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ACCT3001

MODULE 2:
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STRATEGY AND RESPONSIBILITY
ACCOUNTING

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Lecture Outline
 Goals

 Strategy and Strategy Formulation


 Types of strategy
◦ Corporate strategy
◦ Business unit strategy
 Industry and Organisational Analysis
 Value Chain Analysis
 Responsibility Accounting
◦ Types of responsibility centres
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Phases of Management
Control

Modules 1 and 2
Strategies

Strategic Planning
Modules 6, 8, 9 and 10 Module 3

Evaluation Revise Budgeting


Ad Budget
Op just
era
ti o
ns
Measurement and
Reporting
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Modules 4, 5, 6, 7 and 8

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Goals
 Profitability
 Maximising shareholder value
 Risk
 Others
◦ organisational effectiveness
◦ high productivity
◦ good organisational leadership
◦ organisational reputation, etc.
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What is Strategy?

“… the means by which an organisation


plans to achieve its objectives…”

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Strategy Formulation
Involves managers analysing the external
environment and the internal resources of the
organisation to formulate potential courses of
action.

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Strategy Formulation
External analysis Internal Analysis
Competitor Technology
Customer Manufacturing
Supplier Marketing
Regulatory Distribution
Social/Political Logistics

Opportunities and Threats Strengths and Weaknesses


Identify opportunities Identify core competencies

Fit internal competencies with external opportunities

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Firm’s Strategies

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Levels of Strategies
 Corporate – strategies for the whole
organisation.
 Business – strategies for business units within
the organisation.

 Strategic choices are different at different


hierarchical levels, there is a need for
consistency in strategies across business and
corporate levels.

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Corporate Strategy
 “Where will we compete?” instead of “How will
we compete?”.
 What business will we operate in?
 Issues dealt with are:
1.Definition of businesses in which firm will
participate.
2.Deployment of resources among those
businesses.

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Corporate Strategy
 Concerned with
◦ the types of businesses in which the
company as a whole operates;
◦ decisions about which businesses to
emphasise or de-emphasise;
◦ decisions about what businesses to divest
or acquire; and
◦ how to best structure and finance the
company.

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Corporate Strategy
Can be classified into three categories:

◦ Single industry firm – uses core competencies to pursue growth


within that industry.
◦ Related diversified firm - firms that operate in a number of
industries and their businesses are connected to each other
through operating synergies.
◦ Unrelated diversified firm – firms that operate in a number of
industries and their businesses do not share common core
competencies or resources

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Corporate Strategy
Type Single industry Related diversified Unrelated diversified
representation
Pictorial

Identifying Competes in only Sharing of core Totally autonomous


features one industry competencies businesses

McDonald’s Corp Procter & Gamble General Electric


Examples Johnson & Johnson
Wrigley Rockwell
Maytag Philip Morris
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Ford Motor Du Pont
Gillette
Source: Anthony, R.K. and Govindarajan, V, 2007, Management Control Systems, Ch 2, pp. 62.CRICOS Provider Code 0
Business Strategy
 How should we compete in that business?
◦ Also called competitive strategy.
 Deals with how to create and maintain competitive
advantage in each of the industries that the
company has chosen to participate.
 Competition in diversified firms occur at the
business unit level.

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Business Strategy
Business-unit strategy depends on:
◦ its mission (what are its overall objectives?)
◦ its competitive advantage (how should the
business unit compete in its industry to
accomplish its mission?)

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Business Unit Mission
 Boston Consulting Group identified four
business unit strategies which will be
determined by the BU’s mission:
◦ Build
◦ Hold
◦ Harvest
◦ Divest

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The BCG Model
Cash Source
High Low

High High
“Star” “Question Mark”
HOLD BUILD
Market growth rate Cash Use

“Cash cow” “Dog”


HARVEST DIVEST
Low Low

High Low
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Relative market share


Source: Anthony, R.N. and Govindarajan, V, 2003, Management Control Systems, Ch 2, pp. 61
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Generic competitive advantage
Types of Competitive Advantage:
◦ Low cost
◦ Differentiation

