Statements on Management Accounting

7/28/2019 Statements on Management Accounting

1/81

Statements on

Management

AccountingStatement Number 4MM

March 2000

Practices and Techniques:

Designing an Integrated

Cost Management Systemfor Driving Profit and

Organizational Performance


2/81

In accordance with the charge to the Management Accounting

Committee (MAC) to issue statements on ma nagement a ccounting

and financial management principles and practices, Statements

on Management Accounting are promulgated to reflect official

positions of the Institute of M anagement Accountants (IM A). The

work of the MAC is based on a framework for management

accounting, w hose principal categories are:

1. O bjectives

2. Terminology3. C oncepts

4. Practices and Techniques

5. M anagement of Accounting Activities


3/81

Statement on M anagement Accounting

Sta tement No. 4MM

March 2000

D esigning an Integra ted

C ost Management System

for D riving Profitand O rganizat iona l Performance

Institute of Management Accountants

Arthur Andersen LLP

Consortium for Advanced Manufacturing-International


4/81

Publ ished by

Institute of Management Accountants

10 Paragon Drive

Montvale, NJ 07645-1760

htt p://w w w .ima net.o rg

C opyright 2000 in the United Stat es of America

by Institute of Management Accountants

and Arthur Andersen LLPAll rights reserved

IMA Publication Number 00351

ISBN 0-86641-287-5

ACKNOWLEDGMENTS

Statement 4MM, Designing an Integrated Cost Management System for

D riving Profit and Organizational Performance, w as approved for issu-

ance as a Statement on Management Accounting by the Management

Accounting C ommittee (M AC ) of the Institute of M anagement Accoun-

tants (IMA). IMA appreciates the collaborative efforts of the Finance

Business Solutions Center at Arthur Andersen LLP and the w ork of Dr. C .

J. M cNair, C M A, of Babson Co llege, w ho dra fted the manuscript.

Special thanks go to Ra ndolf Holst, CM A (Canada ), Mana ger of Know l-

edge Creation at Arthur Andersen, for his continuing oversight during the

development of the Sta tement. IM A thanks the Consort ium for Advanced

M anufa cturing-Internat iona l (C AM -I) for their support in the develop-

ment o f this SMA. IM A is also gra teful to the members of the Ma nage-

ment Accounting C ommittee for their contributions to this effort.


5/81

TABLE OF CONTENTSParagraph

I. Ra t iona le . .. .. .. .. ... .. .. .. .. .. .. ... .. .. .. .. .. .. ... .. .. .. .. .. .. ... .. .. .. .. . 1

II. Scope . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 6

III. Key Principles Underlying the ICM S Framew ork . .. .. 10

IV. Defining the ICM S Framew ork . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .17

V. Uses and Benefits of the ICM S Framew ork . .. .. .. .. .. .. .31

VI. The Role of Management Accounting . .. .. .. .. .. .. .. .. .. .. .39

VII. Elements of the ICM S Framew ork . .. .. .. .. .. .. .. .. .. .. .. .. .. 41

Information and

Decision-M aking Requirements ............ ......... 42

Design of the ICMS............................................47Stra tegic M ana gement Processes ............ ........... 59

D ecision D omains .............................................. 64

VIII . Conclusion .. .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 170

Bibliography


6/81

TABLE OF EXHIBITSFollowing

Paragraph

Exhibit 1: CAM-I Stra tegic M anagement

Process Model ............................................... 18Exhibit 2: The SMPs and Process Design . .. .. .. .. .. .. .. .. .. .. .. 28

Exhibit 3: The Migration of Information Systems . .. .. .. .. . 34

Exhibit 4: The Decision Domains and the SMPs . .. .. .. .. .. . 38

A. C ustomer/M arket Decision D omain

B. Product D ecision Domain

C . Process D ecision D omainD . Resource D ecision D omain

Exhibit 5: D ecision Flow Analysis . . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. . .. 49

Exhibit 6: Value-Based Customer Segmentation .. .. . .. . .. . .. 68

Exhibit 7: SMPs and Value Segmentation . .. .. .. .. .. .. .. .. .. .. . 71

Exhibit 8: Segment Analysis and Choice .. .. . .. . .. .. . .. . .. . .. . .. 75

Exhibit 9: Eva lua t ion and Contro l w ithin

the C ustomer/M arket D omain ............. .......... 87

Exhibit 10: The Product D esign Decision ... .. . . .. . . .. . . .. . . .. . . 100

Exhibit 11: SMP Information Flows

and Strategic Partnering .............................. 115

Exhibit 12: Abandonment and C reating the Future .. .. . .. . 124

Exhibit 13: Ongoing Process Ma nagement . . .. . .. . .. . .. . .. . .. . 147


7/81

1

I. RATIONALE

1 Over the last 15 years cost management pract ices have been

revolutionized. Spurred on by the criticisms voiced by Thoma sJohnson and Robert Kaplan in Relevance L ost: The Rise and Fall

of M anagement Account ing, a ccounting practitioners and academics

have joined forces to create new forms of cost management that

provide decision-relevant information. Beginning with activity-based

costing in the late 1980s, the list of new cost management techniques

has grown to include activity-based management, activity-based

budgeting, ta rget cost ma nagement, life cycle costing, capacity cost

management, investment management, and strategic cost

mana gement, to na me just a few . Efforts have also been made to

link cost ma nagement to other key performa nce metrics, crea ting

integrated performa nce mana gement systems.

2 At the same time that these changes have taken place in cost

management, there have been parallel developments in the structure

and focus of organizations. Process, or horizonta l, mana gement

has emerged as a key to improving the throughput and performance

of a n organizat ion. The internal benefits of process thinking have

been extended to include an organizations key trading partners,

resulting in the creation of integrated supply chains that span an

industrys value chain.

3 The driving force behind these rapid changes to the information

and management structures of the organization is the customer.

Demanding better, yet cheaper, products and services delivered fa ster

w ith ever-increasing levels of customiza tion, customers are forcing

companies to reexamine every facet of their operations. Information

is the vita l ingredient in defining customer requirements a nd then

meeting them better than the competition. The implementa tion o f

the new mana gement a nd informat ion systems that provide these

insights has become essential to the survival of an organization

seeking to meet the challenges of a globa l market.

4 As a result o f the rapid pace of the implementat ion of new

mana gement systems, though, many organizations toda y a re faced


8/81

2

with fragmented information flows that have created a veritable

Tow er of Babel. New management and measurement systems are

developed in isola tion from other initiatives and systems, resulting

in redunda ncy, ga ps, a nd miscommunica tion. La cking a n

integration framew ork, these initiatives have often fa iled to provide

a ll of their promised benefits.

5 Integration of information is essential if an organizations resources

are to be deployed optimally. Integrat ion provides the ba sis for

robust decision analysis because it supports the incorporation of

multiple perspectives. Whether an organiza tion is just beginning

its journey toward the implementation of new cost management

models or has put many of them in place, the need to integrate

information and management systems remains the same. M eeting

this need is the objective of the integrated cost management system

(ICMS) framew ork.

II. SCOPE

6 This Statement on Management Accounting (SMA) has been written

to help an organization understand how to integrate its cost

management system to optimize its investment in informa tion. The

methods and principles presented in this SMA summarize the findings

of a recent multi-year project completed by the Consortium for

Advanced Manufacturing-International (CAM-I). Organizations

involved this project include, Arthur Andersen, D aimler-Chrysler,

Allied Signal, Boeing, C ase, a nd Koda k.

7 The focus of this publication is on the integration of the cost

management techniques tha t are proving to have the most visibility

and applicability to the decisions and actions of financial practitioners

and operations managers. It is beyond the scope of this guideline to

discuss the deta ils of a ny specific cost management technique. The

focus is, instead, on how these management systems can be combined

into an integrated framew ork to help drive profit and organizat ionalperformance.

