MODULE 1 STRATEGIC BUSINESS ANALYSIS BreonscannerSTRATEGIC BUSINESS ANALYSIS AN ACCREDITED COURSE OF THE CMA PROGRAMME OF THE INSTITUTE OF CERTIFIED MANAGEMENT ACCOUNTANTS Strategic Business Analysis seeks to provide specialisation-level knowledge to accountants and financially motivated general managers in the interface areas between accounting and the other business functions. The subject is an advanced level course that enables students to apply the basic conventions and doctrines of managerial and cost accounting and other generally accepted managerial principles, in order to strategically analyse business situations across the various functions of a business organisation, A number of cost and management accounting issues relating to the design and implementation of strategic, marketing, value analysis and other management models in modern firms are discussed, and major contemporary issues that have emerged in business accounting in recent years are identified, This subject provides an advanced study of the interface between modem ‘managerial accounting and the business functions of strategie planning, marketing, manufacturing and human resource management. The accountant’s role in the marketing decision areas is specifically considered. Learning Goals ted with this unit are to: ‘The learning goals asso 1. Describe the basic conventions and doctrines of managerial and cost accounting and other = generally accepted principles that may be strategically applied across the various functions of a business organisation. 2. Identify major contemporary issues that have emerged in strategic management accounting. 3. Critically evaluate a number of cost and management accounting issues relating to the design and implementation of strategic, marketing, strategic value and other management models in modern firms. 4, Explain the management accountant’s role in the implementation of cost management systems for marketing decision-making and business valuation, Rationale The aim of this subject is to further develop skills of analysis, evaluation and synthesis in the area of strategic management accounting and, in the process, create an awareness of the interface between cost and management accounting and the other business functions such as strategic planning, marketing, production, research and development, etc ‘The subject is not designed as one in which highly structured methods and rules are applied to various topics in order to find one ‘correct’ solution or answer for problems or issues. Rather, it is more a possibilities quest, in which various controversial conceptual and practical issues will be reviewed and analysed with due recognition to the reality of alternative value judgements. Given the history of recent developments in management accounting and other related business practices, this approach to the study of the subject is considered feasible and warranted. ae evidence is available that in managerial accounting, procedures continue 1 evolve and velop. Much of this dynamic activity is nse usiness practi cies an Te eeP, Much ofthis dynamic activity is in response to changing business practices and policies and Pa Bcvascsne:Various writers have suggested that relevance for executives, saying that distorted to be relevant for managers’ pl “finger of guilt’ at Usefulness, especialy in terms ofits strategic applications across business disciplines Course Instructions Participants are required to cover all of the preseri Prior to attending the seminars, Answers in point the se discussion amongst the group attending the seminars. Lecture Outline rmanegement accounting information has lost much of ya the information produced is too late, too aggregated, and io anning and control decisions. Crities have, in fact, pointed the ccounting academicians for failure to advance management accounting's ibed reading and discussion questions for each topic form should be prepared to discuss all questions at ar. Participants are also encouraged to prepare their own questions for the benefit of Topic _1 | Strategie Thinking Topic 2 | Strategic Marketing Analysis and Budgeting Tople 3 | Financial Analysis in Product Portfolio Management Topic 4 | Pricing Methods and Strategies Topic 5 | Financial Dimensions of Pricing in International Business Strategies Topic 6.