metrics, crea ting
integrated performa nce mana gement systems.
2 At the same time that these changes have taken place in cost
management, there have been parallel developments in the structure
and focus of organizations. Process, or horizonta l, mana gement
has emerged as a key to improving the throughput and performance
of a n organizat ion. The internal benefits of process thinking have
been extended to include an organizations key trading partners,
resulting in the creation of integrated supply chains that span an
industrys value chain.
3 The driving force behind these rapid changes to the information
and management structures of the organization is the customer.
Demanding better, yet cheaper, products and services delivered fa ster
w ith ever-increasing levels of customiza tion, customers are forcing
companies to reexamine every facet of their operations. Information
is the vita l ingredient in defining customer requirements a nd then
meeting them better than the competition. The implementa tion o f
the new mana gement a nd informat ion systems that provide these
insights has become essential to the survival of an organization
seeking to meet the challenges of a globa l market.
4 As a result o f the rapid pace of the implementat ion of new
mana gement systems, though, many organizations toda y a re faced
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with fragmented information flows that have created a veritable
Tow er of Babel. New management and measurement systems are
developed in isola tion from other initiatives and systems, resulting
in redunda ncy, ga ps, a nd miscommunica tion. La cking a n
integration framew ork, these initiatives have often fa iled to provide
a ll of their promised benefits.
5 Integration of information is essential if an organizations resources
are to be deployed optimally. Integrat ion provides the ba sis for
robust decision analysis because it supports the incorporation of
multiple perspectives. Whether an organiza tion is just beginning
its journey toward the implementation of new cost management
models or has put many of them in place, the need to integrate
information and management systems remains the same. M eeting
this need is the objective of the integrated cost management system
(ICMS) framew ork.
II. SCOPE
6 This Statement on Management Accounting (SMA) has been written
to help an organization understand how to integrate its cost
management system to optimize its investment in informa tion. The
methods and principles presented in this SMA summarize the findings
of a recent multi-year project completed by the Consortium for
Advanced Manufacturing-International (CAM-I). Organizations
involved this project include, Arthur Andersen, D aimler-Chrysler,
Allied Signal, Boeing, C ase, a nd Koda k.
7 The focus of this publication is on the integration of the cost
management techniques tha t are proving to have the most visibility
and applicability to the decisions and actions of financial practitioners
and operations managers. It is beyond the scope of this guideline to
discuss the deta ils of a ny specific cost management technique. The
focus is, instead, on how these management systems can be combined
into an integrated framew ork to help drive profit and organizat ionalperformance.
8 The ICMS concepts discussed here apply to:
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large and small organizat ions; and
enterprises in all business sectors.
9 The information in this SM A w ill help financial professionals and
others:
comprehend the underlying principles of the ICM S framew ork;
understand the var ious elements o f an in tegra ted cost
management system;
determine the uses and benefits of the ICM S framew ork;
understand the relationships betw een various cost management
approaches;
design an integrated cost management system;
develop a migration path for integration of the various cost
management systems; and
broaden employee aw areness and obtain their buy-in for an
integrated cost ma nagement system.
III. KEY PRINCIPLES UNDERLYINGTHE ICMS FRAMEWORK
10 Understanding the relationship among activities, outcomes, and value
creation has become the key to achieving profita ble performance.
To reach this understanding, an organization has to be able to
integrate its information flow s. Integrat ion creates a know ledge
ba se tha t can be used to communicate decisions, objectives, results,
and opportunities from the top of the organization to the bot tom.
Integrat ion of info rmation a cross a ll functions and processes is an
essential ingredient of effective management in the fast-paced global
economy.
11 The key principles of the ICM S framew ork reflect the information
and decision-making needs of the managers w ho use it. Specifically,
these principles include:
Strategic orientation:A cost management system must incorpora te
and reflect the strategies of the organization and the core
competencies that support the achievement of stra tegic goals.
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Customer dr iven:Information system design, integration, and
use must be centered around defining and meeting customer
requirements.
Value based:Competitive advantage and profitable grow th stem
from understanding how and where the organization creates
value for its customers.
Process/horizontal focus:Integrat ion must incorporate the flow s
of ma terials and information a cross and betw een organizat ions,
highlighting interdependencies.
Decision relevant:Information systems have to be defined aroundand support the key decisions of the orga nizat ion.
Cost effect ive: Integration should focus on the essential 20 percent
of data tha t support 80-90 percent of the decisions made w ithin
an orga nization ra ther tha n on comprehensive integrat ion of
all of the organizations availab le da ta .
Relationship based:Integrated information systems must be
based on and highlight the performance of key transactions
and relationships across the value chain.
12 These principles combine to define the requirements for an effective
integrated cost mana gement system. Specifically, the ICM S should
be elegant, minimizing the complexity o f its underlying structure
and emphasizing the identification and incorporation of data
needed to support decision making within a specific decision
doma in. M ore da ta is not betterincorpora ting the right
information required to support the critical decisions of the
orga nization is the key objective.
13 Flexibilityis a ma jor concern of the ICM S. The da ta structure
should be relational, allow ing for ongoing modifications, additions,
and deletions of da ta f rom the integrated system. This is not to
suggest tha t data should be removed f rom the organizations basic
operational and strategic systems, but ra ther tha t the da ta pulled
into the integrated system should be managed to ensure that it
remains a relevant, eff icient, and cost-effective source of decision-
support information.
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14 User-friendlinessis a lso a concern of an IC MS. Data is transformed
into informa tion w hen users are able to access and deploy it freely
and easily. The ICM S is not a system designed by accountants for
accountantsit is an integrated source of information supported by
efforts throughout the organization. It should be structured to ensure
that users both understand and feel comfortable working with it,
regardless of their location in the organizat ion or their ba ckground.
The goa l of the system design and ma intenance is to ensure tha t the
system is both accessible and relevant to the people who rely on it
for decision support.
15 Of equal concern is the abi lity of the ICM S to capture the
interdependencies within the organization among functions and
teams and betw een partners in the supply chain. The da ta embedded
in the ICM S should be compatiblew ith the systems and a bilities of
both internal users and the organizations key trading partners. Data
may be imported from the point-of-sale, using data links with a
reta il partner. Suppliers both receive and provide information on
the progress of key components or products, including the ability torespond to mix and demand shifts identified a t the point-of-sale.
16 Integration extends beyond the needs of today to include the efforts
in designing and developing new products and services as well as
support for products and services that have been abandoned.
L inkagesare made in the ICM S forw ard and backw ard in the value
chain and across the life of the organization and its customer
relationships. The ICMS seeks to use information as a bridge tocross the communication a nd a ctivity gaps tha t na turally occur in
orga nizat ions. The key components of the ICMS framew ork reflect
these ba sic tenets and objectives.
IV. DEFINING THE ICMS FRAMEWORK
17 The ICM S framew ork emphasizes the relat ionship betw een
information flows and decision making at various levels of the
orga nizat ion. It seeks to identify those essentia l data elements tha t
must be shared betw een individuals, teams, departments, processes,
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and entities for effective, coordina ted decision ma king a nd action
to occur.
18 The fundamental thesis of the ICM S framew ork is that achievingprofitable performance and competitive advantage stems from a
deeper understanding of the relationships among activities, outcomes,
and value creation. A second major thesis is tha t integration of
information f low s is an essentia l element of effective management
decision ma king, serving to clarify communication a nd strengthen
the linkages among interdependent functions, teams, or entities.
