2. Strategic Management
the Strategic Emphasis in Cost Management
• Effective strategic management is critical to the success
of the firm or organization. The growing pressures of:
• economic recession,
• global competition,
• technological innovation, and
• changes in business processes
• have made cost management much more critical and
dynamic than ever before.
2
3. • Managers must think competitively; doing so requires a strategy.
• Strategic thinking involves anticipating changes.
• Therefore, products, services, and operating processes are designed
to accommodate expected changes.
• The firm’s attention is focused on satisfying the customers’ needs;
all of the firm’s resources, from all functions, are directed to that goal.
• Product life cycles—the time from the introduction of a new product
to its removal from the market— are expected to become shorter
and shorter.
• Flexibility is important. The ability to make fast changes is critical in
a dynamic and competitive environment.
3
4. • The strategic emphasis also requires creative and integrative
thinking, that is, the ability to identify and solve problems from a
cross-functional view.
• The business functions are often identified as marketing, production,
finance, and accounting/controllership.
• Instead of viewing a problem as a production problem, a marketing
problem, or finance and accounting problem, cross-functional teams
view it from an integrative approach that combines skills from all
functions simultaneously. This integrative approach is necessary in
a dynamic and competitive environment.
• All of the above changes involve the entire product life cycle from two
different views: The cost life-cycle and the sales life-cycle as follow:
4
5. • Value Chain is a sequence of functions that add value to the products
from the customer view. These functions are:
1. Research and Development: Catching the idea of a new product.
2. Engineering Design: Setting the detailed design, quality, and functions
specifications for the new product .
3. Production: Converting the idea and the design of the new product into
physical Fact to be presented to the customers.
4. Marketing: let the customers know the features and specifications of
the new product.
5. Sales and Distribution: Determining the mechanism of selling and
delivering the new product to the customers.
6. After Sales Customer Services: such as warranty, free consultation,
upgrading, free maintenance, etc. 5
The Cost Life-Cycle - Value Chain Analysis
6. 6
It is the life-cycle of a product or service from the viewpoint of costs
incurred. Life-cycle costing assists managers in minimizing total cost
over the product’s or service’s entire cost life cycle.
Up Stream Down Stream
7. • Cost life cycle is the development of the of a product from the viewpoint
of costs incurred.
• Cost life-cycle assists managers in identifying:
1. How much our products are really cost?
The product cost should include all the costs of functions on the value
chain since the product was an idea until it is on the customer hand,
not the cost of production function only,
2. Areas of improvements:
• Higher quality: to design quality not to inspect quality,
• Lower costs: to manage cost not to control cost,
over the product’s entire cost life cycle as follow:
7
The cost life cycle - Value Chain Analysis
8. Comparison Between the Results of Improvements
Before (upstream) the Fact and After (down stream) the Fact
Quality Design
To build the quality
specifications in the design
of the product during the
design stage.
The result: avoid all sources
of defects in the production
stage; i.e.; Zero defect (total
quality) products.
Quality Inspection
To wait after production, then to
inspect the produced units to
avoid shipping any defected
units to the customers.
The result: three groups of
unnecessary costs:
1. Cost of the inspection itself.
2. Cost of defected units detected
before shipping to the customers
3. Cost of defected units detected
after shipping to the customers.
8
9. Cost Management
To minimize, if not
eliminating, the non-value-
added activities that
causing the existence of
the unnecessary costs
(dealing with the sources
of costs)
Cost Control
To accept the existence of
the non-value-added
activities and its
unnecessary costs then try
to reduce these costs
(dealing with the cost itself )
9
Comparison Between the Results of Improvements
Before (upstream) the Fact and After (down stream) the Fact
10. 10
The Sales Life-Cycle
• Sales life cycle refers to the phase of the product’s or
service’s sales in the market, from introduction of the product
or service to decline and withdrawal from the market. It is the
life-cycle of a product or service from the viewpoint of sales
volume achieved. The sequence of phases of the product or
service in the market starts from (next slide):
– The introduction of the product or service to the market :
– The growth in sales :
– The maturity : to
– The decline and withdrawal from the market
11. 11
The Phases of The Sales Life-Cycle
Introduction
Growth Maturity
Decline
Time
Sales
As the sales life cycle becomes shorter (only months in some industries
such as consumer electronics), the analysis of the sales life cycle
becomes increasingly important. Important strategic cost management
issues arise in each stage of the life-cycle ( next slides).
12. • Phase 1: Introduction.
• The focus of management in the first phase is on design,
differentiation, and marketing.
