Download Report

ACCA Paper P5 – Advanced Performance management
Course slides
For exams in
June 2008
Syllabus
A
Strategic planning and control
B
Economic, fiscal, market and environmental
factors
C
Performance measurement systems and design
D
Strategic performance measurement
E
Performance evaluation and corporate failure
F
Current developments and emerging issues in
performance management
Slide 2
Examiner & Format of the Exam
Examiner: Shane Johnson
Format of the Exam
Marks
Section A
Two compulsory questions
60-70
Section B
Two questions from a choice of three up
to 20 marks each
30-40
Total
Slide 3
100
The December 2007 exam
Topics examined in the December 2007 exam
Question 1
Operating and financial performance measurement,
performance comparisons
Question 2
Residual income, EVA
Question 3
Sensitivity analysis, CSF, ERPS
Question 4
ABM
Question 5
Porter’s five forces, corporate failure
Slide 4
The BPP Learning Media classroom slides
What do these slides cover?
– A selection of key areas of the syllabus
Using the slides
– Use the slides as a point of reference
– Add detail by talking around the slides (eg using material
from the corresponding Study Text chapter)
– Consider adding slides yourself to suit your course
– Recommend students attempt appropriate questions
from the Practice & Revision Kit
Slide 5
Chapter 1
Study Text Chapter 1
Introduction to
strategic
management
accounting
Management Information Hierarchy
• Anthony’s Hierarchy
STRATEGIC
PLANNING
MANAGEMENT
CONTROL
OPERATIONAL
CONTROL
Slide 7
Roles of management accountant
• Information
• Control
• Targets
• Rewards
Slide 8
Strategic Planning
• Strategy
– A course of action to achieve a specific outcome
• Strategic Planning
– The formulation, evaluation and selection of
strategies for the purpose of developing a long-term
course of action.
Slide 9
Strategic Planning
• Scope
• Characteristics
• Information
Slide 10
Management Control
• Scope
• Characteristics
• Examples
Slide 11
Operational Control
• Scope
• Information
Slide 12
Rational model
• 3 main stages
Slide 13
– Strategic analysis
• of our current
position
– Strategic choice
• to get to our desired
future position
– Strategic
implementation
• to make a success of
our strategic choice
Key features of planning model
• Strategy to achieve objectives
• Formal process
• Led from top
• “Drilled-down” through organisation
Slide 14
The rational model
POSITION
AUDIT
MISSION & CORPORATE STRATEGIC
OBJECTIVES APPRAISAL
OPTIONS
ENVIRONMENT
ANALYSIS
Slide 15
STRATEGIC
CONTROL
STRATEGIC STRATEGIC
CHOICE
IMPLEMENT’
The rational model
Advantages
Problems
•
Guides activities
•
Assumes formality
•
Provides a standard
•
•
Communicates
Separate from
operations
•
Legitimacy
•
Bureaucratic
•
Identifies risks
•
Inflexible
•
Lack commitment
Slide 16
Environmental Analysis
• PEST
• Porter’s 5 forces
– Understand inherent attractiveness of industry
– Understand impact of individual forces
Slide 17
Corporate Appraisal
INTERNAL
ANALYSIS
Identify
• Strengths
• Weaknesses
MISSION & CORPORATE
OBJECTIVES APPRAISAL
• Opportunities
• Threats
ENVIRONMENT
ANALYSIS
Slide 18
Position Audit
INTERNAL
ANALYSIS
MISSION & CORPORATE
OBJECTIVES APPRAISAL
ENVIRONMENT
ANALYSIS
Slide 19
Identify
• Strengths
• Weaknesses
SWOT Analysis
INTERNAL : RELATIVE TO COMPETITION
STRENGTHS
WEAKNESSES
exploit
rectify
OPPORTUNITIES
THREATS
seize
nullify
EXTERNAL: PRESENT TO ALL INDUSTRY MEMBERS
Slide 20
Gap analysis – fixed period
OBJECTIVE
SALES
GAP
FORECAST
TIME
Slide 21
Gap Strategies
• Efficiency
• Expansion
• Diversification
Slide 22
Product life cycle (PLC)
Sales
Volume
Sales
Profit
Time
Introduction
Slide 23
Growth
Maturity
Decline
Lecture Example 1
• What advantages and disadvantages do large
companies such as Marks & Spencer face when
relying on the rational model to derive new
strategy ?
Slide 24
Lecture Example 1
Advantages
• Focus on key strategic issues and risks
• Coordinates and integrates diverse business activities
within the organisation
• Improves communication with stakeholders
• Encourages goal congruence
• Avoids damaging short termist behaviour
Slide 25
Lecture Example 1 cont..
