Chapter 1: Introduction to strategic management accounting

Chapter learning objectives

Upon completion of this chapter you will be able to:

  • explain the role, for organisations in general, of strategic performance management in strategic planning and control
  • discuss the role of corporate planning in:
    • clarifying corporate objectives
    • making strategic decisions
    • checking progress towards the objectives
  • compare planning and control at the strategic and operational levels within a business entity
  • assess the use of strategic management accounting in the context of multinational companies
  • discuss the scope for potential conflict between strategic business plans and short-term localised decisions
  • evaluate how SWOT analysis may assist in the performance management process
  • evaluate the methods of benchmarking performance
  • discuss how the purpose, structure and content of a mission statement impacts on business performance
  • discuss the ways in which high-level corporate objectives are developed
  • identify strategic objectives and discuss how they may be incorporated into the business plan
  • discuss how strategic objectives are cascaded down the organisation via the formulation of subsidiary performance objectives
  • explain the performance 'planning gap' and evaluate alternative strategies to fill the gap
  • apply critical success factor analysis in developing performance metrics from business objectives
  • identify and discuss the characteristics of operational performance
  • discuss the relative significance of planning against controlling activities at different levels of the performance hierarchy.

1 Exam focus

2 Assumed knowledge

Note that many of the tools and techniques studied in F5 (and some in F9) are still examinable in P5, including the following:

  • costing methods, e.g. target costing, life cycle costing
  • limiting factor analysis
  • relevant costing
  • risk techniques, e.g. expected values, minimax regret, maximin, maximax
  • budgeting, e.g. flexed budgets
  • forecasting techniques, e.g. hi-low, time series, learning curves
  • standard costing.

3 Planning and control

3.1 Introduction

Planning is concerned with:

  • where an organisation wants to be (usually expressed in terms of its objectives) and
  • how it will get there (strategies).

Control is concerned with monitoring the achievement of objectives and suggesting corrective action.

3.2 The performance hierarchy

The performance hierarchy operates in the following order:

(1) Mission

(2) Strategic (corporate) plans and objectives

(3) Tactical plans and objectives

(4) Operational plans and targets


A mission statementoutlines the broad direction that an organisation will follow andsummarises the reasons and values that underlie that organisation.

A mission should be:

  • succinct
  • memorable
  • a guide for employees to work towards.


Drucker concluded that a mission statement should address four fundamental questions.

Mission statement characteristics

Mission statements will have some or all of the following characteristics:

  • Usually a brief statement of no more than a page in length.
  • Very general statement of entity culture.
  • States the aims (or purposes) of the organisation.
  • States the business areas in which the organisation intends to operate.
  • Open-ended (not stated in quantifiable terms).
  • Does not include commercial terms, such as profit.
  • Not time-assigned.
  • Forms a basis of communication to the people inside the organisation and to people outside the organisation.
  • Used to formulate goal statements, objectives and short-term targets.
  • Guides the direction of the entity's strategy and as such is part of management information.

Illustration 1 – Mission

ICI plc

'The chemical industry is a major force for the improvement of thequality of life across the world. ICI aims to be the world's leadingchemical company, serving customers internationally through theinnovative and responsible application of chemistry and relatedsciences. Through achievement of our aim, we will enhance the wealth andwell-being of our shareholders, our employees, our customers and thecommunities which we serve and in which we operate'


'To produce cars and trucks that people will want to buy, will enjoy driving and will want to buy again'

Coca Cola

'Our mission is:

  • To refresh the world - in mind, body and spirit
  • To inspire moments of optimism - through our brands and actions and
  • To create value and make a difference - everywhere we engage'

Test your understanding 1

What are the potential benefits and drawbacks to an organisation of setting a mission statement?

Strategic, tactical and operational plans

To enable an organisation to fulfil its mission, the mission must be translated into strategic, tactical and operational plans.

Each level should be consistent with the one above.

This process will involve moving from general broad aims to more specific objectives and ultimately to detailed targets.

In this chapter we will focus on strategic and operational plans.