The ICM S framework, a s illustra ted in Exhibit 1, consists of the
following elements:
Str ategic management pr ocesses. Seven core strategic
management processes (SMPs) incorporate current best
practicestarget cost ma nagement (TC M ), asset management
(AM), the extended enterprise (EE), capacity cost management
(CM), process management (PM), act ivity-based cost
management (ABCM), and integrated performance management
(IPM ). As depicted in the exhibit, the SMPs serve as the rods
tha t lock the plattersthe decision domainsinto synchronous
action.
Decision domains. Decisions take place within four primary
domainscustomer/market, product, process, and the resource
level. The driving force of the organization, the answ er whyit
exists a t a ll, is found at the customer/market level. Products
and services are whatthe company is offering to meet customerneeds and deploy its strategy. Processes and their capa city are
the howof the management equation. They are the means to
the desired endsvalue creation and prof its. All of these levels
draw on and define the resource requirements of the
organization.
Integr at ion. Integration takes place at the data level, where
common information requirements are identified and core SMPs
are linked to these information requirements.
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19 The four pla t ters (e.g. , decision domains), are linked by the
information pipelinesthe strategic management processes. As the
exhibit suggests, the SMPs extend throughout the four decision
domains, providing different types of informa tion to users at different
levels of the organization. For instance, t arget cost management, ,
Exhibit 1. CAM-I Strategic Management Process Model
Source: CAM-I, 2000: 11.
Strategic Management Processes
1. Target cost management (TCM)
2. Asset management (AM)
3. Capacity cost management (CM)
4. Process management (PM)
5. The extended enterprise (EE)
6. Integrated performance management (IPM)
7. Activity-based cost management (ABCM)
Decision
Domains
Resource
Process
Product
Customer/Market
1 2 3 4 5 67
StrategicManagementProcesses
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a system for profit planning and cost management, incorporates
profit, cost, and value-based management concepts at the earliest
stages of product development and applies them throughout the
product life cycle by involving the entire value chain or extended
enterprise. The extended enterprise SMP brings trading partners
together in order to leverage cross-orga nizat ional competencies and
know ledge to better meet customer requirements, during both the
design and the execution of the stra tegic plan.
20 Aligning resources to meet specific customer requirements and
ensuring that plan execution is not impaired or prevented by
inadequate or improper resources are the objectives of asset
management and capacity mana gement. The asset management and
capa city management SMPs combine to create a life cycle focus on
identifying and evaluat ing technology, equipment, people, systems,
and related opportunities that could be used to improve organizational
performa nce. Asset management and capacity cost management are
extensions of the capital investment process, which emphasizes
decisions that add value to the organization and benefit itsstakeholders. They zero in on the capacity of resources to create value,
as well as the causes of idle, excess, and ineffective capacity utilization.
21 D efining stra tegies and planning their execution are necessary but
not sufficient management processes. Results depend on the
motivat ion of individuals to achieve the goals and the actions they
take to make their plans a reality. By emphasizing the integration
and balancing of measures, their use, and the rew ards they trigger,integrated performa nce management is the vita l link betw een plans
and results.
22 And finally, the ongoing actions across the many different layers
and areas of the organization have to be knit together into a
streamlined, seamless whole. It is this arena of integration that
process management and activity-ba sed cost mana gement address.
Process management emphasizes the horizonta l linkage of activitiesfrom core w orkflow management through business and enterprise
process integrat ion. It a ligns organizat ional a ctions with customer
values.
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23 In a related manner, a ctivity-based cost mana gement emphasizes
the effective combination of resources to create unique organizational
capabilities. It analyzes specific actions and their tie to processes,
costs, performance, and results. ACBM fills a basic information
void by providing cost and operating information tha t mirrors the
process view. Emphasizing opportunity costs and value analysis,
ABCM management creates an economically rich basis for supporting
decision ana lysis.
24 The SMPs ensure that decisions and da ta used at the top, the strategic
level of the organization, correlates with those used by process level
managers to analyze similar conditions and situations. Coordination
and clear communication a re built into the ICM S structure through
these SM P informa tion pipelines.
25 While the seven SM Ps extend through all four of the decision
doma ins, they a re not equally important to the decisions made at
various levels of the organization. For instance, target cost
management is the dominant SMP for most decisions made in the
customer/market a nd product doma ins. Stra tegic in na ture, these
decisions require analysis and identification of the optimal set of
products, services, and product a ttributes to meet the requirements
of the target customer groups.
26 On the other end of the spectrum, activity-based cost management
plays a dominant role in the resource decision domain. In this
domain, the emphasis is placed on identifying and deploying the
optimal blend of resources to ensure tha t the total costs per dollar of
value delivered to customers is minimized. Keeping the organization
clearly focused on the cost/value tra deoff inherent in the productive
process is a key goal of the information provided by the various
SMPs in the resource decision domain.
27 The integration of the various SMPs w ithin a specific decision domain
is driven by the need for shared data that is developed and
mainta ined in a va riety o f systems. Each decision doma in serves as
a form of focused da ta pool, or subsystem, tha t brings together the
key pieces of information required to support specific decisions. For
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instance, one of the key decisions made w ithin the process domain
is the design and management of effective process-based w orkflow s.
A number of questions are typically addressed during the process
design effort , including:
What are the existing processes and w hat are their capabilities
and limitat ions?
What is the maximum demand the system needs to be able to
handle on a da ily/w eekly ba sis?
What level of quality needs to be maintained?
When quality problems are likely to occur, how can they beavoided or detected?
What resources are currently available?
What is the capacity of the process, given planned demand?
Where are the bottlenecks? What can be done to reduce their
impact or improve their capab ility?
H ow can gaps in the flow best be managed? Should time, space,
or inventory buffers be used to ensure that the bottleneck isnever idle?
What var iety o f products and ac tivit ies wi ll need to be
accommoda ted by this process?
What is the optimal w ay to manage this variety?
D oes the process represent a core competency? If not, should
the activities and output it provides be outsourced?
D o needed skills and competencies exist to make the processw ork smoothly?
Are there any major funct ional, po lit ica l , o r st ructura l
impediments to creating the process?
What performance metrics w ill ensure that process objectives
are reached?
28 As suggested by Exhibit 2, process management is the dominant
SMP used to organize informa tion to a ddress these process designquestions. It provides the ba sic structure for process-level decisions
as well as the underlying integrating structure tha t links the customer
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to the organization and its value chain partners. Process management
emphasizes the bridging of information and workflow gaps as it
looks for the optimal w ay to route work and output through the
organization a nd its supply chain.
Exhibit 2. The SMPs and Process Design
Source: CAM-I, 2000: 349.