The drawbacks of rational planning include
• Too infrequent to allow the business to operate
flexibly and dynamically
• Deters creative, innovative and radical strategy making
• Loss of entrepreneurial thought processes
• Could cause firm to pursue wrong policies if planning
assumptions of plan are wrong
• Can be complicated and difficult to implement because
there is only limited staff involvement in the planning
process
Slide 26
Freewheeling opportunism
“..should not bother with strategic planning..”
Advantages
Disadvantages
•
Short term
opportunities
grasped
•
•
•
Reactive
•
Encourages
initiative
•
Slide 27
Creative
•
•
Control difficult
Long term
opportunities
missed
Purely profit
driven
Not Proactive
Benchmarking
How
• Understand your own business processes
• Establish who/what to benchmark
• Collect and analyse data
• Implement improvements
Slide 28
Benchmarking
Who
• Internal – between SBU’s
• Functional – best in any industry
• Competitive – direct competitors
• Strategic – competitors’ strategies
Slide 29
Benchmarking – why ?
Advantages
• Position audit
• Identify CSF’s
• Identify potential
advantage
Slide 30
Problems
• No best solution
• Reactive
• Information dependant
Risk & Uncertainty
Accounting for risk
Quantify risk
• ROCE
• Rule of thumb
• Payback
• Probability
• NPV
• Sensitivity
• Cost-benefit
• Standard deviation
Slide 31
Question practice – end of Chapter 1
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q1
Slide 32
Q2
Q3
Q4
Chapter 2
Study Text Chapter 2
Alternative
approaches to
budgeting for
control
Budget Cycle
Determine Budget
Control
Planning
Operate
Slide 34
Budgeting and budgetary control - Summary
• Budgeting is part of planning & control
• Managers should only be assessed on those items they
can control
• Feedback control is reactive, feedforward proactive
• The level of budget set and the amount of participation
will impact motivation
Slide 35
Budgeting and budgetary control - Summary
• Flexible budgets are ideal for planning, flexed for
control
• Incremental budgets build in slack and inefficiency, ZBB
uses efficient allocation of resources
• Rolling budgets are useful in time of uncertainty
• ABB looks at managing the causes of costs
• Beyond budgeting focuses on cashflow forecasts and
KPI’s
Slide 36
Fixed/Flexible/Flexed Budgets
• Fixed
– original budget based on single level of activity
• Flexible
– to cope with different levels of activity
– useful at planning stage
• Flexed
– necessary as a control device
– based on actual activity level
Slide 37
Alternative budget models
• Incremental v Zero Based Budgeting
–
–
–
–
more efficient allocation of resources
budgetary slack discouraged
resistance
time/effort
• Periodic v Rolling (continuous) Budgets
– producing more realistic budgets
• ABB
• Beyond Budgeting
Slide 38
Beyond Budgeting
Move away from traditional budgeting
Adaptive
management
process
Slide 39
Employee
empowerment
Behavioural aspects of budgeting
• Impact of budgeting system on human
behaviour:
–
–
–
–
–
–
Slide 40
unites employees against management
possible negative results
protective groups
finding fault
victimised
express superiority
Question practice – end of Chapter 2
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q5
Slide 41
Q6
Q7
Q9
Q10
Chapter 3
Study Text Chapter 3
Changes in business
structure and
management
accounting
Traditional v Modern Manufacturing
• Traditional
– focus was on
manufacturing in long
production runs
– any idle-time was
adverse
– little product diversity
– Buffer inventory
– Production is priority
– Focus: COST
Slide 43
• Modern
– produce in shorter
production
runs/producing on
demand
– inventory is
unacceptable & will
accept some idle-time
– complex/diverse
product ranges
– Customer is priority
– Focus: FLEXIBILITY
Quality management
Traditional
TQM
• Not value adding
• Get it right first time
• Resource intensive
• Constant improvement
• Tolerance of waste within
limits
• Design for quality
• Quality costs defined:
–
–
–
–
Appraisal
Internal failure
External failure
Prevention
• Abandon variances
Slide 44
Elements of TQM
• Work teams given responsibility for their area
• Clear identification of ‘customer’
• Clear identification of ‘supplier’
• Quality circles
• Any bonus paid on quality improvements
Slide 45
Implications of TQM
• Cross functional teams – new control
systems
• Multiple measures for teams
• Resources required to implement
improvements
• Management Accounting should be a quality
circle (supplier/customer to/of other areas)
Slide 46
Functional organisation
Company
Accounts
Slide 47
Production
