#17131 - Strategic Management Theory - Irish Management Accounting Theory

• Ways to measure a company’s performance.

  • There is no one optimum method of measuring performance in a business, however, when performance is measured it is normally done so through financial measures such as cost, sales revenues, cash flows, or more detailed accounting measures such as Return on Capital Employed, Earnings per share or movements in share price. The last few mentioned are generally only applicable to those companies whom are on the stock exchange. In addition, this would be a non-exhaustive list and there are many other ways to measure a company’s performance.

• What is strategic management accounting?

  • This concerns strategic management accounting outside of the company, in term strategic purposes outside of the company providing analysis and management accounting data regarding a business and its competitors. This concept holds that it is necessary not only to monitor financial objectives, however, it is also important to monitor non-financial objectives, and this is the crux of this form of management accounting.

• Benefits and criticisms of Financial Measures.

  • Financial measures are easy and inexpensive to prepare as well as understand.

  • The objective is profit and investors tend to rely on a firm’s financial performance before giving funding.

  • A criticism with financial measures then are that they are internally focused and not compared to another company.

  • Historically, this method was focused on previous years financial situation, however, things change and there’s no point in looking at it retrospectively, its needs to be forward looking.

  • In addition, it is also a short-term measure, which means there is a lack of foreseeability, in the sense that companies may start making bad decisions on the basis of the short term plan.

• Combining both financial and non-financial measures.

  • It is suffice to say that financial measure are inadequate in evaluating a companies performance, and the need for a more holistic approach to pin-point where things aren’t going well with a solution to fix said problem.

  • Thus, financial and non-financial measures are needed, to give a more balanced appraisal of performance.

  • Non-financial measures used may depend on all type of companies and subsequently, these measures will and should effect the behaviour of employees so measures need to be appropriate at the time it is put in place.

  • Measures need to ultimately motive employee morale to improve performance.

  • When the wrong items ends up being measured then the wrong decisions may ultimately follow.

• The Balance Scorecard Approach

  • “The balanced scorecard is like the dials in an airplane cockpit: it gives managers complex information at a glance” according to its creators, Kaplan & Norton 1992 at p.1.

  • Overall it is evident that numbers are not just the key to a successful firm and the Balance Scorecard Approach is a popular method of measuring a company’s performance through both financial and non-financial means and strategic means.

  • This approach established this framework that would allow companies to judge their performance by measures and link them to the companies strategy.

  • Comprehensive view as to how a company is doing using measures and metrics from 4 categories.

  • It begins with vision and strategy, creating targets and then implements performance measures to achieve the companies goals.

• Perspectives that collectively comprise the Balance Scorecard.

1. Financial

   • This is known as the traditional perspective, and it is thought that if you have the appropriate strategy and measures in place then the financial performance should follow suit.

   • The balance scorecard here is to make fundamental improvements to the company as a whole and become more profitable.

2. Customer

   • The desire is of the buyer and the seller both to be profitable to keep business connection strong.

   • To keep the customer happy their concerns fall into four categories; time, quality, performance and service and cost. The business then needs to make goals on foot of these four categories.

   • It is important to benchmark performance against competitors in the same industry to improve performance.

3. Internal Business

   • Internally as a firm how can they do better to provide the best service to a customer, to meet their expectations.

   • In addition, you need to know your customers to stay ahead of the game.

   • There are three things to be considered then within this perspective; cycle time so production times and delivery, quality, which is key as it is what the customers expect from buying a product and finally employee skills, are they adequate to recognise the demands of the customers.

4. Innovation and Learning

   • Continuing improvements of the existing products and processes to keep in the competition market, the ability to innovate is valuable to a company as the introduction of entirely new products is advatangeous when staying ahead of the game in the market.

   • Skills of employees are important here too, retraining employees to give

them the correct skills to contribute to the overall strategic plan.

• Sample Balance Scorecard