| Promotion: Push Strategy and Human Resource ‘Management Topic 7 | Promotion: Pull Strategy and Integrated Marketing Communication Topic 8 | Supply Chain Management and the Place-Distribution Decision Topic 9 | Performance Valuation and Strategic Financial Structures Topic 10 | Strategic Value Analysis Topic 11 | Risk Management - Corporate Radar and Early Warning Systems Topic 12 | Strategic Scorecards Topic Syllabus Topic 1: Strategic Thinking This topic overviews the concepts and development of strategic thinking in modem business enterprises. The traditional areas of corporate strategy; such as strategic objectives and strategic planning decision models are first introduced to the student. The state of strategic thinking in the current environment is then considered, especially in relation to multiple approaches to analysing corporate strategy. Topics 2 Strategic Marketing Analysis and Budgeting Here the marketing concept is introduced and the links between marketing and strategic business analysis are illustrated. It is shown how concepts such as the product life cycle and product portfolio matrix are linked to managerial accounting techniques such as budgeting and life cycle costing to Pd BoiseProvide rete market NB budget is deve A comprehensive strategie segmental Topte 3: Financiat Anay This tépie (ool man; cone i Ee wie “specially in competiti ing related “product in ance the others i "in the 4-Ps of aecte® topics, tt ig ¢ liscussed in detail ani re Po mae ae sent pa keeper Topic 4: Pricing Methods and. Strategies Here the various as i isi ei ects of pricing decisions are covered, especially i i x ; ; covered, especially in competitive environments. eh methods and pricing strategies are specifically contrasted, and the use of such techniques as their mitre te PFOBremming inthe pricing area are discussed, Risk nwcrse pricing strategies ‘nd their limitations are also covered inthis tape, Tepe $: Financial Dimensions of Pricing in International Business Strategies This topic extends the discussion of the previous section on pricing, and considers within a addition tg emmational market. It és shown that setting a selling price faa foreign marker tac in addition to strategic marketing considerations, some unique Ineeratiensl teen dimensions, ‘specially due tothe lengthening of the channels of distribution and the impact of multiple emer: Topic 6: Promotion: Push Strategy and Human Resource Management Here the principal ways of communicating with the market, referred to collectively as the (Promotional mix” are overviewed. The objective of this mix is to make a sale, either by “pul pendonal ein nards the product (using advertising) or by “pushing” the product to the customer (usin eee ning). It is shown that the management accountant has a significant role “push strstegy Seprciaily In the human resource management areas of controlling field sales operations cad evaluating sales force performance. . Topic 7: Promotion: Pull Strategy and Integrated Marketing Communication ims topic continues with the discussion on promation, and specifically looks at “pull strategy” and integrated marketing communication (IMC) with its heavy reliance on advertising. itis demeccirared that the management accountant has a significant role in formulating advertising budgets, especially using specific budget models, and in the difficult areas of controlling advertising outlays and evaluating advertising effectiveness, Tople 8: Supply Chain Management and the Place-Distribution Decision This topic considers the last “P* of the 4-P's of marketing; ie. place (or physical distribution). It is shown that-the control of the supply-chain distribution function involves a “trade-off” betwees maximising customer service and minimising distribution costs, and that the management account bs significant role to play in achieving this balance. The various accounting techniques useful in x16) Contribution Less fixed costs ($150,000 - Depr; $159,000 - other) (200,000, Caine Profit aso ‘The marketing director proposed that the market share could be increased to 20 per cent for 20-6, 20-7 and 20-8 if the following promotion budget was agreed to be spent at the beginning of each of the three years: Isjm = 15% cmaari Jo, on 10% Page 13 (SJ CamScanner7 - of £09 = 20-6 - 20 2 2o-€ 5 5 pen Promotion $100 $75 8 50 “ S25 Fixed Costs = -$ 30 -$ 30 -$30 s 90 rw Total Outflow 5100 “sios; S80 s30f 8 35 (s»,reX4) 3% Inflow = $150 $150 siso| “y ‘5% Net cash flow -$ 100 $45 $s 70 ‘$120 $s oL 15% Disc.Factor L 0.87 0.76 0.66 5% DCF -S 100 $39 $53 $79 s 7 3% Inflow -[___s 90 390 x90, 5270 “3% Net cash flow -S 100 S15 $s 10 Ss 60 s 45 15% Disc.Factor 1 0.87 0.76 0.66 3% DCF -S_100 3B ss s 40] Ss 65) $100,000 20-6 $75,000 20-7 $50,000 20-8 je investment for This promotional budget was to be treated as # long-term strategy project evaluation purposes: i e - of the ‘The fixed costs of $2 per unit are 50 per cant {Oo depres one company The Teed oa thane would be expected 1 INCENSE Yc ply as a DC facan overall profit return objective of 15 per cent whi rate to this type of project and this type of risk. ‘i jth a ‘The managing director has requested that @ further evaluation be considered wit ‘growth in market share of 3 per cent. i p Evaluate whether ot not the project should be adopted assuming these are the only factors to be considered. 