29 While process mana gement serves as the integration mechanism
for the process design decision, it does not conta in all the requisite
information to answer the questions posed above. For instance,
capacity cost mana gement is called on to provide bottleneck potential
and current capa city utilizat ion informat ion and the cost to create
new capacity if needed. In a related way, the extended enterprise
scans the entire supply chain to identify idle capacity, waste, or
bott lenecks that may impede the overall performance of the supplychain. Target cost management sets the limits on what this
performance needs to be, w hile integrated performa nce management
Capabilities and constraints
Capabilit
iesandc
onstraint
s
Capability
assessment
External
Internal
CM
EE
Optimalprocess design
Currentstructure
Priorperformance
New needs
Interdependentactivities and
processes
Performanceassessment
IPM
ABCM
AM
ProcessManagement
CapabilitiesandconstraintsAssetanalysisandpolicy
Costdata
Costandno
n-cost
performancedata
Required
performance
TCM
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provides the basis for measuring current versus required
performance.
30 As suggested by this example, w ithin each decision domain data islinked together to form the founda tion for decision analysis. Not all
information is pulled together; the integration focuses on the vital
few data elements that must be common to all users of the information
system. The ICMS framew ork seeks to sort and refine the shared data
requirements of the organization into manageable, definable
subgroups that reflect the decision structure of the organization.
V. USES AND BENEFITS OFTHE ICMS FRAMEWORK
31 Why should a company use any or all of the strategic management
processes, let alone undertake the effort to integrate them? The ICMS
framew ork has broa d applications in organizations. The information
provided by the ICM S framew ork can be used, for example, for the
following:
identify optimal customer/market segments;
improve the profitability of key products;
support improved decision making;
reduce miscommunicat ion;
optimize the organizations profitability;
increase process effectiveness;
integrate financial and nonfinancial metrics; improve competit ive posit ion;
facilitate strategic marketing and operational decisions;
support rapid response to changing conditions; and
provide the means to integrate activities and outcomes across
processes and entities in the value chain.
32 The ICM S framew ork has broad applications in manufacturing
organizations as well as areas outside of manufacturing, such as
marketing and administra tion. The ICM S framework can be used
in conjunction with other management techniques such as total
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quality management, q uality function deployment, and electronic
commerce. It can a lso be applied a t the supply chain level.
33 The implementation of the ICM S framew ork can help a companyin the follow ing wa ys:
ant icipate and react to environmental changes before an
organization is affected by them, thus avoiding problems before
they occur rather than correcting them after they happen;
continually improve the operations and not merely seek a
temporary equilibrium;
create an external focus on customer requirements and
competitive threats so that customer requirements drive the
organization;
systematica lly rela teall elements, internal and external, so
problems are solved holistically rather than incrementally
through cross-functional integration; this facilitates the problem
being viewed and solved as a whole by building long-term
relations with the suppliers and other members of the extendedenterprise;
optimize profits by ensuring that resources remain focused on
value activities, tha t w aste is identified a nd removed, and that
process improvements result in reductions in nonvalue-added
efforts;
link individual, group, and organizational incentives to ensure
tha t everyone in the organization understands and is motivatedto achieve strategic and operational objectives; and
communicateacross all levels, all processes, and all units the
needs of the customer, results achieved, problems encountered
and solved, and remaining challenges to be met.
34 Not a ll organizations need to implement all of the various SM Ps,
nor do they need to integrate at the same level of intensity. As
suggested by Exhibit 3, there is a migration path tha t an organizationshould expect to follow from early, fragmented cost and performance
information systems to the holistic structure of the ICMS framew ork.
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35 The migration path that is ultimately chosen should reflect the
dominant challenges facing the organization. For instance, Case
Corporation had minimal success in its activity-based cost
management initiative until the need fo r da ta to support decisions
in the customer/market and product decision doma ins arose. The
drive to reestablish its position in the farm tractor market placed
new demands for information on the company that required data
from different parts of the organization and different supporting
SMPs. When a specific SMP or its da ta w as lacking, the new productlaunch team found substitute data sources. The resulting informa tion
collage provided Case mana gement w ith a blueprint and motivation
for embarking on an initia tive to better integrate its information.
Activity-based cost management is now playing a central role in
this integration effort .
36 The key to defining an ICM S implementation path is to understand
Exhibit 3. The Migration of Information Systems
Source: CAM-I, 2000, 17.
Integrationof SMPs
Holisticsystems
20001980 1990
Developmentof targeted
SMPs
Time
Fragmented
databases
Sophistication
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w hat information is provided by each SMP, how this information is
shared betw een SMPs within the various decision domains, and w hat
the optimal set of SMPs is for an organization facing specific
competitive and organizationa l challenges. The ICM S framew ork
facilita tes this effort by categorizing decisions and da ta into logical
clusters that help prioritize the sequence and intensity of SMP
implementa tion and linkage.
37 Q uestions that reflect core decisions within each decision domain
provide the first indication of where the integration effort should
begin (as illustra ted in Exhibit 4). As the exhibit suggests, the seven
SMPs are not all needed at the same time or in the same way. For
insta nce, in the customer/ma rket decision doma in ta rget cost
management dominates as the primary SMP. Even so, at least three
common decisions in this domain rely on o ther SM Ps for their core
data needschoosing geographic regions for operations, defining
and leveraging core competencies, and choosing a distribution
strategy.
38 The decisions and issues summarized in Exhibit 4 are not exhaustive,
but rather provide a glimpse into the ba sic nature and structure of
the ICM S framework. While the various SM Ps all play a role in the
overall functioning of the ICMS, it is sometimes necessary to find
alternative data sources to fill specific information needs. If a specific
SMP is common to most of the key decisions facing an organizat ion,
it should become a primary implementa tion t arget. O n the other
hand, if the data requirements of the organization have only minimalties to one or more SMPs, they should be de-emphasized in the
implementation schedule. There is no reason to believe that every
firm w ill fully implement each and every SMPinforma tion is not
a free good. Any SMP should be evaluated to ensure tha t the costs
to implement and ma intain it are less than the benefits it w ill provide
to the organization. Making these assessments is a primary
responsibility of the financial professional.
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Exhibit 4A. The Decision Domains
Source: CAM-I, 2000: 51.
ll oPrimary source of information Supporting information Minimal information
Customer/Market Decision Domain and the SMPs
1. What markets do we want to be in? TCMl
EEl
CM
AMo
PM
IPM
ABCM
2. What customer segments do wewant to be in?
TCMl
EE
CM
AM
PM
IPM
ABCM
3. What geographic regions? TCM
EEl
CM
AM
PM
IPM
ABCM
4. Assessing market size? TCMl
EE
CM
AM
PM
IPM
ABCM
5. Profit potential of customer/marketsegments?
TCMl
EE
CMo
AM
PM
IPM
ABCMo
6. Industry/competitive trends? TCM
l
EE
o
CM
o
AM
PM
IPM
ABCM
7. What strategies to addresscustomer needs/valuerequirements?
TCM
l
EE
CM
AM
PM
IPM
l
ABCM
8. What are our core competencies? TCMl
EE
CMl
AMl
PM
IPM
ABCM
9. What time frames/windows ofopportunity?
TCMl
EE
CMo
AMo
PM
IPM
ABCM
10. What distribution strategies? TCM
EE
l
CM
AM
PM
IPM
ABCM
o
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Exhibit 4B. The Decision Domains
Source: CAM-I, 2000: 52.
ll oPrimary source of information Supporting information Minimal information
Product Decision Domain and the SMPs
1. What are the product or servicefeatures required by each targetmarket?
TCMl
EEo
CM
AM
PM
IPM
ABCM
2. What are the competitive offerings? TCM
l
EE
o
CM
AM
PM
IPM
ABCM
3. What is the optional product mix? TCM
l
EE
CM
o
AM
PM
IPM
ABCM
4. Quality/functionality requirements? TCM
l
EE
o
CM
AM
PM
IPM
ABCM
5a. Pricing strategy vs. corecompetencies?