Comparing planning and control between strategic and operational levels

Illustration 2 – Strategic planning

Strategic planning is usually, but not always, concerned with the long-term. It raises the question of which business shall we be in?For example, a company specialising in production and sale of tobaccoproducts may forecast a declining market for these products and maytherefore decide to change its objectives to allow a progressive moveinto the leisure industry, which it considers to be expanding.

Strategic and operational planning


Strategic planning is characterised by the following:

  • long-term
  • considers the whole organisation as well as individual SBUs
  • matches the activities of an organisation to its external environment
  • matches the activities of an organisation to its resource capability and specifies future resource requirements
  • will be affected by the expectations and values of all stakeholders, not just shareholders
  • its complexity distinguishes strategic management from other aspects of management in an organisation. There are several reasons for this including:
    • it involves a high degree of uncertainty
    • it is likely to require an integrated approach to management
    • it may involve major change in the organisation.

Quite apart from strategic planning, the management of anorganisation has to undertake a regular series of decisions on mattersthat are purely operational and short-term in character. Such decisions:

  • are usually based on a given set of assets and resources
  • do not usually involve the scope of an organisation's activities
  • rarely involve major change in the organisation
  • are unlikely to involve major elements of uncertainty and the techniques used to help make such decisions often seek to minimise the impact of any uncertainty.
  • use standard management accounting techniques such as cost-volume-profit analysis, limiting factor analysis and linear programming.

Test your understanding 2

Is the activity of setting a profit-maximising selling price for a product a strategic or operational decision?

Give reasons for your answer.

4 The role of strategic management accounting

4.1 What is strategy?

Before looking at the role of strategic management accounting, itis important to understand what is meant by 'strategy' and the'strategic planning process'.

The core of a company's strategy is about choosing:

  • where to compete and
  • how to compete.

It is a means to achieve sustainable competitive advantage.

4.2 The strategic planning process (rational model)

The strategic planning process was examined in detail in paper P3.In P5 the focus is more on the performance management aspects ofstrategic planning and the role of strategic management accounting.

Strategic analysis, choice and implementation

Johnson and Scholes' 3-stage model of strategic planning is auseful framework for seeing the 'bigger picture' of performancemanagement and strategic management accounting issues.

4.3 What is strategic management accounting?

Test your understanding 3

A company selling wooden garden furniture in northern Europe is facinga number of problems:

  • demand is seasonal
  • it is sometimes difficult to forecast demand as it varies with the weather – more is sold in hot summers than when it is cooler or wetter
  • the market is becoming more fashion-conscious with shorter product life cycles
  • there is a growth in the use of non-traditional materials such as plastics.

As a result the company finds itself with high inventory levels ofsome items of furniture which are not selling, and is unable to meetdemand for others. A decision is needed on the future strategicdirection and possible options which have been identified are to:

  • use largely temporary staff to manufacture products on a seasonal basis in response to fluctuations in demand – however it has been identified that this could result in quality problems
  • automate production to enable seasonal production with minimum labour-related problems
  • concentrate on producing premium products which are smaller volume but high-priced and less dependent on fashion.

How could strategic management accounting help with the decision making?

4.4 Critical success factors and key performance indicators

Critical success factors(CSFs) are the vital areas 'where things must go right' for thebusiness in order for them to achieve their strategic objectives. Theachievement of CSFs should allow the organisation to cope better thanrivals with any changes in the competitive environment.

Illustration 3 - CSFs for supermarkets

CSFs for the supermarket industry may include:

  • having the right product mix available in each store
  • having the products actually available on the shelves
  • pricing the products correctly
  • advertising effectively to pull shoppers in.

The organisation will need to have in place the core competencies that are required to achieve the CSFs, i.e. something that they are able to do that is difficult for competitors to follow.

There are five prime sources of CSFs:

(1) The structure of the industry- CSFswill be determined by the characteristics of the industry itself, the car industry 'efficient dealer network organisation' will beimportant where as in the food processing industry 'new productdevelopment' will be important.

(2) Competitive strategy, industry position and geographic location

  • Competitive strategies such as differentiation or cost leadership will impact CSFs.
  • Industry position, e.g. a small company's CSFs may be driven by a major competitor's strategy.
  • Geographical location will impact factors such as distribution costs and hence CSFs.