3.4 Suggested Solution (a) The inflow is calculated on the basis of an increase of $0,000 units (ie. 5 per cent (\1,0 X s) winket share) at a contribution of $3 per unit (Le. $150,000) - there is a set-off of Fixed costs of $30,000, which is shown as outflow. 20,000 2.0% Since there isa positive NPV of 71.6 it passes the DCF performance objective, (©) The inflow on the 39 marketshare basis would be sales of $300,000, (Le. $0,008 nits) Sales of $300,000 oF 30,000 units will give contribution or inflow of 190,000, ie, «reduction of $60,000 compared to 5 per cent market share increase, 30/000 xd ‘A growin th markei share of 3 per cent will give a NPV of -65 which indicaes that te promotion campaign will nt achieve the net return DCF rate of 15 percent. In some businesses, matket share may be the prime or corporate objective, but the BORDER Manufeeturing Company's corporate or prime objective inthis example was @ DCF rate of 1S per cent Dor isa talnatin method toed be ulmade Hy vake Q an invohnut b need on eepided tubne tathgloun: 7 + Sarat Ub Distount Packer MAT th ot CamScanner‘The State of Strategic Thinking 41 Strategie Planning: Unfashionable? (@) A ‘Fad of the 1970 to 1990s? ~ No self-respecting chief executive could do without strategic-planning staff uring this period. + No Business School could do without strategie planning in their curriculum. (©) Reasons for Falling out-of Fashion - Other ‘concerns’ seen as the new tickets to success. Eg: Corporate culture Intrapreneurship Quality, Productivit . , Teamwork (lapanese Methods) + Benchmarking Competitive Advantage Just-in-Time (JIT) ‘Activity Based Costing (ABC) ‘After all, Japanese companies supposedly don't prepare strategic plans. 4.2 Reasons for the Demise of Strategic Planning (Mid-1980s) (a) Strategie Planning was not Promoting ‘Strategic Thinking’. ‘Thick binders (plans) instead of improved communication Domination of ‘form’ over ‘substance’ (form filling) Meaningless long-term projections that obscured strategic insight Line managers considered planning as an ‘irrelevant’ ritual Strategie Planning Techniques came under fire Early techniques (PLC, Experience Curve, product-portfolio matrix) promised easy answers based on simple concepts of competition. * single - variable re. competitior/experience * one corresponding route to success. * these techniques were rarely used in combination (i variables) multiple- Premises behind the prescriptions did not always hold. marketshare to profit (Bank of America) * low-cost producer (Texas Instruments) ceMazti Page 15, Bounscannertors). Reasons or Implementation Difficulties: (6 Pre-Implementations Factors). e (@) Poor Preparation of Line Managers: fl i tuations = Should be conched in the sills required to guide strategy debates.-in real situ = A.good *how-to’ example given in Daniel Gray's paper. (&) Faulty Definition of Business Units: Define ‘what business are we really in?" Structure must follow strategy. (©) Vaguely Formulated Goals: Move beyond ‘generalised’ often conflicting goals ‘Targets don't mean much without ‘pathways’ or ‘Strategic Mileposts’ (@) Inadequate information for ‘Action Planning’: Forums for interfunctional debate . Planning in detail ‘Appoint *Teams’ for each strategic thrust (©) Badly handled ‘reviews’ of SBU plans: z Encourage ‘Healthy Conflict’ Reconciliation instead of ‘Force Fitting” ( Inadequate linkage of Strategic Planning - with other control systems: - Plans in conflict with Budgets, 5 Plans and MIS conflicting * Plans conflicting with Reward Systems 43° Thinking Is Strategy (a) The questions remain the same: + The future direction of competition? = The needs of the customer? - The likely behaviour of competitors? : How to gain competitive advantage?” (b) The problems are with the techniques and organisational processes used to answer them, The solution is to improve strategic planning, not abolish it. ‘The need to plan formally has not changed - otherwise strategic thinking will be crowded out by day-to-day pressures. Page 16 eMart (SJ CamScanner) Fe ‘or Employees to “Think Strategically" they must be “Empowered”. © Fe Moment of Truth: Jan Carizon (1989), the President ofthe Scan line System, summarises this approach excellently in his book * of Truth’ as follows: jornents * Everyone needs to know and feel that he (or she) is needed. I Everyone wants to be treated as an individual. that would otherwise remain concealed, individual who is given information cannot help but take responsibility. Giving someone the freedom to take responsibility releases resources ‘An individual without information cannot take responsibility: an = Employees will think strategically only when the