TCM
l
EE
CM
AM
PM
IPM
ABCM
5b. Distribution strategy vs. corecompetencies?
TCM
EEl
CM
AM
PM
IPM
ABCM
6. Capacity investment requirements? TCM
EE
CMl
AM
PM
IPM
ABCMo
7. Are we meeting our return on salesobjectives?
TCM
EE
CM
AM
PM
IPMl
ABCMo
8. What product technology isavailable?
TCM
l
EE
o
CM
AM
PM
IPM
ABCM
9. Supplier capabilities? TCM
EE
l
CM
AM
PM
IPM
o
ABCM
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Exhibit 4C. The Decision Domains
Source: CAM-I, 2000: 53.
ll oPrimary source of information Supporting information Minimal information
Process Decision Domain and the SMPs
1. Organizational structures? TCM
EE
CM
AM
PMl
IPM
ABCMo
2. How well maintaining c.c.s? TCM
EE
CM
AM
o
PM
o
IPM
l
ABCM
3. Process cost drivers? TCM
EE
CMo
AM
PMl
IPM
ABCM
4. Capacityinternal/external? TCM
EEo
CMl
AMo
PM
IPM
ABCM
5. How are the processes performing(cycle time, quality, process, yield,flexibility, dependability, downtime,bottlenecks, scheduling)?
TCM
EE
CM
AM
PM
IPMl
ABCM
6. What process technology? TCM
EE
CM
AM
o
PM
l
IPM
ABCM
7. Process capability assessments? TCM
EE
CM
o
AM
PM
l
IPM
ABCM
8. What are the performance gaps? TCM
EE
CM
AM
PM
o
IPM
l
ABCM
9. What are the activities in theprocess? Value/non-value added?
TCM
EE
CM
AM
PM
l
IPM
ABCM
10. What distribution strategies? TCM
EE
CM
AM
PM
l
IPM
l
ABCM
l
11. What are our process improvementtargets?
TCM
EE
CM
AM
PMl
IPMo
ABCMo
12. What is our shared service strategy? TCM
EE
CMo
AMo
PMl
IPM
ABCMo
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Exhibit 4D. The Decision Domains
Source: CAM-I, 2000: 55.
ll oPrimary source of information Supporting information Minimal information
Resource Decision Domain and the SMPs
1. What is our resource capability? TCM
EEo
CM
AM
PM
IPMl
ABCM
2. What is our resource utilization(people, plant, equipment)?
TCM
EE
CM
l
AM
PM
IPM
o
ABCM
3. Scheduling? TCM
EEo
CMo
AM
PMl
IPM
ABCM
4. Resource mix? TCM
EEo
CM
AM
PM
IPM
ABCMl
5. Cost of resources utilized? TCM
EE
CMo
AM
PM
IPM
ABCMl
6. Should we buy or lease, etc.? TCM
EE
o
CM
o
AM
l
PM
IPM
ABCM
o
7. What resources are needed to support
our core competencies?
TCM
EE
o
CM
AM
o
PM
l
IPM
ABCM
o
8. Inventory policies? TCM
EEo
CMl
AM
PMl
IPM
ABCM
9. What would be optimal assetmanagement practices?
TCM
EEo
CMo
AMl
PMo
IPM
ABCM
10. What R&D investments should bemade?
TCM
EEl
CM
AMl
PMo
IPM
ABCM
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VI. THE ROLE OF MANAGEMENT ACCOUNTING
39 Financial professionals play a lead role in the design and
implementation of integrated cost management systems. They serveas the source of much of the incorporated data as well as an objective
verifier of the reliability of information collected from multiple
sources. Specific activities and initiat ives tha t should be undertaken
by f inancial professiona ls in the IC M S initiat ive include:
identification of the primary decisions that need to be supported
by the informa tion system;
identification of primary sources of different forms of dataw ithin the organization;
assessment of the reliability of these information sources;
identification of key data gaps based on the primary decisions
to be supported;
creation of data collection and measurement initiatives to fill
information voids;
identification and implementation of decision support tools thatw ill ensure that shared da ta is used a ppropriately;
development of internal control systems and procedures to ensure
tha t da ta integrity is maintained on a n ongoing basis;
participation on the implementation team, including choosing
integration and reporting software solutions, deciding on
educa t ion and t r a in ing requi rement s , p l ann ing the
implementation sequence for the various SMPs, given theorganizations needs, and scheduling implementation phases
w ith roll-out dates for various aspects of the system; and
matching all cost and performance data to ensure that it provides
consistent, objective signals to users regarding the sta tus of the
organization a nd the potential impact of decisions on overall
performance.
40 Financial practitioners are part of the core ICM S implementationteam, spearheading w hen necessary the efforts required to ha rness
the pow er of the organizations information for decision making.
Serving a unique role in the organization, financial practitioners
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strive to ensure tha t the integration initiative is conducted effectively
and efficiently and that the needs of both internal and external
customers and users of the system are met. Achieving these goals
requires a working knowledge of the basic elements of the ICMS
framework.
VII. ELEMENTS OF THE ICMS FRAMEWORK
41 The development of the ICM S framew ork reflects its focus on
identifying and meeting the information requirements of the
organization. Information is a unique goodits use does not reducethe amount of informat ion ava ilable to o thers. It is a inexha ustible
resource that increases in value as it is used. The self-multiplying
nature of information enables and empow ers individuals w ithin the
organization, aiding them in coordinat ing their learning and actions.
Yet information is indivisibleit can be used only as a complete
data set; missing data eliminates functionality and relevance for
the entire information system. Finally, informa tion is cumulat ive
each new observation and data entry adds to the overall body ofknowledge contained within the information system. The ICMS
builds from and reflects these basic features of information in its
design, fra mew ork, implementa tion, and utilizat ion in supporting
decision making in an orga nizat ion. The basic elements of the ICM S
framew ork include:
information and decision-making requirements;
design of the IC M S; strategic management processes; and
decision doma ins.
Information and Decision-Making Requirements
42 Information and decision making are the essential dimensions of
the integration structure of the ICMS. Reflecting the search for
know ledge, the ICM S can be defined a s cognitive informat ion tha thas been generalized a nd a bstracted from an understanding of the
cause-and-effect relations of a pa rticular phenomenon occurring in
the externa l environment. The cause-and-effect relations emphasized
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by the ICMS are the transactions that occur within a business
betw een customers, suppliers, and other stakeholders. The amount
of value created w ithin an orga nizat ion depends on the effectiveness
w ith w hich it captures, measures, responds to , a nd a nticipates the
critical business driversits primary cause-and-effect relations.
43 The primary force driving the movement to integrate business
processes and information systems is the ever-expanding demand
for knowledge about the key requirements of customers and the
optimal w ay to increase the amount of value created for them. An
organization that fails to develop a rich, integrated database of
economic and noneconomic informa tion and makes it accessible to
the entire value chain w ill not be able to learn fast enough to susta in
itself in the global market. Integrated information systems are the
fuel tha t pow ers the know ledge creation engine tha t is so essentia l
to optimizing an orga nizat ions competitive position.
