Lecture 1 Introducing organisations, strategy and management control

systems
What is management accounting?
Management accounting is the process of gathering, summarising and reporting financial and nonfinancial information used internally by managers to make decisions regarding things such as:
How to direct resources
Investment decisions
Manage and evaluate risk
Evaluate performance of managers and sub-units
Evaluate and improve production and/or service delivery performance
Improve quality
Meet customer/client expectations
Evaluate customers and suppliers
Develop suitable incentives
Ultimately, this helps to:
Direct behaviour
Facilitate decision making e.g. provide cost information or influence decision making e.g. advising on
strategy (low cost or differentiation)
Provide feedback
Facilitate learning
Four functions of control
1. Motivate decisions and actions consistent with organisational objectives
2. Integrate efforts of several different parts of the organisation
3. Provide information about the results of operations and peoples performance
4. Facilitate the implementation of strategic plans
Formal management and accounting control mechanisms
Formal budgeting and planning processes
Cost system data for costing, pricing, product and customer profitability analysis
o Bulk buy, cheaper suppliers
o How much can we charge customer?
o Net profit margin analysis how much does $1 of revenue become profit? ROA?
Activity-related analysis for improved process management
Strategic-related data collection to assist with decisions such as: outsourcing, capital investment,
involvement in strategic alliances and collaborative ventures
Formal evaluation procedures of units and managers
Incentive programs and reward system structures e.g. bonuses
Informal management and accounting control mechanisms
Informal practices such as informal meetings and social work settings
Practices such as observation/copying and employee engagement that permeate the organisation
Recruitment and hiring practices that might result in seeking new employees most likely to suit
existing organisational culture
Informal feedback processes which might include one-on-one consultations between senior and
subordinate managers and/or informal meetings
Employee development and organisational learning practices
Cultural and belief systems
Note that the divide between the formal and informal mechanisms are not always clear-cut and
sometimes are actually intertwined.
What are the differences between a diagnostic control system and interactive control
system?
Diagnostic control systems:
Formal information systems that managers use to monitor organize actual outcomes and correct
deviations from pre -set standards of performance
All measurements can be used diagnostically by calculating variances between goal and actual
results
Interactive control systems:

Formal information systems that managers use to personally involve themselves in the decision
activities of subordinates. Through these interactive control systems, managers seek to get
information out of the entire organization. When information is gathered, debates and dialogs take
place to stimulate organizational learning. This makes strategy a continual process as strategy must
be reviewed during management meetings

Key influences on managing the contemporary organisation:

Incentives
Sustainability
o Are you able to continue this trend?
o Environmental
o Social
Risk
o Credit risk
o Operational risk
o Foreign currency risk
o Liquidity risk
All contributes to reputation

Lecture 2 Responsibility accounting, structure and the organisational sub-unit

Key influences on the nature of the management accounting and control systems:
Strategy: organisational and business-unit level, no cost or differential
Organisational culture and belief systems as well as national culture
Organisational structure
External environment e.g. law/regulations, economy, competitors, public opinion, customers, market
trend, price of resources
Size
Technology
Organisational structure
Reflected in:
Formal structure which defines relationships between people, teams, divisions etc.
The organisation of work and practices and work flows how individuals and subunits communicate
and coordinate their work
This achieves two main objectives:
Facilitates particular work flows i.e. makes it easier to do things that need to be done
Focuses attention i.e. ensures people are concentrating on the organisations strategy
Things that influence structural choices:
Strategy
Market orientation/ specialisation
External environment and industry
Costs
Organisation size
Organisational culture and beliefs
The nature of organisational activities
Common forms of organisational structure:
In general, all structures have their advantages and disadvantages. Regardless of the structure, an
organisation as a whole, ultimately needs to the customer responsive. In addition to this, generally all
organisations will show some sort of functional structure.
Organising by functions is appropriate when the benefits of specialisation are greater than the benefits
or market responsiveness. On the other hand, organising by market focus, is appropriate when the
benefits of market responsiveness outweigh the benefits of specialisation. Business can either be
efficient as possible in one or the other, but never both (even though the matrix attempts to support
the best of both worlds)
Structure
Functional
Activities grouped by function e.g.