cost of both baring risk and loyee behaviour is modified in the long-run sharing risk is reduced, and emp! by creating a holistic global ownership culture. KEY POINT: ‘Strategic Planning is an integral pai Management’...e. no longer an added managerial duty business and how to run it. instead a way of thinking about a ———— “PREDICT “STRATEGIC “MEETTHE BUDGET” PLANNING” | STRATEGICALLY of ‘Strategic ~ but “THINK DESCRIPTION: Basic FINANCIAL LONG-RANGE (CUSTOMER DRIVEN PLANNING PLANNING PLANNING ASSUMPTIONS: the peetRepente Past Trends Will ‘Tradhtonal Planning ‘Continu Cycles are inadequate | te copewith rapid . ‘change ee Riva Yon Plane eiphiForecasts Value-Based Plannin Fund Statements S-Force Mode! ° Growth Share Metrix ard Riek Management cMazTi ge 17 BoisaorEmpowerment Accounting ef “The Key Aspects ofn “Empowered” Open-Book Approach are that ‘© Shares a broad array of financial and other information with employees ‘+ Trains employees to become more business literate (both in Financial and Non Financial Performance Indicators) + Empowers them to use the information in their work, trusting them @5 partners in the reputation enhancement process, and © Rewards them when the company is successful in both maintaining and enhancing its reputation (and thus its value). Key Performance Indicators + Accounting - especially financial accounting - is stil preoccupied by lagging indicators (navigating by looking at the wake created by the ship”). ‘Owners, investors, creditors, bankers, government now all need leading indicators ‘Owners are becoming far more preoccupied with the future safety and performance of their investments. Further, governments (infrastructure); employees (human assets) and environmental groups (the Earth) are also claiming to be providers of capital, ru @® also wanting to be regarded as ‘accountees’ ‘The ‘accountee (the corporation), and its investors and regulators are increasingly demanding to be provided with appropriate information by the ‘accountors’, ie. the accounting profession. ‘This requires the provision of: + Strategie and control information; «+ Fuure-oientated and historical infomation; © Financial and non-financial information; + Profit-motivated and socially-responsible information; Timely and accurate information; and ‘* Motivational information However, numerous research and media reports indicate thatthe accounting profession has failed to provide such value enhancing reports. ‘Aga result the perceived value of the accounting profession itself has diminished e Page 18 ceMazTl BoiseEmpowerment: Controversial Issues ~ Sharing sensitive information with with employees is risky ‘They may demand more remuneration * Competitors may get hold of the information + Employees cannot fully comprehend the big picture + Training in understanding financial reports isnot easy Not all performance and rewards are measured in financial terms Empowerment Results of Research = Ina-comprenensive research study undertaken in the USA by the Financia! Executives Research Foundation (FERF), seven companies were investigated i depth, (Barton, T.L, Shenk, W.G. and Tyson, T:M., Open-Book Managerert: Creating and Ownership Culture, Financtal Executives Research Foundation Executive Report, Vol. 5, No.2, March 1998) 1 was found that, in general, the risk element of information leaking to ‘wes largely unfounded, . 2 information most frequently withheld was individual salary information 2 Ail seven companies, however, regularly disclosed detailed operating data to ‘employees and placed particular emphasis on numbers that affected incentive ‘compensation. competitors Disclosure did not mean that employees receive ‘Their own printed copies of reports or Had continuous access to information. Thus “real” open-book management obviously required broad — but not total ~ information sharing. Employee Training For Empowerment ‘The quoted study from the USA found that the companies in the study group varied in their approach to training: ‘Some companies found that formal training courses worked the best Whilst others preferred to incorporate training informally into the daily activities of open-book management. cMazTi Page 19 BoiseImplications for CFOs i in the company who maintains the _ The CFO isthe “gatekeeper” — the key financial expert inthe cOmPa Te ne ro orf infoheagon upon hich open-book management and empower st accounting largely draws. = Becuide sharing financial information is key to both open-boOk management 108 bes aerearerment accounting, the CFO mus also champion these managemen approaches, ‘with the willing cooperation of the CEO. . _ However, this support may require a change in the traditional parameters of the CFO's position. = Traditional CFOs who try to preserve a “business as usual” atitude in an