44 R. J . Chambers, a noted academic and expert in accounting
information systems, developed a series of principles that can be
used to evaluate and shape the ICM S.
An information system is a system for supplying information to
users who must ta ke coordinated a ction. If effective communi-
cat ion is to ta ke place, the language used must be such tha t a ll
members of the organization would identify the response. If
action is to be coordinated, the informat ion system cannot be
treated a s a group of independent subsystems.
The information system must remove all doubt about data;
tha t is, the system must be so reliable tha t the user w ill depend
on it rather than on his own observations. For example,
information w ill fail to evoke response (decisions) relevant to
the pursuit of its ends if it is found by receivers to be inconsistent
w ith their ow n direct observat ions. In this case, the system that
produces the information will serve to increase rather than
decrease doubt; it w ill cloud rather than clarify issues confrontingdecision ma kers.
There is a point at which the marginal cost of differentiation of
information and comprehensiveness of information exceeds the
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marginal utility of information to the receiver. For example,
individuals capacity for making sound judgments about a
complex situa tion ma y be seriously impaired by supplying them
with a lot of information that they believe would be relevant
but w hose influence on the situation is not clear.
Thus, the information system is an abstracting system. Its
justification lies in the reduction of the informat ion a vailable
to the information that is relevant to action. But abstraction
should not be carried to the point where differences in the
significance of da ta are obscured.
An information system is a device for continually bringing undernotice new facts and new know ledge. It must provide not only
the premises of decisions but a lso a feedback so tha t decisions
may be reaffirmed or abandoned in favor of others. The
development of an organization and the development of the
judgment of its a gents a like depend on this feedback.
Since both the capacity and the time available for observation
are limited, an information system must provide a formal recordto guard against misinterpretation of past experiences. The
records of an organizat ion are its memory. Therefore, all records
and communicat ions at any time serve not only their immediate
function but a lso the function of memory.
The information system must be regarded as a continuously
developing instrument, in much the same way as an organizat ion
is cont inuously developing.
It is a matter of experience that information processing is done
according to habitual modes far more commonly than according
to delibera te assessments of the users requirements.
45 These features of effective information systems can also be used to
create a list of the symptoms of a broken informa tion system, such
as the follow ing:
information exists in separate databa ses that are difficult tointegrate;
inconsistent signals and information are given by different parts
of the system;
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users complain of information overload;
users complain that w hile there is lots of data , little usable,
relevant information is ava ilable; feedback about the impact of decisions is not regularly provided;
prior results are not maintained in usable format (e.g., trends,
etc.);
the information system has not been adjusted as the organization
has changed; a nd
the information system does not support w hat-if analysis, so
most decisions are guided by the w eve always done it thisw ay theory.
46 To avoid these types of problems, the ICM S needs to be designed to
support the key decisions made w ithin an organization, facilita te a
wide range of analysis, and be the source of reliable, consistent
details and information to users both within and outside the
organization.
Design of the ICMS
47 It is during the design stage of the ICM S that the relationships
betw een specific data requirements and decisions a re established.
Five general steps make up the ba sic approa ch used to make sure
tha t the ICM S meets the needs of its users:
analysis of the decision system;
analysis of information requirements; aggregation o f decisions;
design of information system features; and
design of internal control routines to ensure data integrity.
48 As this list suggests, the driving force in the ICM S design process is
the identificat ion and a ggregation of the organizations decisions in
terms of their information requirements. A fa ilure to cata log the
major decisions made w ithin the organization w ill leave the ICM S
unfocused, increasing the risk that the information gathered will
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fa il to meet the needs of users. What do each of these specific issues
enta il in terms of a ctivities and outcomes?
Anal ysi s of the Decision System
49 D ecision flow charts can be used to gain an understanding of the
ICM S data requirements, as illustra ted in Exhibit 5. D eta iling the
key decisions made, a s w ell as the relat ionship betw een decisions,
often reveals that some important decisions are made by default
(e.g., based on established routines ). Other decisions may a ctually
be the result of interdependent effortsa decision made in the
purchasing department, for instance, has an effect on the work doneon the plant floor.
Exhibit 5. Decision Flow Analysis
A/R
Treasurer
Preparecost
analysis
Take? Inform
customerSchedule
1 hour
1 day
=(requiredtime =30
minutes)
Inform
customer
Make
Ship
Invoice
Collect
Production
Logistics
A/R
Release to
production
Order
entry
Receive
request for
special order
Sales Sales Scheduling LogisticsFinancial
analyst
Order
entry
Financial
analyst
Y
N
Breakdown -
times 3-5 days
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50 To be useful in ICM S design, decision flow charts need to detail
w hat decision is being made, w ho is responsible for it, w hat o ther
departments, activities, or processes are af fected, problems w ith the
decision or its outcome, and related fa ctors. These flow charts should
contain sufficient detail to make sure that all key information demands
can be identified. It is easier to introduce finer information into an
integrated information system than it is to combine fine subsystems
into one integrated system.
Analysis of Informati on Requi rements
51 Three unique categories of organizational decisions typically aremade: concrete, complex, and unstructured. The first type of decision
is easily modeled to identify an optimal solution. Any decision that
falls into this category is relatively certain and can be made
automatically by routines established w ithin the information system.
The decision is reviewed only when problems occur or if periodic
updates are completed. For a decision about the need to replenish stock
on a low -value inventory item such as toggle bolts or copy paper, the
information needed and optimal choice to make are easy to identify
(e.g., stock levels, lead times, demand patterns). For these types of
decisions, the goal is to minimize the time and resources used to support
them by stabilizing the decision rules and analysis undertaken.
52 For some decisions, it is difficult to identify an optimal solution
the set o f va riables that needs to be considered is too complex to be
completely defined. For instance, a large fa ctory needs to factor in
a large number of issues, such as available capacity, routings, ship
dates, raw material inventory levels, and labor availability when
completing its run and ship schedules. There may be some theoretical
optimum for this complex decision, but it cannot be directly or
easily identified. The result is that these decisions are often made
using simulation and scenario analysis to identify potential solutions.
While defining the optimal solution may be difficult, the information
requirements of the decision can be identified a nd met.
53 For the third class of decisions, models do not exist to structure the
analysisnot only do optimal solutions not exist but information
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requirements are also difficult to define. When decision ma kers can
identify needed information, it can be incorpora ted in the information
system. While many mana gers know w hat output they need, a nd
w hy, they do not have the requisite know ledge to identify the deta iled
da ta requirements these needs represent. In this situa tion the design
and use of information systems becomes the most challenging.
54 If the information is integrated around a framew ork such as that
present in the various SM Ps, w hat da ta is available, w hat criterion
w ill be used in the decision process, a nd how best to capture currently
unavailable da ta bits become more apparent. The ICMS framework
creates a structure for da ta and its analysis that is consistent a cross
key decision settings faced by the organizat ion. It brings a common
set of insights and knowledge to the organization, allowing it to
minimize its performance and communica tion ga ps.