• This phase involves little competition, and sales rise slowly
as customers become aware of the new product or service.
• Costs are relatively high because of high R&D expenditures
and capital costs for setting up production facilities and
marketing efforts.
• Prices are relatively high because of product differentiation
and the high costs at this phase.
• Product variety is limited.
12
Sales Life-Cycle
13. Phase 2: Growth.
• The focus in this phase shifts to new product development
and pricing strategy as competition develops.
• Sales begin to increase rapidly as does product variety.
• The product continues to enjoy the benefits of differentiation.
• Competition increases, and prices begin to fall.
Phase 3: Maturity.
• Sales continue to increase but at a decreasing rate.
• The number of competitors and of product variety decline.
• Prices fall further, and differentiation is no longer important.
• Competition is based on cost given competitive quality and
functionality. 13
Sales Life-Cycle
14. • Phase 4: Decline.
• Sales and prices decline, as do the number of competitors.
• Control of costs and an effective distribution network are
key to continued survival.
• In the third and fourth phases, management’s attention
turns to cost control, quality, and service as the market
continues to become more competitive.
• Thus, the firm’s strategy for the product or service changes
over the sales life cycle from differentiation in the early
phases to cost leadership in the final phases.
• Similarly, the strategic pricing approach changes over the
product or service life cycle (next slide). 14
Sales Life-Cycle
15. • Strategic pricing depends on the position of the product or
service in the sales life cycle.
• In the first phase, pricing is set relatively high to recover
development costs and to take advantage of product
differentiation and the new demand for the product.
• In the second phase, pricing is likely to stay relatively high as
the firm attempts to build profitability in the growing market.
• In the latter phases, pricing becomes more competitive, and
target costing and lifecycle costing methods are used as the
firm becomes more a price taker than a price setter and
makes efforts to reduce upstream and downstream costs.
15
Strategic Pricing for Phases of the Sales Life Cycle
16. How a Firm Succeeds: The Competitive Strategy
• A firm succeeds by implementing a strategy, that is, a
plan for using resources to achieve sustainable goals
within a competitive environment.
• Finding a strategy begins with determining the purpose
and long-range direction, and therefore the mission, of
the company. (see next slide)
• The mission is developed into specific performance
objectives, which are then implemented by specific
corporate strategies, that is, specific actions to achieve
the objectives that will fulfill the mission.
16
17. How a Firm Succeeds :
Mission Statements of Selected Companies
• Ford Motor Company (ford.com)
• Provide personal mobility for people around the world.
• IBM (ibm.com)
• To lead in the creation, development, and manufacture of
the industry’s most advanced information technologies, and
to translate these into value for our customers.
• Google (google.com)
• To organize the world’s information and make it universally
accessible and useful.
• Walt Disney (disney.com): To make people happy.
17
18. Consequences of Lack of Strategic Information
• The firm is likely to stray from its competitive course, to make
strategically wrong manufacturing and marketing decisions: to choose
the wrong products or the wrong customers.
• Some of the consequences of a lack of strategic information are :
− Decision making based on intuition instead of accurate cost information
− Lack of clarity about direction and goals
− Lack of a clear and favorable perception of the firm by customers and
suppliers
− Incorrect investment decisions; choosing products, markets, or
manufacturing processes
− Inability to effectively benchmark competitors, resulting in lack of
knowledge about more effective competitive strategies
− Failure to identify most profitable products, customers, and markets.
18
19. Planning and Control Cycle
Begin
Decision
Making
Formulating long-and
short-term plans
(Planning)
Measuring
performance
(Controlling)
Implementing
plans (Directing
and Motivating)
Improving future
planning
(Feed backing)
19
20. Decision Making
• The Model of planning and control cycle illustrate
the smooth flow of management activities from
planning through directing and motivating,
controlling, and then back to planning again.
• All of these activities involve decision making,
so it is depicted as the hub around which the
other activities revolve.
20
21. Planning: To prepare for the future
Operational Budgets
• Planning the daily
activities (Sales,
Purchases, Expenses,
Cash Flows, etc.).
• How to use the available
resources in the short
run.
Capital Budgets
• Planning the investment
(capital) decisions (New
Projects).
• How to add to and adjust
the company resources
in the long run.
Budgets are the basic Accounting tool for planning
Defines the organization's purpose and selects the focus and
scope of its strategy.
21
22. Directing and Motivating
Directing and motivating involves managing day-to-day
activities to keep the organization running smoothly.
Employee work assignments.
Routine problem solving.
Conflict resolution.
Effective communications.