(3) Environmental factors- factors such as increasing fuel costs can have an impact on the choice of CSFs.

(4) Temporary factors- temporaryinternal factors may drive CSFs, e.g. a supermarket may have been forcedto recall certain products due to contamination fears and may thereforegenerate a short term CSF of ensuring that such contamination does nothappen again in the future.

(5) Functional managerial position- the function will affect the CSFs, e.g. production managers will be concerned with product quality and cost control.

Test your understanding 4

The directors of Dream Ice Cream (DI), a successful ice creamproducer, with a reputation as a quality supplier, have decided to enterthe frozen yogurt market in its country of operation. It has set up aseparate operation under the name of Dream Yogurt (DY).

The following information is available:

  • DY has recruited a management team but production staff will need to be recruited. There is some concern that there will not be staff available with the required knowledge of food production.
  • DY has agreed to supply yogurts to Jacksons, a chain of supermarkets based in the home country. They have stipulated that delivery must take place within 24 hours of an order being sent.
  • DY hopes to become a major national producer of frozen yogurts.
  • DY produces four varieties of frozen yogurt at present; Mango Tango, Very Berry, Orange Burst and French Vanilla.


Explain five CSFs to the performance of DY on whichthe directors must focus if DY is to achieve success in the marketplace.(10 marks)

Key performance indicators (KPIs)

Key point: Things that are measured get done more often than things that are not measured

The achievement of CSFs can be measured by establishing key performance indicators (KPIs) for each CSF and measuring actual performance against these KPIs.

Illustration 4 - CSFs and KPIs

A parcel delivery service, such as DHL, may have the following CSFs and KPIs:

Question focus: Now attempt question 1 part (b) from chapter 13.

Expandable text

CSFs and KPIs will have a central role in the strategic planning process:

4.5 Long-term and short-term conflicts

Strategic planning is a long-term, top-down process. The decisions made can conflict with the short-term localised decisions:

  • Divisional managers tend to be rewarded on the short-term results they achieve. Therefore, it will be difficult to motivate managers to achieve long-term strategic objectives.
  • Divisional managers need to be able to take advantage of short-term unforseen opportunities or avoid serious short-term crisis. Strict adherence to a strategy could limit their ability to do this.

Long-term and short-term conflicts

The whole concept of strategic planning explored earlier in thischapter implies a certain top-down approach. Even in the era ofdivisional autonomy and employee empowerment it is difficult to imaginethat a rigorous strategic planning regime could be associated with abottom-up management culture. There is a potential for conflict here.

  • The idea of divisional autonomy is that individual managers operate their business units as if they were independent businesses – seeking and exploiting local opportunities as they arise.
  • Managers are rewarded in a manner which reflects the results they achieve.
  • The pressures on management are for short-term results and ostensibly strategy is concerned with the long-term. Often it is difficult to motivate managers by setting long-term expectations.
  • Long-term plans have to be set out in detail long before the period to which they apply. The rigidity of the long-term plan, particularly in regard to the rationing and scheduling of resources, may place the company in a position where it is unable to react to short-term unforeseen opportunities, or serious short-term crisis.
  • Strict adherence to a strategy can limit flair and creativity. Operational managers may need to respond to local situations avert trouble or improve a situation by quick action outside the strategy. If they then have to defend their actions against criticisms of acting 'outside the plan', irrespective of the resultant benefits, they are likely to become apathetic and indifferent.
  • The adoption of corporate strategy requires a tacit acceptance by everyone that the interests of departments, activities and individuals are subordinate to the corporate interests. Department managers are required to consider the contribution to corporate profits or the reduction in corporate costs of any decision. They should not allow their decisions to be limited by short-term departmental parameters.
  • It is only natural that local managers should seek personal advancement. A problem of strategic planning is identifying those areas where there may be a clash of interests and loyalties, and in assessing where an individual has allowed vested interests to dominate decisions.

Test your understanding 5

How might an organisation take steps to avoid conflict between strategic business plans and short-term localised decisions?

4.6 Strategic management accounting in multinational companies

A multinational companyhas subsidiaries or operations in a number of countries, e.g. it mayacquire raw materials in one country, manufacture the product in asecond country, sell its products in the third country and have its headoffice in its home country.