8 The ICMS concepts discussed here apply to:


9/81

3

large and small organizat ions; and

enterprises in all business sectors.

9 The information in this SM A w ill help financial professionals and

others:

comprehend the underlying principles of the ICM S framew ork;

understand the var ious elements o f an in tegra ted cost

management system;

determine the uses and benefits of the ICM S framew ork;

understand the relationships betw een various cost management

approaches;

design an integrated cost management system;

develop a migration path for integration of the various cost

management systems; and

broaden employee aw areness and obtain their buy-in for an

integrated cost ma nagement system.

III. KEY PRINCIPLES UNDERLYINGTHE ICMS FRAMEWORK

10 Understanding the relationship among activities, outcomes, and value

creation has become the key to achieving profita ble performance.

To reach this understanding, an organization has to be able to

integrate its information flow s. Integrat ion creates a know ledge

ba se tha t can be used to communicate decisions, objectives, results,

and opportunities from the top of the organization to the bot tom.

Integrat ion of info rmation a cross a ll functions and processes is an

essential ingredient of effective management in the fast-paced global

economy.

11 The key principles of the ICM S framew ork reflect the information

and decision-making needs of the managers w ho use it. Specifically,

these principles include:

Strategic orientation:A cost management system must incorpora te

and reflect the strategies of the organization and the core

competencies that support the achievement of stra tegic goals.


10/81

4

Customer dr iven:Information system design, integration, and

use must be centered around defining and meeting customer

requirements.

Value based:Competitive advantage and profitable grow th stem

from understanding how and where the organization creates

value for its customers.

Process/horizontal focus:Integrat ion must incorporate the flow s

of ma terials and information a cross and betw een organizat ions,

highlighting interdependencies.

Decision relevant:Information systems have to be defined aroundand support the key decisions of the orga nizat ion.

Cost effect ive: Integration should focus on the essential 20 percent

of data tha t support 80-90 percent of the decisions made w ithin

an orga nization ra ther tha n on comprehensive integrat ion of

all of the organizations availab le da ta .

Relationship based:Integrated information systems must be

based on and highlight the performance of key transactions

and relationships across the value chain.

12 These principles combine to define the requirements for an effective

integrated cost mana gement system. Specifically, the ICM S should

be elegant, minimizing the complexity o f its underlying structure

and emphasizing the identification and incorporation of data

needed to support decision making within a specific decision

doma in. M ore da ta is not betterincorpora ting the right

information required to support the critical decisions of the

orga nization is the key objective.

13 Flexibilityis a ma jor concern of the ICM S. The da ta structure

should be relational, allow ing for ongoing modifications, additions,

and deletions of da ta f rom the integrated system. This is not to

suggest tha t data should be removed f rom the organizations basic

operational and strategic systems, but ra ther tha t the da ta pulled

into the integrated system should be managed to ensure that it

remains a relevant, eff icient, and cost-effective source of decision-

support information.


11/81

5

14 User-friendlinessis a lso a concern of an IC MS. Data is transformed

into informa tion w hen users are able to access and deploy it freely

and easily. The ICM S is not a system designed by accountants for

accountantsit is an integrated source of information supported by

efforts throughout the organization. It should be structured to ensure

that users both understand and feel comfortable working with it,

regardless of their location in the organizat ion or their ba ckground.

The goa l of the system design and ma intenance is to ensure tha t the

system is both accessible and relevant to the people who rely on it

for decision support.

15 Of equal concern is the abi lity of the ICM S to capture the

interdependencies within the organization among functions and

teams and betw een partners in the supply chain. The da ta embedded

in the ICM S should be compatiblew ith the systems and a bilities of

both internal users and the organizations key trading partners. Data

may be imported from the point-of-sale, using data links with a

reta il partner. Suppliers both receive and provide information on

the progress of key components or products, including the ability torespond to mix and demand shifts identified a t the point-of-sale.

16 Integration extends beyond the needs of today to include the efforts

in designing and developing new products and services as well as

support for products and services that have been abandoned.

L inkagesare made in the ICM S forw ard and backw ard in the value

chain and across the life of the organization and its customer

relationships. The ICMS seeks to use information as a bridge tocross the communication a nd a ctivity gaps tha t na turally occur in

orga nizat ions. The key components of the ICMS framew ork reflect

these ba sic tenets and objectives.

IV. DEFINING THE ICMS FRAMEWORK

17 The ICM S framew ork emphasizes the relat ionship betw een

information flows and decision making at various levels of the

orga nizat ion. It seeks to identify those essentia l data elements tha t

must be shared betw een individuals, teams, departments, processes,


12/81

6

and entities for effective, coordina ted decision ma king a nd action

to occur.

18 The fundamental thesis of the ICM S framew ork is that achievingprofitable performance and competitive advantage stems from a

deeper understanding of the relationships among activities, outcomes,

and value creation. A second major thesis is tha t integration of

information f low s is an essentia l element of effective management

decision ma king, serving to clarify communication a nd strengthen

the linkages among interdependent functions, teams, or entities.

The ICM S framework, a s illustra ted in Exhibit 1, consists of the

following elements:

Str ategic management pr ocesses. Seven core strategic

management processes (SMPs) incorporate current best

practicestarget cost ma nagement (TC M ), asset management

(AM), the extended enterprise (EE), capacity cost management

(CM), process management (PM), act ivity-based cost

management (ABCM), and integrated performance management

(IPM ). As depicted in the exhibit, the SMPs serve as the rods

tha t lock the plattersthe decision domainsinto synchronous

action.

Decision domains. Decisions take place within four primary

domainscustomer/market, product, process, and the resource

level. The driving force of the organization, the answ er whyit

exists a t a ll, is found at the customer/market level. Products

and services are whatthe company is offering to meet customerneeds and deploy its strategy. Processes and their capa city are

the howof the management equation. They are the means to

the desired endsvalue creation and prof its. All of these levels

draw on and define the resource requirements of the

organization.

Integr at ion. Integration takes place at the data level, where

common information requirements are identified and core SMPs

are linked to these information requirements.


13/81

7

19 The four pla t ters (e.g. , decision domains), are linked by the

information pipelinesthe strategic management processes. As the

exhibit suggests, the SMPs extend throughout the four decision

domains, providing different types of informa tion to users at different

levels of the organization. For instance, t arget cost management, ,

Exhibit 1. CAM-I Strategic Management Process Model

Source: CAM-I, 2000: 11.

Strategic Management Processes

1. Target cost management (TCM)

2. Asset management (AM)

3. Capacity cost management (CM)

4. Process management (PM)

5. The extended enterprise (EE)

6. Integrated performance management (IPM)

7. Activity-based cost management (ABCM)

Decision

Domains

Resource

Process

Product

Customer/Market

1 2 3 4 5 67

StrategicManagementProcesses


14/81

8

a system for profit planning and cost management, incorporates

profit, cost, and value-based management concepts at the earliest

stages of product development and applies them throughout the

product life cycle by involving the entire value chain or extended

enterprise. The extended enterprise SMP brings trading partners

together in order to leverage cross-orga nizat ional competencies and

know ledge to better meet customer requirements, during both the

design and the execution of the stra tegic plan.

20 Aligning resources to meet specific customer requirements and

ensuring that plan execution is not impaired or prevented by

inadequate or improper resources are the objectives of asset

management and capacity mana gement. The asset management and

capa city management SMPs combine to create a life cycle focus on

identifying and evaluat ing technology, equipment, people, systems,

and related opportunities that could be used to improve organizational

performa nce. Asset management and capacity cost management are

extensions of the capital investment process, which emphasizes

decisions that add value to the organization and benefit itsstakeholders. They zero in on the capacity of resources to create value,

as well as the causes of idle, excess, and ineffective capacity utilization.