Sales
Purchasing
Departments & Divisions
Department – functional specialism
Division – semi-autonomous business unit
Advantages
• Lower staff input
• Product comparisons
• Uses local knowledge
• Junior staff morale
Slide 48
Disadvantages
• Co-ordination
• Loss of control
• Conflict
Divisionalisation approaches
• Functional departments
• Geographic division
• Product/brand division
• Customer/market
Slide 49
Centralisation v Decentralisation
Pro-centralisation
Pro-decentralisation
• Central decisions
• Management overload
• Wider view
• Junior managers morale
• Resource allocation
• Local decisions
• Cheaper management
• Faster decisions
• Crisis decisions
• Develop junior managers
• Separate spheres of
responsibility
Slide 50
Multi-Divisional
Company
Product 1
Product 2
Product 3
Finance
Marketing
Purchasing
Slide 51
Network organisations
Outsourcing
Functions
Line
Authority
A
Clients
B
C
Slide 52
1
2
3
Porter’s Value Chain
• Identifies specific points where a firm can organise and
perform its activities most effectively to gain
competitive advantage
• Benefits along the value chain can be achieved due to
integration, automation and better information
exchanges
Slide 53
Value Chain
Firm Infrastructure
Support Activities
Technology Development
Human Resource Management
Procurement
Inbound Operations Outbound
Logistics
Logistics
Slide 54
Marketing
& Sales
Service
Business Process Re-engineering
• Start from scratch
• Re-define business processes
• Add value to customers
•FUNDAMENTAL
•RADICAL/DRAMATIC
Slide 55
Steps in BPR
• Identify Business Objectives
• Identify specific processes to be redesigned
• Evaluate existing processes
• Identify Potential IT applications
• Design and build new processes and systems
• Implement
Slide 56
Activity Based Costing (ABC) and ABM
Production set
up costs
Machine oil &
Machine repairs
Supervisor’s
salary
ACTIVITIES
Slide 57
Examined Dec 2007
No. of production
set ups
OAR
No. of machine
hours
OAR
No. of labour
hours
OAR
COST DRIVERS
Question practice – end of Chapter 3
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q11
Slide 58
Q12
Q13
Q14
Q15
Chapter 4
Study Text Chapter 4
Effect of
information
technology on
modern
management
accounting
Information needs and IT within organisations
Traditional usage
Strategic usage
Internal processes focus
External customer focus
Cost reduction
Localised benefits
Value creation
Shared benefits
Solving customer problems
Solving internal problems
Business led
Technology led
Incremental development
Total system development
Exploitation limited by system
Slide 60
Exploitation of information
Intranets
• Internal network
• Hold centralised, digitised information
• Accessible by all
Slide 61
EDI
• Electronic Data Interchange
– Computer to computer interchange
– Standardised, agreed exchanges
– Used between business partners
Slide 62
Extranets
• Allow external, authorised users access to
internal information
• Use internet technology
• Help to link the supply chain
Slide 63
Databases
• Systems which hold collections of records and
files, designed in such a way as to facilitate
access to the whole user community
Slide 64
Database Structure
User 1
User 2
Database
Administrator
Database Management System
Store
Slide 65
Data Warehouse
A separate database that stores current and
historical data of potential interest to managers
throughout the company
(Laudon and Laudon)
Slide 66
Components of a Data Warehouse
Internal
operational
data
Internal
historical
data
External
data
sources
Slide 67
Extraction
and
Transformation
Data
Warehouse
Data
access
and
analysis
•Queries
•Reports
•OLAP
•Data mining
Information
directory
Other Systems
• CRM Systems
– Facilitate the creation of a comprehensive customer
profile giving everyone in the organisation one view
• SCM Systems
- Provide links across the supply chain to enhance efficiency
and sharing of information
• ERP Systems
– Provide firm wide integration of processes and
information
Slide 68
Question practice – end of Chapter 4
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q17
Slide 69
Q18
Chapter 5
Study Text Chapter 5
Impact of world
economic and
market trends
Lecture Example
Despite having a wide range of business interests
Virgin have received wide and often negative press
about the standard and value for money of its rail
service.
Suggest environmental factors which Virgin
management should consider and continuously
monitor during their rail business planning process
Slide 71
Lecture Example
Virgin Rail
• Government legislation (integrated transport
policies, safety measures, etc.)