Illustration 5 – Multinational companies

The development of multinational companies

Typically, a multinational company takes the form of a centralcorporation with subsidiaries in each of the countries in which itoperates. Well-known examples include Ford, Shell, Nestlé, GeneralMotors, Toyota and Microsoft. By the early 1990s, 37,000 multinationalcompanies with annual sales of $5.5 billion controlled about one-thirdof the world's private sector assets. The advent of these multinationalsis associated with the apparent globalisation of the world economy.Various factors have contributed to this development, but one factor iscritical. Increases in the scale of technology (in terms of cost, riskand complexity) have rendered even the largest national markets toosmall to be meaningful economic units on a stand-alone basis. Companiesmust expand internationally to support the technological developmentthat is needed to remain competitive in many fields.

The modern trend in international business seems to be away fromthe old multinational corporations and towards networks and alliances.Strategic planning for the latter is another issue altogether.

The strategic process in a multinational company must take account ofcertain special features which have financial implications. Theseinclude:

  • process specialisation
  • product specialisation
  • economic risk
  • political sensitivities
  • administrative issues.

Multinational strategic management accounting

Process specialisation. There may be a cost advantage inlocating certain types of activity in certain countries. For example, alabour intensive operation may be best placed in a low wage area. Manycompanies (and not just traditional multinationals) have recentlyrelocated customer service desks and telephone call centres to India.

Product specialisation. In spite of globalisation and theconcept of 'world products', particular countries have characteristictastes that the multinational must cater to.

Economic risk. The economics of a multinational operation may be highly sensitive to issues such as exchange rate fluctuations.

Political sensitivities. The multinational company operates across state boundaries and must be acutely aware of associated risk factors.

Administrative issues. A multinational company will findthat even its own internal transactions are vulnerable to exchange ratemovements, currency exchange controls and the existence (or absence) ofinternational tax treaties. For example, if a multinational domiciled incountry A tries to repatriate profits earned by its subsidiary incountry B then it may find that those profits are taxed twice – oncein A and again in B.

Impact of exchange rates

In the 1980s, many car manufacturers (Nissan, Toyota and Peugeot toname but three) built car assembly facilities in the UK to serve thewhole of Europe – because the UK was perceived as a low-cost area. TheUK's non-adoption of the Euro and the appreciation of the pound in thelate 1990s suddenly made the UK a high-cost area. For a time, theviability of several high-profile plants was brought into question.

Test your understanding 6

A multinational company with subsidiaries in NorthAmerica and Europe is considering launching its products in SouthAmerica. As a management accountant supporting senior managers in makingstrategic decisions, what factors would you need to consider in yourassessment of the options facing the company?

5 The role of corporate planning

5.1 Introduction

The term 'corporate planning' refers to the formal process which facilitates the strategic planning framework described above.

Illustration 6 – The role of corporate planning

The description of the role of a corporate planning department of a hospital might be:

  • to manage the business planning process through which the objectives of individual clinical departments and support services are agreed
  • to compile and publish the annual plan for the hospital
  • to monitor performance against the targets set in the business planning process
  • to monitor performance compared with other similar organisations
  • to undertake specific strategic projects.

5.2 The role of corporate planning in clarifying corporate objectives

The strategic analysis stage will generate a range of objectives, typically relating to:

  • maximisation of shareholder wealth
  • maximisation of sales
  • growth
  • survival
  • research and development leadership
  • quality of service
  • contented workforce
  • respect for the environment.

These need to be clarified in two respects:

  • conflicts need to be resolved, e.g. profit versus environmental concerns
  • to facilitate implementation and control, objectives need to be translated into SMART (specific, measurable, achievable, relevant and time bound) targets.

Illustration 7 – SMART objectives

A statement such as 'maximise profits' would be of little use incorporate planning terms. The following would be far more helpful:

  • achieve a growth in EPS of 5% pa over the coming ten-year period
  • obtain a turnover of $10 million within six years
  • launch at least two new products per year.

5.3 Role of corporate planning in making strategic choices

The strategic management accountant will contribute to the acceptability and feasibility aspects in particular:

5.4 The role of corporate planning in checking towards the objectives set

It is not enough merely to make plans and implement them.

