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1. A. Operational Tools:
1. Costing Tools:
a) Activity-based costing (ABC)
ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered as the
modern alternative to absorption costing, allowing managers to better understand product
and customer net profitability. This provides the business with better information to make
value-based and therefore more effective decisions.
ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional
absorption costing tends to focus on volume- related drivers, such as labour hours, while
activity-based costing also uses transaction-based drivers, such as number of orders
received. In this way, long-term variable overheads, traditionally considered fixed costs, can
be traced to products.
The activity-based costing process:
Example
The Chinese electricity company Xu Ji used ABC to capture direct costs and variable
overheads, which were lacking in the state-owned enterprise‘s (SOE) traditional costing
systems. The ABC experience has successfully induced standardisation in their working
practices and processes. Standardisation was not a common notion in Chinese culture or in
place in many Chinese companies. ABC also acts as a catalyst to Xu Ji‘s IT developments –
first accounting and office computerisation, then ERP implementation.
Prior to the ABC introduction in 2001, Xu Ji operated a traditional Chinese state-enterprise
accounting system. A large amount of manual bookkeeping work was involved. Accounting
was driven predominantly by external financial reporting purposes, and inaccuracy of
product costs became inevitable. At this time, Xu Ji underwent a series of flotation following
China‘s introduction of free market competition.
The inaccuracy of the traditional costing information seriously impeded Xu Ji‘s ability to
compete on pricing. The two main tasks for the ABC system were to: trace direct labour
costs directly to product and client contracts; and allocate manufacturing overheads on the
basis of up-to-date direct labour hours to contracts.

2. b) Throughput accounting
Throughput Accounting (TA) is a principle-based and simplified management accounting
approach that provides managers with decision support information for enterprise
profitability improvement. TA is relatively new in management accounting. It is an
approach that identifies factors that limit an organization from reaching its goal, and then
focuses on simple measures that drive behavior in key areas towards reaching
organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to
traditional cost accounting. As such, Throughput Accounting is neither cost accounting nor
costing because it is cash focused and does not allocate all costs (variable and fixed
expenses, including overheads) to products and services sold or provided by an enterprise.
Management accounting is an organization's internal set of techniques and methods used to
maximize shareholder wealth. Throughput Accounting is thus part of the management
accountants' toolkit, ensuring efficiency where it matters as well as the overall effectiveness
of the organization. It is an internal reporting tool.
For example: The railway coach company was offered a contract to make 15 open-topped
streetcars each month, using a design that included ornate brass foundry work, but very
little of the metalwork needed to produce a covered rail coach. The buyer offered to pay
$280 per streetcar. The company had a firm order for 40 rail coaches each month for $350
per unit.
C) Overhead Allocation
The allocation of certain overhead costs to produced goods is required under the rules of
various accounting frameworks. In many businesses, the amount of overhead to be allocated
is substantially greater than the direct cost of goods, so the overhead allocation method can
be of some importance.
There are two types of overhead, which are administrative overhead and manufacturing
overhead. Administrative overhead includes those costs not involved in the development or
production of goods or services, such as the costs of front office administration and sales;
this is essentially all overhead that is not included in manufacturing overhead.
Manufacturing overhead is all of the costs that a factory incurs, other than direct costs.
We need to allocate the costs of manufacturing overhead to any inventory items that are
classified as work-in-process or finished goods. Overhead is not allocated to raw materials
inventory, since the operations giving rise to overhead costs only impact work-in-process
and finished goods inventory.
The following items are usually included in manufacturing overhead:
 Depreciation of factory equipment Quality control and inspection
 Factory administration expenses Rent, facility and equipment
 Indirect labor and production supervisory wages
 Repair expenses Indirect materials and supplies Rework labor, scrap and spoilage
 Maintenance, factory and production equipment Taxes related to production assets
 Production employees‘ benefits Utilities

3. Example
Mulligan Imports has a small golf shaft production line, which manufactures a titanium
shaft and an aluminum shaft. Considerable machining is required for both shafts, so
Mulligan concludes that it should allocate overhead to these products based on the total
hours of machine time used. In May, production of the titanium shaft requires 5,400 hours
of machine time, while the aluminum shaft needs 2,600 hours. Thus, 67.5% of the overhead
cost pool is allocated to the titanium shafts and 32.5% to the aluminum shafts.
d) Marginal costing:
Marginal costing distinguishes between fixed costs and variable costs as conventionally
classified. The marginal cost of a product –― is its variable cost‖. This is normally taken to
be; direct labour, direct material, direct expenses and the variable part of overheads.
Marginal costing is formally defined as: ‗the accounting system in which variable costs are
charged to cost units and the fixed costs of the period are written-off in full against the
aggregate contribution. Its special value is in decision making‘.
The term ‗contribution‘ mentioned in the formal definition is the term given to the
difference between Sales and Marginal cost. Thus
MARGINAL COST = VARIABLE COST DIRECT LABOUR + DIRECT MATERIAL +
DIRECT EXPENSE + VARIABLE OVERHEADS
Example
If a manufacturing firm produces X unit at a cost of $ 300 and X +1 units at a cost of $ 320,
the cost of an additional unit will be $ 20 which is marginal cost. Similarly if the production
of X-1 units comes down to $ 280, the cost of marginal unit will be $ 20 (300– 280).
e) Variance Analysis:
Variance Analysis, in managerial accounting, refers to the investigation of deviations in
financial performance from the standards defined in organizational budgets. Variance
analysis typically involves the isolation of different causes for the variation in income and
expenses over a given period from the budgeted standards.
Example
So for example, if direct wages had been budgeted to cost $100,000 actually cost $200,000
during a period, variance analysis shall aim to identify how much of the increase in direct
wages is attributable to:
 Increase in the wage rate (adverse labor rate variance );
 Decline in the productivity of workforce (adverse labor efficiency variance);
 Unanticipated idle time (labor idle time variance);
 More wages incurred due to higher production than the budget (favorable sales
volume variance).

4. f) Standard Costing:
Standard costing is an important subtopic of cost accounting. Standard costs are usually
associated with a manufacturing company's costs of direct material, direct labor, and
manufacturing overhead.
Rather than assigning the actual costs of direct material, direct labor, and manufacturing
overhead to a product, many manufacturers assign the expected or standard cost. This
means that a manufacturer's inventories and cost of goods sold will begin with amounts
reflecting the standard costs, not the actual costs, of a product.
Standard costing and the related variances is a valuable management tool. If a variance
arises, management becomes aware that manufacturing costs have differed from the
standard (planned, expected) costs.
If actual costs are greater than standard costs the variance is unfavorable. An unfavorable
variance tells management that if everything else stays constant the company's actual profit
will be less than planned.
If actual costs are less than standard costs the variance is favorable. A favorable variance
tells management that if everything else stays constant the actual profit will likely exceed
the planned profit.
If we assume that a company uses the perpetual inventory system and that it carries all of its
inventory accounts at standard cost (including Direct Materials Inventory or Stores), then
the standard cost of a finished product is the sum of the standard costs of the inputs:
1. Direct material
2. Direct labor
3. Manufacturing overhead
a. Variable manufacturing overhead
b. Fixed manufacturing overhead
Usually there will be two variances computed for each input.
g) Kaizen Costing:
Kaizen costing focuses the organization‘s attention on thing that managers and operators of
an existing system can do to reduce costs. Therefore, unlike target costing, which planners
use before the product is in production, operations personnel use kaizen costing when the
products in the production. Whereas target costing is driven by customer considerations,
kaizen costing is driven by periodic profitability targets set internally by senior management
(Kaplan & Atkinson, 2001).