Aggregati on of Deci sions
55 Finding a log ica l st ructure for def in ing and ana lyzing the
organizat ions decisions and the information they require is diff icultunless decision models are uniformly defined. The ICMS framework
is built around the natural hierarchy of decisions within an
organization. Aggregat ion is not a ta sk that needs to be doneit is
built into the models structure. The objective is to identify the major
decisions ma de at the customer/market, product/service, process,
and resource levels. These decision clusters are then ma tched a gainst
the information capa bilities of the seven SMPs. The result is a ta ble
similar to tha t presented in Exhibit 4.
Design of Informati on System Featu res
56 The analysis of the decision structure provides a pattern for the
design of the ICM S framework. There are any number of w ays to
configure the physical assets that support the framew ork. Relat ional
da tabases, local area netw ork (LAN) structures, or mainframe-based
client/server systems are just a few of the opt ions ava ilable. The
advantage of the ICM S structure is tha t it a llow s for the separa tion
of the supporting da ta ba ses and techniquesthese sources of da ta
are brought together only as needed. The amount o f shared da ta is
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minimized, reflecting the fact that the more tightly integrated the
da ta sources are in the integrated system, the more costly the system
w ill be to configure and susta in.
Design of Internal Control Rout ines to Ensure Data Integri ty
57 Ensuring the integrity of the underlying data entering the system is
critical to its long-term usefulness. If input or output errors are made,
the information provided to users will have little value. Internal
contro l procedures need to be designed to address these potentia l
problems. Input errors can occur that are difficult to detect in the
ICMS framework. If this data is used across multiple decisiondomains, SMPs, and a nalysis, the impact of these errors multiplies.
Ensuring the quality of the ICM S da ta is a primary concern of the
financial practitioner.
58 The ICM S framew ork is superior in many w ays to other attempts
to integrate the da ta of the organization because it emphasizes the
20 percent of shared data that supports 80-90 percent of the common
decisions. As such, the requisite da ta and its integra tion represent20 percent or less of the total potential cost and activity level normally
required by such a system. In addition, the unique nature of each
SMP provides an effective infrastructure for organizing the da ta ,
all but eliminating redundancy in the database. The complete
framew ork provides a logical, consistent basis for collecting, sharing,
and using da ta to crea te relevant informat ion and reports. It is to
the specifics of the rela tionship betw een the SM Ps and the various
decision domains that a ttention now turns.
Strategic Management Processes
59 Creating information conduits from the top of the organization to
the bottom, a strategic management process is one of the tw o primary
dimensions of the ICMS framework. Each of the seven core stra tegic
management processes contains unique types of information.
Specifically: Target cost managementisa system of profit planning and cost
management tha t is price led, customer focused, design centered,
and cross functiona l. TCM emphasizes the relationship betw een
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the va lue embedded in a product/service bundle, customer
requirements, and the maximum amount of resources/costs tha t
can be consumed to meet these needs. It identifies the right
products, prices, and features to optimize the value created by
processes and a ctivities. It is this discipline and its application
to the development and management of an organizations
product and service offerings, that helps ensure long-term
business survival, growth, and prosperity in todays rapidly
changing, competitive market.
Extended enterpriseencapsulates the horizonta l flow of products
and services that ma kes up the industry va lue chain. Identifyingcore relat ionships and creating system solutions to performance
shortfalls, EE is the primary source of external information
about customer satisfaction, changes in buying patterns, supply
chain capability, and system performance against customer
requirements. The objective of EE is to develop a n environment
in which all value chain members function as a single entity.
Aligning the purpose and strategies of diverse entities into a
cooperative whole opens opportunities for cost reduction,
investment leveraging, cycle time reductions, and know ledge
sharing, all of which can contribute to increased customer
satisfaction. Eliminating many of the w asteful transaction costs
and removing redundancies, delays, and inefficiencies from the
supply chain, companies embra cing EE are creating new forms
of competitive advantage for themselves and their trading
partners.
Asset managementserves as the organizing system for a ll asset
investment and management efforts and therefore plays a pivotal
role in cost management integrat ion. AM detai ls the
requirements for and tracks the progress of new resource
acquisitions that are often critical if strategic and tactical
objectives are to be met. Asset management moves beyond the
purchase of new physical resources, though, to examine thecompetencies of the human resources of the organization.
Investments in human and intellectual capital can often spell
the difference betw een success and fa ilure of new programs and
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strategies. M onitoring investments against their planned results
helps pinpoint a rea s that ma y become hot spots for
performance downstream. It also helps ensure that value
creation, not the politics of self-interest, lies behind the request
for and use of scarce orga nizat ional resources.
Capacity cost managementprovides information about how
assets are being used, what resources are being wasted, and
w here potentia l improvements may be reaped. The objective of
C M therefore is to support the profitable mana gement of the
value-generating competencies, processes, and capabilities of
an organization. C M is a pivota l support strategic managementprocess. It seldom provides the first type of data needed to make
a decision but ra ther provides informa tion to other SM Ps more
centra l to resolving the issues at hand. Every time a cost estimate
is used, some judgment of potential capacity has to be made.
Whether the capacity estimate is made actively (by observation)
or pa ssively (using historical da ta ), it a ffects the economics of
the decision.
Process managementemphasizes the linkage of a ctivities w ithin
an orga nization into a seamless, coordinated, effective w hole
tha t experiences minimal disruption due to errors or miscom-
munication. Shaped by a clear understanding of the flow of
activities that create value for an organizations customers, it
serves as a vehicle to set strategy in motion by providing a
better understanding of how , w here, and w hy resources are con-
sumed. C reating explicit linkages of individuals and a ctivitiesacross the organization, PM bridges communication gaps
gaps tha t can result in fumbles, errors, a nd excess costs.
Activit y-based cost managementis based on the belief that
accurate and relevant information is critical to any organizat ion
that hopes to maintain or improve its competitive position.
Providing a cross-functional, integrated view of the organization,
its activities, and its business processes, ABCM has been credited
with triggering a revolution in management reporting and
decision support. ABCM provides the basis for developing
economic assessments of products, process, and activity
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performance and targeting opportunities that increase the value
creating potentia l of the organiza tion.
Integrated performance management. M easurement lies at theheart of the organization. What is measured becomes visible,
w hat is measured is rew arded and gets done. Defining the play-
ing field for organizational action, signaling the score in the
competitive arena, a nd linking past, present, and future actions
into a coordinated system, IPM is the basis for optimizing cur-
rent and future performance. D riven by customer requirements
and stakeholder expectations, IPM serves as the primary means
to: 1) link functiona l areas to synchronize their efforts, 2) com-municate stra tegies, 3) achieve goals, and 4) motivate employees
to meet or exceed performance expectat ions. Linking perfor-
mance measurements betw een organizat ional levels and across
processes organizations ensures that resources are being used
effectively.
60 The information contained w ithin an SM P is interdependent with
that stored in others. For instance, capacity cost managementprovides information on physical asset capabilities and current
utilizat ion levels. A financial va lue is placed on the utilized versus
w asted components of capacity by activity-based cost management,
w hile the extended enterprise identif ies potentia l sources for surge
or unplanned production. Finally, ta rget cost management defines
the tota l costs the organization can afford to incur to provide specific
types of capacity if ta rget profit levels are to be attained by a product/
service bundle.