21 D efining stra tegies and planning their execution are necessary but

not sufficient management processes. Results depend on the

motivat ion of individuals to achieve the goals and the actions they

take to make their plans a reality. By emphasizing the integration

and balancing of measures, their use, and the rew ards they trigger,integrated performa nce management is the vita l link betw een plans

and results.

22 And finally, the ongoing actions across the many different layers

and areas of the organization have to be knit together into a

streamlined, seamless whole. It is this arena of integration that

process management and activity-ba sed cost mana gement address.

Process management emphasizes the horizonta l linkage of activitiesfrom core w orkflow management through business and enterprise

process integrat ion. It a ligns organizat ional a ctions with customer

values.


15/81

9

23 In a related manner, a ctivity-based cost mana gement emphasizes

the effective combination of resources to create unique organizational

capabilities. It analyzes specific actions and their tie to processes,

costs, performance, and results. ACBM fills a basic information

void by providing cost and operating information tha t mirrors the

process view. Emphasizing opportunity costs and value analysis,

ABCM management creates an economically rich basis for supporting

decision ana lysis.

24 The SMPs ensure that decisions and da ta used at the top, the strategic

level of the organization, correlates with those used by process level

managers to analyze similar conditions and situations. Coordination

and clear communication a re built into the ICM S structure through

these SM P informa tion pipelines.

25 While the seven SM Ps extend through all four of the decision

doma ins, they a re not equally important to the decisions made at

various levels of the organization. For instance, target cost

management is the dominant SMP for most decisions made in the

customer/market a nd product doma ins. Stra tegic in na ture, these

decisions require analysis and identification of the optimal set of

products, services, and product a ttributes to meet the requirements

of the target customer groups.

26 On the other end of the spectrum, activity-based cost management

plays a dominant role in the resource decision domain. In this

domain, the emphasis is placed on identifying and deploying the

optimal blend of resources to ensure tha t the total costs per dollar of

value delivered to customers is minimized. Keeping the organization

clearly focused on the cost/value tra deoff inherent in the productive

process is a key goal of the information provided by the various

SMPs in the resource decision domain.

27 The integration of the various SMPs w ithin a specific decision domain

is driven by the need for shared data that is developed and

mainta ined in a va riety o f systems. Each decision doma in serves as

a form of focused da ta pool, or subsystem, tha t brings together the

key pieces of information required to support specific decisions. For


16/81

10

instance, one of the key decisions made w ithin the process domain

is the design and management of effective process-based w orkflow s.

A number of questions are typically addressed during the process

design effort , including:

What are the existing processes and w hat are their capabilities

and limitat ions?

What is the maximum demand the system needs to be able to

handle on a da ily/w eekly ba sis?

What level of quality needs to be maintained?

When quality problems are likely to occur, how can they beavoided or detected?

What resources are currently available?

What is the capacity of the process, given planned demand?

Where are the bottlenecks? What can be done to reduce their

impact or improve their capab ility?

H ow can gaps in the flow best be managed? Should time, space,

or inventory buffers be used to ensure that the bottleneck isnever idle?

What var iety o f products and ac tivit ies wi ll need to be

accommoda ted by this process?

What is the optimal w ay to manage this variety?

D oes the process represent a core competency? If not, should

the activities and output it provides be outsourced?

D o needed skills and competencies exist to make the processw ork smoothly?

Are there any major funct ional, po lit ica l , o r st ructura l

impediments to creating the process?

What performance metrics w ill ensure that process objectives

are reached?

28 As suggested by Exhibit 2, process management is the dominant

SMP used to organize informa tion to a ddress these process designquestions. It provides the ba sic structure for process-level decisions

as well as the underlying integrating structure tha t links the customer


17/81

11

to the organization and its value chain partners. Process management

emphasizes the bridging of information and workflow gaps as it

looks for the optimal w ay to route work and output through the

organization a nd its supply chain.

Exhibit 2. The SMPs and Process Design


29 While process mana gement serves as the integration mechanism

for the process design decision, it does not conta in all the requisite

information to answer the questions posed above. For instance,

capacity cost mana gement is called on to provide bottleneck potential

and current capa city utilizat ion informat ion and the cost to create

new capacity if needed. In a related way, the extended enterprise

scans the entire supply chain to identify idle capacity, waste, or

bott lenecks that may impede the overall performance of the supplychain. Target cost management sets the limits on what this

performance needs to be, w hile integrated performa nce management

Capabilities and constraints

Capabilit

iesandc

onstraint

s

Capability

assessment

External

Internal

CM

EE

Optimalprocess design

Currentstructure

Priorperformance

New needs

Interdependentactivities and

processes

Performanceassessment

IPM

ABCM

AM

ProcessManagement

CapabilitiesandconstraintsAssetanalysisandpolicy

Costdata

Costandno

n-cost

performancedata

Required

performance

TCM


18/81

12

provides the basis for measuring current versus required

performance.

30 As suggested by this example, w ithin each decision domain data islinked together to form the founda tion for decision analysis. Not all

information is pulled together; the integration focuses on the vital

few data elements that must be common to all users of the information

system. The ICMS framew ork seeks to sort and refine the shared data

requirements of the organization into manageable, definable

subgroups that reflect the decision structure of the organization.

V. USES AND BENEFITS OFTHE ICMS FRAMEWORK

31 Why should a company use any or all of the strategic management

processes, let alone undertake the effort to integrate them? The ICMS

framew ork has broa d applications in organizations. The information

provided by the ICM S framew ork can be used, for example, for the

following:

identify optimal customer/market segments;

improve the profitability of key products;

support improved decision making;

reduce miscommunicat ion;

optimize the organizations profitability;

increase process effectiveness;

integrate financial and nonfinancial metrics; improve competit ive posit ion;

facilitate strategic marketing and operational decisions;

support rapid response to changing conditions; and

provide the means to integrate activities and outcomes across

processes and entities in the value chain.

32 The ICM S framew ork has broad applications in manufacturing

organizations as well as areas outside of manufacturing, such as

marketing and administra tion. The ICM S framework can be used

in conjunction with other management techniques such as total


19/81

13

quality management, q uality function deployment, and electronic

commerce. It can a lso be applied a t the supply chain level.

33 The implementation of the ICM S framew ork can help a companyin the follow ing wa ys:

ant icipate and react to environmental changes before an

organization is affected by them, thus avoiding problems before

they occur rather than correcting them after they happen;

continually improve the operations and not merely seek a

temporary equilibrium;

create an external focus on customer requirements and

competitive threats so that customer requirements drive the

organization;

systematica lly rela teall elements, internal and external, so

problems are solved holistically rather than incrementally

through cross-functional integration; this facilitates the problem

being viewed and solved as a whole by building long-term

relations with the suppliers and other members of the extendedenterprise;

optimize profits by ensuring that resources remain focused on

value activities, tha t w aste is identified a nd removed, and that

process improvements result in reductions in nonvalue-added

efforts;

link individual, group, and organizational incentives to ensure

tha t everyone in the organization understands and is motivatedto achieve strategic and operational objectives; and

communicateacross all levels, all processes, and all units the

needs of the customer, results achieved, problems encountered

and solved, and remaining challenges to be met.

34 Not a ll organizations need to implement all of the various SM Ps,

nor do they need to integrate at the same level of intensity. As

suggested by Exhibit 3, there is a migration path tha t an organizationshould expect to follow from early, fragmented cost and performance

information systems to the holistic structure of the ICMS framew ork.