Advantages
Encourages
specialisation

Disadvantages
Overload at the top
Regional or product

manufacturing, marketing, sales, distribution

etc.

Good for developing

expertise, depth of
knowledge and
economies of scale and
scope
Clear accountability
and chain of command

Divisional
Focused around geographical or products

Matrix
Offers control and coordination along two
dimensions

Hybrid
Offers tailored structure that suits a
particular organisations needs. Some
functions are organised by client or region
while others are centralised.

Directs attention to
marketplace results
rather than process
results (under a
functional structure)
Greater responsiveness
to demands of specific
product/regional
markets or clients
Can hold divisional
managers accountable
for end-to-end results in
their region/product
Good model for
developing future
leaders and managers

Maximises
responsiveness or scale
in two dimensions e.g.
A product manager and
regional manager both
looking over same
market
CEO able to take on a
strategic planning role
Breaks down silo effect

Enables scale and

functional specialisation
benefits to be obtained
at back-end, but
provides alignment
around customer or
sales channel at the
front-end.

category differences
are not well managed
The silo effect little
synergy between
functions leads to lack
of communication and
collaboration can
inhibit innovativeness
and business growth
Can be very topdown.
Communicating
upwards can be
intimidating
Measuring
performance is
problematic
Duplication of
functions within
division while this
may improve decision
making, it is costly
Loss of economies of
scale within functions
Horizontal information
flows are problematic
Fosters competition
rather than
collaboration (silo
effect)
May result in loss of
learning within
functions
Dual hierarchy can be
confusing and
bureaucratic can
have conflicting
demands
Doesnt clarify the
importance between
the two dimensions
Accountability issues

How do informal networks influence structure?

Informal social networks break down the communication barrier between divisions. By opening up
channels for people to work collaboratively and share ideas, there is more chance for an organisation to
come up with new innovations as well as intangibly grow as a firm.
Responsibility accounting
Cost centres
Subunits with costs but no significant revenues e.g. manufacturing, research and development, staff
training, HR, accounting
Revenue centres
Subunits with manager responsibility for revenue e.g. sales units
Profit centres
Subunits were managers are held accountable for profits
Investment centres
Subunits where managers are held accountable for profits and return of the investment in the subunit
Span of attention
Is influenced by:
Work-unit design
Span of control people and functions under a managers control
Span of accountability the performance measures for which the manager is held accountable
A managers attention is generally focused only on the domains in which the manager can influence or
where information/other resources are beneficial to the managers individual work unit. However, work
units tend to be silos i.e. tend to only focus on their own work, see no influence of their work over the
other divisions or the firm as a whole, may see themselves as in competition with others. To overcome
this, by joining points in the structure (e.g. adopting hybrid or matrix), this forces communication and
coordination and as a result becomes a part of their span of attention.

Lecture 3 - Measuring and evaluating sub-unit performance using financialbased diagnostic tools
Measures need to:
Reflect strategy and key business drivers
Be relatively objective
Be consistent with value creation
Reflect managerial responsibility and accountability
Be complete and timely
Be responsive
Therefore, measures suitable at one level of an organisation may not be suitable at another level

Performance measures as diagnostic

tools
Diagnostic control is the use of routine
performance measurement, feedback and
reward systems that help keep
organisations on track
The series of events for diagnostic control:
1. Performance expectations are set
2. Actual performance is measured
3. Variances are used to diagnose
performance problems
4. Efforts are made to bring performance
back in line with expectations. These
responses tend to be routine rather
than analytical or creative where
variance are viewed as a performance
issue
In effect, ensures that strategies are
implemented effectively and there is a
conservation of scarce management
attention.
Behavioural effect of different performance measures
Financial performance
measurement
ROI
= (Net Operating
Income/Total Assets)