5. h) Life Cycle Costing
As mentioned above, target costing places great emphasis on controlling costs by good
product design and production is planning, but those up-front activities also cause costs.
There might be other costs incurred after a product is sold such as warranty costs and plant
decommissioning. When seeking to make a profit on a product it is essential that the total
revenue arising from the product exceeds total costs, whether these costs are incurred
before, during or after the product is produced. This is the concept of life cycle costing, and
it is important to realise that target costs can be driven down by attacking any of the costs
that relate to any part of a product‘s life.
i) Target Costing:
Target costing is a system under which a company plans in advance for the price points,
product costs, and margins that it wants to achieve for a new product. If it cannot
manufacture a product at these planned levels, then it cancels the design project entirely.
With target costing, a management team has a powerful tool for continually monitoring
products from the moment they enter the design phase and onward throughout their
product life cycles. It is considered one of the most important tools for achieving consistent
profitability in a manufacturing environment.
A numerical example of Target and Lifecycle Costing
A company is planning a new product. Market research information suggests that the
product should sell 10,000 units at $21.00/unit. The company seeks to make a mark-up of
40% product cost. It is estimated that the lifetime costs of the product will be as follows:
1. Design and development costs $50,000
2. Manufacturing costs $10/unit
3. End of life costs $20,000
The company estimates that if it were to spend an additional £15,000 on design,
manufacturing costs/unit could be reduced.
Required:
a) What is the target cost of the product?
b) What is the original lifecycle cost per unit and is the product worth making on that
basis?
c) If the additional amount were spent on design, what is the maximum manufacturing
cost per unit that could be tolerated if the company is to earn its required mark-up?
Solution:
The target cost of the product can be calculated as follows:
(a) Cost + Mark-up = Selling price
100% 40% 140%

6. $15 $6 $21
(b) The original life cycle cost per unit = ($50,000
+ (10,000 x $10) + $20,000)/10,000 = $17
This cost/unit is above the target cost per unit, so the product is not worth making.
(c) Maximum total cost per unit = $15. Some of this will be caused by the design and end of
life costs: ($50,000 + $15,000 + $20,000)/10,000 = $8.50
Therefore, the maximum manufacturing cost per unit would have to fall from $10 to ($15 –
$8.50) = $6.50.
j) Quality Costing:
In process improvement efforts, quality costs or cost of quality is a means to quantify the
total cost of quality -related efforts and deficiencies. It was first described by Armand V.
Feigenbaum in a 1956 Harvard Business Review article.
Prior to its introduction, the general perception was that higher quality requires higher
costs, either by buying better materials or machines or by hiring more labor. Furthermore,
while cost accounting had evolved to categorize financial transactions into revenues,
expenses, and changes in shareholder equity, it had not attempted to categorize costs
relevant to quality, which is especially important given that most people involved in
manufacturing never set hands on the product. By classifying quality-related entries from a
company's general ledger, management and quality practitioners can evaluate investments
in quality based on cost improvement and profit enhancement.
Quality costs help to show the importance of quality-related activities to management; they
demonstrate the cost of non-quality to an organization; they track the causes and effects of
the problem, enabling the working out of solutions using quality improvement teams, and
then monitoring progress. As a technique in the introduction and development of TQM,
quality costing is a powerful tool for enhancing a company‘s effectiveness. Quality Costing
provides pragmatic advice on how to set about introducing and developing a quality costing
system and using the data that emerges. (Barrie G. Dale and J.J. Plunkett).
k) Absorption costing
Absorption costing is a process of tracing the variable costs of production and the fixed costs
of production to the product. Variable Costing traces only the variable costs of production to
the product and the fixed costs of production are treated as period expenses.

7. Job costing:
According to this method costs are collected and accumulated according to jobs, contracts,
products or work orders. Each job or unit of production is treated as a separate entity for the
purpose of costing. Job costing is carried out for the purpose of ascertaining coat of each job
and takes into account the cost of materials, labor and overheads etc.
Batch Costing:
This is a form of job costing. Under job costing, executed job is used as a cost unit, whereas
under batch costing, a lot of similar units which comprises the batch may be used as a cost
unit for ascertaining cost. In the case of batch costing separate cost sheets are maintained
for each batch of products by assigning a batch number.
Process costing:
Process costing is a term used in cost accounting to describe one method for collecting and
assigning manufacturing costs to the units produced. Processing cost is used when nearly
identical units are mass produced. (Job costing or job order costing is a method used when
the units manufactured vary significantly from one another.)
To illustrate process costing, let's assume that a product requires several processing
operations— each of which occurs in a separate department. The costs of Department One
for the month of June amount to $150,000 of direct materials and $225,000 of conversion
costs (direct labor and manufacturing overhead). If the number of units processed in June
in Department One is the equivalent of 100,000 units, the per unit cost of the products
processed in Department One in June will be $1.50 for direct materials and $2.25 for
conversion costs. These costs will then be transferred to Department Two and its processing
costs will be added to the cost of the units.
Contract Costing:
According to CIMA, terminology as ―a form of specific order costing: attribution of costs to
individual contracts‖. Being a form of specific order costing, contract costing is similar to
job order costing. Both these forms are concerned with costing of specific orders. However,
the term contract costing is used for jobs which take a long time to complete. Further, work
being of a contractual in nature, the same is carried on away from the factory premises
(Iyengar, 1998).

8. 2. Pricing Tools:
a) Cost plus Pricing:
Cost plus pricing is a cost-based method for setting the prices of goods and services. Under
this approach, you add together the direct material cost, direct labor cost, and overhead
costs for a product, and add to it a markup percentage (to create a profit margin) in order to
derive the price of the product. Cost plus pricing can also be used within a customer
contract, where the customer reimburses the seller for all costs incurred and also pays a
negotiated profit in addition to the costs incurred.
The Cost plus Calculation
ABC International has designed a product that contains the following costs:
Direct material costs = $20.00
Direct labor costs = $5.50
Allocated overhead = $8.25
The company applies a standard 30% markup to all of its products. To derive the price of
this product, ABC adds together the stated costs to arrive at a total cost of $33.75, and then
multiplies this amount by (1 + 0.30) to arrive at the product price of $43.88.
b) Market sensitive Pricing:
The amount by which changes in a product's cost tend to affect consumer demand for that
product. The price sensitivity of a product within its target market is often used by a
business when determining its optimal pricing and marketing strategy for the product.
It is important for the suppliers to understand how cost sensitive the customers are; so that
they should focus on some strategies always to keep their customers falling under least price
sensitive stage.
For example, reducing one dollar on a towel‘s price could put that towel on sale and
everybody rushes to buy it, but reducing one dollar on a car will not make any difference
and will not attract customers by any means. Hence the primary challenge for all the
organizations should be making certain that the change in price is perceptible for all the
customers.
c) Segmented pricing
Segmented pricing is said to be done when a company fixes or sets more than one price for
a product, irrespective of its production and distribution costs being the same.
Segmentation must be done keeping in mind the cost parameters. Further, the perceived
value of the product must be constantly assessed and it must be ensured that the image of
the brand doesn‘t get degraded at any stage due to this activity.