20/81

14

35 The migration path that is ultimately chosen should reflect the

dominant challenges facing the organization. For instance, Case

Corporation had minimal success in its activity-based cost

management initiative until the need fo r da ta to support decisions

in the customer/market and product decision doma ins arose. The

drive to reestablish its position in the farm tractor market placed

new demands for information on the company that required data

from different parts of the organization and different supporting

SMPs. When a specific SMP or its da ta w as lacking, the new productlaunch team found substitute data sources. The resulting informa tion

collage provided Case mana gement w ith a blueprint and motivation

for embarking on an initia tive to better integrate its information.

Activity-based cost management is now playing a central role in

this integration effort .

36 The key to defining an ICM S implementation path is to understand

Exhibit 3. The Migration of Information Systems

Source: CAM-I, 2000, 17.

Integrationof SMPs

Holisticsystems

20001980 1990

Developmentof targeted

SMPs

Time

Fragmented

databases

Sophistication


21/81

15

w hat information is provided by each SMP, how this information is

shared betw een SMPs within the various decision domains, and w hat

the optimal set of SMPs is for an organization facing specific

competitive and organizationa l challenges. The ICM S framew ork

facilita tes this effort by categorizing decisions and da ta into logical

clusters that help prioritize the sequence and intensity of SMP

implementa tion and linkage.

37 Q uestions that reflect core decisions within each decision domain

provide the first indication of where the integration effort should

begin (as illustra ted in Exhibit 4). As the exhibit suggests, the seven

SMPs are not all needed at the same time or in the same way. For

insta nce, in the customer/ma rket decision doma in ta rget cost

management dominates as the primary SMP. Even so, at least three

common decisions in this domain rely on o ther SM Ps for their core

data needschoosing geographic regions for operations, defining

and leveraging core competencies, and choosing a distribution

strategy.

38 The decisions and issues summarized in Exhibit 4 are not exhaustive,

but rather provide a glimpse into the ba sic nature and structure of

the ICM S framework. While the various SM Ps all play a role in the

overall functioning of the ICMS, it is sometimes necessary to find

alternative data sources to fill specific information needs. If a specific

SMP is common to most of the key decisions facing an organizat ion,

it should become a primary implementa tion t arget. O n the other

hand, if the data requirements of the organization have only minimalties to one or more SMPs, they should be de-emphasized in the

implementation schedule. There is no reason to believe that every

firm w ill fully implement each and every SMPinforma tion is not

a free good. Any SMP should be evaluated to ensure tha t the costs

to implement and ma intain it are less than the benefits it w ill provide

to the organization. Making these assessments is a primary

responsibility of the financial professional.


22/81

16

Exhibit 4A. The Decision Domains


ll oPrimary source of information Supporting information Minimal information

Customer/Market Decision Domain and the SMPs

1. What markets do we want to be in? TCMl

EEl

CM

AMo

PM

IPM

ABCM

2. What customer segments do wewant to be in?

TCMl

EE

CM

AM

PM

IPM

ABCM

3. What geographic regions? TCM

EEl

CM

AM

PM

IPM

ABCM

4. Assessing market size? TCMl

EE

CM

AM

PM

IPM

ABCM

5. Profit potential of customer/marketsegments?

TCMl

EE

CMo

AM

PM

IPM

ABCMo

6. Industry/competitive trends? TCM

l

EE

o

CM

o

AM

PM

IPM

ABCM

7. What strategies to addresscustomer needs/valuerequirements?

TCM

l

EE

CM

AM

PM

IPM

l

ABCM

8. What are our core competencies? TCMl

EE

CMl

AMl

PM

IPM

ABCM

9. What time frames/windows ofopportunity?

TCMl

EE

CMo

AMo

PM

IPM

ABCM

10. What distribution strategies? TCM

EE

l

CM

AM

PM

IPM

ABCM

o


23/81

17

Exhibit 4B. The Decision Domains



Product Decision Domain and the SMPs

1. What are the product or servicefeatures required by each targetmarket?

TCMl

EEo

CM

AM

PM

IPM

ABCM

2. What are the competitive offerings? TCM

l

EE

o

CM

AM

PM

IPM

ABCM

3. What is the optional product mix? TCM

l

EE

CM

o

AM

PM

IPM

ABCM

4. Quality/functionality requirements? TCM

l

EE

o

CM

AM

PM

IPM

ABCM

5a. Pricing strategy vs. corecompetencies?

TCM

l

EE

CM

AM

PM

IPM

ABCM

5b. Distribution strategy vs. corecompetencies?

TCM

EEl

CM

AM

PM

IPM

ABCM

6. Capacity investment requirements? TCM

EE

CMl

AM

PM

IPM

ABCMo

7. Are we meeting our return on salesobjectives?

TCM

EE

CM

AM

PM

IPMl

ABCMo

8. What product technology isavailable?

TCM

l

EE

o

CM

AM

PM

IPM

ABCM

9. Supplier capabilities? TCM

EE

l

CM

AM

PM

IPM

o

ABCM


24/81

18

Exhibit 4C. The Decision Domains



Process Decision Domain and the SMPs

1. Organizational structures? TCM

EE

CM

AM

PMl

IPM

ABCMo

2. How well maintaining c.c.s? TCM

EE

CM

AM

o

PM

o

IPM

l

ABCM

3. Process cost drivers? TCM

EE

CMo

AM

PMl

IPM

ABCM

4. Capacityinternal/external? TCM

EEo

CMl

AMo

PM

IPM

ABCM

5. How are the processes performing(cycle time, quality, process, yield,flexibility, dependability, downtime,bottlenecks, scheduling)?

TCM

EE

CM

AM

PM

IPMl

ABCM

6. What process technology? TCM

EE

CM

AM

o

PM

l

IPM

ABCM

7. Process capability assessments? TCM

EE

CM

o

AM

PM

l

IPM

ABCM

8. What are the performance gaps? TCM

EE

CM

AM

PM

o

IPM

l

ABCM

9. What are the activities in theprocess? Value/non-value added?

TCM

EE

CM

AM

PM

l

IPM

ABCM

10. What distribution strategies? TCM

EE

CM

AM

PM

l

IPM

l

ABCM

l

11. What are our process improvementtargets?

TCM

EE

CM

AM

PMl

IPMo

ABCMo

12. What is our shared service strategy? TCM

EE

CMo

AMo

PMl

IPM

ABCMo


25/81

19

Exhibit 4D. The Decision Domains



Resource Decision Domain and the SMPs

1. What is our resource capability? TCM

EEo

CM

AM

PM

IPMl

ABCM

2. What is our resource utilization(people, plant, equipment)?

TCM

EE

CM

l

AM

PM

IPM

o

ABCM

3. Scheduling? TCM

EEo

CMo

AM

PMl

IPM

ABCM

4. Resource mix? TCM

EEo

CM

AM

PM

IPM

ABCMl

5. Cost of resources utilized? TCM

EE

CMo

AM

PM

IPM

ABCMl

6. Should we buy or lease, etc.? TCM

EE

o

CM

o

AM

l

PM

IPM

ABCM

o

7. What resources are needed to support

our core competencies?