• The franchiser’s power and attitude
• Competition
• Level of service
• Pricing
Slide 72
Lecture example cont…
• Performance
• Customer comments
• Media comment and adverse publicity
• Technology (availability of new rolling stock)
• Network Rail policies, programmes and plans
Slide 73
Cost plus pricing
Full Cost
plus
Marginal Cost
Plus
Relevant cost
approach
All costs
plus
mark up
Marginal costs
plus mark up
Minimum
price
considering
opportunity
cost
Slide 74
Pricing Strategies
• Premium pricing
• Price discrimination
– By age
– By time
– By place
• Product bundling
• Psychological pricing
• Multiple products/loss leaders
• Discounts
Slide 75
Porter’s 5 Forces
Examined Dec 2007
POTENTIAL
ENTRANTS
SUPPLIERS
INDUSTRY
COMPETITORS
SUBSTITUTE
INDUSTRIES
Slide 76
BUYERS
BCG Matrix
High
Relative Market Share
Low
High
Market
or
Industry
Growth
Rate
Low
Slide 77
Star
Question Mark
Cash Cow
Dog
Ansoff’s Matrix
Present
Present
PRODUCT
Withdrawal
Consolidation
MARKET
New
Product
Development
Penetration
Diversification
Market
Development
New
Slide 78
•
Related
•
Unrelated
Question practice – end of Chapter 5
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q19
Slide 79
Chapter 6
Study Text Chapter 6
Impact of national
fiscal and monetary
policy on
performance
What should a company consider when assessing performance?
• Culture
• Economics
• Competitive forces
• Politics
• Technology
• Funding
• Legal factors
Slide 81
Organisational culture
• Values
• Attitudes
• Norms
• Expectations
“the way we do things round here” Handy
Slide 82
Levels of Culture
• Basic – which guides behaviour within the
organisation
• Overt – expressed in the organisation and
members
• Visible – style of office and dress rules etc
Slide 83
Question practice – end of Chapter 6
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q20
Slide 84
Chapter 7
Study Text Chapter 7
Other
environmental and
ethical issues
Stakeholders:
• Customers
– connected
• Suppliers
– connected
• Competition
– external
• Employees
– internal
• Local Community
– external
Slide 86
Stakeholder mapping Matrix
Low
Interest
High
Low
Minimal Effort
(-)
Keep Informed
(-)
Keep Satisfied
(-)
Key Players
(+)
Power
High
(+)/(-) support/oppose new strategy
Slide 87
Position in Matrix: (Open to discussion)
• Customers – High power, high interest
• Suppliers – Low power, high interest
• Competition – Low power, high interest
• Employees – Low power, high interest
• Local Community – Low power, high interest
Slide 88
Views on Stakeholders
Strong View
Weak View
• All stakeholders have
legitimate claim on
management
• Management should
focus on enhancement of
shareholder wealth
• Management should
adopt a balanced
approach
• Management should only
consider other
stakeholders if assisting
the core objective
Slide 89
Ethics and the organisation
Sources of pressure
Scope
• UK government
• Treatment of
stakeholders
• EU
• Consumers
• Green issues
• Employees
• Support for the
disadvantaged
• Pressure groups
Slide 90
• Dealing with unethical
entities
Corporate Ethics
Two approaches
• Organisation exists
to maximise
shareholder wealth
• Organisation
should benefit all
stakeholders
Slide 91
Considerations
• Who are stakeholders?
• Implications?
• Rights?
• Considered rights?
• Honest dealings?
• Compensation?
• Consequences?
Professional Ethics
• Objectivity
• Professional competence
• Professional behaviour
• Technical standards
• Integrity
• Confidentiality
Slide 92
Ethical codes
Content
• Employee –
employer
relationship
• Customer care
• Supplier relations
• Bribery
Slide 93
Implementation
• Senior mgmt support
• Followers prosper
• Offenders punished
• Explained to staff
• Detail provided
• Staff have access
Question practice – end of Chapter 7
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q21
Slide 94
Chapter 8
Study Text Chapter 8
Management
accounting and
information systems
Characteristics of management information
Strategic Planning
Tactical Mgt and control
Operational control
Slide 96
Information at different levels
• In the exam you must be able to identify the
key features of information at different levels in
the organisation
• The differences relate to:
– The nature of the role/tasks
– The nature of the decision making
– The format, source and level of detail
Slide 97
Lecture example
Strategic
Slide 98
•New outlets
•E-commerce strategy
Tactical
•Pricing
•Promotion strategies
Operational
•Staff rota
•Inventory replenishment
Management Information Systems (MIS)
• In relation to the information issues raised in
Chapter 1, organisations must develop a range
of appropriate MIS
• The design and selection of the MIS system
needs to take into account the information
needs of the organisation
Slide 99
Question practice – end of Chapter 8
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q22
Slide 100
Chapter 9
Study Text Chapter 9
Sources of
management
information
Information
…is data that has been processed in a way to be
meaningful and useful to its recipients.