copen-book tclture will severely restrict the potential of the system in the following ways! 2 They will not be actively involved in explaining the implications of the ‘open-book. financial and non-financial numbers : «They will consciously or unconsciously resist disclosing information regarding the critical suscess factors or key performance indicators (KPIs) of the business: “The Empowered CFO must possess the following skills or atributes: ie the ability: + to motivate others (one CEO calls it cheerleading”) to enable a “buy-in” of the ‘open-book culture throughout the company and to ensure the continued commitment of al to sustain it into the Future. + totrain others on how the business makes money and on what the financial and non financial information means + to adapt to understand their role in the new culture © to execute it professionally and enthusiastically e to communicate effectively-to speak in everyday language and avoid unnecessary jargon or technical lingo, an to enunciate clearly the goals and strategies ofthe company «to set aside prejudices and irational fears —to avoid a traditionalist mentality ané heute thatthe open-book and empowerment culture willbe given the chance to succeed. (© CFOsand Accountants can undertake four influencing-empowerment accounting roles: = Resouree Consultant: This catalyzing role links employees to resources 50 that it enhances their self-esteem and problem solving skills, in order to work rewards achieving their own independence and own control over their lives. Sanitizer: This enabling role helps employees gain the knowledge necessary eo take control of their own work environment. Here the empowered person recognizes and identifies their own strengths and the strengths of others. ‘Teacher Trainer: This priming role places the CFO as the manager of the Teaming process aimed at helping the employees (and other stakeholders) 0 find solutions for ther situations, The CFO acts as a broker to seek to educate the craployees and other stakeholders about the bariers that people eneauntes, Page 20 cMAZTI Boise44 cMazr 4s 46 Co-operater: eegperater: This is a Group king role where the employee is he one who eee lng in achng sien a posit The CFO )wered employee to other fare common histories, ian eaten ployee to others who share common histories, The Elements of a Good Strategic Plan @) (b) © @ © o Analyse the Industry in which the firm competes. Be aware of sources of Competitive Advantage (and Focus on them) = Lower Cost (Cost Leadership) | = Differentiation relative to competitors (Product Differentiation) Analyse the existing and potential competitors ‘Assess the companies ‘Competitive Position’ e sustained Choose a strategy built on competitive advantage and how it can b ‘Translate the chosen strategy into concrete actions. Two Views of Strategy @ External to Internal (Porter) External Environment Industry Structure Competitive Advantage Strategic Positioning Implementation Internal to External Based on Capabilities Resource Based View of the firm ‘Organizations reflect on the past of their firms) Resources @) ‘Tangible resources: Financial Physical Human Resources ‘Organisational resources Intangible resources: Technology (patents ete) Innovation (including capacity to innovate) Brand names Corporate culture Resourees that Create Value Pege 21 d BoisePage 22 47 48 How do we determine which resources create value? @ i} ‘They must be: . . * Valuable: The resource must exploit opportunities present in the firm's environment ; * Rare: The resource must be rare among a firm's current and potential competitors + Imperfectly Imitable : Firms must not be able to copy oF imitate the resource + Substinutes: Strategically equivalent substitutes must not exist. Capabilities (@) Capabilities represent the firm's ability to integrate and/or deploy resources to achieve a desired objective (b) Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm's tangible and intangible resources that are: - based on the development, transmission and exchange or sharing of information, and : knowledge, as carried out by firm's employees. (©) _ Examples of Capabilities @ + Corporate Head Office . Financial management Ability to effectively motivate and coordinate the activities of departmental/divisional ete managers, + Management of acquisitions Information Management + Ability to integrate activities through MIS + Research and Development + Fast-oycle developments in basic research Speed of new product development Resources and Capabilities for Competitive Advantage ‘Tangible Asset» = Competencies ——*Compatiive Advantage Intangible Assets cMAaTI (SJ CamScannerErrors to Avoid In Strategie Planning (a) Restructuring ‘Strategy: structure must follow strategy. Be ) Buying competitors instesd of beating them: This may be a quickeix10 market , but most great companies have beaten their competitors through innovation and dynamism, (© Forming ‘Alliances’ as a solution to a company’ carry formidable costs in terms of organisational coordination, and run the gr Fisk of dissipating competitive strengths. (@)—Amitation instead of Innovation: Most strategic thinking is still im (Emulation of a competitor strategy). © Dive ication for growth’s where they cannot add any value. 