Advantages

Disadvantages

Controls for size

differences across plants
and divisions

Can encourage dysfunctional

behaviour as when an investment
alternative that offers a return
equal to or greater than the cost of
capital, but less than the divisions
anticipated RO, the manager will
not invest in that opportunity even
though it benefits the firm. On the
other hand, if they do, managers
are penalised for making decisions
that lower their ROI but increases
value of firm overall i.e. Managers
will make decisions that are myopic
and compromise long term growth
and development e.g.:
o Cutting in areas like R&D or
training, reducing employees
o Defer asset replacement due to
(short-term) impact on the ROI
result
o Discourage managers from
investing in projects that will
decrease their ROI (perhaps in
the short-term), but is good for
the overall organisation (and
even the division in the longer
term)

RI
= (Net operating income
(Total assets * required
rate of return)

Economic Value Added

(EVA)
= (NPAT + R&D) (WACC *
(A L + R&D)

Commonly viewed as a
measure of value added
to the firm
Overcomes some of the
dysfunctional tendencies
of ROI
Provides a more
economic notion of
profits and assets and it
removes accounting
distortions from the

Size differences A larger plant or

division will tend to have a higher
EVA relative to its smaller
counterparts.
Financial Orientation Managers

can manipulate the financial

numbers by using different financial
accounting methods to realise
revenue and recognise expense.
Can encourage dysfunctional
behaviour.

Short-Term Orientation EVA

overemphasises the need to
generate immediate results
therefore it creates a distinctive for
managers to invest in innovative
product or process technologies.
Results Orientation EVA does not
help point towards the root causes
of operational inefficiencies
therefore offer limited useful
information to people charged with
the responsibility of managing
business processes.
Note: Financial measures alone should not be used to measure performance should be used in
conjunction with customer perspective, internal business process perspective, and innovation and
learning perspective. A balance of these will reduce the risk of overemphasising short run profits by
incorporating the nonfinancial drivers of long term financial wealth into the performance
measurement and reward systems providing a complete picture of performance.

calculation
Overcomes goal
incongruence and
dysfunctional decision
making
Provides a measure of
wealth creation that aligns
the goals of divisional
managers with the goal of
the entire company

Lecture 4 Pricing internal transfers

The transfer price is an internally set transaction price to account for the transfer of goods and services
between divisions of the same firm.
Two basic transfer pricing decisions: Whether to buy/sell internally or externally
Ideally, managers of the two divisions would make these decisions with the goal of maximising the
value of the firm overall. In reality, often managers make decisions with the goal of maximising their
divisions performance. Thus, managers are often in conflict and do not necessarily act in the best
interest of the firm (lack of goal congruence.
Transfer Price Alternatives
Method
Cost- based

Marketbased

Negotiated

Dual

Explanation
Transfer price based on the costs of producing the products
Used when:
Market data is not readily available
Product transferred internally is not identical to product on general market,
may be unique or customised for internal supply
Managers sourcing autonomy is limited and market price is deemed
inequitable
Where corporate management dictates that external purchase of internallyavailable product is not an option
Several methods: variable cost, full cost, full cost plus mark-up
Transfer is recorded at external market price
Selling division records a normal sale
Purchasing division records equivalent of arms length purchase
May be some concession for savings from internal sale

A negotiated satisfactory transfer price among managers

Often used to ensure equity between divisions
Sometimes used when market price is unavailable or production costs are
unstable
Managers may work out overall profit to firm of their joint product, and share
the profit
The purchaser records the transaction at one price and the seller records the
transaction at another price. Any difference can be written off to a corporate

account. Under this method, tensions between divisions may be reduced, however,
does not necessarily mean will always produce decisions in the best interests of
the firm as a whole.
What is the appropriate method?
This depends on:
Availability of market price
Cost function of selling division and existence of idle capacity (Opportunity costs associated with
internal transfer)
Re-current or one-off transfer
Magnitude of transfers in the context of overall business volume for both divisions
Level of pricing and sourcing autonomy/centralisation promoted by the firm
Also need to consider:
Does this TP encourage divisions to act in the firms best interest?
Does this result in a fair and equitable performance evaluation?
Does it encourage appropriate resource allocation?
Do this motivate managers?