9. Example
Awers Inc. manufactures and sells red salmon caviar both online and at a brick and mortar
retail location. Awers practices SEGMENTED PRICING because they sell their ―product at
two or more prices, where the differences in price is not based on differences in costs"
(Armstrong and Kotler pg. 275). For example, a 200-gram can of caviar costs $5.99 in the
retail store and only $5.90 online. This price difference is not due to costs because there is
only one factory that makes this product and then it is distributed to the retail store and the
online store. Online there is an $18 fee for special refrigerated shipping and handling, but
this does not affect the price, since it is an add-on price. The segmented prices reflect
differences in demand as well as customer perceived value.
d) Price Skimming
A Skimming policy is more attractive if demand is inelastic. A skimming pricing policy
involves setting prices of products relatively high compared to those of similar products and
then gradually lowering prices. The skimming price is the highest price possible that buyers
who most desire the product will pay (skim the cream off the top -- skim the innovators).
This market segment is more interested in quality, status, uniqueness, etc. This policy is
effective in situations where a firm has a substantial lead over competition with a new
product.
A great example of Skimming is DVD players in the late 1990's and early 2000's - in the
late 1990's DVD players sold for $500 and $400 when they first came out, then the price
dropped to less than $100 by 2001 by 2004 you can get them for $50 or $60 at many
different types of stores.
e) Penetration Pricing:
A penetration pricing policy involves setting prices of products relatively low compared to
those of similar products in the hope that they will secure wide market acceptance that will
allow the company to later raise its prices. Such a policy is often used when the firm expects
competition from similar products within a short time and when large-scale production and
marketing will produce substantial reductions in overall costs. The low price must help keep
out the competition, and the company must maintain its low price position.
f) Transfer Pricing:
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges
made between related parties for good, services, or use of property (including intangible
property). Transfer prices among components of an enterprise may be used to reflect
allocation of resources among such components, or for other purpose. Many governments
have adopted transfer pricing rules that apply in determining or adjusting income taxes of
domestic and multinational taxpayers. A few countries follow rules that are materially
different overall, so the transfer pricing getting momentum.

10. 3. Budgeting Tools:
a) Priority- Based Budgeting:
Whether attempting to rebuild in a post - recession climate, or persevering through another
year of stagnating or declining revenues , the challenge facing local governments remains:
how to allocate scarce resources to achieve the community‘ s highest priorities . Priority -
based budgeting provides a new lens that produces powerful insights, and local
governments that are using it are making significant breakthroughs.
Priority- based budgeting is a way for local governments to spend within their means by
continuously focusing on the results most relevant to their communities and the programs
that influence those results to the highest possible degree. The process involves a systematic
review of existing services, why they exist, what value they offer to citizens, how they
benefit the community, what they cost, and what objectives and citizen demands they are
achieving. Each service or program is assigned a score based on its contribution to desired
results so that tax dollars can be allocated to those with the greatest impact.
Priority- based budgeting enables a local government to see more clearly which programs
are of the highest relevance and to allocate its resources to its highest priorities and focus on
delivering high - quality services that reflect what the community expects from it.
b) Activity Based Budgeting:
Activity based budgeting is the idea that each activity within an organization should record
their costs in order to define their expenditures. This can help tie together strategic goals
and determine what costs are needed when creating a budget. The basic premise is to
streamline costs, improve business practices and meet objectives rather than simply setting a
budget based on history, inflation or revenue growth.
In an attempt to control indirect costs and improve the data received from the accounting
department, General Electric began using activity based budgeting in the early 1960s. The
accounting department noted that many indirect costs could be predicted before the costs
were actually incurred. In addition, the different departments were not aware of the effect
their expenses had on other departments. In order to resolve this problem they began to
look at each specific activity in order to determine its costs to the organization.
c) Cash Flow Forecast:
A cash flow forecast indicates the likely future movement of cash in and out of the business.
It's an estimate of the amount of money you expect to flow in (receipts) and out (payments)
of your business and includes all your projected income and expenses. A forecast usually
covers the next 12 months; however it can also cover a short-term period such as a week or
month. The concept of cash flow is quite easy:
Net Cash Position = Receipts – Payments

11. Cash flow forecasting or cash flow management is a key aspect of financial management of
a business, planning its future cash requirements to avoid a crisis of liquidity . Cash flow
forecasting is important because if a business runs out of cash and is not able to obtain new
finance, it will become insolvent.
Cash flow is the life-blood of all businesses—particularly start-ups and small enterprises. As
a result, it is essential that management forecast (predict) what is going to happen to cash
flow to make sure the business has enough to survive. How often management should
forecast cash flow is dependent on the financial security of the business. If the business is
struggling, or is keeping a watchful eye on its finances, the business owner should be
forecasting and revising his or her cash flow on a daily basis. However, if the finances of the
business are more stable and 'safe', then forecasting and revising cash flow weekly or
monthly is enough.
d) Zero-Based Budgeting
Zero-based budgeting is a budgeting method that involves starting with $0 and adding only
enough money in the budget to cover expected costs.
Example:
There are many ways to create company budgets. Let's take the marketing department of
Company XYZ as an example. Last year , the department spent $1 million. What's the right
way to set a budget for next year?
You might simply give the department $1 million again, but this might not reflect the
changes in the marketing programs next year, the need to hire more marketing people due
to additional sales, or other factors.
Another way might be to give all departments a 10% increase or decrease based on what the
board of directors would like earnings per share to be next year. This would give the
department $1.1 million or $900,000, depending on which way the board goes.
A third way would be zero-based budgeting, whereby the department starts with no
budgeted funds and must justify every person and expense that should be included in the
budget for the coming year. This might result in a budget of, say, $1,024,314, which is
higher than last year but reflective of the actual needs next year.
e) Incremental budgeting:
Incremental budgeting is budgeting based on slight changes from the preceding period's
budgeted results or actual results. This is a common approach in businesses where
management does not intend to spend a great deal of time formulating budgets, or where it
does not perceive any great need to conduct a thorough re-evaluation of the business. This
mindset typically occurs when there is not a great deal of competition in an industry, so that
profits tend to be perpetuated from year to year.

12. 4. Profitability Analysis Tools:
a) Customer profitability analysis:
Customer profitability analysis is a decision tool used to evaluate the profitability of a
customer relationship. The analysis procedure compels banks to be aware of the full range
of services purchased by each customer and to generate meaningful cost estimates for
providing each service. The applicability of customer profitability analysis has been
questioned in recent years with the move toward unbundling services.
b) Relevant Costing
Relevant costing is a management accounting toolkit that helps managers reach decisions
when they are posed with the following questions:
1. Whether to buy a component from an external vendor or manufacture it in house?
2. Whether to accept a special order?
3. What price to charge on a special order?
4. Whether to discontinue a product line?
5. How to utilize the scarce resource optimally?, etc.
Relevant costing is an incremental analysis which means that it considers only relevant costs
i.e. costs that differ between alternatives and ignores sunk costs i.e. costs which have been
incurred, which cannot be changed and hence are irrelevant to the scenario.
Example
Company A manufactures bicycles. It can produce 1,000 units in a month for a fixed cost of
$300,000 and variable cost of $500 per unit. Its current demand is 600 units which it sells
at $1,000 per unit. It is approached by Company B for an order of 200 units at $700 per
unit. Should the company accept the order?
Solution
A layman would reject the order because he would think that the order is leading to loss of
$100 per unit assuming that the total cost per unit is $800 (fixed cost of $300,000/1,000
and variable cost of $500 as compared to revenue of $700).
On the other hand, a management accountant will go ahead with the order because in his
opinion the special order will yield $200 per unit. He knows that the fixed cost of $300,000
is irrelevant because it is going to be incurred regardless of whether the order is accepted or
not. Effectively, the additional cost which Company A would have to incur is the variable
cost of $500 per unit.
Hence, the order will yield $200 per unit ($700 minus $500 of variable cost).