5, Other Strategic Approaches THEORY COMPETING ON Sone aon "THE EDGE, sake: Most of these acquisitions are in ns 5 strategie dilemmas: These ave tative ew fields FIVE FORGES COMPETENCES. Sous rauaty [Fema bunt inaustry viewed [Indust Spc, Structure of Unpreaiae [ASSUMPTIONS iii e — Dofensibte Sustainable Connor position advantage tno GOAL, Z Tnaustry Taauetim | Riahtmoves | Ability to change PERFORMANCE | structure ccompotanc ‘RIVER Piek an Greate vision, | Make the “right” | Gain the industry, pick | bulld competitive and | “eda a strategy Bhdexplott | collaborative | time pace, position, Competences to | moves shape at fitthe realise vision semi-coherent SraATEGY organisation strategic direction Profits Long term Short term win | Continual jominance success: o« ceMAzTI Page 23 BounscannerA CASE STUDY IN STRATEGIC OBJECTIVES TAYLOR CORPORATION “The Taylor Corporation is considering 3 possible strategies for increasing the market share ofthe company from its present 20% level. While the projects are not independent projects, the company is restricted to a financing constraint of $500,000, at an optimum cost of capital of 10% per annum. ‘The 3 strategies are as follows: Accounting Strategy: invest $100,000 immediately to expand the working capital cycle by offering extended credit terms to prospective customers and also carry larger safety stocks to prevent stock-outs, Market share is expected to rise to 25% (a +5% increase in year 1, and maintaining this in years 2 and 3) by implementing such a strategy. ‘Marketing Strategy: invest $200,000 immediately and $165,000, $50,000 and $30,000 respectively at the beginning of each of the following 3 years for a comprehensive promotional program. This is expected to increase market share by +10% (ie to a level of 30% in year 1 and maintaining this in years 2 and 3). ‘Manufacturing Strategy: Invest $500,000 immediately to purchase a state-of-the-art Flexible Manufacturing System (FMS). Market share is expected to remain static for years 1 and 2 and then more than double (ie to a level of 50%) in the third year. ‘The current operational cash-based revenues and costs for the company are as follows: Current sales @ $100 per unit (10,7) $1,000,000 less: Volume-related variable costs 50 pwr & (500,000) less: Non-volume-related variable costs 3° ytrw /30°{ op tala (300,000) Cash-based EBIT s. It is expected that the non-volume related activities required to service a market share of between 25% and 50% would increase costs by 10% of current expenditure levels, ‘The planning period of the company is three years. Assume that there are no terminal values or taxes. Required: (@) Calculate the NPV under the ‘Accounting Strategy.” (b) Calculate the NPV under the “Marketing Strategy.’ (©) Compare the ‘Accounting vs Marketing NPVs’, and discuss the advantages and disadvantages under each strategy. Which strategy should the Taylor Corporation choose? (Calculate the NPV under the ‘Manufacturing Strategy.’ Discuss the cost-benefit aspects of making FMS investments as against the Accounting and Marketing strategies. Page 24 mart BoiseTopic 2 ‘amScannerStrategic Marketing Analysis and Budgeting Introduction Here the marketing concept is introduced and the links between marketing and strategic business fnalyss are illustrated, It's shown how concepts suchas the produt ie syle and product portfolio provides tinked to managerial accounting techniques such as budgeting and life eyele costing to Provide relevant information for strategic decision making. A comprehensive strategic segmental ‘marketing budget is developed in this topic, Specific Objectives ‘The interface between the marketing and managerial accounting functions is becoming increasingly important in modern industrial settings. The objectives of this topic are for students to: + obtain an overview of the terminology of marketing management + understand the marketing concept and its application * appreciate the traditional tools and techniques of marketing, such as the product life cycle and product portfolio matrix * consider the financial dimensions of marketing planning, especially the factors that affect ;profitability” in a business * examine the links between traditional management accounting tools and techniques and marketing strategy. Lecture Outline + Marketing