61 Asset management establishes the baseline measures of performance
and defines the hurdles to new investment in concise, consistent
terms for use by capacity cost ma nagement. In a related w ay, process
management detai ls the impact of capaci ty problems on
organizational throughput. Finally, integrated performance
management details the current level of performa nce in nonfinancial
terms, such as quality, throughput time, a nd first-pass yields. Effective
capacity management cannot take place without the support and
insights provided by the other SM Ps.
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62 Integration of the SM Ps is the best w ay to ensure that all of the
required informa tion resides somewhere in the orga nization. It a lso
makes this data accessible across the various levels and functions
within the organization, avoiding duplication in the acquisition,
storage, and provision of information. O ne source of each primary
type of data reduces the potential for error, inconsistency, and
confusion in the ICM S framew ork w hile minimizing the amount of
explicit integrat ion tha t needs to take place. Informa tion sharing is
a very different ba sis for integrat ion of an information system tha n
the pooling and common storage and application of the organizations
entire data set in a da ta w arehouse or enterprise resource planningsystem.
63 The seven SM Ps link the levels of the organization, ba sed on a
common theme or subsystem of information and analysis. What
remains to be identified is the full set o f info rmation needed w ithin
one level or domain of decision making. The second major dimension
of the ICM S framework emphasizes the coordination and integration
of data by domain.
Decision Domains
64 The ICM S framew ork comprises four basic decision domains:
customer/market, product , process, and resource. Follow ing is a
summary of these decision domains in terms of their coverage of
issues and analysis.
Customer/M arket Domain
65 Within the customer/market decision domain attention revolves
around understanding what customers value and delivering the
opt imal set of products and services to meet these needs. It is within
this domain that an organizations competitive strategy is established
and executed as it seeks to find a unique niche in the market that
will provide it with the optimal return on its investments in core
competencies, a ssets, know ledge, a nd human resources. The fourprimary decision bundles include:
defining customer value segments;
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developing customer segment strategies;
determining competitive positioning w ithin chosen segments;
and establishing reporting and control tools.
D efining Customer Value Segments
66 The driving force behind a business is the need to provide customers
with the precise set of goods and services they require at a price
they are w illing to pay. The goa l is to understand the set o f product/
service value attributes or set o f chara cteristics most desired by the
targeted customer and market segments and then to build thesefeatures into the offerings of the orga nizat ion.
67 Specific value at tributes desired by different sets of customers differ
w idely. For instance, one group of customers might place its greatest
emphasis on service, product quality, and related features, while
another might be most concerned with price and delivery. If an
orga nizat ion does not understand these differences, it may provide
one generic product/service bundle that fails to meet either segmentsrequirements.
68 An example of a generic product/service bundle is show n in Exhibit 6.
For this small public relations organization, three specific customer
value segments were identified: research, publicity, and full
marketing services. A customer tha t fa lls into the research segment
places high value on the research activities of the organization,
w hile one tha t is seeking public relations support places litt le or novalue on this effort. If the organizat ion does research at the same
level for a ll of its customers, no one w ill be fully satisfied w ith the
effort made. In a related manner, public relat ions clients put most
of their value on placements in different media (television, magazine,
new spaper), an effort not desired or rew arded by research clients.
Unless the public relations orga nization ta ilors its activities to those
issues and outcomes valued by each uniq ue value segment, it w ill
w aste its scarce resources doing work tha t is not valued w hile leaving
other important tasks inadequately addressed. Understanding the
customer ba se from the standpoint of differences in value attributes
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and performance requirements is essentia l to the development of an
effective stra tegy.
Exhibit 6. Value-Based Customer Segmentation
Source: CAM-I, 2000: 310.
69 The goal in defining the unique value propositions for various
segments of customers is to identify those groups tha t w ill provide
the best match betw een w hat the organization does best (its core
competencies) and the efforts tha t w ill meet the optimal number of
customers needs effectively. The resulting value-ba sed stra tegy is
ba sed on the successful completion of the follow ing steps:
identifying customer value preferences;
determining relative value rankings by customer;
benchmarking the organizations performance against customer
requirements versus that of key competitors;
conducting price and value trade-off analysis for various
segments; and
developing cost and pro f it pro ject ions fo r each va lue
segmenta tion strategy.
70 The target cost management SM P is the primary provider of the
information a nd structure needed to complete the customer value
Attributes Public Research MarketingRelations Support
Research 5 70 25
Placements 60 0 15
Accounting meeting 10 5 5
Meeting support 5 0 15Crisis management 0 10 0
Third-party endorsements 15 0 5
Develop plans 5 150 35
Totals 100 100 100
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analysis and choice of value segments. Predominantly a tool for
strategic and tactical planning, TCM creates a framework for
identifying and analyzing the value preferences of existing or
potentia l customers. It provides guidance on specific product/service
attributes, price, a nd value ratings.
71 TC M does not provide all of the information required to complete
these ana lyses. As suggested by Exhibit 7, the extended enterprise,
integrated performance management, and activity-based cost
management a ll play key support ing roles in meeting the needs of
this class of decisions. The extended enterprise links the entire supply
chain, providing a pipeline of info rmation from the final consumer
of the product/service bundle back to the originat ing orga nizat ions
and suppliersit keeps the organiza tion close to its customers.
Exhibit 7. SMPs and Value Segmentation
Source: CAM -I, 2000, 312.
CostABCM
IPM
EE
TCM
Value
Cost/valueanalysis
Segmentationstrategy
Market and CustomerValue AssessmentsPrice/Profit Set
Valuepreferences
72 The benchmarking aspect of value-based segmentat ion efforts is
supported by integrated performance management, w hich scans theenvironment comparing organization performance against internal
goa ls, customer needs, a nd competitors performance. Activity-based
cost management, on the other hand, provides basic economic
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da ta on the costs and potentia l profits of va rious product/service
bundles w ithin customer segments. It helps crea te a segment map
tha t incorporates value preferences, prices, costs, and pro fita bility
in order to guide the final choice of segment strategies. Information
is shared among these four SMPs w ithin the customer/market
decision domain as various customer stra tegies are developed and
analyzed.
D eveloping Segment Strategies
73 Once an organization has obtained the knowledge of what various
customer segments value, by how much, a nd w hy, a ttention turnsto crafting and executing the optimal blend o f segment stra tegies to
opt imize profitability. Six primary activities performed during this
decision ana lysis include:
documenting the complete value segment array;
analyzing organizational requirements for each value segment;
assessing organizational abilities, competencies, a nd constraints
for each va lue segment;
evaluating the compatibility of segments and organizational
competencies;
assessing investment and operational implications of the various
segments; and
choosing and executing a segmentation strategy.
74 Three specific forms of information a re required to complete therequired analysis: 1) the organizations and supply chains core
competencies, 2) the array of value-ba sed segments with preferences,
and 3) an analysis of the organizations and the supply chains ability
to meet requirements of the different customer segments, given the
resource and capa city constra ints.
75 All seven SM Ps are required to fully address the issues raised w hen
choosing a segment stra tegy, a s illustra ted in Exhibit 8. For instance,the extended enterprise SMP provides a deta iled a nalysis of current
core competencies of the supply chain, its flexibility, and the
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constra ints facing the organizat ion and its tra ding partners. This
da ta is fed to target cost management, w here it is organized into an
economic framework tha t seeks to identify the optimal match between
these competencies and customer requirements.
Exhibit 8. Segment Analysis and Choice
Source: C AM-I, 2000: 314.