13. c) Cost-Volume-Profit Analysis
Cost-volume-profit (CVP) analysis is used to determine how changes in costs and volume
affect a company's operating income and net income. In performing this analysis, there are
several assumptions made, including:
 Sales price per unit is constant.
 Variable costs per unit are constant.
 Total fixed costs are constant.
 Everything produced is sold.
 Costs are only affected because activity changes.
If a company sells more than one product, they are sold in the same mix. CVP analysis
requires that all the company's costs, including manufacturing, selling, and administrative
costs, be identified as variable or fixed.
If The Three M's, Inc., has sales of $750,000 and total variable costs of $450,000, its
contribution margin is $300,000. Assuming the company sold 250,000 units during the
year, the per unit sales price is $3 and the total variable cost per unit is $1.80. The
contribution margin per unit is $1.20. The contribution margin ratio is 40%. It can be
calculated using either the contribution margin in dollars or the contribution margin per
unit. To calculate the contribution margin ratio, the contribution margin is divided by the
sales or revenues amount.
d) Economic Value to the Customer (EVC):
One of the most difficult areas of the product role is setting product price. Everyone wants
to add their 2 cents and opinions fly around the room, often without any research or
understanding of pricing dynamics. There are however many flawed practices when
understanding the value to the customer, such as taking into account
development/products times or cost, "coolness factor", size of the customer's business, or
even number of customer units.
The reality is that the maximum amount a customer is willing to pay (the Economic Value to
the Customer or EVC) can be calculated with a simple formula:
EVC = Reference Value + Differentiation Value
As an example, when I moved to California two years ago I needed to buy a new car for
commuting in the bay area. Initially, I was thinking about a BMW M3 convertible (my
requirements list has convertible as mandatory), and went to talk to the BMW dealer, took a
test drive etc. From memory the M3 was about $70K.
After driving the M3 I decided to check out the Mini Cooper S convertible, and found that it
met my needs and had a total price of approx. $35K. So the Mini Cooper S became my
Reference Value. Although the BMW M3 was clearly a better car than the Mini, I couldn't
determine $35K of differentiation value. The Mini had the same three year service plan
included, had a cabin size roughly the same as the BMW, had an automatic roof, had more
than enough power. So purchased the Mini and I have been very happy with my decision.

14. 5. Investment Decision Making tools:
a) Capital Asset Pricing Model (CAPM):
The capital asset pricing model (CAPM) is used to calculate the required rate of return for
any risky asset. Your required rate of return is the increase in value you should expect to see
based on the inherent risk level of the asset.
Example:
As an analyst, you could use CAPM to decide what price you should pay for a particular
stock. If Stock A is riskier than Stock B, the price of Stock A should be lower to compensate
investors for taking on the increased risk.
The CAPM formula is: ra = rrf + Ba (rm-rrf)
where:
rrf = the rate of return for a risk-free security
rm = the broad market's expected rate of return
Ba = beta of the asset
CAPM can be best explained by looking at an example.
Assume the following for Asset XYZ:
rrf=3%, rm=10%, Ba = 0.75
By using CAPM, we calculate that you should demand the following rate of return to invest
in Asset XYZ: ra = 0.03 + [0.75 * (0.10 - 0.03)] = 0.0825 = 8.25%
b) Sensitivity analysis:
It is the Simulation analysis in which key quantitative assumptions and computations
(underlying a decision, estimate, or project) are changed systematically to assess their effect
on the final outcome. Employed commonly in evaluation of the overall risk or in identification
of critical factors, it attempts to predict alternative outcomes of the same course of action. In
comparison, contingency analysis uses qualitative assumptions to paint different scenarios. Also
called what-if analysis.
Sensitivity analysis (SA), broadly defined, is the investigation of these potential changes and
errors and their impacts on conclusions to be drawn from the model. There is a very large
literature on procedures and techniques for SA. This paper is a selective review and
overview of theoretical and methodological issues in SA. There are many possible uses of SA,
described here within the categories of decision support, communication, increased

15. understanding or quantification of the system, and model development. The paper focuses
somewhat on decision support. It is argued that even the simplest approaches to SA can be
theoretically respectable in decision support if they are done well. Many different
approaches to SA are described, varying in the experimental design used and in the way
results are processed. Possible overall strategies for conducting SA are suggested. It is
proposed that when using SA for decision support, it can be very helpful to attempt to
identify which of the following forms of recommendation is the best way to sum up the
implications of the model: (a) do X, (b) do either X or Y depending on the circumstances, (c)
do either X or Y, whichever you like, or (d) if in doubt, do X. A system for reporting and
discussing SA results is recommended.
c) Non-financial factors for investment appraisal:
Although the financial case for making an investment is a vital part of the decision-making
process, non-financial factors can also be important.
Key non-financial factors may include:
 meeting the requirements of current and future legislation
 matching industry standards and good practice
 improving staff morale, making it easier to recruit and retain employees
 improving relationships with suppliers and customers
 improving your business reputation and relationships with the local community
 developing the capabilities of your business, such as building skills and experience in new
areas or strengthening management systems
 anticipating and dealing with future threats, such as protecting intellectual property against
potential competition
For example, you might need to take into account the environmental impact of a potential
investment. To some extent, this may be reflected in financial factors, e.g. the energy savings
offered by new machinery. But other effects - such as the effect on your reputation - will
also be important. See our guide to making the case for environmental improvements.
d) Net present value (NPV):
NPV is the difference between the present value of the future cash flows from an investment
and the amount of investment. Present value of the expected cash flows is computed by
discounting them at the required rate of return.
For example, an investment of $1,000 today at 10 percent will yield $1,100 at the end of the
year; therefore, the present value of $1,100 at the desired rate of return (10 percent) is
$1,000. The amount of investment ($1,000 in this example) is deducted from this figure to
arrive at net present value which here is zero ($1,000-$1,000). A zero net present value
means the project repays original investment plus the required rate of return. A positive net
present value means a better return, and a negative net present value means a worse return,
than the return from zero net present value. It is one of the two discounted cash flow
techniques (the other is internal rate of return) used in comparative appraisal of investment
proposals where the flow of income varies over time.