Management: The Terminology and an Overview * The Financial Dimensions of Marketing Planning + Budgeting for Marketing Activities . ‘Segmental Reporting and EVA® 2€N3 (SJ CamScannerSpecific Readings Course Notes, Ceaune At Ratnatunga, 5. and Waldmann, E, (2003) “A Marketing Approach to Service Gia in Accounting: ‘A ‘Case Study”, Journal of Business and Econoniey Research, Westen Academic Press, 2(5) May, pp. 29-43, Senta B: Levin, 7. (2006),"what Business Are You In?", Harvard Business Review, October, pp. 126-137 Coating, C: Ratnatunga, 3. (2013), “Marketing Strategy and_Management Accounting", Chere Sin Strategie Mangement Ascouming- Tex Soke BESAERIS Reading D: Ratna, 3, 2019, rae 8 Marketing Accounting in Practice, Chapter 6 in He Management Accounting Tox Book SESSSRAGERE Reading Tj, The Economist 2001), “Keeping the Customer Satisfied", The Economist, July PP 3- 2cN4 BeonseanerCourse Notes Strategic Marketing Analysis and Budgeting 1, Marketing Management: The Terminology and an Overview 1.1 The Production ~ Sales Era (a) Production Oriented Industry = Sources and Supply of goods were limited. = Customer demands were relatively unsophisticated. : Limited Competition meant that goods were generally bought and not 014 People dealing in such products were termed to have a “Sales Orientation” (b) Marketing Oriented Industry - The Marketing Concept = Competition intensified. More attention paid to needs of customers. © Start with customer © Work towards product People in such industries were termed to have a "marketing orientation (©) Steps in the Marketing Concept Define customer "Needs" (Marketing Research needed) © How are produets bought? © Who is doing the buying? + Why do people buy? Define “Target Segments" «Broad Market (size, growth rate vs. company capability) © Market Segment (similarity of needs) : Economy - Quality - Funetion : Use © The above is known as ~psychographic segmentation” = Create a ~Differential Advantage” ‘= process of creating a monopoly for the company. use any/all »Marketing Mix” variables: + Product > Price 2CNS (SJ CamScanner= Promotion = Physical Distribution The Company must have an ADVANTAGE (look at the consumers) ‘The Company must be able to create a DIFFERENTIAL (look at the Competition). pe CREATING A DIFFERENTIAL ADVANTAGE IN THE TARGET SEGMENTS OF ‘THE MOBILE PHONE MARKET TARGET Durenentiat, | apvenrisnc | pisrmupurion SEGMENT ADVANTAGE MIX METHOD! General Price (Credit TV; Newspapers Chain Stores Pablie Discounts) Seles Product Professional Direc andBasinesamen | (tata Journals Programability) omies oust Direct Mai Disuors (Reliabitity; Joumals Agents Serie) 2cN6 Formulate Company's “POSITIONING STRATEGY”. Look at all possible ‘differential advantages: Make a choice of exactly where it hopes to specialise in, This will depend on the company's »product-market combi Beanscaner12 THE PRODUCT LIFE CYCLE (PLC) Decline 7 / (are Stretching) +95 | Research and Introdution Development Time ose ¥ 94)03.50 () Concept evolved due to the ‘changes’ that take place in the product-market combination of firm. (b) The STAGES in the progress of a product: = Research and Development (R&D) + Marketing Research Costs © Product Prototype Research Costs + Introduction + Very high -death’ rate * Lots of initial problems to solve. > Growth Customer acceptance ~ * Production experience ‘Market Expansion Cost Reduction 2cN7 (SJ CamScanner13 CNB = Maturity . and Peaks a yn Intensifies Decline «Duet Technological; Taste; Cost Ese © - Must Extend PLC; Divest; or Harvest, MISSION “STRATEGIC FOCUS’ OF THE PRODUCT-MARKET (a) The Main Decisios = whether to aim for: + Increased Productivity © Increased Volume = They have very clear cut FINANCIAL IMPLICATIONS (©) Increasing “Productivi ~ This decision is usually required for existing products. Productivity inereases may be obtained by: + Increasing Prices Improving Sales Mix * Reducing Costs (©) Increasing -Volume: ‘This decision could pertain to both Existing and New products, The main Volume-Growth alternatives for achieving long-term profitability are given in the following model (@) The Model: New Market Market Development Diversification L_ Present Markets Market Penetration Product Development Present Products New Products . Market Penetr: ion; Increasing volume to present customers Market Development: Finding new customers for present products Product Development: New and different characteristics to serve company's existing customers and applications Diversification: Simultaneous departure from existing products and existing markets. (SJ CamScanner© 1 A Detailed took at the Strategic Focus of Present products. ~The Strategic Focus shifts along with the PLC. ~ AS the Focus shifts - the various combinations of the marketing mix must also change. (usually