CIMA

1

• CIMA
• Management Accountancy Business Strategy
• Lecture 6
• Internal Apprasial- Customers, Suppliers
  Resources

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Learning Outcomes
At the end of this session, you will

• understand the principles of internal appraisal
• be able to identify the techniques relevant to
  internal appraisal
• have applied some of these techniques to your own
  organisation

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Internal Appraisal
InternalAppraisal
Value Chain
PositionAudit
Aim to identify the organisations strengths and
weaknesses
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Position Audit
Part of the planning process which examines the
current state of the entity in respect of

• Resources of tangible and intangible assets and
  finance
• Products, brands and markets
• Operating systems such as production and
  distribution
• Internal organisation
• Current results
• Returns to stockholders

(CIMA)
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Marketing Audit Procedure

• Marketing environment
• Marketing objectives, strategies and plans and
  organisation
• Marketing activities organisation, systems and
  productivity

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Marketing Audit

• The size of the customer base
• Order sizes
• Profitability in different markets
• Market share
• Past growth and future prospects for each market
• Demand for products (growing, stable, declining)
• Competing and substitute products
• Application of technology to specific products
• Profitability per product
• Competitor analysis

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Key Customer Analysis
For many firms, some customers are more important
than others, in revenue terms. This analysis
identifies

• Who the key customers are
• History of their relationship with the supplier
• Relationship of customer to product
• Importance of key customers in the market
• Customer attitudes and behaviour
• Financial performance
• Profitability of sales to each customer

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Customer Profitability Analysis/ Customer Account
Profitability

• is the Analysis of the revenue streams and
  service costs associated with specific customers
  or customer groups
• (CIMA, 1996)

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Customer Profitability

• The total sales revenue generated from a
  customer or customer group, less all the costs
  that are incurred in servicing that customer or
  customer group
• Customer profitability differs in many cases, due
  to customer-specific costs such as
• discounts
• distribution costs
• credit period
• customer-specific stocks
• Number of orders
• complexity of orders
• advertising, possibly

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Comparative Customer Profitability

• Should ignore costs which cannot be avoided by
  refusing to serve one of them
• Some costs may be hard to apportion e.g.,
  advertising, although it may be possible to
  apportion advertising expenditure to some
  segments
• Accounting system should be flexible enough to
  enable customer information to be extracted in a
  number of different ways
• Relational database might be suitable

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Uses of Customer Profitability Information

• Identifying expensive customers, and then
• Reducing customer-specific costs, or
• Ceasing to seek out expensive customers
• Charging more to expensive customers

• Identifying ways of building customer loyalty
  (as repeat
• business is cheaper to win than new business)
• Activity based costing might be incorporated as
  some
• customers might influence cost drivers more
  than others

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Question for Discussion

• Can you identify the key customers of your
  organisation?
• Are there any differences (that you are aware of)
  in their profitability?
• Are there any other important differences between
  your customers?

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The Product Life Cycle
Sales and Profits
Sales




Profits
Maturity
Losses/ Investments
Decline
Growth
Introduction
Product Development
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Product Life Cycle
can be used to analyse

• Product categories (liquor)
• Product forms (white liquor)
• Products (vodka)
• Branded products (Smirnoff)

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Life Cycles

• Product categories - longest
• Product forms - follow PLC more faithfully
• Products - follow standard PLC or some variant
• Branded products - short or long PLC

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Stage Characteristics
Intro
Growth
Maturity
Decline
Products Not standard Different
Standardised Standardised
types Customers Innovators More Mass
market Sophisticated Marketing High costs
High costs Segmentation Marketing
exp falls Competors Few
More Stable no. Slow
exit Profits Losses Breakeven Stable
Falling Mfg Initial over- Under-
Stable, given Over-capacity capacity
capacity existing tech Distrn Few
Key mkting Stabilised
Declining channels issue
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Strategic Implications of PLC
At the position audit/SWOT stage, firms
should try to

• Analyse existing products
• Plan for new products to take over from those in
  decline, in order to maintain steady growth in
  revenue and profits for the company as a whole

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Problems of PLC

• Life cycle stage?
• Suitable strategies at each stage?
• Product success depends the customer need it
  satisfies, but it is not clear what life cycle,
  in marketing terms, this follows
• Does not always apply (Kelloggs Corn Flakes)
• Where new products can be copied easily,
  competition will build up well ahead of demand

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Product Portfolios and BCG Analysis

• PLC suggests that a firm needs a
• Group or portfolio of products
• Different stages in their life cycle
• Losses of one can be balanced by profits of
  another
• Boston Box - market share, market growth rate

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Portfolio Planning The Boston Box
Hi
Market Growth
Lo
Hi
Lo
Market Share
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Product Profitability
From the mgmt accountants point of view,
difficulties arise when the firm sells many
varieties of product/service