76 Internal assessments are conducted a t the same time, relying on
information provided by capacity cost management, process
management, integrated performance management, and activity-
based cost ma nagement. When shortfalls in capability a re identified,
asset management provides information on the preferred way to
bridge identified gaps. Pooling data around existing capabilities,
the cost to enhance these competencies where needed, and the
potential costs and benefits of one segment strategy over anotherrequire da ta gathered in every part of the organization and its supply
chain.
Process capability
Available capacity cost
to use idle capacity
CorecompetenciesFlexibility/constraints
PM
CM
AM
Ability to meetcustomer
requirements
Trade-offs
Firm performancerequirements (price/
profit/ share)
EE
Cost of
various alternatives
Asset analysis/policies
ABCM
TCM
Choice ofsegments
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D etermining Competi ti ve Posit ioning w ithin Chosen Segments
77 In TC M , defining a product/customer niche is a primary decision.
Emphasizing the how of how a strategy is to be deployed, thisdecision helps bridge the gap betw een planning and execution o f a
plan. Is the organization best off differentiating itself on price,
quality, responsiveness, flexibility, or variety of products of fered? If
price or a low -cost strategic position seems best, analysis of how to
best leverage the supply cha in needs to be completed.
78 While TCM once again provides the structure for this decision within
the customer/market decision domain, it relies heavily on informationprovided by the other six SMPs to complete its ana lysis. The various
SMPs and the information they add to this decision are described
below.
79 EE provides information on trends in the market and the potential
of the supply chain to differentia te itself from competitors on core
performance dimensions. EE ties together data from the beginning
to the end of the supply pipeline on what customers are buying,w hen, w here, and trends in their consumption patterns.
80 IPM assesses the organizations current performance against customer
requirements, responsiveness of the organization a nd its competitors
to changes in those needs, and areas where improvements can or
could be made.
81 CM identifies internal constraints and capabilities serving to place
limits on the position chosen by the organization and its trading
partners. If the plant or supply chain is currently running close to
capa city, it ma y not be feasible to choose a strategic position that
requires flexibility and responsiveness.
82 AM provides estimates of the costs and return requirements for any
new asset purchases to meet the needs of chosen segment stra tegies.
For instance, if electronic data interchange (EDI) is essential to
effective positioning in a segment, the orga nizat ion a nd its supplychain must be able to purchase this capability and deploy it effectively
and rapidly.
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83 PM defines process capab ilities and constraints for each of the
potentia l stra tegic positions. If a process is not in place to provide
consistent product/service quality a nd availability, these stra tegic
dimensions w ill not be ava ilable to the organization.
84 ABCM assesses the relative costs and profitability of each of the
potentia l segment positions, such as the underlying costs to provide
a just-in-time delivery capability. Each potential segment and stra tegy
needs to be evalua ted for profit performance for the short and long
run, covering the entire life cycle of the affected product/service
bundles.
85 The choice of a strategic position incorporates more information
than almost any other decision undertaken by the organization.
While target cost management provides the organizing fra mew ork,
da ta must be collected from multiple SMPs to complete the ana lysis.
The ICMS framework provides the data linkages and structures
that will complete the complex compilation of data and analysis
required to optimize the organizat ions strategic position.
Establishing Evaluation and Cont rol Tools
86 H aving established a segment strategy and put the activities and
structures in place to execute it, attention turns to maintenance,
contro l, and continuous improvement. M anagement report ing is a
key part of the evaluat ion cycle tha t keeps an organization on track,
constantly improving its performance against customer and
stakeholder requirements. As suggested by Exhibit 9, integratedperformance management provides the fra mew ork for this last set
of decisions w ithin the customer/market decision domain.
87 Embedded w ithin the core databa se of the organization, evaluation
and control draws on three supporting SMPs: ABCM, CM, and
AM . Ea ch of these SM Ps provides a unique perspective on current
versus expected performance on key dimensions such as quality,
cost, profita bility, delivery, and customer satisfaction. These SMPsfeed directly to the balanced scorecard structure that lies at the
heart of the integrated performance management SMP.
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88 Creating management reports that summarize current performance
and related trends against defined critical success factors and key
performance indicators is the primary purpose of IPM. ABCM provides
detailed cost and resource data to IPM, supporting the analysis of
customer and market profitability and the performance. AM, on the
other hand, provides data on major a sset purchases and performance
as w ell as the defined performance requirements for these assets.
89 CM provides a different type of evaluation and control information,
focusing on the actual utilization of resources, planned versus actual
idle time, and a reas where bottlenecks and constra ints are appearing
tha t w ill impair the ability of the organization to a chieve its goa ls.
The three supporting SMPs provide feedback to the organization
through IPM on the efficiency and effectiveness of its activities,investments, and operational assets, resulting in an integrated set of
management reports. Through these reports organizational
Exhibit 9. Evaluation and Control within the Customer/Market Domain
Source: CAM-I, 2000: 321.
Integrated Performance
Management (IPM)
PM
Evaluation/learningABCM
Capacity plan
Financialresults
CM
AM
Operational results
Back to all SMPs
Assetperformancerequirements
Cost
estima
tes:bu
dgets
Actualperformance
Standards/objectives/
budget
Actualcapa
city
utilization
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performance is made visible, opportunities for improvement are
identified, and remedial actions are made possible w hen necessary.
The result is organizational learning and the ability to improve
long-term performance against the expectations of all of the
organizations stakeholders.
90 Without the development and implementat ion of the ICM S
framework this entire class of decisions has to rely on intuition,
instinct, and incomplete data. When integrated information is
available, rigor and repeatability are added to the analysis and
choice process w ithin the customer/market and other decision
domains. Learning becomes possible because communication is
regularized. An organization can perform these decisions without
the ICMS framework but with a higher degree of risk and less
certa inty that optimality w ill be achieved over the long term. Similar
issues motivate the development and integration of information w ith
the product decision doma in.
Product D eci si on Domain
91 The development of a strategy brings, by definition, the need to
identify and provide specific product/service bundles to the market.
These bundles need to have specific attributes and features that
reflect the chosen segmenta tion strategy. Within the product decision
domain, then, market strategies are translated into detailed
specifications and requirements for performance that will drive
ongoing decision making and activities.
92 For instance, if the stated customer/market strategy is to a chieve
a dominant market share in the computer printer and peripheral
market by o ffering low cost and high functiona lity, t he decisions
a t the product doma in have to d rive tow ard optimizing the blend
of functions per dollar o f cost incurred. Achieving these goa ls may
require the use of common parts, such as computer circuits, w here
all functions are already programmed but specific features are
blocked for lower-end models. It may seem illogical to hide theadded functionality, but it may provide the low est-cost solution
for the entire product family. The approach used to execute the
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strategy needs to reflect the critical success factors of the
segmenta tion a pproach, minimizing the complexity and variety
to the production process w hile maximizing the variety of fered to
the customer.
93 The translation of strategy into specific product/service design and
development goals and their achievement requires a tremendous
amount of information and analysis. Beginning with a detailed
mapping of va lue a tt ributes to specific product/service features,
decisions w ithin this doma in require the ongoing assessment o f the
cost/performance trade-offs tha t a re inherent in each potential product
or service a lternat ive.
94 As the product moves off the draw ing board and into production,