Cost Management and Strategic Decision Making Evaluating Opportunities and Leading Change

1. 1 Cost Management and Strategic Decision Making Evaluating Opportunities and Leading Change

2. 1-2 Learning Objective 1

3. 1-3 Characteristics of Cost Management What is Cost Management? • It goes beyond historical measurement and reporting. • It assesses the impacts of • current or proposed decisions. • It is a philosophy, an attitude, and a set of techniques to create more customer value and achieve lower cost. ?

4. 1-4 Learning Objective 2

5. 1-5 Characteristics ofCost-Management Analysts Cost analysts use costaccounting and other data to: Improveproducts Improveresource use Improveservices Supportstrategies Reducecosts

6. 1-6 Characteristics ofCost-Management Analysts Integrity Broad knowledgeof the business Ability to workin cross-functionalteams

7. 1-7 Ethical Standards for Cost-Management Analysts Cost-management analysts must maintain highstandards of ethical behavior because they cancontrol the information used for importantstrategic management decisions. The IMA (Institute of Management Accountants) Statement of Ethical Professional Practice, published for its management accountant membership, offers guidance for ethical behavior applicable to cost-management analysts.

8. 1-8 IMA Overarching Ethical Principles Honesty PRINCIPLES Fairness Objectivity Responsibility

9. 1-9 IMA Standards for Ethical Behavior Follow applicable laws, regulations and standards. Competence Maintain professional expertise, and communicate any limitations or constraints. Provide decision support information and recommendations that are accurate and timely.

10. 1-10 IMA Standards for Ethical Behavior Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage. Confidentiality Inform relevant parties about the proper use of confidential information.

11. 1-11 IMA Standards for Ethical Behavior Avoid conflicts of interest and advise others of potential conflicts. Refrain from conduct that could compromise ethical performance. Integrity Abstain from activities that might discredit the profession.

12. 1-12 IMA Standards for Ethical Behavior Communicate information fairly and objectively. Disclose delays or deficiencies in information and its processing. Credibility Disclose all information that should influence an intended user’s understanding of reports and analyses.

13. The CEO and CFO are now personally responsible for their company’s financial statements. They must sign the statements and take responsibility for their accuracy. The CEO and CFO are responsible for their company’s system of internal controls over its financial reporting. Accurate cost measurement has gained in importance. 1-13 Sarbanes-Oxley Act (SOX)(Section 404)

14. 1-14 Internal Control System(to assure that a company achieves…) Effectiveness and efficiency in its operations Compliance with laws and regulations Reliability in its financial reporting

15. 1-15 Learning Objective 3

16. 1-16 Strategic Decision Making Strategy An organization’s overall planor policy to achieve its goals. Keyquestions Where do we want to go? How do we want to get there?

17. 1-17 • New market potential • Be early entrant • Achieve growth • Capture market share • Continuing market • Maintain growth • Be a major player • Protect market share • Continuing market • Maintain cash flow • Maintain volume • Cut costs • Declining market • Exit at lowest cost • Minimize losses • Find a buyer quickly Exh. 1.1 Where do We Want to Go? – Strategic Missions Build High Hold REWARDS Medium Harvest Divest Low Low Medium High RISK

18. 1-18 Competitive advantages result from achieving a value chain that enables an organization to provide more value (perhaps at a lower cost) than its competitors. How Do We Want to Get There? Managers are more successfulin attaining objectives if they: Understand sourcesand threats tocompetitive advantages. Use effective decision making techniques.

19. 1-19 Exh. 1.2 The Value Chain Where do we want to go?How do we want to get there? Physical resources Human resources • Support services • Accounting • Human resources • Legal services • Information systems • Telecommunications R & D Design Supply Production Marketing Distri- bution Customer service Value of products and services Primary processes

20. 1-20 Outsourcing and the Value Chain Focus resources on parts of the value chain that are most important to company goals. Outsource those value chain processes that can be done more efficiently by others. What is most likelyto be outsourced? Information services, legal, logistics, human resources, payroll, accounting, tax. Potential problem Loss of controlandinternal expertise.

21. 1-21 New Competitors ExistingCompetitors Customers Substitutes Suppliers Exh. 1.3 Competitive Advantages, Sources and Threats Product Strategy Business Unit Strategy Source of Capability Low Cost Production Build Create New Knowledge Hold Product Differentiation Harvest Imitate Others Divest Market Focus

22. 1-22 Formulation of Strategic Action Plans An 8-step process at Pursuit Data 1. Identify need for change. 2. Create team to lead and manage change. 3. Create vision of the change and strategy for achieving vision. 4. Communicate vision and strategy for change and have change teamact as a role model. 5. Encourage innovation and remove obstacles to change. 6. Ensure that short-term achievements are frequent and obvious. 7. Use successes to create opportunities for improving entire organization. 8. Reinforce culture of more improvement, better leadership, moreeffective management.

23. 1-23 Learning Objective 4

24. 1-24 Evaluating Plans and Outcomes Operationalperformanceanalysis Strategicperformanceanalysis Has short-runperformance metexpectations? Has long-runperformance metexpectations?

25. 1-25 Differences between the expected and actual costs of business operations Evaluating Plans and Outcomes VarianceAnalysis Quantitative information and qualitative information about a proposed plan CostBenefitAnalysis

26. 1-26 End of Chapter 1