  • The results of the plans have to be compared against stated objectives to assess the firm's performance.
  • Action can then be taken to remedy any shortfalls in performance.

Corporate planning is not a once-in-every-ten-years activity, butan on going process which must react quickly to the changingcircumstances of the firm and of the environment.

Diagram of corporate planning activities

Test your understanding 7

Why do you think managers need to understand corporate planning?

6 Tools used in strategic analysis

There are a number of tools used as part of the first stage of the strategic planning process. Two of these are:

  • Benchmarking
  • SWOT analysis

6.1 Benchmarking

Benchmarking is the use of a yardstick to compare performance. The yardstick, or benchmark, is based upon the best in class.

Types of benchmarking

There are three basic types:

  • Internal: this is where another branch or department of the organisation is used as a benchmark.
  • Competitor: uses a direct competitor with the same or similar processes as the benchmark.
  • Process or activity: focuses on a similar process in another company which is not a direct competitor.

Illustration 8 – Process benchmarking at Xerox

Among the pioneers in the benchmarking 'movement' were Xerox,Motorola, IBM and AT&T. The best known is the Xerox Corporation.

Some years ago, Xerox confronted its own unsatisfactory performance in product warehousing and distribution.It did so by identifying the organisation it considered to be the verybest at warehousing and distribution, in the hope that 'best practices'could be adapted from this model. The business judged to provide a modelof best practice in this area was L L Bean, a catalogue merchant ( existed in an unrelated sector). Xerox approached Bean with a requestthat the two engage in a co-operative benchmarking project. The requestwas granted and the project yielded major insights in inventoryarrangement and order processing, resulting in major gains for Xeroxwhen these insights were adapted to its own operations.

Strategic, functional and operational benchmarks

Benchmarks could include the following:

Strategic benchmarks

  • market share
  • return on assets
  • gross profit margin on sales.

Functional benchmarks

  • % deliveries on time
  • order costs per order
  • order turnaround time
  • average stockholding per order.

Operational benchmarks

These are at a level below functional benchmarks. They yield thereasons for a functional performance gap. An organisation has tounderstand the benchmarks at the operational level in order to identifythe corrective actions needed to close the performance gap.

The benchmarking process

Benchmarking process

A typical benchmarking process is likely to include:

  • Planning - identifying the subject area to be reviewed, defining the objectives for the study and the criteria that will be used to assess success, selecting the approach and type of benchmarking, identifying potential partners etc.
  • Collecting data and information - developing with partners a mutual understanding and benchmarking protocol, agreeing terminology and performance measures to be used, undertaking information and data collection, collation of findings.
  • Analysing the findings - review of findings, gap analysis, seeking explanation for the gaps in performance, ensuring comparisons are meaningful and credible, communicate the findings, identify realistic opportunities for improvement.
  • Implement recommendations - examine the feasibility of making improvements with respect to organisational constraints and preconditions, obtain the support of key stakeholders for making the changes needed, implement action plans, monitor performance, keep stakeholders informed of progress.
  • Monitoring and reviewing - evaluate the benchmarking process and the results of improvement initiatives against business objectives, document the lessons learnt, periodically re-consider the benchmarks in the light of changes.

Illustration 9

Example of benchmarking success

Kellogg's factories all use the same monitoring techniques, so itis possible to compare performance between sites, although there arealways some things that are done differently.

They can interrogate this information to improve performance acrossevery site. As things have improved, Kellogg's have also had toreassess their baseline figures and develop more sophisticated tools tomonitor performance to ensure they continue to make progress.

They have seen a 20% increase in productivity in six years using this system.

The benefits and problems of benchmarking

The potential benefits to be obtained from a benchmarking exercise are:

  • identifying gaps in performance
  • putting the company's resources and performance into perspective, reflecting the fact that it is the relative position of a company which matters in assessing its capabilities
  • learning and applying best practices
  • learning from the success of others
  • minimising complacency and self-satisfaction with your own performance
  • encouraging continuous improvement.

Test your understanding 8

What are the potential problems of benchmarking?

Performance comparison

Performance comparison with the competition

Comparative analysis can be usefully applied to any value activitywhich underpins the competitive strategy of an organisation, an industryor a nation.