Article Summary: Control with fairness in transfer pricing

Analysis in two dimensions:
1. The extent to which a company carries on production and distribution activities that other
companies could perform
2. The extent to which the company is engaged in different businesses

In competitive organisations
Highly diversified organisations that have little vertical integration and interdivisional dependence
between business units
Company strategy is the sum of the business unit strategies and the strategic planning is bottom-up
Use to similar performance measures for all units generates enormous internal competition
Definition of fairness is similar to what would be expected in the market
Decentralised decision making

Distributive bargaining process (win lose bargaining) which results in each business unit to
maximise its objectives, even at the expense of the other

Market-based pricing
One kind is cost-plus-profit mark-up. A buying unit may source a unique or proprietary good from a
selling unit for which there is no market price since it is not sold externally. The seller establishes a
cost indeed to approximate the price if the product were on the market
Methods for determining the mark-up include comparable products, average gross profits and
average ROA of the selling unit
When top management does set policies that influence the transfer price, the ability of the units to
establish a true market price is hampered
Some argue that it is reasonable to use market-based price less some discounts as there is no
selling costs, receivables carrying costs and credit risk. However, the more an internal transactions
resembles an external one, the less justified the discount becomes.
Many competitive companies will choose external vendors as to avoid complications
As the head office gets more involved with inter-unit relationships, complaints and unfairness may
arise. However, top management may want to increase internal transfers because of excess
capacity in the selling unit or to take advantage of proprietary technologies.
Dual pricing
One way to overcome unfairness is dual pricing
This policy combines the advantages of market-based pricing (the profit incentive for the selling
unit) and of mandatory internal sourcing
The buying unit receives the transferred good at cost and the selling unit is credited with the market
prices. Double counting of profits is eliminated at a higher level in the organisation.
Transfer pricing policy can be used to maintain a companys location on the MAP, it can be used to
move a company in the director of a desired future position. For example, a competitive
organisation can use a dual pricing policy to increase in vertical integrated, moving the company up
on the MAP.
Disadvantages include: inaccuracy in double counting can lead to net income of whole company to
be less than the sum of the net profits of the units, especially in financial and control systems are
inadequate; if business is poor and the selling unit cant meet its external quota it will generate
excessive internal sales; buying unit has little incentive to negotiate in market as they are getting it
at cost
Cooperative organisations
Highly vertically integrated companies
Primary mechanism of control is organisational structure
Business unit managers dont have as much autonomy
Top management more directly involved in day-to-day operations and exercises control directly
through interactions with subordinates
Less competition due to having different performance evaluation criteria
Collaborative organisations
Emphasises both the interdependence of vertical integration and the independent contributions of
the business uits as diversified businesses.

Lecture 5 The role of non-financial measures in performance management;

BSC
Traditional, financial based performance managers
Only captures business performance at an objective level
Is outcome based (lag indicators)
Focuses on the past
Are typically short-term orientated
May not be useful in providing information for correcting emerging problems or providing warning
signals
Does not identify causes of business performance
Are relatively unhelpful at the operational level
Non-financial measures
Are often the enablers in an organisation and are just as informative as financial based PMs
Tracking of these activities are likely to lead to improvements in financial measure
Often labelled leading measures
The Balanced Scorecard
1. Designed to overcome the limitations of using traditional, financial performance measures in
isolation
2. Reports on the key performance metrics that will determine the success of the companys strategy
across four perspectives:
1. Customer
2. Financial
3. Internal business process
4. Learning and growth
3. Based on an understanding of cause and effect relationships within an organisation
4. Encompasses a balance of measures
5. Should be crafted from the organisations strategy map
What would the ideal BSC look like?
Should reflect critical success factors relating to the organisational/unit strategy
Should reflect the objectives
Must be quantifiable
Realistic
Objectives and measures within each perspective need to explain cause and effect through linkages
i.e. the BSC is an integrated performance measurement system
What are the constraints to think about when constructing a BSC?
Data collection cost
Future costs of pursuing the strategy these measures are based on
Do benefits outweigh cost
Time
Sometimes investments in non-financial measures can damage short- term returns
Previous research has found that decision makers tend to overweight the common measures of a
BSC, which are used in the balanced scorecards of multiple divisions of an organization. Thus, these
decision makers tend to ignore the unique measures of a BSC, which are the measures tailored to
the strategy of that specific division. Overweighting the common measures and ignoring the unique
measures instead, is called common measure bias.
Perspective
Financial