16. e) Internal rate of return (IRR)
One of the two discounted cash flow (DCF) techniques (the other is net present value or
NPV) used in comparative appraisal of investment proposals where the flow of income
varies over time. IRR is the average annual return earned through the life of an investment
and is computed in several ways. Depending on the method used, it can either be the
effective rate of interest on a deposit or loan, or the discount rate that reduces to zero the
net present value of a stream of income inflows and outflows. If the IRR is higher than the
desired rate of return on investment, then the project is a desirable one. However, it is a
mechanical method (computed usually with a spreadsheet formula) and not a consistent
principle. It can give wrong or misleading answers, especially where two mutually-
exclusive projects are to be appraised. Also called dollar weighted rate of return.
f) Accounting rate of return (ARR):
The accounting rate of return (ARR) is a simple estimate of a project's or investment's
profitability that subtracts money invested from returns without regard to interest accrual
or applicable taxes.
Example:
Also called the "simple rate of return," the accounting rate of return (ARR) allows companies
to evaluate the basic viability and profitability of a project based on projected revenue less
any money invested. The ARR may be calculated over one or more years of a project's
lifespan. If calculated over several years, the averages of investment and revenue are taken.
The ARR itself is derived from dividing the average profit (positive or negative) by the
average amount of money invested. For instance, if the annual profit for a given project over
a three year span averages $100, and the average investment in a given year is $1000, the
ARR would be $100 / $1000 = 10%.
g) Discounted payback period:
Timeframe required to regain the value of discounted cash flow, so that it equals the value
of the initial investment. The formula to calculate this figure is: Payback Period (Year before
recovery + unrecovered cost at the start of the year/cash flow during the year).
One of the major disadvantages of simple payback period is that it ignores the time value of
money. To counter this limitation, an alternative procedure called discounted payback
period may be followed, which accounts for time value of money by discounting the cash
inflows of the project.
h) Payback period:
The amount of time taken to break even on an investment. Since this method ignores the
time value of money and cash flows after the payback period, it can provide only a partial
picture of whether the investment is worthwhile.

17. 6) Other operational tools:
a) Theory of constraints:
Used in cost accounting, this method is based on outlining how to eliminate impacts on
production while still increasing the profit margin. Impacts on production can include a
decrease in production output because of mechanical difficulties or handling waste
products effectively.
The Theory of Constraints is an organizational change method that is focused on profit
improvement. The essential concept of TOC is that every organization must have at least one
constraint. A constraint is any factor that limits the organization from getting more of
whatever it strives for, which is usually profit. The Goal focuses on constraints as bottleneck
processes in a job-shop manufacturing organization. However, many non-manufacturing
constraints exist, such as market demand, or a sales department‘s ability to translate market
demand into orders.
b) Linear programming:
Linear programming (LP; also called linear optimization) is a method to achieve the best
outcome (such as maximum profit or lowest cost) in a mathematical model whose
requirements are represented by linear relationships. Linear programming is a special case
of mathematical programming (mathematical optimization).
More formally, linear programming is a technique for the optimization of a linear objective
function, subject to linear equality and linear inequality constraints. Its feasible region is a
convex polytope, which is a set defined as the intersection of finitely many half spaces, each
of which is defined by a linear inequality. Its objective function is a real-valued affine
function defined on this polyhedron. A linear programming algorithm finds a point in the
polyhedron where this function has the smallest (or largest) value if such a point exists.
c) Benchmark:
A benchmark is a feasible alternative to a portfolio against which performance is measured.
Example:
Let's assume you compare the returns of your stock portfolio, which is a broadly diversified
collection of small-cap stocks and is managed by Company XYZ, with the Russell 2000
index, which you feel is an accurate universe of feasible alternative investments. If
Company XYZ's portfolio returns 5.5% in a year but the Russell 2000 (the benchmark)
returns 5.0%, then we would say that your portfolio beat its benchmark.
Benchmarks help an investor communicate his or her wishes to a portfolio manager. By
assigning the manager a benchmark with which to compare the portfolio's performance,
the portfolio manager will make investment decisions with the eci's performance in mind.

18. d) Decision Tree Analysis:
A decision tree is a decision support tool that uses a tree-like graph or model of decisions
and their possible consequences, including chance event outcomes, resource costs, and
utility. It is one way to display an algorithm.
Decision trees are commonly used in operations research, specifically in decision analysis,
to help identify a strategy most likely to reach a goal.
e) Customer Relationship Management (CRM):
Customer Relationship Management are those aspects of a business strategy which relate to
techniques and methods for attracting and retaining customers. Customer relationship
management (CRM) is a system for managing a company‘s interactions with current and
future customers. It often involves using technology to organize, automate and synchronize
sales, marketing, customer service, and technical support.
Customer relationship management (CRM) refers to the practices, strategies and
technologies that companies use to manage, record and evaluate customer interactions in
order to drive sales growth by deepening and enriching relationships with their customer
bases.
f) 360-degree feedback:
In human resources or industrial psychology, 360-degree feedback, also known as multi-
rater feedback, multi-source feedback, or multi source assessment, is feedback that comes
from members of an employee's immediate work circle. Most often, 360-degree feedback
will include direct feedback from an employee's subordinates, peers (colleagues), and
supervisor(s), as well as a self-evaluation. It can also include, in some cases, feedback from
external sources, such as customers and suppliers or other interested stakeholders. It may be
contrasted with "upward feedback," where managers are given feedback only by their direct
reports, or a "traditional performance appraisal," where the employees are most often
reviewed only by their managers.
The results from a 360-degree evaluation are often used by the person receiving the
feedback to plan and map specific paths in their development. Results are also used by some
organizations in making administrative decisions related to pay and promotions. When this
is the case, the 360 assessment is for evaluation purposes, and is sometimes called a "360-
degree review." However, there is a great deal of debate as to whether 360-degree feedback
should be used exclusively for development purposes, or should be used for appraisal
purposes as well.
g) Value Chain Analysis:
Value chain analysis (VCA) is a process where a firm identifies its primary and support
activities that add value to its final product and then analyze these activities to reduce costs
or increase differentiation. Value chain represents the internal activities a firm engages in
when transforming inputs into outputs.
M. Porter introduced the generic value chain model in 1985. Value chain represents all the
internal activities a firm engages in to produce goods and services. VC is formed of primary

19. activities that add value to the final product directly and support activities that add value
indirectly. Below you can see the Porter‘s VC model.
Primary Activities
Support Activities
Although, primary activities add value directly to the production process, they are not
necessarily more important than support activities. Nowadays, competitive advantage
mainly derives from technological improvements or innovations in business models or
processes. Therefore, such support activities as ‗information systems‘, ‗R&D‘ or ‗general
management‘ are usually the most important source of differentiation advantage. On the
other hand, primary activities are usually the source of cost advantage, where costs can be
easily identified for each activity and properly managed.
h) Total Quality Management (TQM):
A core definition of total quality management (TQM) describes a management approach to
long–term success through customer satisfaction. In a TQM effort, all members of an
organization participate in improving processes, products, services, and the culture in
which they work. The methods for implementing this approach come from the teachings of
such quality leaders as Philip B. Crosby, W. Edwards Deming, Armand V. Feigenbaum,
Kaoru Ishikawa, and Joseph M. Juran.
Total Quality Management (TQM) refers to management methods used to enhance quality
and productivity in business organizations. TQM is a comprehensive management approach
that works horizontally across an organization, involving all departments and employees
and extending backward and forward to include both suppliers and clients/customers.
TQM is only one of many acronyms used to label management systems that focus on quality.
Other acronyms include CQI (continuous quality improvement), SQC (statistical quality
control), QFD (quality function deployment), QIDW (quality in daily work), TQC (total
quality control), etc. Like many of these other systems, TQM provides a framework for
implementing effective quality and productivity initiatives that can increase the profitability
and competitiveness of organizations.