The implementation of a chosen course of action.
In this setting, management accounting information gets
communicated to front-line and support employees to inform
their daily decisions and work activities.
22
23. Controlling
The control function ensures that plans are being followed.
Prepare performance reports
Compare between the actual results and the budgeted results
Performance reports
are an essential part of the control function.
Includes two components:
1. Measuring and monitoring ongoing performance
and;
2. Taking short-term actions based on the measured
performance.
23
24. Feed backing
Feedback information is mainly used to confirm or correct
past expectations.
Reporting the results of comparisons Include Feedback
information that help the managers examining past
performance and systematically exploring alternative ways
to improve future planning and performance.
Managers take actions to lower costs, change resource
allocations, improve the quality, cycle time and flexibility of
processes, modify the product mix, change customer
relationships, and redesign and introduce new products.
24
25. • Many changes in the business environment in recent years have
caused significant modifications in the strategic management
practices. The primary changes are:
1. Greater focus on the customer;
2. Dual Internal & External Focus (Increase in global competition);
3. Continue improvements;
4. New forms of management organization;
5. Enterprise Resource Planning (ERP); and
6. New Technologies Models.
25
The Contemporary Business Environment
Newly Evolving Management Themes (Ideas)
26. 1- Focus on the Customer: Meaning of Customer Satisfaction
• Satisfying customer Current Requirements
Future Expectations
• Why?
• Because the company customer is the main source of
Revenues. There are 3 basic important functions of
revenues:
1- Covering period Expenses,
achieving Profits that is used for
3- Financing future
plans
Self–financing source
2- Paying Dividends
To current owners
To attract investors
26
27. 1. Innovation: introducing new products to the markets.
2. Time : new products in shorter periods of time
(faster response, flexibility).
3. Quality : higher quality (conformance with the
pre-specified quality specifications).
4. Cost : Lower cost of product or service is the most
important competitive factor.
5. On Time delivery: regular delivery, no delay.
6. After Sales Services: warranties, maintenance, free
consultation, upgrading.
Customer Satisfaction: Key Factors of Success
27
28. 3- Dual Internal & External Focus (Increase in global competition)
First: Internal Evaluation: using internal data for evaluating the company
performance
• Horizontal Evaluation: comparing actual results end of period with
planned (budgeted) results beginning of same period.
• Vertical Evaluation: comparing actual results current period with actual
results past (previous) period(s).
• Two drawbacks lead to serious problem:
1- This evaluation is based on the company internal data only, i.e., the
company is comparing with itself.
2- The Company does not know what is going on around in its external
environment.
• The serious problem: the company is not sure that its improvement
efforts are on the right direction.
28
29. • Second: External Evaluation: comparing the performance of the
company with the performance of the best in the industry Benchmarking.
• Benchmarking is a process by which a firm identifies its critical success
factors, studies the best practices of other firms (or other business units
within a firm) for achieving these critical success factors, and then
implements improvements in the firm’s processes to match or beat the
performance of those competitors.
• The comparison is based on a group of performance indicators such
as: productivity, inventory turnover, new products, quality measures,
cash flow, lead-time, regular delivery time, number of suppliers, etc.
• The output of this comparison makes the company able to determine the
Competitive Gap (next slide),
29
31. • The results generated from the competitive gap analysis
are the basic input for the strategic planning according to
the following steps:
1. The first step of the strategic planning is to perform what is
called SWOT analysis. The SWOT analysis relates the
internal Strengths and Weaknesses of the company to the
external (industry) Opportunities and Threats in the
marketplace.
2. Only then can we develop the specific business strategy
guided by the company vision and business mission.
31
Strategic Planning
32. 3. Business strategy, in turn, determines performance
goals and measures, and, ultimately, patterns of action.
4. Define the resources required for achieving these goals.
5. Determine how to obtain the required resources.
6. Plan how (what is to be done, why, who, when, where)
to use the available resources.
7. Set a group of performance measures for evaluating the
usage of the resources.
32
Strategic Planning
33. • In the step of determine how to obtain the required resources
for achieving the strategic goals, there are three ways to go:
First: Can we obtain the required resources from our own
sources; if not
Second: Can we obtain the required resources through a
merge or consolidation process with other company(s); if not
Third: The only remaining choice is to change the industry
33
Strategic Planning
To be a big fish in a small market better than to be
small fish in a big market
34. • To compete and continue in a business environment
companies management must believe that:
“Whatever good today, there is better tomorrow, and
we have to look for this better, not to leave it to the
others”.
