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 enterprises
(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 Jis 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 Chinas introduction of free market competition.
The inaccuracy of the traditional costing information seriously impeded Xu
Jis 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.

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

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).

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 organizations 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).

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 products 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%
$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 qualityrelated 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 companys 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.

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).

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 towels 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 doesnt get degraded at any
stage due to this activity.

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.

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
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 businessesparticularly 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.

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
manufacture it in house?
2. Whether to accept a special order?
3. What price to charge on a special order?

an

external

vendor

or

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).

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.

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 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.

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.

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 nonmanufacturing constraints exist, such as market demand, or a sales
departments 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.

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 companys 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 activities that add value to the final
product directly and support activities that add value indirectly. Below you
can see the Porters 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 longterm 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.

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 companys 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.

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 ".
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.

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.

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 succeededbut 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 metricvalueupon 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

The five steps of DMAIC

Define the system, the voice of the customer

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.

and

their

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.

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
organisation from five interrelated facets:

the

performance

of

an

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.

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.

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
revenues, net profits, or assets of the parent company Another use of
segment margin is on an incremental basis, where you model
estimated impact of a specific customer order (or other activity) into
existing segment margin in order to forecast the results of accepting
customer order (or other activity).

the
the
the
the
the

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.

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 .
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
managements 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 valueengineering they are not because this would impose an unnecessary cost
on the manufacturer, and to a limited extend also an increased cost on the
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
Competitor's
Competitor's
Competitor's

objectives
assumptions
strategy
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.

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 Groups Product Portfolio Matrix Like Ansoffs
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.

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'.