20. B. Performance Measurement Tools:
i) Return On Capital Employed (ROCE)
A financial ratio that measures a company's profitability and the efficiency with which its
capital is employed. Return on Capital Employed (ROCE) is calculated as:
ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed
A higher ROCE indicates more efficient use of capital. ROCE should be higher than the
company‘s capital cost; otherwise it indicates that the company is not employing its capital
effectively and is not generating shareholder value.
Example
Scott's Auto Body Shop customizes cars for celebrities and movie sets. During the year, Scott
had a net operating profit of $100,000. Scott reported $100,000 of total assets and $25,000
of current liabilities on his balance sheet for the year.
Accordingly, Scott's return on capital employed would be calculated like this:
As you can see, Scott has a return of 1.33. In other words, every dollar invested in employed
capital, Scott earns $1.33. Scott's return might be so high because he maintains low assets
level.
ii) Cash Flow Return on Investment – (CFROI):
A valuation model that assumes the stock market sets prices based on cash flow, not on
corporate performance and earnings.
It's valuable to consider as many models as possible when looking at the stock market.
Financial theory is similar to scientific theory; no model can be entirely proved or disproved,
and a diversity of opinions is encouraged
Cash flow return on investment (CFROI) is the indicator that helps a firm to evaluate the
performance of an investment or product. It can also be termed as the calculation that helps
the stock market to set prices on the basis of cash flow.

21. iii) Residual Income:
The amount of income that an individual has after all personal debts, including the
mortgage, have been paid. This calculation is usually made on a monthly basis, after the
monthly bills and debts are paid. Also, when a mortgage has been paid off in its entirety, the
income that individual had been putting toward the mortgage becomes residual income.
Residual income is often an important component of securing a loan. The loaning institution
usually assesses the amount of residual income an individual has left after paying off other
debts each month. If the individual requesting the loan has sufficient residual income to
take on additional debt, the loaning institution will be more likely to grant the loan because
having an adequate amount of residual income will ensure that the borrower has sufficient
funds to make the loan payment each month.
Some examples of residual income sources include:
 Royalties from intellectual property, such as books and patents
 Subscriptions, advertisements, donations or affiliate links from your blog or website
 Purchasing an office or apartment building and leasing or renting out the properties
 A savings and investment program that earns interest
 E-book sales
 Stock photography royalties
iv) Economic Value Added (EVA):
Economic value added (EVA) is an internal management performance measure that
compares net operating profit to total cost of capital. Stern Stewart & Co. is credited with
devising this trademarked concept. Economic value added (EVA) is also referred to as
economic profit.
Example:
The formula for EVA is:
EVA = Net Operating Profit After Tax - (Capital Invested x WACC)
Assume that Company XYZ has the following components to use in the EVA formula:
NOPAT = $3,380,000
Capital Investment = $1,300,000
WACC = .056 or 5.60%
EVA = $3,380,000 - ($1,300,000 x .056) = $3,307,200
The positive number tells us that Company XYZ more than covered its cost of capital. A
negative number indicates that the project did not make enough profit to cover the cost of
doing business.
v) Profit Before Tax – (PBT):
A profitability measure that looks at a company's profits before the company has to pay
corporate income tax. This measure deducts all expenses from revenue including interest
expenses and operating expenses, but it leaves out the payment of tax.
Also referred to as "earnings before tax ".

22. Profit before tax measures a company's operating and non-operating profits before taxes are
considered. It is the same as earnings before taxes.
Example:
Simplifying things a bit, revenue minus expenses equals earnings. The resulting figure is
usually listed on a company's income statement right before taxes are listed. For example,
take a look at the income statement for Company XYZ:
In this example, profit before tax is $150,000 while net income is $100,000.
vi) Return on Investment (ROI):
Return on investment (ROI) measures the gain or loss generated on an investment relative to
the amount of money invested. ROI is usually expressed as a percentage and is typically
used for personal financial decisions, to compare a company's profitability or to compare
the efficiency of different investments.
The return on investment formula is: ROI = (Net Profit / Cost of Investment) X 100
Example:
The ROI calculation is flexible and can be manipulated for different uses. A company may
use the calculation to compare the ROI on different potential investments, while an investor
could use it to calculate a return on a stock.
For example, an investor buys $1,000 worth of stocks and sells the shares two years later for
$1,200. The net profit from the investment would be $200 and the ROI would be calculated
as follows:
ROI = (200 / 1,000) x 100 = 20%
The ROI in the example above would be 20%. The calculation can be altered by deducting
taxes and fees to get a more accurate picture of the total ROI.

23. C. Performance Management Tools:
i) Balanced Scorecard:
A performance metric used in strategic management to identify and improve various
internal functions and their resulting external outcomes. The balanced scorecard attempts
to measure and provide feedback to organizations in order to assist in implementing
strategies and objectives.
This management technique isolates four separate areas that need to be analyzed: (1)
learning and growth, (2) business processes, (3) customers, and (4) finance. Data collection
is crucial to providing quantitative results, which are interpreted by managers and
executives and used to make better long-term decisions.
ii) Business Process Reengineering (BPR):
Thorough rethinking of all business processes, job definitions, management systems,
organizational structure, work flow, and underlying assumptions and beliefs. BPR's main
objective is to break away from old ways of working, and effect radical (not incremental)
redesign of processes to achieve dramatic improvements in critical areas (such as cost,
quality, service, and response time) through the in-depth use of information technology.
Also called business process redesign. Business process reengineering (BPR) is the analysis
and redesign of workflow within and between enterprises.

24. Business process re-engineering is a business management strategy, originally pioneered in
the early 1990s, focusing on the analysis and design of workflows and business processes
within an organization. BPR aimed to help organizations fundamentally rethink how they
do their work in order to dramatically improve customer service, cut operational costs, and
become world-class competitors. In the mid-1990s, as many as 60% of the Fortune 500
companies claimed to either have initiated reengineering efforts, or to have plans to do so.
iii) Value-based management:
Recent years have seen a plethora of new management approaches for improving
organizational performance: total quality management, flat organizations, empowerment,
continuous improvement, reengineering, kaizen, team building, and so on. Many have
succeeded—but quite a few have failed. Often the cause of failure was performance targets
that were unclear or not properly aligned with the ultimate goal of creating value. Value-
based management (VBM) tackles this problem head on. It provides a precise and
unambiguous metric—value—upon which an entire organization can be built.
The thinking behind VBM is simple. The value of a company is determined by its discounted
future cash flows. Value is created only when companies invest capital at returns that
exceed the cost of that capital. VBM extends these concepts by focusing on how companies
use them to make both major strategic and everyday operating decisions. Properly executed,
it is an approach to management that aligns a company's overall aspirations, analytical
techniques, and management processes to focus management decision making on the key
drivers of value.
iv) Six Sigma:
Six Sigma is a set of techniques and tools for process improvement. It was developed by
Motorola in 1986. Jack Welch made it central to his business strategy at General Electric in
1995. Today, it is used in many industrial sectors.
The term Six Sigma originated from terminology associated with manufacturing, specifically
terms associated with statistical modeling of manufacturing processes. The maturity of a
manufacturing process can be described by a sigma rating indicating its yield or the
percentage of defect-free products it creates.
DMAIC

25. The five steps of DMAIC
 Define the system, the voice of the customer and their requirements, and the project
goals, specifically.
 Measure key aspects of the current process and collect relevant data.
 Analyze the data to investigate and verify cause-and-effect relationships. Determine
what the relationships are, and attempt to ensure that all factors have been
considered. Seek out root cause of the defect under investigation.
 Improve or optimize the current process based upon data analysis using techniques
such as design of experiments, poka yoke or mistake proofing, and standard work to
create a new, future state process. Set up pilot runs to establish process capability.
 Control the future state process to ensure that any deviations from the target are
corrected before they result in defects. Implement control systems such as statistical
process control, production boards, visual workplaces, and continuously monitor the
process.
Some organizations add a Recognize step at the beginning, which is to recognize the right
problem to work on, thus yielding an RDMAIC methodology.
v) Value Stream Mapping:
Value stream mapping is a lean manufacturing or lean enterprise technique used to
document, analyze and improve the flow of information or materials required to produce a
product or service for a customer.
A value stream map (AKA end-to-end system map) takes into account not only the activity of the
product, but the management and information systems that support the basic process. This is
especially helpful when working to reduce cycle time, because you gain insight into the decision
making flow in addition to the process flow. It is actually a Lean tool.
The basic idea is to first map your process, then above it map the information flow that
enables the process to occur.
Value stream mapping
Value stream mapping usually employs standard symbols to represent items and processes, therefore
knowledge of these symbols is essential to correctly interpret the production system problems.