TCM

EE

o

CM

AM

o

PM

l

IPM

ABCM

o

8. Inventory policies? TCM

EEo

CMl

AM

PMl

IPM

ABCM

9. What would be optimal assetmanagement practices?

TCM

EEo

CMo

AMl

PMo

IPM

ABCM

10. What R&D investments should bemade?

TCM

EEl

CM

AMl

PMo

IPM

ABCM


26/81

20

VI. THE ROLE OF MANAGEMENT ACCOUNTING

39 Financial professionals play a lead role in the design and

implementation of integrated cost management systems. They serveas the source of much of the incorporated data as well as an objective

verifier of the reliability of information collected from multiple

sources. Specific activities and initiat ives tha t should be undertaken

by f inancial professiona ls in the IC M S initiat ive include:

identification of the primary decisions that need to be supported

by the informa tion system;

identification of primary sources of different forms of dataw ithin the organization;

assessment of the reliability of these information sources;

identification of key data gaps based on the primary decisions

to be supported;

creation of data collection and measurement initiatives to fill

information voids;

identification and implementation of decision support tools thatw ill ensure that shared da ta is used a ppropriately;

development of internal control systems and procedures to ensure

tha t da ta integrity is maintained on a n ongoing basis;

participation on the implementation team, including choosing

integration and reporting software solutions, deciding on

educa t ion and t r a in ing requi rement s , p l ann ing the

implementation sequence for the various SMPs, given theorganizations needs, and scheduling implementation phases

w ith roll-out dates for various aspects of the system; and

matching all cost and performance data to ensure that it provides

consistent, objective signals to users regarding the sta tus of the

organization a nd the potential impact of decisions on overall

performance.

40 Financial practitioners are part of the core ICM S implementationteam, spearheading w hen necessary the efforts required to ha rness

the pow er of the organizations information for decision making.

Serving a unique role in the organization, financial practitioners


27/81

21

strive to ensure tha t the integration initiative is conducted effectively

and efficiently and that the needs of both internal and external

customers and users of the system are met. Achieving these goals

requires a working knowledge of the basic elements of the ICMS

framework.

VII. ELEMENTS OF THE ICMS FRAMEWORK

41 The development of the ICM S framew ork reflects its focus on

identifying and meeting the information requirements of the

organization. Information is a unique goodits use does not reducethe amount of informat ion ava ilable to o thers. It is a inexha ustible

resource that increases in value as it is used. The self-multiplying

nature of information enables and empow ers individuals w ithin the

organization, aiding them in coordinat ing their learning and actions.

Yet information is indivisibleit can be used only as a complete

data set; missing data eliminates functionality and relevance for

the entire information system. Finally, informa tion is cumulat ive

each new observation and data entry adds to the overall body ofknowledge contained within the information system. The ICMS

builds from and reflects these basic features of information in its

design, fra mew ork, implementa tion, and utilizat ion in supporting

decision making in an orga nizat ion. The basic elements of the ICM S

framew ork include:

information and decision-making requirements;

design of the IC M S; strategic management processes; and

decision doma ins.

Information and Decision-Making Requirements

42 Information and decision making are the essential dimensions of

the integration structure of the ICMS. Reflecting the search for

know ledge, the ICM S can be defined a s cognitive informat ion tha thas been generalized a nd a bstracted from an understanding of the

cause-and-effect relations of a pa rticular phenomenon occurring in

the externa l environment. The cause-and-effect relations emphasized


28/81

22

by the ICMS are the transactions that occur within a business

betw een customers, suppliers, and other stakeholders. The amount

of value created w ithin an orga nizat ion depends on the effectiveness

w ith w hich it captures, measures, responds to , a nd a nticipates the

critical business driversits primary cause-and-effect relations.

43 The primary force driving the movement to integrate business

processes and information systems is the ever-expanding demand

for knowledge about the key requirements of customers and the

optimal w ay to increase the amount of value created for them. An

organization that fails to develop a rich, integrated database of

economic and noneconomic informa tion and makes it accessible to

the entire value chain w ill not be able to learn fast enough to susta in

itself in the global market. Integrated information systems are the

fuel tha t pow ers the know ledge creation engine tha t is so essentia l

to optimizing an orga nizat ions competitive position.

44 R. J . Chambers, a noted academic and expert in accounting

information systems, developed a series of principles that can be

used to evaluate and shape the ICM S.

An information system is a system for supplying information to

users who must ta ke coordinated a ction. If effective communi-

cat ion is to ta ke place, the language used must be such tha t a ll

members of the organization would identify the response. If

action is to be coordinated, the informat ion system cannot be

treated a s a group of independent subsystems.

The information system must remove all doubt about data;

tha t is, the system must be so reliable tha t the user w ill depend

on it rather than on his own observations. For example,

information w ill fail to evoke response (decisions) relevant to

the pursuit of its ends if it is found by receivers to be inconsistent

w ith their ow n direct observat ions. In this case, the system that

produces the information will serve to increase rather than

decrease doubt; it w ill cloud rather than clarify issues confrontingdecision ma kers.

There is a point at which the marginal cost of differentiation of

information and comprehensiveness of information exceeds the


29/81

23

marginal utility of information to the receiver. For example,

individuals capacity for making sound judgments about a

complex situa tion ma y be seriously impaired by supplying them

with a lot of information that they believe would be relevant

but w hose influence on the situation is not clear.

Thus, the information system is an abstracting system. Its

justification lies in the reduction of the informat ion a vailable

to the information that is relevant to action. But abstraction

should not be carried to the point where differences in the

significance of da ta are obscured.

An information system is a device for continually bringing undernotice new facts and new know ledge. It must provide not only

the premises of decisions but a lso a feedback so tha t decisions

may be reaffirmed or abandoned in favor of others. The

development of an organization and the development of the

judgment of its a gents a like depend on this feedback.

Since both the capacity and the time available for observation

are limited, an information system must provide a formal recordto guard against misinterpretation of past experiences. The

records of an organizat ion are its memory. Therefore, all records

and communicat ions at any time serve not only their immediate

function but a lso the function of memory.

The information system must be regarded as a continuously

developing instrument, in much the same way as an organizat ion

is cont inuously developing.

It is a matter of experience that information processing is done

according to habitual modes far more commonly than according

to delibera te assessments of the users requirements.

45 These features of effective information systems can also be used to

create a list of the symptoms of a broken informa tion system, such

as the follow ing:

information exists in separate databa ses that are difficult tointegrate;

inconsistent signals and information are given by different parts

of the system;


30/81

24

users complain of information overload;

users complain that w hile there is lots of data , little usable,

relevant information is ava ilable; feedback about the impact of decisions is not regularly provided;

prior results are not maintained in usable format (e.g., trends,

etc.);

the information system has not been adjusted as the organization

has changed; a nd

the information system does not support w hat-if analysis, so

most decisions are guided by the w eve always done it thisw ay theory.

46 To avoid these types of problems, the ICM S needs to be designed to

support the key decisions made w ithin an organization, facilita te a

wide range of analysis, and be the source of reliable, consistent

details and information to users both within and outside the

organization.

Design of the ICMS

47 It is during the design stage of the ICM S that the relationships

betw een specific data requirements and decisions a re established.

Five general steps make up the ba sic approa ch used to make sure

tha t the ICM S meets the needs of its users:

analysis of the decision system;

analysis of information requirements; aggregation o f decisions;

design of information system features; and

design of internal control routines to ensure data integrity.

48 As this list suggests, the driving force in the ICM S design process is

the identificat ion and a ggregation of the organizations decisions in

terms of their information requirements. A fa ilure to cata log the

major decisions made w ithin the organization w ill leave the ICM S

unfocused, increasing the risk that the information gathered will


31/81

25

fa il to meet the needs of users. What do each of these specific issues

enta il in terms of a ctivities and outcomes?

Anal ysi s of the Decision System

49 D ecision flow charts can be used to gain an understanding of the

ICM S data requirements, as illustra ted in Exhibit 5. D eta iling the

key decisions made, a s w ell as the relat ionship betw een decisions,

often reveals that some important decisions are made by default

(e.g., based on established routines ). Other decisions may a ctually

be the result of interdependent effortsa decision made in the

purchasing department, for instance, has an effect on the work doneon the plant floor.