Information is data with added business value.
Information systems collect, process and
provide information for use within the
organisation.
Slide 102
Sources of organisational information
Internal sources
Formal
1.
2.
3.
Management accounting information
Control procedures, records and general
correspondence
Appraisal systems
Informal
1.
2.
3.
Slide 103
Cross-departmental networking
The “Grapevine”
Social gatherings
Sources of organisational information
External sources
Formal
1.
2.
3.
Commercial data vendors
Government and official authorities
Trade associations and professional bodies
Informal
1.
2.
3.
Slide 104
Suppliers and other intermediaries
Customers and their representatives
The Internet
The Internet
• The Internet – an international network of
networks, both commercially and publicly
owned
• E-commerce – the process of buying and selling
using computer mediated communications
Slide 105
Question practice – end of Chapter 9
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q23
Slide 106
Q24
Chapter 10
Study Text Chapter 10
Recording and
processing methods
and management
reports
Lecture example – Security # 1
Suggest ways in which computer facilities and
equipment can be physically protected.
Slide 108
Answer
a) Secure location
(i) locked doors, access cards, security guards, reception
personnel, keypad access
b) Personnel controls
(i) ID cards – including photograph
(ii) sign in/out procedure
• IT
(i) alarm systems
• Portable equipment
(i) register to include booking out procedures,
barcoding/postcode marking
• Checking
(i) equipment audits
Slide 109
Lecture example – Security # 2
• How might unauthorised access to a computer
system be prevented and, if it cannot be
prevented (and 100% prevention is unlikely),
how the offenders might be discovered and
apprehended?
Slide 110
Answer
a) Hardware
(i) card access to rooms,
(ii) firewall computers,
(iii)CCTV
•
Software
(i) passwords,
(ii) virus checkers
(iii)computer access logs
(iv)file access logs
•
Organisational arrangements
(i) internal audit
(ii) division of duties
Slide 111
Viruses
• A virus is a piece of software which may damage
the software and data held on the computer.
• Writing, distributing or planting viruses is an
offence under the Computer Misuse Act.
• Cheap, commercial, anti-virus software is available
from many sources.
• Many organisations also install firewalls on
computers connected to the internet.
Slide 112
Question practice – end of Chapter 10
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q25
Slide 113
Chapter 11
Study Text Chapter 11
Performance
hierarchy
The performance hierarchy
• Vision
Vague
Timeless
Specific
Timebound
• Mission
• Goals
• Objectives
Slide 115
Mission / mission statements
• Provides rationale as to why an organisation
exists
• States long term direction
• Effective when all members work towards
rather than against its main principles
Slide 116
An effective mission should contain:
• Campbell et al
–
–
–
–
Purpose
Strategy
Policies & Behaviour Standards
Values & Beliefs
Slide 117
Mission Statement Examples
Purpose
Profit, service, to be the best
Strategy
Quality, cheap, global
Behaviour standards
Open door policy
Values & beliefs
Animal testing, staff welfare,
environment
Slide 118
Mission statements
Advantages
Criticisms
• Nature
• Vague/meaningless
• Common culture
• Not representative
• Focus
• Implementation needed
• Goal congruence
Slide 119
The role of objectives
• S - specific
• M - measurable
• A - agreed
• R - realistic
• T - time bound
Slide 120
Objective setting
Mission
Vertical consistency
Horizontal Consistency
Slide 121
Gap analysis
Objective
Objective
eg profit
GAP
Forecast
Time
Slide 122
Ansoff’s Matrix
Present
Present
PRODUCT
Withdrawal
Consolidation
MARKET
New
Product
Development
Penetration
Diversification
Market
Development
New
Slide 123
•
Related
•
Unrelated
Question practice – end of Chapter 11
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q26
Slide 124
Chapter 12
Study Text Chapter 12
Scope of strategic
performance
measures in the
private sector
Introduction
• Aim of private company is to maximise
shareholder wealth
• Analysis can be performed across 4 areas:
Profitability
Liquidity
Gearing
Shareholders’ ratios
Slide 126
Financial analysis
Examined Dec 2007
• Profitability and return
• Debt and gearing
• Liquidity
• Shareholders ratios
Must compare
Different firms
and time periods
P/E, div cover, div
yield, EPS, div cover
ROCE, margins, asset turnover
Debt/equity, interest cover
Receivables/payables/inventory
days, current ratio, acid test
Slide 127
Basis for comparison
• Over time
• Against other companies
– Same sector?