• Direct Product Profitability aims to analyse the
  profitability of each product line
• It is particularly useful to retailers, for whom
  shelf space is a scarce resource
• Retailers judge the success of their stores by
  revenue per square metre
• New IT systems enable the success of individual
  product lines to be assessed (Wal Mart article in
  FT)

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Problems with DPP

• Include cross-subsidisation (e.g. mobile phone
  hardware might be cheap, but the profit is made
  on calls),
• Taking overheads into account (e.g. ABC)
• Shared overheads, and
• Incorporation of customer-related costs (e.g.
  discounts), into product profitability

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Resource Audit
A review of an organisation's

• Physical resources
• Human resources
• Culture and structure
• Systems
• Finance
• Intangibles (patents, brand identities)
• Knowledge

Limiting factors must be identified
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Limiting (or Key) Factor

• A factor which at any time or over a period may
  limit the activity of an entity, often one where
  there is a shortage or difficulty of supply

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Efficiency and Effectiveness

• EFFICIENCY "how well the resources have been
  utilisedirrespective of the purpose for which
  they have beenemployed
• EFFECTIVENESS "whether the resources have been
  employed in the best possible way"

(defined by Johnson and Scholes)
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The Value Chain

• Competitive Advantage arises out of the wayin
  which firms organise and perform activities
• Activities are the means by which a firm
  createsvalue in its products
• Customers purchase value, which they measure
  bycomparing a firm's products and services
  withsimilar offerings by competitors
• The business creates value by carrying out
  itsactivities either more or less efficiently
  thanother businesses, or combined in such a way
  toprovide a unique product or service

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The Value Chain
Firm Infrastructure
M
Human Resource Management
SupportActivities
A
Technology Development
R
Procurement
G
OutboundLogistics
InboundLogistics
I
Marketing Sales
Operations
Service
N
Primary Activities
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Primary and Support Activities

• Primary activities are directly related to
  production,sales, marketing, delivery and
  services (eg warehousing,manufacture,
  installation etc)
• Support activities provide purchased inputs,
  humanresources, technology, and
  infrastructure(eg management hierarchy) to
  support primary activities
• A firm's value activities need not all be
  performedin-house and can be outsourced.
• A firm is connected to the value chains of other
  firms(in a value system)

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The Value System
Supplier(upstream)value chain
Channel(downstream)value chain
Customervalue chain
Organisations value chain
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The Value Chain and Competitive Advantage
Firms gain competitive advantage by managing,
efficiently and effectively

• The individual activities in the value chain
• The linkages between these activities
• The value system as a whole

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Relevance of Value Chain to Management Accounting
It provides a way of structuring accounting data
that is relevant to the actual processes of the
business

• The costs embedded in the value chain are
  influenced by
• Major strategic choices (e.g. scale, vertical
  integration, technology)
• Management decisions and practices (e.g. to
  exploit linkages)

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Value Chain Analysis
Requires changes in the orientation of the
accounting system

• The main cost driver is the customer, and it
  should be possible to work back from customer
  benefits to product and service features to the
  value activities which provide them and finally
  to the ultimate costs
• Furthermore, linkages are not really recognised
  in traditional costing systems, but their use
  should be maximised by any firm employing the
  value chain

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Questions to Stimulate Resource Insight

• What resources do we have? (The resource audit)
• How productive is our resource utilisation?
• How flexible are our resources?
• How balanced are our resources?
• What is the nature of our political situation?
• How successful is our 'strategic fit'?
• What is the nature and extent of our 'strategic
  standing'?
• What is the nature and extent of any 'resource
  slack'in the organisation?
• Which are our strengths, weaknesses, and
  distinctivecompetences?
• Where and how can we add value to our
  organisation?

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Distinctive Competence

• Something a firm does well, uniquely, or better
  than its competitors
• An internal strength directly related to
  environmental opportunities (which can be
  exploited) or threats (which can be neutralized

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Core Competences

• the collective learning in the organisation,
  especially how to coordinate diverse production
  skills and integrate multiple streams of
  technologies (Hamel and Prahalad)
• Sony - miniaturisation - Walkman, video cameras,
  notebook computers
• Canon - optics, imaging and microprocessor
  controls - copiers, laser printers, cameras and
  large scanners
• MS - consistent ability to deliver high quality
  clothing and food products at reasonable prices

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Tests for Core Competences

• Do they provide potential access to a wide
  variety of markets?
• Do they make a significant contribution to the
  perceived customer benefits of the end product?
• Is it difficult for competitors to imitate?
• (Hamel and Prahalad, The core competence of the
  corporation, HBR, May-June, 1990)