• The company must have endless (open end) strategic
goals. The achievements of these goals should be
measured and valuated by using trends not standards;
Why?
34
4- Continuous Improvements
35. • The Traditional concept is that, if you do not invest you will stay
as you are achieving same level of benefits. In other words, if the
investment decision is not accepted (rejected), the company will be
able to generate the present (same) cash flows (benefits) as follow:
35
36. • Recently, technology is available for all companies in the industry.
Therefore, if you do not use it, the competitors will do. As a result the
competitors will improve their quality, flexibility, lead time, on time
delivery, customer satisfaction, etc. This will increase their market shares
at the expense of the company market share and the company at the
end will be out of market.
If you are not going forward you are moving backward
36
37. 5- New Forms of Management (Flat) Organization
• New manufacturing processes done through fully automated product
lines (cells) . To operate, control, and maintain these types of new
automated processes two requirements are need:
First: Employees Empowerment
1. Highly qualified (education, training, practice, personal insights); and
Multi skilled employees (operate, control, maintain, solving problems
on the spot).
2. Fully delegated authority to make prompt and necessary decisions.
Second: Flat Oragnization
In response to fully automated product lines (cells), and employees
empowerment, a traditional hierarchical organization with many levels of
management is replaced by a more flatter flexible organizational form with
self-directed work teams (next slide).
• The purpose: Increases the speed of decision making.
37
38. 38
A traditional hierarchical organization with many levels of management
An organization that has been “flattened” by removing layers of management
Flattening
Organizations
39. 6- Enterprise Resource Planning (ERP)
Use of Information Technology and the Internet
• Perhaps the most fundamental of all business changes in
recent years has been the increasing use of information
technology and the Internet.
Systems for Enterprise-Wide Process
coordination and Integration
• Consist of :
1. Enterprise systems
2. Supply chain management systems
3. Customer relationship management systems
4. Knowledge management systems
39
40. Enterprise Application Architecture
40
Sales And
Marketing
Manufacturing
And Production
Finance And
Accounting
Human
Resources
FUNCTIONAL AREAS
Customers
Distributors
Suppliers
Business Partners
Supply Chain
Management
Systems
Customer
Relationship
Management
Systems
Knowledge
Management
Systems
Enterprise
Systems
41. Enterprise Systems
• Enterprise systems, also known as enterprise resource planning
(ERP) systems, provide a single information system for organization-
wide coordination and integration of key business processes.
• Information that was previously fragmented in different systems can
seamlessly flow throughout the firm so that it can be shared by
business processes in manufacturing, marketing, accounting, human
resources, and other areas (functions) of business.
41
Traditional View of Systems: Functional View
• Within the business: There are functions, each function has its
own information system isolated (stand alone) from the information
systems of the other functions.
• Outside the organization’s boundaries: There are no connections
with customers and suppliers (vendors).
42. Traditional View of Systems: Functional View
42
Manufacturing
And
Production
Manufacturing
And Production
Systems
Finance and
Accounting
Systems
Finance
And
Accounting
Sales and
Marketing
Systems
Sales
And
Marketing
Human
Resources
Systems
Human
Resources
43. • Internal Integration (net-work): Enterprise systems, also known as
enterprise resource planning (ERP) systems, provide a single
information system with a common central database for
organization-wide coordination and integration of key business
processes: finance and accounting, human resources, manufacturing
and production, and sales and marketing.
• External Integration with suppliers: integrate (connects) suppliers
networks with the company internal network. (Supply chain
Management)
• External Integration with customers: integrate (connects)
customers networks with the company internal network. (Customer
Relation Management)
43
Recent View of Systems: Process View
46. 46
Financing and
Accounting
• General ledger
reporting
• Project Costing
• Annual reports
• budgeting,
Manufacturing
And Production
• Quality measurements
• Maintenance schedules
• Design specification
• Machine output
• Order tracking
Human Resources
• Corporate policies
• Employee savings
plans
• Benefits enrollment
• Online training
• Job postings
Sales and Marketing
• Competitors analysis
• Price updates
• Promotional
campaigns
• Sales presentations
• Sales contacts
Corporate
Intranet
Intra-nets (Internal Integration):
• An internal-wide network that provides access to the data and
information of the basic four functions in a business firm.
47. Extra-nets:
• Allow authorized suppliers (vendors) and customers to
have limited access to the Business internal intranet.
47
Sales And
Marketing
Suppliers
Customers
Manufacturing
Engineers
Firm
Extranet
48. Supply Chain Management (SCM)
• Network of business processes for linking and
coordinating the activities involved in:
• procuring raw materials (buying),
• transforming into products (making), and
• distributing them to customers (moving).