26. Value stream mapping is a lean-management method for analyzing the current state and
designing a future state for the series of events that take a product or service from its
beginning through to the customer. At Toyota, it is known as "material and information flow
mapping".It can be applied to nearly any value chain.
vi) Performance Prism :
Business performance is a concept that has many dimensions and driven by multiple
parameters. Most of the existing frameworks do capture the components of performance
measurement, but in isolation and not as one integrated unit. This is solved by the
performance prism framework.
The five facets of the prism
The Performance Prism aims to manage the performance of an organisation from five
interrelated ‗facets‘:
1. Stakeholder satisfaction – who are our stakeholders and what do they want?
2. Stakeholder contribution – what do we want and need from our stakeholders?
3. Strategies – what strategies do we need to put in place to satisfy the wants and needs
of or our stakeholders while satisfying our own requirements too?
4. Processes – what processes do we need to put in place to enable us to execute our
strategies?
5. Capabilities – what capabilities do we need to put in place to allow us to operate our
processes?
The Prism is designed to be a flexible tool – it can be used for commercial or non-profit
organisations, big and small. When light is shined into a prism, it is refracted, thus the
Prism shows the hidden complexity of white light. According to Neely and Adams, the
Performance Prism illustrates the true complexity of performance measurement and
management.

27. D. Strategic Management Tools:
D.1. Performance Reporting Tools:
a) Value Added Reporting:
A new form of accounting statement--the value- added statement--is gaining popularity in
the United Kingdom, and could easily be adopted in the United States, with beneficial
results. Riahi-Belkaoui maintains that the value-added statement can be viewed as a
modified income statement: it reports the operating performance of a company at a given
point in time, using both accrual and matching procedures. Unlike the income statement,
however, the VAS is interpreted not as a return to shareholders but as a return to the larger
group of capital and labor providers. Belkaoui spells out how the statement is developed,
how it can be adapted to U.S. needs, and what its potential benefits would be. His book will
thus interest not only accountants, teachers, and students who follow trends in international
and multi-national accounting, but also those who want to prepare for the development of
techniques and procedures that might be anticipated in the U.S.
b) Contribution after variable costs:
Contribution margin is a cost accounting concept that allows a company to determine the
profitability of individual products.
The phrase "contribution margin" can also refer to a per unit measure of a product's gross
operating margin, calculated simply as the product's price minus its total variable costs.
The formula for contribution margin is the sales price of a product minus its variable costs.
In other words, calculating the contribution margin determines the sales amount left over
after adjusting for the variable costs of selling additional products.
Example of Contribution Margin
Suppose that a company is analyzing its revenues and expenses. The company has sales of
$1,000,000 and variable costs of $400,000. The contribution margin for this example
would be the difference of $1,000,000 and $400,000, which is $600,000. The $600,000 is
the amount left over to pay fixed costs. A 'per product' margin can be found by dividing
$600,000 by the number of units sold.

28. c) Gross Margin:
Gross margin is net sales less the cost of goods sold. The gross margin reveals the amount
that an entity earns from the sale of its products and services, before the deduction of any
selling and administrative expenses. The figure can vary dramatically by industry. For
example, a company that sells electronic downloads through a website may have an
extremely high gross margin, since it does not sell any physical goods to which a cost might
be assigned. Conversely, the sale of a physical product, such as an automobile, will result in
a much lower gross margin.
The amount of gross margin earned by a business dictates the level of funding left with
which to pay for selling and administrative activities, financing costs, and dividend
payments to investors.
Gross Margin Formula
The calculation is: (Net sales - Cost of goods sold) / Net sales
For example, a company has sales of $1,000,000 and cost of goods sold of $750,000, which
results in a gross margin of $250,000 and a gross margin percentage of 25%. The gross
margin percentage may be stated in a company's income statement.
d) Segmental Margin:
Segment margin is the amount of net profit or loss generated by a segment of a business. It
is extremely useful to track segment margins (especially on a trend line) in order to learn
which parts of a total business are performing better or worse than average. The analysis is
also useful for determining where to invest additional funds in a business. However, the
measurement is of little use for smaller organizations, since they are not large enough to
have multiple business segments.
For a public company, any business unit that has at least 10% of the revenues, net profits, or
assets of the parent company Another use of the segment margin is on an incremental basis,
where you model the estimated impact of a specific customer order (or other activity) into
the existing segment margin in order to forecast the results of accepting the customer order
(or other activity).
e) Net Profit Margin:
Net profit margin is the percentage of revenue remaining after all operating expenses,
interest, taxes and preferred stock dividends (but not common stock dividends) have been
deducted from a company's total revenue.
The net profit margin formula looks at how much of a company's revenues are kept as net
income. The net profit margin is generally expressed as a percentage. Both net income and
revenues can be found on a company's income statement.

29. D.2. Strategic Tools:
a) Strategy Mapping:
A Strategy Map contains the answer to the question, ―What do you want to accomplish.‖ A
Strategy Map does not contain measures, it contains objectives. This simplifies the selection
of measures in the Balanced Scorecard. Strategy maps instill the discipline of ―Objectives
before Measures‖. A Strategy Map contains objectives that are linked in a cause and effect
relationship. The cause and effect relationship is described between objectives in
perspectives. Those perspectives are the four main perspectives of the Balanced Scorecard
approach, which describe the cause and effect relationship. The scorecard components
(Objectives, measures, targets, initiatives, assessments, responsibility) sit behind the
objectives on the strategy map.
A Strategy Map is about focus and choice. A Strategy Map for a management team contains
the few things that that team have to focus on to make the biggest difference. For this
reason, Strategy Maps are not operational maps:
b) Core Competencies:
In their 1990 article entitled, The Core Competence of the Corporation, C.K. Prahalad and
Gary Hamel coined the term core competencies, or the collective learning and coordination
skills behind the firm's product lines. They made the case that core competencies are the
source of competitive advantage and enable the firm to introduce an array of new products
and services.
A core competency is knowledge or expertise in a given area. Core competencies can be
assessed by observing a person's behavior at work, while playing a sport or by reviewing a
company's output.
These examples of different kinds of core competency show how the main strength of a
person or a group is its core competency.
Examples of Core Competency
Analytical Thinking - Applies logic to solve problems and get the job done.
Client Service - Ability to respond to the clients and anticipate their needs.
Computer Competency - Is skilled at operating a computer.
Conflict Resolution - Works to resolve differences and maintain work relationships.
Continuous Education - Implements professional development and training.
Creative Thinking - Ability to look outside the box and develop new strategies.
Decision Making - Can make decisions and take responsibility for them.
Document Use - Ability to use and understand documents.
c) Risk management:
The identification, analysis, assessment, control, and avoidance, minimization, or
elimination of unacceptable risks. An organization may use risk assumption, risk avoidance,
risk retention , risk transfer , or any other strategy (or combination of strategies) in proper
management of future events .

