Strategy and management control

Accounting Ahead | Original study resource | accountingahead.com.au

Strategy and management control

MODULE 5 | PART B.1 | STUDENT COMPANION

Strategy: a pattern in a stream of decisions - some intended strategies are never realised; others emerge

(Mintzberg and Waters). Variation in strategy must be matched by variation in processes, systems and structure

- including performance measures.

Strategy shapes the measures

Strategic situation Measures that matter most

Fierce rivalry Market share

Powerful customers Customer profitability

Cost leadership Cost per unit, purchasing and production efficiency

Differentiation or focus Innovation, product features, advertising effectiveness, brand reputation

Budget gym vs boutique studio Cost per member, equipment uptime vs class satisfaction, price premium

Contingency theory: measures follow the strategy

Measures along the value chain

Value chain activity Meal-kit company (imagined) measure

Inbound logistics Supplier on-time deliveries

Operations Kits packed per hour; packing errors

Outbound logistics Deliveries on time

Marketing and sales Cost to acquire a customer

Service Complaints resolved within a day

Procurement Ingredient price variances

Technology App uptime

Human resources Staff turnover

Firm infrastructure Total cost per order

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Feedback (cybernetic) control

Standard

Thermostat: desired temperature. Sales:

target revenue

Measure

Thermometer. Accounting system

Compare

Actual versus desired. Report and

variance

Correct

Heat or cool. Training, marketing,

incentives - or a new target

Feedback control

Cybernetic control

Control concepts

Concept Remember

Management control Set targets, measure, correct; integrated controls over inputs, process and

outputs; tension with flexible decisions

Internal control Reasonable assurance on reliable financial reporting, effective and efficient

operations, compliance

Performance management

system - eight core elements

Vision and mission; key success factors; structure; strategies and plans; key

performance measures; target setting; performance evaluation; reward systems

Four further factors How the system changes; how it is used; strength and coherence; information

flows, systems and networks

Broader controls External, non-financial and predictive information; informal personal and social

controls

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

When ROI misleads

Division's current ROI 18%

Organisation's cost of capital 10%

New project's return 14%

Division manager's view: lowers average ROI Reject

Organisation's view: 14% beats 10% cost of capital Accept

ROI can make managers turn down value-creating projects

Other ROI questions: total capital or net assets? current assets included? cost or book value? high return on

small capital versus lower return on large capital? Traditional controls also invite gaming, short-termism and

hidden cause and effect.

Practice questions

MODULE 5 | PART B.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Strategy and measures

A discount airline and a business-class-only airline fly the same route. Suggest three performance measures

each, and explain how their strategies explain the difference.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Question 2 - Feedback control

A hospital kitchen has a target of serving 98% of meals within ten minutes of the scheduled time. Describe the

four elements of feedback control for this target, and one informal control that could also influence staff.

Question 3 - ROI

Division X earns an ROI of 22%. The group's cost of capital is 12%. Its manager rejects a project returning 16%.

Explain why, whether this is good for the group, and how residual income could help.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART B.1 | STUDENT COMPANION

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 5 | PART B.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Strategy and measures

Discount airline (cost leadership): cost per available seat kilometre, aircraft turnaround time, load factor.

Business-class airline (differentiation): customer satisfaction and Net Promoter Score, on-time performance for

time-sensitive travellers, yield (revenue per passenger). Each tracks what its strategy needs - cost efficiency

versus premium value.

Question 2 - Feedback control

Standard: 98% of meals within ten minutes. Measure: timestamps when trays leave the kitchen. Compare: daily

report of the percentage on time, by ward and meal. Correct: adjust rosters, prep routines or trolley routes - or

revisit the target. Informal control: a team culture of pride in patient care, or the head chef's daily briefing.

Question 3 - ROI

Accepting the 16% project would pull the division's average below 22%, so the manager rejects it. That hurts the

group, because 16% exceeds the 12% cost of capital - value is lost. Residual income (profit - 12% x investment)

would rise if the project is accepted, aligning the manager with the group.

STRATEGIC MANAGEMENT ACCOUNTING | M5 PART B.1 | WORKED ANSWERS

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