• Integrates supplier, manufacturer, distributor, and
customer logistics time
• Reduces time, redundant effort, and inventory costs
48
50. Supply Chain Management (SCM)
Information from Supply Chain Management Systems helps
firms to:
• Decide when and what to produce, store, and move.
• Rapidly communicate orders.
• Track the status of orders.
• Check inventory availability and monitor inventory levels.
• Reduce inventory, transportation, and warehousing costs.
• Track shipments.
• Plan production based on actual customer demand.
• Rapidly communicate changes in product design.
50
51. Customer Relationship Management (CRM)
• Business and technology discipline for managing customer
relationships to optimize revenue, profitability, customer
satisfaction, and customer retention
• Manages all ways used by firms to deal with existing and
potential new customers
• Capture and integrate customer data from all over the
organization, consolidate and analyze the data, distribute
results to various systems and customer touch points across
the enterprise
• Provides a unified view of customer across the company
• Consolidates customer data from multiple sources and
provides analytical tools for answering questions
51
52. Operational CRM
• Customer-facing applications, such as sales force automation, call
center and customer service support, marketing automation,
teleselling, e-selling, and field sales.
Analytical CRM
• Applications that analyze customer data generated by operational
CRM applications to provide information for improving business
performance
• Examples: Develop customer segmentation strategies and customer
profiles; analyze customer or product profitability; identify trends in
sales length cycle; analyze leads generated and conversion rates,
reduce churn rate: number of customers who stop using or purchasing
products or services from a company.
52
54. Important Dimensions of Knowledge
• Data: Flow of captured events or transactions
• Information: Data organized into categories of
understanding.
• Knowledge: Concepts, experience, and insight that
provide a framework for creating, evaluating, and using
information.
• Wisdom: The collective and individual experience of
applying knowledge to the solution of problem; knowing
when, where, and how to apply knowledge.
54
55. 16
better
The more data that is created, the better
understanding and wisdom people can obtain.
Knowledge Management –
Turning Data into Wisdom
55
56. Knowledge Management Systems
• Support processes for acquiring, storing, distributing, and
applying knowledge (The Knowledge Management Value
Chain).
• Collects relevant knowledge and make it available
wherever and whenever it is needed.
• Support business processes and management decisions.
• Also link the firm to external sources of knowledge.
• Knowledge value increases as more people share it.
56
58. Control Frameworks
• In the late 1990s and early 2000s, a series of multi-million-
dollar accounting frauds made headlines.
– The impact on financial markets was substantial, and
Congress responded with passage of the
Sarbanes-Oxley Act of 2002 (aka, SOX).
• The intent of SOX is to:
– Prevent financial statement fraud.
– Make financial reports more transparent.
– Protect investors.
– Strengthen internal controls in publicly-held companies.
– Punish executives who perpetrate fraud.
58
59. Control Frameworks
• SOX has had a material impact on the way boards of directors,
management, and accountants operate.
• In 1992, The Committee of Sponsoring Organizations (COSO)
issued the Internal Control Integrated Framework.
• COSO’s internal control model has five crucial components:
- Control environment.
- Control activities.
- Risk assessment.
- Information and communication.
- Monitoring. 59
60. Control Frameworks
• Nine years after COSO issued the preceding framework, it
began investigating how to effectively identify, assess, and
manage risk so organizations could improve the risk
management process.
• Result: Enterprise Risk Manage Integrated Framework (ERM)
• The framework should help management manage uncertainty
and its associated risk to build and preserve value.
• To maximize value, a company must balance its growth and
return objectives and risks with efficient and effective use of
company resources.
60
61. • COSO developed a
model to illustrate the
elements of ERM.
• The ERM model is
three-dimensional.
• Means that each of
the eight risk and
control elements are
applied to the four
objectives in the entire
company and/or one
of its subunits.
61
Control Frameworks
62. • Columns at the top
represent the four
types of objectives
that management
must meet to achieve
company goals.
– Strategic objectives
– Operations objectives
– Reporting objectives
– Compliance objectives
62
Control Frameworks
63. • Columns on the
right represent the
company’s units:
– Entire company
– Division
– Business unit
– Subsidiary
63
Control Frameworks
64. • The horizontal rows are
eight related risk and
control components,
including:
– Internal environment
– Objective setting
– Event identification
– Risk assessment
– Risk response
– Control activities
– Information and
communication
– Monitoring
64
Control Frameworks