Description
Involves identifying
desired financial results
given the entitys
vision
Encourage managers
to evaluate the
effectiveness of their
strategies and
operating plans
Help employees to

Examples
ROI
RI
EVA
Discounts and rebates as a percentage of
gross sales (% discount on normal selling
price)
Total COGS per case
Divisional profit (Revenue COGS)
Gross margin percentage per case (Average

relate their activities to

financial outcomes

Customer

Internal Business
Processes

Learning and
Growth

Shareholder Value is
derived from creating
customer value which
is evidenced in:
- Customer
acquisition
- Customer
satisfaction
- Customer retention
Analysis is concerned
with identifying desired
customers and
developing strategies
to acquire and keep
them
Can identify targeted
customers, markets or
products.
Defines the processes
in which strategically
the business must
excel
May involve the
identification of new
processes
Core measurements
include: Innovation,
Operations, Post-sales
service
Cost, quality and time
measures are
considered

Resources that create

the potential to
efficiently and
effectively perform the
business processes
that create customer
value now and in the
future
- People
- Infrastructure
- Systems and
technology
Ensuring employees
have sufficient
knowledge and
expertise
Checking that internal
processes support

selling price per case/Average cost per case)

Share price
Net sales generated by new products in last
two years (Sum of sales generated by new
sales through regional segmentation per
annum)
Net revenue growth by customer (Growth in
revenue discounts by key customer group)
Customer satisfaction index/surveys
(Quarterly retail surveys using likert scales
across three dimensions timely delivery,
product quality and process efficiency)
Customer retention rate/behaviour
Market share (Kilgors market share across
ten top lines)
Market share growth
Customer acquisition
Customer profitability
Discounts and rebates as a percentage of
gross sales
Net revenue growth by customer
Quality index (likert scale)

Days inventory on hand

Production waste and scrap (Total volume
packaged as a percentage of total volume
produced)
Operating equipment effectiveness (%
produced of the rated throughput)
Schedule attainment (Delivery in full on time)
Employee safety Long term injury free rate
(Time period since last reported incident.)
Rate of employee participation in community
(number of employee hours spent
participating in community)
Sustainability total carbon emissions (Tones
Co2)
Sustainability energy efficiency
Sustainability water efficiency
Cycle time
Load schedule
Delivery times
Employee engagement index (From
compulsory anon surveys translated onto a
likert scale)
Employee safety Long term injury free rate
(Time period since last reported incident.)
Training and development hours per
employee
Rate of employee participation in community
(number of employee hours spent
participating in community)
Net sales generated by new products in last
two years
Knowledge sharing within divisions (Number
of intra work-units attended)
Regrettable turnover ratio (100% - lost staff)

existing strategies
Improving internal
business processes
Improving customer
satisfaction

What are key challenges associated with developing a bonus system based on BSC
performance?
Decision between having a bonus system which weighs the four different perspectives either
equally or otherwise. If using different weightings, consideration into the unintentional behavioural
effects of managers if one measurement is weighted more than the other perspectives i.e.
managers engaging in suboptimal behaviours to maximise one perspective at the expense of the
other perspectives
Need to make sure that performance measures relate to those under a managers span of control
may be demotivating if they are not and are punished for a bad performance in a measure that they
dont have significant control over. However, this needs to be balanced as too much control can
lead to dysfunctional behaviours and manipulation of targets for a favourable evaluation
To be used as a bonus system, arbitrary conversion will be required to convert the variances in to a
standardised set of results. Can lead to inadvertent error or intentional bias. As a result, managers
may be unfairly evaluated as the standardised result loses a lot of disaggregated information on the
performance of the manager
Sometimes it is difficult to see the causal-link between their performance and the bonus they
received. It may fail as a motivation tool if a bonus is being rewarded because of the success in one
perspective, there becomes no encouragement to improve the other perspectives.