To find out the level of investment in fixed assets of competitors,the business can use physical observation, information from trade pressor trade association announcements, supplier press releases as well astheir externally published financial statements, to build a clearpicture of the relative scale, capacity, age and cost for eachcompetitor. The method of operating these assets, in terms of hours andshift patterns, can be established by observation, discussions withsuppliers and customers or by asking existing or ex-employees of theparticular competitor. If the method of operating can be ascertained itshould enable a combination of internal personnel management andindustrial engineering managers to work out the likely relativedifferences in labour costs. The rates of pay and conditions cangenerally be found with reference to nationally negotiated agreements,local and national press advertising for employees, trade and employmentassociations and recruitment consultants. When this cost is usedalongside an intelligent assessment of how many employees would beneeded by the competitor in each area, given their equipment and otherresources, a good idea of the labour costs can be obtained.

Another difference which should be noted is the nature of thecompetitors' costs as well as their relative levels. Where a competitorhas a lower level of committed fixed costs, such as lower fixed labourcosts due to a larger proportion of temporary workers, it may be able torespond more quickly to a downturn in demand by rapidly laying off thetemporary staff. Equally, in a tight labour market and with risingsales, it may have to increase its pay levels to attract new workers.

In some industries, one part of the competitor analysis issurprisingly direct. Each new competitive product is purchased on aregular basis and then systematically taken apart, so that eachcomponent can be identified as well as the processes used to put theparts together. The respective areas of the business will then assessthe costs associated with each element so that a complete product costcan be found for the competitive product.

A comparison of similar value activities between organisations isuseful when the strategic context is taken into consideration. Forexample, a straight comparison of resource deployment between twocompetitive organisations may reveal quite different situations in thelabour cost as a percentage of the total cost. The conclusions drawnfrom this, however, depend upon circumstances. If the firms arecompeting largely on the basis of price, then differentials in thesecosts could be crucial. In contrast, the additional use of labour by oneorganisation may be an essential support for the special servicesprovided which differentiate that organisation from its competitors.

One danger of inter-firm analysis is that the company may overlookthe fact that the whole industry is performing badly, and is losing outcompetitively to other countries with better resources or even otherindustries which can satisfy customers' needs in different ways.Therefore, if an industry comparison is performed it should make someassessment of how the resources utilisation compares with othercountries and industries. This can be done by obtaining a measurement ofstock turnover or yield from raw materials.

Benchmarking against competitors involves the gathering of a rangeof information about them. For quoted companies financial informationwill generally be reasonably easy to obtain, from published accounts andthe financial press. Some product information may be obtained byacquiring their products and examining them in detail to ascertain thecomponents used and their construction ('reverse engineering').Literature will also be available, for example in the form of brochuresand trade journals.

However, most non-financial information, concerning areas such ascompetitors' processes, customer and supplier relationships and customersatisfaction will not be so readily available. To overcome thisproblem, benchmarking exercises are generally carried out withorganisations taken from within the same group of companies (intra-groupbenchmarking) or from similar but non-competing industries(inter-industry benchmarking).

6.2 SWOT analysis

The purpose of SWOT analysisis to provide a summarised analysis of the company's present situationin the market place. It can also be used to identify CSFs and KPIs.


Test your understanding 9

What types of strengths, weaknesses, opportunities and threats would a 'no frills' airline have?

Test your understanding 10

Envie Co owns a chain of retail clothing stores specialising inladies' designer fashion and accessories. Jane Smith, the originalfounder, has been pleasantly surprised by the continuing growth in thefashion industry during the last decade.

The company was established 12 years ago, originally with one storein the capital city. Jane's design skills and entrepreneurial skillshave been the driving force behind the expansion. Due to unique designsand good quality control, the business now has ten stores in variouscities.

Each store has a shop manger that is completely responsible formanaging the staff and stock levels within each store. They producemonthly reports on sales. Some stores are continually late in supplyingtheir monthly figures.

Envie runs several analysis programmes to enable managementinformation to be collated. The information typically providesstatistical data on sales trends between categories of items and stores.The analysis and preparation of these reports are conducted in themarketing department. In some cases the information is out of date interms of trends and variations.