– Different sector?
• Industry averages
• Against other measures
Slide 128
Limitations/strengths of ratios
• Limitations
–
–
–
–
–
Need a comparator
Must be clearly defined
Inflation effects
Differing bases
Historical
Slide 129
• Strengths
– Easier to understand than
absolutes
– Changes over time can be
seen
– Gives context
– Can help create targets
– Summary of results
Profit as a measure
Advantages
• Simple
• Relates to
shareholder wealth
Slide 130
Disadvantages
• Easily manipulated
• Short term
enhancement
• Absolute measure
ROCE/ROI
Profit before interest and tax
x 100%
Average capital employed.
Advantages
• Relative measure
• Easily understood
• Relates to asset
consumption
Slide 131
Disadvantages
• Reliance on profit
• Which investment
base to use?
RI
Examined Dec 2007
Controllable divisional profit – notional interest charge
(Head Office Investment x ROI)
Advantages
• Fewer dysfunctional
decisions
• Can account for risk
Slide 132
Disadvantages
• Profit based absolute
measure
• Investment base?
• Determining ROI?
• Inter-divisional
comparisons difficult
NPV calculations
Cashflows
Exclude inflation
Must be
• Future
• Incremental
• Cash
Include inflation
• Use current/real cashflows • Use money/nominal
cashflows
• Discount at real rate, r
• Discount at money rate, m
1+m = (1+r) x (1+i)
Slide 133
Sensitivity analysis
Examined Dec 2007
How much can NPV change before NPV is negative?
Sensitivity =
NPV total
PV cashflow
NPV total
= 1,148
PV of resale value = 4,000 * DF @12%
=4,000 * 0.636
=2,544
Slide 134
Sensitivity
=
1,148
2,544
=
45%
If the chain sells for 45% less than our initial estimate
the NPV of the project will be zero.
If the estimate is further out than this, the project
would return a negative NPV.
Slide 135
Question practice – end of Chapter 12
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q27
Slide 136
Q28
Q29
Q30
Q31
Chapter 13
Study Text Chapter 13
Strategic
performance issues
in complex business
structures
Porter’s 5 Forces
Examined Dec 2007
Threat of
New
Entrants
Bargaining
Power of
Suppliers
Competitive
Rivalry
Substitute
Industries
Slide 138
Bargaining
Power of
Customers
Lecture Example
• Using the model identify the forces and their
strength for a clothing manufacturer
Slide 139
Lecture Example
• Buyers – retail stores, strong
• Suppliers – staff (labour), manufacturers
(fabric and equipment) weak
• Substitutes – Other manufacturers, strong
• New Entrants – Easy to set up on basic level
(China currently entering market), strong
• Competition – Brands, strong
Slide 140
Lecture Example
• Buyers – Value adding activities, keeping up
with trends
• Suppliers – Single supplier deals regularly
reviewed
• Substitutes – Build reputation (no subs for
clothing!)
• New Entrants – Build reputation
• Competition – Branding or niche products
Slide 141
BCG Matrix
High
Relative Market Share
Low
High
Market
or
Industry
Growth
Rate
Low
Slide 142
Star
Question Mark
Cash Cow
Dog
Uses of The BCG
• Internal balance
• Assess trends
• Evaluate competitors
• Evaluate risk
Slide 143
Ansoff’s Matrix
Present
PRODUCT
New
Present
Market
Penetration
Product
Development
MARKET
Diversification
Market
Development
New
Slide 144
•
Related
•
Unrelated
Question practice – end of Chapter 13
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q34
Slide 145
Q35
Chapter 14
Study Text Chapter 14
Divisional
performance and
transfer pricing
issues
EVA
Examined Dec 2007
Calculate NOPAT – interest rate (WACC) x net assets
(or capital charge)
NOPAT
• Take reported profit after tax
• Adjust for non-cash items
• Add back net interest cost
• Economic depreciation is a cost
Net Assets – usually replacement cost
• Shareholder funds plus long term debt
Slide 147
Example
Profit after tax = 160, depreciation = 30, tax rate = 30%,
interest = 20, WACC = 15%,
replacement cost of net assets = 1,100
20X8
NOPAT
= 160 + 30 + 20 x 0.7
= 204
Net Assets = 1,100
EVA
= 204 – 15% x 1,100
= 39
Slide 148
EVA
Advantages 
Disadvantages X
• Measures value added to
Shareholders
• Lots of adjustments to
profit
• Cash based
• Historic measure
• Easy to communicate
• Relies on estimate of
interest rate
• Difficult to make
comparisons
Slide 149
Aims of Transfer Pricing System
• Controllability
– one product one price and easily agreed, simplicity
• Goal congruence
– divisional decisions benefit whole company
• Autonomy
– motivation
• Performance evaluation
– ensure reward goes where it’s due
Remember: Does the company want the transfer to take
place?