Lecture 6 Reward Systems

Where incentives are to be included in reward systems, key considerations include the
following:
Who incentives apply to
Whether performance is measured at the individual, divisional/unit and/or corporate levels or
combination thereof. If combination is applied, what weightings apply?
What performance measures will be used
Whether a distinction between short-term and long-term incentives will be made, if so, what
proportion of total rewards should relate to short-term/long-term performance
Whether to use concepts of relative performance evaluation
What targets will be set
Incentive system structures
The logic of incentives to assist with the alignment of executives and shareholder interests requires
performance-based compensation structures focus on links to long-term results and not facilitate
unintended consequences
Provide a suitable mix of cash and equity structured to reward good performance, penalise poor
performance , with short-term and longer-term rewards
Bonus plans might best be structured by including clawback provisions and bonus banks
Equity plans might best be structured with a lower weight on short-term share prices and a greater
weight on long-term share prices
Restrict vesting and unloading of shares criteria, such as limited cash-out provisions of equity
holdings

Lecture 7 Market-related analysis and the external environment

Profit Analysis
Step 1:
The Flexible Budget is a profit plan utilising at budgeted unit costs and prices, but restated for actual
sales volume. It enables us to separate the volume effect on profit from all other effects such as price,
cost and efficiency.
Step 2:
Calculate meaningful variance: Competitive effectiveness
Average Budgeted Contribution Margin @budgeted mix
Average Budgeting Contribution Margin @ actual mix

Market size variance measures the expected profit increase/decrease as a result of change in the
magnitude of the total market for the firms products.
Change in market size * Planned market share * Planned average CM
Market share variance measures the profit increase/decrease due to actual market share being different
from that reflected in the profit plan
Actual market size * Change in market share * Planned CM
Product mix variance is a suitable calculation when products are deemed to be operating in the same
market. This is caused by selling products in a different mx than planned.
Change in average CM 8 Actual unit volume
The value of profit analysis
Can be used to:
1. Diagnostically inform managers of organisation performance relative to the market, improve
forecasting techniques and adjust targets
2. Interactively as a strategic learning tool to facilitate a review of strategic direction, review
underlying assumptions about markets, customers and competitors

Lecture 8 Profit Plans

Objectives of this planning process/Why are they prepared?
To translate the strategy of the business into a detailed plan to create value. This process requires
manager to agree on assumptions, evaluate strategic alternatives and arrive at a consensus
regrading a business strategy and its ability to satisfy the demands of different constituencies
To evaluate whether sufficient resources are available to implement the intended strategy
To create a foundation to link economic goals with leading indicators of strategy implementation
Explain the normal budget cycle and the role of profit planning/strategic budgeting in that
process
1. Assess vision and core competencies
2. Reconsider long-term strategies
3. Develop operating plans
4. Translate strategies and operating plans into master budget (PROFIT PLANNING)
Provides information on the economic resources available to the company and helps managers to
evaluate the trade-offs facing them
People throughout the organisation will have an agreed direction of the company
Facilitates coordination among the various departments
Used to set performance goals/hold managers accountable
5. Monitor actual result and compare to budget
6. Investigate variances
7. Evaluate and reward performance
8. Back to beginning of cycle
Underpinning this budget cycle is a process of analysis of alternate actions. Once a path is chosen,
these action steps are embedded into the annual budget
State common criticisms of budgets/budget processes
Time consuming
Ineffective practice
Hides opportunities and stunts growth
Brings out the most unproductive behaviour in organisation if it is done poorly, people will set for
mediocrity, can be misleading.
If managers know that information disclosed as part of the profit planning process will be used for
performance evaluation, they may make soft targets in order to get a favourable evaluation
Outline ways to improve the effectiveness of budgets and budget processes
Downplay the role of profit planning as a performance evaluation tool which will decrease the risk of
goal incongruent behaviour
Distinguish between discretionary and engineered costs/cost centres
When forecast operating expenses there are:

Variable costs (economies of scale, operating efficiencies, bargaining with suppliers to negotiate
lower prices, redesigning products to lower their cost of production, increasing prices)
Non-variable costs two types of cost centres:
1. Engineered cost centres
o Input/output relationships are well understood i.e. input requirements to produce a unit of
output is clear
o E.g. manufacturing
2. Discretionary cost centres
o Outputs are more qualitative than quantitative
o Activities tend to be labour intensive
o Costs less likely to be variable with respect to output therefore planning is more difficult
(need to use incremental budgeting technique)
o More difficult to determine optimum spending levels
o E.g. R&D departments, training, many public sector activities such as libraries, schools etc.
How we do overcome these difficulties?
- Engineer them i.e. take an activity based view (each activity is assigned a standard price)
- Program budgeting structure budgeting around projects/programs
- Zero-base budgeting - in zero-based budgeting, every line item of the budget must be approved,
rather than only changes. Zero-based budgeting requires the budget request be re-evaluated
thoroughly, starting from the zero-base. Preparation of fresh budget every year without reference
to past. This process is independent of whether the total budget or specific line items are
increasing or decreasing.

Distinguish between more traditional budgeting and the concepts of Beyond Budgeting
Traditional budgeting:
Command and control style
An underlying assumption can be that managers and employees do not have the skill sets,
motivation, or honesty to act in a way that supports company objectives.
A command and control approach is too often driven by an end-over-means focus on short-term
profits that can foster questionable and even dishonest behaviours.
Centralised bureaucracy
Have fixed targets might not necessarily reflect what is achievable in different circumstances
therefore can lead to questionable behaviour
Beyond Budgeting:
Empowering and coaching style - less bureaucratic control can yield better long-term results.
Results improve when management relinquishes control and allows business units and teams to
leverage customer proximity and act autonomously on goals, plans, and initiatives trust in
managers and employees
Decentralised teams more autonomy
Have relative targets compares team performance to dynamic and more relevant performance
indicators like peer performance, benchmarks, and best practices.
Profit wheels
When creating profit wheels, key
questions to consider are:
Does the organisational strategy
create economic value? What are the
alternatives? Can we translate this
strategy into accounting numbers?
Does the organisation have enough
cash to fund this strategy?
Doe the strategy create enough value
to attract investors/lenders?

Lecture 9 Strategic Capital Investments

Key stages in capital investment decision-making processes
1. Idea generation low levels in organisation, strategy, competing for limited funds
2. Proposal development screening tools, qualitative factors e.g. reputation
3. Selection of projects analysis (NPV, IRR, etc), options analysis: real options
4. Control or performance evaluation monitoring project performance (spending within budget), postaudit
Why invest in assets
To achieve strategy, improve inefficiencies
Asset allocation system
An asset allocation system is the set of formal routines and procedures designed to process and
evaluate requests to acquire new assets. This is known as a capital investment plan.
The elements of this system include:
1. Schema for classifying asset acquisition proposals
2. Analytical tools that support the evaluation of alternatives
Non-financial measures to consider for capital investment
- Alignment of proposals with strategy
- Strategic, culture fit, availability of staff, employee turnover, company image, growth
Three classes of assets
Regulatory type investment
OH&S, sustainability investment
Focus on investments required due to regulatory obligations
Investment to increase operating efficiency/higher revenue

 Incremental investment in current operations

CAPEX (conventional cap expenditure) usually models an average decision
NPV, IRR, payback period
Investment of strategic nature
Might include investment in new technology, products and markets
Conventional CAPEX decision models are often inadequate due to: greater uncertainty, more
difficulty to quantity benefits
Why doesnt conventional techniques work for strategic investments?
Greater uncertainty with cash flows
Strategic investment capitalise on synergies
Benefits:
Provide a framework and set categories into which asset proposals can be grouped
Include analytical tools that can be tailored to different types of assets
Provide guidelines that help managers throughout the organisation understand how their proposals
relate to the strategy of the business