As the business has developed Jane has used the service of a localIT company to implement and develop their systems. She now wants toinvest in website development with the view of reaching global markets.


(a) Construct a SWOT analysis with reference to the proposal of website development.       

(b) Explain how the use of SWOT analysis may be of assistance to Envie Co.

7 Gap analysis

Gap analysisis carried out as the final part of strategic analysis. It identifiesthe difference between the desired and the expected performance. 

The planning gap is the difference between the forecastedposition (based on extrapolation of current activities) and the desiredtarget. The gap may be measured in terms of earnings, demand, return oncapital employed etc.

In the diagram showing the gap:

T = target

F0 = initial forecast

F1 = forecast adjusted for improvements in internalefficiency, e.g. internal cost savings through better use of resourcesor divestment of a loss-making business unit.

F2 = forecast adjusted for product-market expansion, i.e. the expansion gap involves the development of a new product or market where as the diversification gap involves the development of new products and markets

Benchmarking and SWOT analysis can both be used to identify the gapand to help the organisation to identify strategies to address the gap.

Illustration 10 - SWOT analysis and gap identification

SWOT analysis would seek to identify:

  • Threats focusing on weaknesses - This would have top priority and the company should seek to identify and consider possible solutions. This requires a defensive response of some kind and may well necessitate rapid change.
  • Threats focusing on strengths - this requires a review of the supposed strength to ensure that it is still as strong as previously thought. Remember, what is good today, may not be so tomorrow.
  • Opportunity focusing on strengths - this gives the organisation the chance to develop strategic competitive advantage in the marketplace. They should check the research and assesses the strengths again.
  • Opportunity focusing on weakness - this will require management to make a decision as to whether to change and pursue the opportunity or, alternatively, ignore the prospect and ensure resources are not wasted in this area in future. Usually substantial change will be required if the company is going to pursue the opportunity. The company should check that their internal competencies will allow them to exploit the opportunity.

Chapter summary

Test your understanding answers

Test your understanding 1

Test your understanding 2

This is an operational decision. Setting a profit-maximisingselling price is an exercise based on forecast demand and marginalcosts over a coming period such as a year. It does not involve askingwhether a product should be sold at all, whether its design should bemodified or how its selling price should be influenced by the positionof the product in its life cycle or the product matrix of the business.

Test your understanding 3

Strategic management accounting may assist the decision making process as follows:

  • analysis of the market for different types of product:
    • review of competitors' products
    • likely size and value of different market sectors
    • price comparison of different products
  • forecasts of costs of manufacturing new products, comparing different levels of automation/ use of temporary staff  
  • forecasts of profitability of different products
  • investigation of capital costs of different options and investment appraisal of possible options
  • analysis of the cost of holding inventory under different options.

Test your understanding 4

Critical success factors (CSFs) are as follows:

Product quality - the fact that production staff may have noprevious experience in a food production environment is likely to proveproblematic. It is vital that a comprehensive training programme is putin place at the earliest opportunity. DY need to reach and maintain thehighest level of quality as soon as possible.

Supply quality - the quality and timeliness of delivery intoJacksons supermarkets assumes critical significance. Hence supply chainmanagement must be extremely robust as there is little scope for error.

Technical quality - compliance with existing regulatorsregarding food production including all relevant factory health andsafety requirements is vital in order to establish and maintain thereputation of DY as a supplier of quality products. The ability to storeproducts at the correct temperature is critical because yogurts areproduced for human consumption and in extreme circumstances could causefatalities.

External credibility - accreditation by relevant tradeassociations/regulators will be essential if nationwide acceptance of DYas a major producer of frozen yogurts is to be established.

New produce development - while DY have produced a range offrozen yogurts it must be recognised that consumer tastes change andthat in the face of competition there will always be a need for acontinuous focus on new product development.

Margin - while DY need to recognise all other CSFs theyshould always be mindful that the need to obtain desired levels of grossand net margin remain of the utmost importance.

Notes: only five CSFs were required. Alternative relevant discussion and examples would be appropriate.