the focus shifts from LEFT to RIGHT as one moves from one stage of the life eycle to the next). Strategie Alternatives Expand Maret Redore Cot Cost Leadership ——> << Product Differentiation 9SR66.s0 Six Pairs of Businesses in the Computer Industry & Their Strategic Positions and Dilemmas Leading Edge Technologies Stay on leading edge, Component not on bleeding edge High-Growth Integrators Ventures Find the “right” mix of Grow without losing control price and features Diversified Multinational Corporations Balance synergies Standards * Battles Capture the winner-takes-all wars Corporate Transformations Time when and how to switch 2CN9 BounscannerThe Financial Dimensions of Marketing Planning 2.1 The Factors that Affect “Profitability” in a Business (9) Extending the “Learning Curve" phenomenon, itor who has XE cows decline predicably with units produced, the competio produced the most units will probably have the lowes ve about the Thus, since products ofall competitors in a eertain segment have about the same markel price - the competitor with the most “unit experien ‘enjoy the greatest profit, (Thus highest RO!) ionship between: (©) This ean lead to the hypothesis that there is a close relationship betwee Market Share; and Profitability C Lid - Smallest ‘Competitor Ltd - Market Leader ‘Total Accumulated Volume (units) Figure 1 ‘The Experience Curve 9aJR4S.sa eronwmin 9 Sealy 2CN10 Bounscanner(© This hypothesis has bbeen accepted as a result of Stud (sing a data base of 1,000 companies). "hee vt In, ne bb Grad pit Impad 9 Hark Seeky . ROI goes up steadily as market share increases. Pius a % ROL 40% 30% 20% 10% 10% 20% «30% © 40% Market Share Figure2 The PIMS Study 94IRASb.sa ‘The study seems to indicate that if a company maximises its market share - then it will maximise ROI as well. Is this conclusion correct? (@)_The~Maximise-Market Share Goal For the Controller, the implications of the PIMS Study seem to be... “Forget all controls initially and allow the new product manager to go for market share at all costs." Reasons why this would be a “Recipe for Disaster Investment in Market Share generally requires large cash resources. Such cash is usually “internally generated ‘Therefore, must have a ~balanced” Product Portfolio i.e. Have cash generating products that are able to finance new products that are usually cash absorbers, ‘The nature of the ‘Competition’ and the “Structure of the Market" must be considered. - tis easier to obtain leadership in a growth market, than take it away from someone who "owns" it in a non-growth market e.g. if'a company maintains volume when the market is growing, it will actually be losing market share). 2eNI1 Bcvascsne:22 2cNnI2 blindly seeking “Maximum anagers go about ran Market Shires uetContoller must rake them aware of the relationship arket Share™- between: + Market Share; . Market Growth, and * Cash Flow chart that is known a: This relationship is very clearly displayed in a chart that THE PRODUCT PORTFOLIO MATRIX”. ‘The Product Portfolio Matrix This shows the 1" and Cash '¢ relationship between “Market Share", “Market Growth ant itd TAS (Cash Absorber) (Cash Absorber or Cas Market Generator) ore ‘Low, DOG CASH COW Low ic @ ‘Market Share Relative to Largest Competitor (Cash Cows (High Market Share; Low Market Growth) Position of some strength Large generation of cash ‘Must maintain market share Stars High Market Share; High Market Growth) Potential market my st be grown into Must at least hold ‘market share in a growing market, eats (Low Market Share; High Market Growth) ‘Neads investment to keep a foothold in a market dominated by others Expand a few (having differential advantages ) Dogs (Low Market Share; Low Market Growth) Produce very litle cash - if any, Expansion possible onl Pat on ‘milking status: ly by ‘improving efficiency: and ‘cutting prices Ifthey do - slaughter. + ifthey don’t use valuable resources, B camScanner'1 Segmental Direct Costing (a) There is a large amount of marketing costs which one has fo regard a8 ~unallocable overhead’, : itis not that management is unable to influence them but, because they are not objectively allocable to marketing segments (such as PRODUCTS; CUSTOMERS etc.) () Traditionally accountants use arbitrary (or subjective) allocation : ‘These allocation bases are often Volume-base (¢-8, % Revenue) - In other instances the cause - effect relationship may be questionable (eg, number of calls made) = This causes problems for marketing managers who need unambiguous information for decision making, (©) Thus, the method of direct costing at differing segmental levels has been suggested. ‘The Segmental Levels of a Company TEVEL a —— act em J ‘Calculate ] —— Protet Selenite ] Ss Conor Functions ] Price ] Service ] | 2n13 Bounscanner