Lecture 10 Risk Management

Classified into four components
Type of risk
Description
Strategic risk
Impediment in achievement
of high level goals that are
aligned with and support the
mission
Unexpected turn of events
(also called shocks) that
significantly reduces the
ability of managers to
implement their intended
business strategy

Operations risk

Anything that might damage

the ability of an organisation
to provide product or service
offerings to customers
Influenced by:
- The extent of formalised
(and constantly
maintained procedures
and protocols
- The ability of employees
and service providers to
understand and follow
prescribe organisational
procedures
- Evidence of systems that
provide timely, complete
and accurate transaction
recording and reporting
- The ability of an
organisation to
safeguard its assets
(including information)
- The ability to respond to
crisis and support
business operations

Examples
Market related activity and
competitive dynamics such
as:
- Threats from competitors
- Customer switching
(substitutes, trends)
- Changes in technology
such as technological
innovation
- Supplier pricing
Booksellers facing strategic risk
with the market being more
saturated with customers
switching to digital books rather
than hardcopies.
External physical
destruction e.g. flood, war,
famine and other calamities
Internal shocks such as
wilful damage or unintended
mistakes that result in
unexpected permanent
damage to core machinery
Flow of toxin into
pharmaceutical products or
food products
Intellectual property
damage occurs with thefts
of property rights and
slackness in patenting and
registration
Intel faced operational risk
when a disruption in [their]
supply chain caused a design
flaw in nearly 8 million
accessory chips.

Financial risk

Legal and regulatory risk

under adverse operating

circumstances
Exposure to creditors and
potential for shortfalls in
liquidity
Exposure to and ability to
comply with applicable and
impending laws and
regulations in Australia and
overseas

GFC

OH&S
Environmental regulation
Licensing arrangements
Government intervention
through regulation can
sometimes have dramatic
effects for organisations

Tabcorp faced legal and

regulatory risk when the
government enabled individual
venues to purchase machine
entitlements rather than having
to get them from two key
operators, one being Tabcorp.
Risk exposure calculator
Growth

Pressure for
performance

Rate of expansion

Lack of adequate
experience of key
employees

Culture

Rewards for
entrepreneurial risk
taking

Executive resistance to
bad news

Level of internal
competition

Information
management

Transaction complexity
and velocity

Gaps in diagnostic
measures

Degree of
decentralised decision
making

Rate each component 1-5; 1 being LOW and 5 being HIGH

Collectively, test forces can surprise managers in the form of operating errors, impairment of assets
and crisis of customer confidence
The calculator can help determine the magnitude and type of pressures that might led to a substantial
failure of breakdown
Managing risk
Setting conduct boundaries
Specifies avoidable behaviour through codes of conduct
E.g. You shall not reveal companys confidential information to outsiders
Setting organisation beliefs
Specifies what the firm stands for
E.g. Companys mission statements, ideologies
Setting internal controls
Structural safeguards
o Strategy
o Clear lines of hierarchical authority
o E.g. limits placed on a bank managers lending powers and prohibiting an accountant to handle
cash
System safeguards
o Key performance indicators
o Timely reporting, accurate recording and secure databases
Staff safeguards
o Risk champions
o Training to reach higher proficiency
o Job rotation to reduce surprises (but must not break the clear lines of authority provides
opportunity)
o Special assignment
Minimising operational risks - internal operational controls:
Internal system checks

 Identify input-process-output efficiency rates to check for and prevent surprises

If any changes made to input-process-output check impact on quality and quantity at each stage
Minimising market-related strategic risk
Scanning the market and conducting periodic SWOT analysis to understand the dynamics
i.e. read financial newspapers daily to fully understand market; attend organisation meetings and
events to network with peers/competitors