Slide 150
A transfer pricing situation – The Brewery Group
Beer
Beer
Rooms
Slide 151
Avoiding dysfunctional behaviour
• Set price to earn a return in one division and
incur cost in another
• Enable profit centres are measured
commercially
• Allow profit centre managers to agree on
transfer
Slide 152
Methods of setting transfer price
• Market price
– Use external market price where there is an
external market
– Adjusted market price to reflect savings
• Cost Based Approach
– Actual v Standard
– Standard full cost plus %
– Standard variable cost plus %
Slide 153
Selling Division transfers at MC
• When is this desirable?
– If there is no external market for Division S
– If there is an external market for S and it has spare
capacity
• Who benefits?
– If there is spare capacity then the whole group
should benefit
• Reaction of the Selling Division?
– S will be unhappy with a TP at MC
Slide 154
Methods of setting transfer price
• Dual pricing
– Use variable cost and transfer share of profits at
end of year to supplying division
– If external market exists
• charge receiving division variable or marginal cost
• supplying gets market price
• Two Part Tariff
– Variable cost for transfer plus fixed costs at year
end
• Opportunity Cost Based Approach
Slide 155
Opportunity Cost Based Approach
MinimumTP (accepted by transferring division)
• If external market for intermediate product
– if S is at full capacity, then it may have to forego
income from the external market and the
opportunity cost will be lost contribution
– if S has spare capacity - it will not be forgoing any
income and hence the transfer price will be at
MC
• No external market
– no opportunity cost - transfer at MC
Slide 156
Opportunity Cost Based Approach
Maximum TP (accepted by receiving division)
• Lower of
– External Market Price and
– Net revenue in receiving division
• Where net revenue =
– final selling price LESS own divisional costs
Slide 157
Transfer pricing in practice
•
Negotiation
•
Head Office intervention
•
Head Office cost allocations
Slide 158
International Transfer Pricing
• Global company with many subsidiaries around
the world
• Taxation consideration
• Possibly manipulate pricing system to earn high
profits in a low tax country
• But tax authority impose ‘Arm’s length’ price
Slide 159
Question practice – end of Chapter 14
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q36
Slide 160
Q37
Q38
Q39
Q40
Chapter 15
Study Text Chapter 15
Scope of strategic
performance
measures in
not-for-profit
organisations
Not-for-profit organisations
• Prime goal for assessed by economic
measures
– Profit making may be part of this activity however
• Examples
– Charities, Councils, Forces, Colleges, NHS
Slide 162
Public Sector bodies
• Citizens Charter
–
–
–
–
–
Set and published standards
Quality via privatisation
League tables
Complaints procedures
User to consumer
Slide 163
Lecture Example
• Highlight problems that may occur when using
league tables
–
–
–
–
Tunnel Vision
Lack of true comparability
Creative accounting
Self fulfilling prophecy
Slide 164
VFM
example
– washing up liquid
Economy
– more clean plates per $
Efficiency
– more clean plates per squirt
Effectiveness – plates as clean as they should be
Slide 165
Question practice – end of Chapter 15
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q41
Slide 166
Q42
Q43
Q44
Q45
Chapter 16
Study Text Chapter 16
Behavioural
aspects of
performance
measurement
Performance measurement and behaviour
Controllability
– Variable costs
– Fixed costs
Uncontrollable factors
– Factors beyond the
control of the manager
Slide 168
Accountability
– Agency theory
– Hard and soft
accountability
Reward schemes
– Link to performance
– Group scheme
Management styles and motivation
• Hopwood’s management styles
– Budget-constrained
– Profit-conscious
– Non-accounting
• Motivation
– challenging but achievable
– goal congruence
Slide 169
Question practice – end of Chapter 16
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q46
Slide 170
Q47
Chapter 17
Study Text Chapter 17
Alternative views
of performance
measurement
Balanced Scorecard
Customer
Internal
Innovation &
Learning
Financial
Slide 172
Advantages of Balanced Scorecard
• Considers all strategic measures
• Holistic view
• Avoids short term arguments
• Considers business activity linkages
• Forces organisation to look externally
• Useful for risk assessment
Slide 173
Balanced Scorecard
• Features
–
–
–
–
Broad outlook
internal & external matters
financial & non-financial