Exhibit 5. Decision Flow Analysis

A/R

Treasurer

Preparecost

analysis

Take? Inform

customerSchedule

1 hour

1 day

=(requiredtime =30

minutes)

Inform

customer

Make

Ship

Invoice

Collect

Production

Logistics

A/R

Release to

production

Order

entry

Receive

request for

special order

Sales Sales Scheduling LogisticsFinancial

analyst

Order

entry

Financial

analyst

Y

N

Breakdown -

times 3-5 days


32/81

26

50 To be useful in ICM S design, decision flow charts need to detail

w hat decision is being made, w ho is responsible for it, w hat o ther

departments, activities, or processes are af fected, problems w ith the

decision or its outcome, and related fa ctors. These flow charts should

contain sufficient detail to make sure that all key information demands

can be identified. It is easier to introduce finer information into an

integrated information system than it is to combine fine subsystems

into one integrated system.

Analysis of Informati on Requi rements

51 Three unique categories of organizational decisions typically aremade: concrete, complex, and unstructured. The first type of decision

is easily modeled to identify an optimal solution. Any decision that

falls into this category is relatively certain and can be made

automatically by routines established w ithin the information system.

The decision is reviewed only when problems occur or if periodic

updates are completed. For a decision about the need to replenish stock

on a low -value inventory item such as toggle bolts or copy paper, the

information needed and optimal choice to make are easy to identify

(e.g., stock levels, lead times, demand patterns). For these types of

decisions, the goal is to minimize the time and resources used to support

them by stabilizing the decision rules and analysis undertaken.

52 For some decisions, it is difficult to identify an optimal solution

the set o f va riables that needs to be considered is too complex to be

completely defined. For instance, a large fa ctory needs to factor in

a large number of issues, such as available capacity, routings, ship

dates, raw material inventory levels, and labor availability when

completing its run and ship schedules. There may be some theoretical

optimum for this complex decision, but it cannot be directly or

easily identified. The result is that these decisions are often made

using simulation and scenario analysis to identify potential solutions.

While defining the optimal solution may be difficult, the information

requirements of the decision can be identified a nd met.

53 For the third class of decisions, models do not exist to structure the

analysisnot only do optimal solutions not exist but information


33/81

27

requirements are also difficult to define. When decision ma kers can

identify needed information, it can be incorpora ted in the information

system. While many mana gers know w hat output they need, a nd

w hy, they do not have the requisite know ledge to identify the deta iled

da ta requirements these needs represent. In this situa tion the design

and use of information systems becomes the most challenging.

54 If the information is integrated around a framew ork such as that

present in the various SM Ps, w hat da ta is available, w hat criterion

w ill be used in the decision process, a nd how best to capture currently

unavailable da ta bits become more apparent. The ICMS framework

creates a structure for da ta and its analysis that is consistent a cross

key decision settings faced by the organizat ion. It brings a common

set of insights and knowledge to the organization, allowing it to

minimize its performance and communica tion ga ps.

Aggregati on of Deci sions

55 Finding a log ica l st ructure for def in ing and ana lyzing the

organizat ions decisions and the information they require is diff icultunless decision models are uniformly defined. The ICMS framework

is built around the natural hierarchy of decisions within an

organization. Aggregat ion is not a ta sk that needs to be doneit is

built into the models structure. The objective is to identify the major

decisions ma de at the customer/market, product/service, process,

and resource levels. These decision clusters are then ma tched a gainst

the information capa bilities of the seven SMPs. The result is a ta ble

similar to tha t presented in Exhibit 4.

Design of Informati on System Featu res

56 The analysis of the decision structure provides a pattern for the

design of the ICM S framework. There are any number of w ays to

configure the physical assets that support the framew ork. Relat ional

da tabases, local area netw ork (LAN) structures, or mainframe-based

client/server systems are just a few of the opt ions ava ilable. The

advantage of the ICM S structure is tha t it a llow s for the separa tion

of the supporting da ta ba ses and techniquesthese sources of da ta

are brought together only as needed. The amount o f shared da ta is


34/81

28

minimized, reflecting the fact that the more tightly integrated the

da ta sources are in the integrated system, the more costly the system

w ill be to configure and susta in.

Design of Internal Control Rout ines to Ensure Data Integri ty

57 Ensuring the integrity of the underlying data entering the system is

critical to its long-term usefulness. If input or output errors are made,

the information provided to users will have little value. Internal

contro l procedures need to be designed to address these potentia l

problems. Input errors can occur that are difficult to detect in the

ICMS framework. If this data is used across multiple decisiondomains, SMPs, and a nalysis, the impact of these errors multiplies.

Ensuring the quality of the ICM S da ta is a primary concern of the

financial practitioner.

58 The ICM S framew ork is superior in many w ays to other attempts

to integrate the da ta of the organization because it emphasizes the

20 percent of shared data that supports 80-90 percent of the common

decisions. As such, the requisite da ta and its integra tion represent20 percent or less of the total potential cost and activity level normally

required by such a system. In addition, the unique nature of each

SMP provides an effective infrastructure for organizing the da ta ,

all but eliminating redundancy in the database. The complete

framew ork provides a logical, consistent basis for collecting, sharing,

and using da ta to crea te relevant informat ion and reports. It is to

the specifics of the rela tionship betw een the SM Ps and the various

decision domains that a ttention now turns.

Strategic Management Processes

59 Creating information conduits from the top of the organization to

the bottom, a strategic management process is one of the tw o primary

dimensions of the ICMS framework. Each of the seven core stra tegic

management processes contains unique types of information.

Specifically: Target cost managementisa system of profit planning and cost

management tha t is price led, customer focused, design centered,

and cross functiona l. TCM emphasizes the relationship betw een


35/81

29

the va lue embedded in a product/service bundle, customer

requirements, and the maximum amount of resources/costs tha t

can be consumed to meet these needs. It identifies the right

products, prices, and features to optimize the value created by

processes and a ctivities. It is this discipline and its application

to the development and management of an organizations

product and service offerings, that helps ensure long-term

business survival, growth, and prosperity in todays rapidly

changing, competitive market.

Extended enterpriseencapsulates the horizonta l flow of products

and services that ma kes up the industry va lue chain. Identifyingcore relat ionships and creating system solutions to performance

shortfalls, EE is the primary source of external information

about customer satisfaction, changes in buying patterns, supply

chain capability, and system performance against customer

requirements. The objective of EE is to develop a n environment

in which all value chain members function as a single entity.

Aligning the purpose and strategies of diverse entities into a

cooperative whole opens opportunities for cost reduction,

investment leveraging, cycle time reductions, and know ledge

sharing, all of which can contribute to increased customer

satisfaction. Eliminating many of the w asteful transaction costs

and removing redundancies, delays, and inefficiencies from the

supply chain, companies embra cing EE are creating new forms

of competitive advantage for themselves and their trading

partners.

Asset managementserves as the organizing system for a ll asset

investment and management efforts and therefore plays a pivotal

role in cost management integrat ion. AM detai ls the

requirements for and tracks the progress of new resource

acquisitions that are often critical if strategic and tactical

objectives are to be met. Asset management moves beyond the

purchase of new physical resources, though, to examine thecompetencies of the human resources of the organization.

Investments in human and intellectual capital can often spell

the difference betw een success and fa ilure of new programs and


36/81

30

strategies. M onitoring investments against their planned results

helps pinpoint a rea s that ma y become hot spots for

performance downstream. It also helps ensure that value

creation, not the politics of self-interest, lies behind the request

for and use of scarce orga nizat ional resources.

Capacity cost managementprovides information about how

assets are being used, what resources are being wasted, and

w here potentia l improvements may be reaped. The objective of

C M therefore is to support the profitable mana gement of the

value-generating competencies, processes, and capabilities of

an organization. C M is a pivota l support strategic managementprocess. It seldom provides the first type of data needed to make

a decision but ra ther provides informa tion to other SM Ps more

centra l to resolving the issues at hand. Every time a cost estimate

is used, some judgment of potential capacity has to be made.