How to determine which to develop


◦ Industry Analysis
◦ Value Chain Analysis

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Industry Analysis
Industry conditions => firm performance
Porter, 1985 - focus on five competitive
forces:
◦ intensity of rivalry among existing
competitors;
◦ bargaining power of customers;
◦ bargaining power of suppliers;
◦ threat from substitutes; and
◦ threat of new entry.
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Porter’s Five Forces
Analysis
Potential
Entrants
Threat of new entrants

Bargaining power Industry


of suppliers Competitors

Suppliers Rivalry Buyers


Among
Existing Bargaining power
Firms of buyers
Threat of substitute
products or services
Substitutes 19

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LOW COST
 Providing goods or services at the lowest cost while
providing acceptable features.
 Economies of scale, tight cost control, cost
minimization.
 Minimal expenditure in R&D, marketing and
overhead
 Serves as an entry barrier to potential competitors
◦ Examples: Briggs and Stratton (small hp
gas engines), Texas Instruments
(calculators)
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DIFFERENTIATOR
Providing non-standardised goods or services to
customers with unique needs, usually at a
premium price.
Examples:
◦ Design: Porsche motor cars.
◦ Technology: Apple Mac
◦ Image: Dick Smith Foods delivers the promise
“as Australian as you can get” against rival
Australian, but US owned Kraft Company.
Key: customers should be willing to pay for
perceived value added 21

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Basis for Competitive Advantage
Superior
Cost-cum-
differentiation Differentiation
advantage Advantage
Relative
Differentiation
Position

Low-Cost Advantage Stuck-in-the-Middle

Inferior

Superior Inferior
Relative Cost Position
Source: Anthony, R.N. and Govindarajan, V, 2003, Management Control Systems,
22 Ch 2, pp. 67. 23

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Value Chain Analysis

Product
Product
Design
Design
Production
Production
Research
Research
and
and
Development
Development Marketing
Marketing
Securing
Securing raw
raw
materials
materials and
and Distribution
Distribution
other
other resources
resources
Customer
Customer
Start Service
Service

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Centralization Vs.
Decentralization

Centralized
Centralized Decentralized
Decentralized
Organizations
Organizations Organizations
Organizations

Decisionsare
Decisions arehanded
handed
downform
down formthe
thetop
top
Decisionsare
Decisions aremade
madeatat
echelonof
echelon of
divisionaland
divisional and
managementand
management and
departmentallevels
departmental levels
subordinatescarry
subordinates carry
themout
them out

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Decision Making
Delegation
Top Management Decision making is
pushed down.

Middle Middle
Management Management

Supervisor Supervisor Supervisor Supervisor

Decentralization often occurs as an organisation grows.


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Benefits And Costs Of A
Decentralized Organization
Benefits
Benefits Costs
Costs
 Delegating = Time Relief
 Empowering Employees =  Lack of big picture view
Knowledge & Expertise  Lack of coordination
 Delegating = Timely Responses  Narrow focus
to Opportunities & Problems  Transferring of
 Decision Making Autonomy = knowledge difficult
Managerial Training
 Decision Making Authority =
Greater Motivation

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WHAT IS RESPONSBILITY
ACCOUNTING?

 Responsibility accounting refers to the


concepts used to measure the performance
of people and departments in order to foster
goal congruence

 The basis of a responsibility accounting


system is the designation of each subunit in
the organization as a particular type of
responsibility centre

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TYPES OF RESPONSIBILITY CENTRES

 A responsibility centre is a subunit in an organization


whose manager is held accountable for specified results

Cost
Cost RESPONSIBILITY
RESPONSIBILITY Investment
Investment
Center
Center CENTERS
CENTERS Center
Center

Revenue
Revenue Profit
Profit
Center
Center Center
Center

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Responsibility and
Controllability
 Controllability is the degree of influence that
a manager has over costs, revenues, or
related items for which he is being held
responsible

 Segregation of controllable and non-


controllable costs in a responsibility
accounting system is important for
performance evaluation

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Next lecture
Budgets: Control Purpose

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