Identifies customer needs
• Development
– Specific to company
– Can be created at all levels of management
Slide 174
The Performance Pyramid
Lynch & Cross
Corporate Vision
Market
Customer
Satisfaction
Financial
Flexibility
Quality Delivery
Productivity
Cycle time
Operations
Slide 175
Waste
Performance pyramid
• Derives from the idea that the organisation
operates at different (management) levels
• Each of these levels has different concerns
• But they should support each other in achieving
business objectives
LINKAGES
Slide 176
Problems of PM in Service Businesses
•
•
•
•
S imultaneity
H eterogeneity
I ntangibility
P erishability
Slide 177
Fitzgerald and Moon’s Building Blocks
Dimensions
Profit
Competitiveness
Quality
Resource utilisation
Flexibility
Innovation
Standards
Ownership
Achievability
Equity
Slide 178
Rewards
Clarity
Motivation
Controllability
Dimensions
base measure on
these areas
Standards/Targets
ensure equity/fairness
Rewards
need to be clear
Question practice – end of Chapter 17
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q48
Slide 179
Q49
Q50
Q51
Q53
Chapter 18
Study Text Chapter 18
Non- financial
performance
indicators
Problems with Financial Performance Indicators
• Only monetary terms
• Focus on past
• Not full picture
• Short term focus
Solution = NFPIs
Slide 181
Value of NFPIs
• Quick
• Anything can be measured
• Easy to calculate
• Not as easy to manipulate
• Qualitative or quantitative
• Can focus on key areas like customer
satisfaction, quality
Slide 182
Problems of NFPIs
• Information overload
• Detail vs. big picture
• Out of date
Must be linked to financial measures
Balanced Scorecard
Slide 183
Lecture Example 1
• In the role of coffee shop manager,
suggest some NFPI for your business
–
–
–
–
–
–
Returning customers
Comments
Occupancy
Knowledge of staff
New product take up
Stock outs
Slide 184
Question practice – end of Chapter 18
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q54
Slide 185
Q55
Q56
Q57
Q58
Chapter 19
Study Text Chapter 19
Predicting and
preventing
corporate failure
Predicting business failure
• Declining industries
– End game
– Product revitalisation
• Declining companies
– Slatter’s ten symptoms
• Measures
– Liquidity
– Z score
– Argenti’s A score
Slide 187
Examined Dec 2007
Strategies for improvement
• Identify the causes of decline and strategies to
deal with them
• Strategic drift
– Counteracting
• Review leadership
Slide 188
Question practice – end of Chapter 19
You should now be able to attempt the following key
question from the BPP Learning Media Practice and
Revision Kit.
Q59
Slide 189
Chapter 20
Study Text Chapter 20
Current
developments in
management
accounting
techniques
Changing role of the Management Accountant. Burns and Scapens
• Provision of information that is;
– Forward looking
– External
– Assists meeting of objectives
• Links to strategic core
– Planning and control
• Changes arose due to
– Technology
– Management structure
– Competition
Slide 191
Modern Japanese techniques
• TQM
• JIT
• Target costing
• Kaizen costing
• Continuous improvement
Slide 192
Just In Time
Supplier Base
JIT
purchasing
Raw material
& components
Work-in Progress
Manufacturing Resources
Planning (MRP 2)
Advanced Manufacturing
Technology
Total Quality Management
Computer Integrated
Manufacturing
Finished Goods
Demand Pull
Customers
Slide 193
Target costing
To reduce the life-cycle costs of new products
through cost reduction:
• Pre-production planning
• R&D
Slide 194
Implementing target costing
a) Define product spec & sales volume
b) Target selling price
c) Required profit
d) Target selling price
less: target profit
Target cost
X
(X)
X
e) Estimated cost
f)
Estimated cost – target cost = cost gap
g) Reduce costs or negotiate with customer
Slide 195
Question practice – end of Chapter 20
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q60
Slide 196
Q61
Q62
Chapter 21
Study Text Chapter 21
Current issues
and trends in
performance
management
Value-based management
• Value mind set
• Value drivers
– Any variable that affects the value of the company
• Management processes
Slide 198
Recently developed performance management frameworks
• Six Sigma
–
–
–
–
–
Define
Measure
Analyse
Improve
Control
Slide 199
• Performance Prism
–
–
–
–
–
Stakeholders satisfaction
Strategies
Processes
Capabilities
Stakeholder contribution
Question practice – end of Chapter 21
You should now be able to attempt the following key
questions from the BPP Learning Media Practice
and Revision Kit.
Q63
Slide 200
Q64
Q65
Q66