Whether the capacity estimate is made actively (by observation)

or pa ssively (using historical da ta ), it a ffects the economics of

the decision.

Process managementemphasizes the linkage of a ctivities w ithin

an orga nization into a seamless, coordinated, effective w hole

tha t experiences minimal disruption due to errors or miscom-

munication. Shaped by a clear understanding of the flow of

activities that create value for an organizations customers, it

serves as a vehicle to set strategy in motion by providing a

better understanding of how , w here, and w hy resources are con-

sumed. C reating explicit linkages of individuals and a ctivitiesacross the organization, PM bridges communication gaps

gaps tha t can result in fumbles, errors, a nd excess costs.

Activit y-based cost managementis based on the belief that

accurate and relevant information is critical to any organizat ion

that hopes to maintain or improve its competitive position.

Providing a cross-functional, integrated view of the organization,

its activities, and its business processes, ABCM has been credited

with triggering a revolution in management reporting and

decision support. ABCM provides the basis for developing

economic assessments of products, process, and activity


37/81

31

performance and targeting opportunities that increase the value

creating potentia l of the organiza tion.

Integrated performance management. M easurement lies at theheart of the organization. What is measured becomes visible,

w hat is measured is rew arded and gets done. Defining the play-

ing field for organizational action, signaling the score in the

competitive arena, a nd linking past, present, and future actions

into a coordinated system, IPM is the basis for optimizing cur-

rent and future performance. D riven by customer requirements

and stakeholder expectations, IPM serves as the primary means

to: 1) link functiona l areas to synchronize their efforts, 2) com-municate stra tegies, 3) achieve goals, and 4) motivate employees

to meet or exceed performance expectat ions. Linking perfor-

mance measurements betw een organizat ional levels and across

processes organizations ensures that resources are being used

effectively.

60 The information contained w ithin an SM P is interdependent with

that stored in others. For instance, capacity cost managementprovides information on physical asset capabilities and current

utilizat ion levels. A financial va lue is placed on the utilized versus

w asted components of capacity by activity-based cost management,

w hile the extended enterprise identif ies potentia l sources for surge

or unplanned production. Finally, ta rget cost management defines

the tota l costs the organization can afford to incur to provide specific

types of capacity if ta rget profit levels are to be attained by a product/

service bundle.

61 Asset management establishes the baseline measures of performance

and defines the hurdles to new investment in concise, consistent

terms for use by capacity cost ma nagement. In a related w ay, process

management detai ls the impact of capaci ty problems on

organizational throughput. Finally, integrated performance

management details the current level of performa nce in nonfinancial

terms, such as quality, throughput time, a nd first-pass yields. Effective

capacity management cannot take place without the support and

insights provided by the other SM Ps.


38/81

32

62 Integration of the SM Ps is the best w ay to ensure that all of the

required informa tion resides somewhere in the orga nization. It a lso

makes this data accessible across the various levels and functions

within the organization, avoiding duplication in the acquisition,

storage, and provision of information. O ne source of each primary

type of data reduces the potential for error, inconsistency, and

confusion in the ICM S framew ork w hile minimizing the amount of

explicit integrat ion tha t needs to take place. Informa tion sharing is

a very different ba sis for integrat ion of an information system tha n

the pooling and common storage and application of the organizations

entire data set in a da ta w arehouse or enterprise resource planningsystem.

63 The seven SM Ps link the levels of the organization, ba sed on a

common theme or subsystem of information and analysis. What

remains to be identified is the full set o f info rmation needed w ithin

one level or domain of decision making. The second major dimension

of the ICM S framework emphasizes the coordination and integration

of data by domain.

Decision Domains

64 The ICM S framew ork comprises four basic decision domains:

customer/market, product , process, and resource. Follow ing is a

summary of these decision domains in terms of their coverage of

issues and analysis.

Customer/M arket Domain

65 Within the customer/market decision domain attention revolves

around understanding what customers value and delivering the

opt imal set of products and services to meet these needs. It is within

this domain that an organizations competitive strategy is established

and executed as it seeks to find a unique niche in the market that

will provide it with the optimal return on its investments in core

competencies, a ssets, know ledge, a nd human resources. The fourprimary decision bundles include:

defining customer value segments;


39/81

33

developing customer segment strategies;

determining competitive positioning w ithin chosen segments;

and establishing reporting and control tools.

D efining Customer Value Segments

66 The driving force behind a business is the need to provide customers

with the precise set of goods and services they require at a price

they are w illing to pay. The goa l is to understand the set o f product/

service value attributes or set o f chara cteristics most desired by the

targeted customer and market segments and then to build thesefeatures into the offerings of the orga nizat ion.

67 Specific value at tributes desired by different sets of customers differ

w idely. For instance, one group of customers might place its greatest

emphasis on service, product quality, and related features, while

another might be most concerned with price and delivery. If an

orga nizat ion does not understand these differences, it may provide

one generic product/service bundle that fails to meet either segmentsrequirements.

68 An example of a generic product/service bundle is show n in Exhibit 6.

For this small public relations organization, three specific customer

value segments were identified: research, publicity, and full

marketing services. A customer tha t fa lls into the research segment

places high value on the research activities of the organization,

w hile one tha t is seeking public relations support places litt le or novalue on this effort. If the organizat ion does research at the same

level for a ll of its customers, no one w ill be fully satisfied w ith the

effort made. In a related manner, public relat ions clients put most

of their value on placements in different media (television, magazine,

new spaper), an effort not desired or rew arded by research clients.

Unless the public relations orga nization ta ilors its activities to those

issues and outcomes valued by each uniq ue value segment, it w ill

w aste its scarce resources doing work tha t is not valued w hile leaving

other important tasks inadequately addressed. Understanding the

customer ba se from the standpoint of differences in value attributes


40/81

34

and performance requirements is essentia l to the development of an

effective stra tegy.

Exhibit 6. Value-Based Customer Segmentation


69 The goal in defining the unique value propositions for various

segments of customers is to identify those groups tha t w ill provide

the best match betw een w hat the organization does best (its core

competencies) and the efforts tha t w ill meet the optimal number of

customers needs effectively. The resulting value-ba sed stra tegy is

ba sed on the successful completion of the follow ing steps:

identifying customer value preferences;

determining relative value rankings by customer;

benchmarking the organizations performance against customer

requirements versus that of key competitors;

conducting price and value trade-off analysis for various

segments; and

developing cost and pro f it pro ject ions fo r each va lue

segmenta tion strategy.

70 The target cost management SM P is the primary provider of the

information a nd structure needed to complete the customer value

Attributes Public Research MarketingRelations Support

Research 5 70 25

Placements 60 0 15

Accounting meeting 10 5 5

Meeting support 5 0 15Crisis management 0 10 0

Third-party endorsements 15 0 5

Develop plans 5 150 35

Totals 100 100 100


41/81

35

analysis and choice of value segments. Predominantly a tool for

strategic and tactical planning, TCM creates a framework for

identifying and analyzing the value preferences of existing or

potentia l customers. It provides guidance on specific product/service

attributes, price, a nd value ratings.

71 TC M does not provide all of the information required to complete

these ana lyses. As suggested by Exhibit 7, the extended enterprise,

integrated performance management, and activity-based cost

management a ll play key support ing roles in meeting the needs of

this class of decisions. The extended enterprise links the entire supply

chain, providing a pipeline of info rmation from the final consumer

of the product/service bundle back to the originat ing orga nizat ions

and suppliersit keeps the organiza tion close to its customers.

Exhibit 7. SMPs and Value Segmentation

Source: CAM -I, 2000, 312.