Test your understanding 5

Possible steps include:

  • involving local managers in strategy formulation
  • agreeing strategies with business units within certain boundaries
  • ensuring performance management reflects a combination of short- and long-term issues
  • permitting flexibility within the strategic planning process to allow for changes due to local circumstances
  • a combination of strategic planning and freewheeling opportunism (no strategic plans). For example, strategic planning may be used for activities such as identifying the organisation's resource capability and its resources. Freewheeling opportunism may be used to exploit an organisation's competences, e.g. the skills of particular individuals or groups.

Test your understanding 6

Possible factors could include:


The company needs to determine where best to locate activitiesrelated to the new market, e.g. whether to manufacture products in SouthAmerica as well as selling there. This will require a comparison of thetotal product costs with manufacture in different locations, includingfactors such as:

  • labour costs
  • materials – costs of purchasing in different areas, costs of sourcing elsewhere and transporting to manufacturing site
  • distribution – costs under different scenarios including setting up own sales force, using existing distributors
  • costs of after-sales support.


In addition to changes in manufacturing costs due to the locationof manufacture there may be additional costs if products need to betailored for the South American market. These need to be estimated.

Exchange rates

The company needs to assess the impact of exchange ratefluctuations on the value of income earned in South America. There is aneed to consider how this risk will be managed, e.g. by hedging.

Political risk

The company needs to be aware of the possibility of an unexpectedpolitically motivated event in S.America affecting the outcome of theinvestment, e.g. the government may decide to raise taxation.

Administrative issues

The financial impact of a number of other factors needs to beincorporated into the evaluation of the options such as the impact oninternal transactions of exchange rate movements, currency exchangecontrols and tax regimes. There will, e.g. be implications for anytransfer pricing system. Exchange rate fluctuations also need to betaken into account in developing performance measures for business unitmanagers in overseas locations to ensure that they are not beingpenalised for changes in income which are out of their control.

Test your understanding 7

  • An understanding of corporate planning is essential for all management because lower-level objectives are inexorably linked to higher-level strategies. An appreciation of these strategies and how they are formulated can be an effective guide to action.
  • Moreover, whatever the level at which a manager operates within an organisation, he or she can have some influence over that organisation's corporate strategy.

Test your understanding 8

  • Best practice companies unwilling to share data.
  • Lack of commitment by management and staff. The reasons for benchmarking need to be communicated by managers to staff in order to gain full co-operation. Staff need to be reassured that their status, remuneration and working conditions will not suffer.
  • Identifying best practice is difficult.
  • Costly in terms of time and money.
  • What is best today may not be so tomorrow.
  • Differences, for example in accounting treatment, may make comparisons meaningless.

Test your understanding 9

Test your understanding 10

SWOT Question – Envie Co


Successful company
Steady increase in market share
Experience in the market
Founder's entrepreneurial skills
Good designs
Good quality control
Keen to exploit to technology
Strong IT

Management of information is often out of date
No in-house IT expertise
No web experience
Not sure if the new system will generate new sales
Lack of control over store managers
Out of date reporting from some stores
Over reliance on IT provider

E-trading can provide a new sales channel and revenue stream
Identification and recording of customer details to enhance customer relationships
Extension of customer base
Global market potential
Cut costs in many areas
Create a vision of a modern company
Develop product range further
Look at employing an IT specialist

Customer resistance to on-line shopping
Loss of unique identity; may become just another website trader
Resistance within the company
Effects on existing personnel and working conditions
Costs of developing the website may outweigh the benefits
Security issues
Loss of competitive edge

The above are suggested answers.

(b) The use of SWOT analysis will focus management attention oncurrent strengths and weaknesses of the organisation which will be ofassistance in formulating the business strategy. It will also enablemanagement to monitor trends and developments in the changing businessenvironment. Each trend or development may be classified as anopportunity or a threat that will provide a stimulus for an appropriatemanagement response.

Management can make an assessment of the feasibility of requiredactions in order that the company may capitalise upon opportunitieswhilst considering how best to negate or minimise the effect of anythreats.

Created at 5/24/2012 4:25 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 5/25/2012 12:55 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

Rating :

Ratings & Comments  (Click the stars to rate the page)


Recent Discussions

There are no items to show in this view.