3 things accounting must do to be more closely tied to strategic planning
- be more outward looking eg. business environment, customers
- greater concern for developing methods that give competitive advantage
- must be concern to monitor strategies and pring to sucessful conclusion ie have more emphaisis on long term planning and act as guardian of business strategy
Competitor Analysis - 2 methods
Competitor Array - identify key success factors for industry and rank businesses. subjective
Competitor profiling - find out waht drives competitors and predict how they resond to change look at
1. mission and objectives
2. strategies
3. assumptions
4. resource and capabilities
Customer profitability requires
total costs of selling and distributing to be known
uses customer related costs and their cost drivers
In practice -
small proportion of customers produce most profit
less profitable customers could be targeted for price increase
big companies do customer analysis in groups but hard to do
Competitive advantage through cost leadership
businesses compete on price
so need to compete in costs
need strategy commitment linked to managing cost base
eg. kaizen, target costing etc
Non financial measures can be
lead indicators
4 areas to Balanced scorecard
- financial
- customer
- internal business process (eg. product cycle times, speed of response to complaints
- Learning and Growth - people, systems
BSC can be applied to company, division, subdivision etc
known as cascading, should link to each tier
Requirements
non financial measures must be evident, often intrinsically linked to financial performance
concern for financial measures - must be a cause and effect relationship
Nature of BS
aims to strike balance between:
internal and external measures
existing outcomes and future performance
hard and soft, financial and non financial
4 steps to create Shareholder value
- set objectives that centralise maximising shareholder returns
- establish methods to measure
- manage business in such a manner as to promote shareholder returns
- measure returns over time and assess.
4 issues with accounting profit
- measured over short period of time
- risk is ignored
- does not take into account cost of capital
- can vary according to different accounting practices
Changes to be made to financial statements to eliminate conservative base
- R + D costs written off at time they benefit, not period occured
- restructuring costs should be viewed as future investment
Max profit when:
marginal revenue = marginal cost of production
Practical considerations with trying to optimise
- demand notoriously difficult to predict
- cost difficult to estimate
- labour in short supply so element of opportunity cost should exist
- optimal level derived from short term profit max, may not be in line with long term goals
Full cost pricing
logical as means break even
but suppliers price takers, not makers
market may not agree, does not take into account demand function
still useful info - LRAC, helps with entry decisions, basis for negotiation for fixed price contracts
Marginal Cost
minimum price, assumes fixed costs not affected by decision to produce, airlines use for offpeak
short term/ limited approach
Target pricing
use market research to set target price, find reasonable profit
Price skimming
- very high to capture highest customers with low sensitivity to high prices
- lowers price to capture next cascade once saturated
Penetration pricing
sold cheap to discourage competitors, once market leader then raise prices