30. Risk management is the identification, assessment, and prioritization of risks (defined in ISO
31000 as the effect of uncertainty on objectives) followed by coordinated and economical
application of resources to minimize, monitor, and control the probability and/or impact of
unfortunate events or to maximize the realization of opportunities. Risk management‘s
objective is to assure uncertainty does not deviate the endeavor from the business goals.
Risk sources are more often identified and located not only in infrastructural or
technological assets and tangible variables, but in Human Factor variables, Mental States
and Decision Making. The interaction between Human Factors and tangible aspects of risk,
highlights the need to focus closely into Human Factor as one of the main drivers for Risk
Certain aspects of many of the risk management standards have come under criticism for
having no measurable improvement on risk, whether the confidence in estimates and
decisions seem to increase. For example, it has been shown that one in six IT projects
experience cost overruns of 200% on average, and schedule overruns of 70%.
d) Mission statement:
"Statement of purpose" redirects here. For use in the university and college admissions , see
admissions essay .
A mission statement is a statement of the purpose of a company, organization or person; its
reason for existing; a written declaration of an organization's core purpose and focus that
normally remains unchanged over time.
Properly crafted mission statements
(1) serve as filters to separate what is important from what is not,
(2) clearly state which markets will be served and how, and
(3) communicate a sense of intended direction to the entire organization.
A mission is different from a vision in that the former is the cause and the latter is the effect;
a mission is something to be accomplished whereas a vision is something to be pursued for
that accomplishment. Also called company mission, corporate mission, or corporate
purpose.
e) Value engineering:
Value engineering (VE) is systematic method to improve the "value" of goods or products
and services by using an examination of function. Value, as defined, is the ratio of function
to cost . Value can therefore be increased by either improving the function or reducing the
cost . It is a primary tenet of value engineering that basic functions be preserved and not be
reduced as a consequence of pursuing value improvements.
The reasoning behind value engineering is as follows: if marketers expect a product to
become practically or stylistically obsolete within a specific length of time, they can design it
to only last for that specific lifetime. The products could be built with higher-grade
components, but with value-engineering they are not because this would impose an
unnecessary cost on the manufacturer, and to a limited extend also an increased cost on the

31. purchaser. Value engineering will reduce these costs. A company will typically use the least
expensive components that satisfy the product's lifetime projections.
How is Value Engineering Applied?
The technique of Value Engineering is governed by a structured decision making process to
assess the value of procedures or services. Whenever unsatisfactory value is found, a Value
Management Job plan can be followed. This procedure involves the following 8 phases :
1. Orientation 2. Information 3. Function 4. Creativity 5. Evaluation 6. Recommendation 7.
Implementation 8. Audit
f) Competitor Analysis:
In formulating business strategy, managers must consider the strategies of the firm's
competitors. While in highly fragmented commodity industries the moves of any single
competitor may be less important, in concentrated industries competitor analysis becomes a
vital part of strategic planning.
Casual knowledge about competitors usually is insufficient in competitor analysis. Rather,
competitors should be analyzed systematically, using organized competitor intelligence-
gathering to compile a wide array of information so that well informed strategy decisions
can be made.
Competitor Analysis Framework
Michael Porter presented a framework for analyzing competitors. This framework is based
on the following four key aspects of a competitor:
 Competitor's objectives
 Competitor's assumptions
 Competitor's strategy
 Competitor's capabilities
Objectives and assumptions are what drive the competitor, and strategy and capabilities are
what the competitor is doing or is capable of doing.
g) SWOT Analysis:
SWOT analysis is a simple framework for generating strategic alternatives from a situation
analysis. It is applicable to either the corporate level or the business unit level and
frequently appears in marketing plans. SWOT (sometimes referred to as TOWS) stands for
Strengths,
Weaknesses, Opportunities, and Threats. The SWOT framework was described in the late
1960's by Edmund P. Learned, C. Roland Christiansen, Kenneth Andrews, and William D.
Guth in Business Policy, Text and Cases (Homewood, IL: Irwin, 1969). The General Electric
Growth Council used this form of analysis in the 1980's. Because it concentrates on the
issues that potentially have the most impact, the SWOT analysis is useful when a very
limited amount of time is available to address a complex strategic situation.

32. The following diagram shows how a SWOT analysis fits into a strategic situation analysis.
Situation Analysis
/
Internal Analysis External Analysis
/ /
Strengths Weaknesses Opportunities Threats
|
SWOT Profile
The internal and external situation analysis can produce a large amount of information,
much of which may not be highly relevant. The SWOT analysis can serve as an
interpretative filter to reduce the information to a manageable quantity of key issues. The
SWOT analysis classifies the internal aspects of the company as strengths or weaknesses and
the external situational factors as opportunities or threats. Strengths can serve as a
foundation for building a competitive advantage, and weaknesses may hinder it. By
understanding these four aspects of its situation, a firm can better leverage its strengths,
correct its weaknesses, capitalize on golden opportunities, and deter potentially devastating
threats.
h) The Boston Matrix:
The Boston Consulting Group‘s Product Portfolio Matrix Like Ansoff‘s matrix, the Boston
Matrix is a well-known tool for the marketing manager. It was developed by the large US
consulting group and is an approach to product portfolio planning. It has two controlling
aspect namely relative market share (meaning relative to your competition) and market
growth.
Problem Children
These are products with a low share of a high growth market. They consume resources and
generate little in return. They absorb most money as you attempt to increase market share.
Stars
These are products that are in high growth markets with a relatively high share of that
market. Stars tend to generate high amounts of income. Keep and build your stars. Look for
some kind of balance within your portfolio. Try not to have any Dogs. Cash Cows, Problem
Children and Stars need to be kept in a kind of equilibrium. The funds generated by your
Cash Cows is used to turn problem children into Stars, which may eventually become Cash
Cows. Some of the Problem Children will become Dogs, and this means that you will need a
larger contribution from the successful products to compensate for the failures.

33. i) Environmental Management Accounting:
EMA is the generation and analysis of both financial and non-financial information in order
to support internal environmental management processes. It is complementary to the
conventional financial management accounting approach, with the aim to develop
appropriate mechanisms that assist in the identification and allocation of environment-
related costs (Bennett and James (1998a), Frost and Wilmhurst (2000)). The major areas for
the application for EMA are:
 product pricing
 budgeting
 investment appraisal
 calculating costs and
 savings of environmental projects, or setting
 quantified performance targets.
EMA is as wide-ranging in its scope, techniques and focus as normal management
accounting. Burritt et al (2001) stated: 'there is still no precision in the terminology
associated with EMA'.
They viewed EMA as being an application of conventional accounting that is concerned
with the environmentally-induced impacts of companies, measured in monetary units, and
company-related impacts on environmental systems, expressed in physical units. EMA can
be viewed as a part of the environmental accounting framework and is defined as 'using
monetary and physical information for internal management use'.