CostABCM

IPM

EE

TCM

Value

Cost/valueanalysis

Segmentationstrategy

Market and CustomerValue AssessmentsPrice/Profit Set

Valuepreferences

72 The benchmarking aspect of value-based segmentat ion efforts is

supported by integrated performance management, w hich scans theenvironment comparing organization performance against internal

goa ls, customer needs, a nd competitors performance. Activity-based

cost management, on the other hand, provides basic economic


42/81

36

da ta on the costs and potentia l profits of va rious product/service

bundles w ithin customer segments. It helps crea te a segment map

tha t incorporates value preferences, prices, costs, and pro fita bility

in order to guide the final choice of segment strategies. Information

is shared among these four SMPs w ithin the customer/market

decision domain as various customer stra tegies are developed and

analyzed.

D eveloping Segment Strategies

73 Once an organization has obtained the knowledge of what various

customer segments value, by how much, a nd w hy, a ttention turnsto crafting and executing the optimal blend o f segment stra tegies to

opt imize profitability. Six primary activities performed during this

decision ana lysis include:

documenting the complete value segment array;

analyzing organizational requirements for each value segment;

assessing organizational abilities, competencies, a nd constraints

for each va lue segment;

evaluating the compatibility of segments and organizational

competencies;

assessing investment and operational implications of the various

segments; and

choosing and executing a segmentation strategy.

74 Three specific forms of information a re required to complete therequired analysis: 1) the organizations and supply chains core

competencies, 2) the array of value-ba sed segments with preferences,

and 3) an analysis of the organizations and the supply chains ability

to meet requirements of the different customer segments, given the

resource and capa city constra ints.

75 All seven SM Ps are required to fully address the issues raised w hen

choosing a segment stra tegy, a s illustra ted in Exhibit 8. For instance,the extended enterprise SMP provides a deta iled a nalysis of current

core competencies of the supply chain, its flexibility, and the


43/81

37

constra ints facing the organizat ion and its tra ding partners. This

da ta is fed to target cost management, w here it is organized into an

economic framework tha t seeks to identify the optimal match between

these competencies and customer requirements.

Exhibit 8. Segment Analysis and Choice

Source: C AM-I, 2000: 314.

76 Internal assessments are conducted a t the same time, relying on

information provided by capacity cost management, process

management, integrated performance management, and activity-

based cost ma nagement. When shortfalls in capability a re identified,

asset management provides information on the preferred way to

bridge identified gaps. Pooling data around existing capabilities,

the cost to enhance these competencies where needed, and the

potential costs and benefits of one segment strategy over anotherrequire da ta gathered in every part of the organization and its supply

chain.

Process capability

Available capacity cost

to use idle capacity

CorecompetenciesFlexibility/constraints

PM

CM

AM

Ability to meetcustomer

requirements

Trade-offs

Firm performancerequirements (price/

profit/ share)

EE

Cost of

various alternatives

Asset analysis/policies

ABCM

TCM

Choice ofsegments


44/81

38

D etermining Competi ti ve Posit ioning w ithin Chosen Segments

77 In TC M , defining a product/customer niche is a primary decision.

Emphasizing the how of how a strategy is to be deployed, thisdecision helps bridge the gap betw een planning and execution o f a

plan. Is the organization best off differentiating itself on price,

quality, responsiveness, flexibility, or variety of products of fered? If

price or a low -cost strategic position seems best, analysis of how to

best leverage the supply cha in needs to be completed.

78 While TCM once again provides the structure for this decision within

the customer/market decision domain, it relies heavily on informationprovided by the other six SMPs to complete its ana lysis. The various

SMPs and the information they add to this decision are described

below.

79 EE provides information on trends in the market and the potential

of the supply chain to differentia te itself from competitors on core

performance dimensions. EE ties together data from the beginning

to the end of the supply pipeline on what customers are buying,w hen, w here, and trends in their consumption patterns.

80 IPM assesses the organizations current performance against customer

requirements, responsiveness of the organization a nd its competitors

to changes in those needs, and areas where improvements can or

could be made.

81 CM identifies internal constraints and capabilities serving to place

limits on the position chosen by the organization and its trading

partners. If the plant or supply chain is currently running close to

capa city, it ma y not be feasible to choose a strategic position that

requires flexibility and responsiveness.

82 AM provides estimates of the costs and return requirements for any

new asset purchases to meet the needs of chosen segment stra tegies.

For instance, if electronic data interchange (EDI) is essential to

effective positioning in a segment, the orga nizat ion a nd its supplychain must be able to purchase this capability and deploy it effectively

and rapidly.


45/81

39

83 PM defines process capab ilities and constraints for each of the

potentia l stra tegic positions. If a process is not in place to provide

consistent product/service quality a nd availability, these stra tegic

dimensions w ill not be ava ilable to the organization.

84 ABCM assesses the relative costs and profitability of each of the

potentia l segment positions, such as the underlying costs to provide

a just-in-time delivery capability. Each potential segment and stra tegy

needs to be evalua ted for profit performance for the short and long

run, covering the entire life cycle of the affected product/service

bundles.

85 The choice of a strategic position incorporates more information

than almost any other decision undertaken by the organization.

While target cost management provides the organizing fra mew ork,

da ta must be collected from multiple SMPs to complete the ana lysis.

The ICMS framework provides the data linkages and structures

that will complete the complex compilation of data and analysis

required to optimize the organizat ions strategic position.

Establishing Evaluation and Cont rol Tools

86 H aving established a segment strategy and put the activities and

structures in place to execute it, attention turns to maintenance,

contro l, and continuous improvement. M anagement report ing is a

key part of the evaluat ion cycle tha t keeps an organization on track,

constantly improving its performance against customer and

stakeholder requirements. As suggested by Exhibit 9, integratedperformance management provides the fra mew ork for this last set

of decisions w ithin the customer/market decision domain.

87 Embedded w ithin the core databa se of the organization, evaluation

and control draws on three supporting SMPs: ABCM, CM, and

AM . Ea ch of these SM Ps provides a unique perspective on current

versus expected performance on key dimensions such as quality,

cost, profita bility, delivery, and customer satisfaction. These SMPsfeed directly to the balanced scorecard structure that lies at the

heart of the integrated performance management SMP.


46/81

40

88 Creating management reports that summarize current performance

and related trends against defined critical success factors and key

performance indicators is the primary purpose of IPM. ABCM provides

detailed cost and resource data to IPM, supporting the analysis of

customer and market profitability and the performance. AM, on the

other hand, provides data on major a sset purchases and performance

as w ell as the defined performance requirements for these assets.

89 CM provides a different type of evaluation and control information,

focusing on the actual utilization of resources, planned versus actual

idle time, and a reas where bottlenecks and constra ints are appearing

tha t w ill impair the ability of the organization to a chieve its goa ls.

The three supporting SMPs provide feedback to the organization

through IPM on the efficiency and effectiveness of its activities,investments, and operational assets, resulting in an integrated set of

management reports. Through these reports organizational

Exhibit 9. Evaluation and Control within the Customer/Market Domain


Integrated Performance

Management (IPM)

PM

Evaluation/learningABCM

Capacity plan

Financialresults

CM

AM

Operational results

Back to all SMPs

Assetperformancerequirements

Cost

estima

tes:bu

dgets

Actualperformance

Standards/objectives/

budget

Actualcapa

city

utilization


47/81

41

performance is made visible, opportunities for improvement are

identified, and remedial actions are made possible w hen necessary.

The result is organizational learning and the ability to improve

long-term performance against the expectations of all of the

organizations stakeholders.

90 Without the development and implementat ion of the ICM S

framework this entire class of decisions has to rely on intuition,

instinct, and incomplete data. When integrated information is

available, rigor and repeatability are added to the analysis and

choice process w ithin the customer/market and other decision

domains. Learning becomes possible because communication is

regularized. An organization can perform these decisions without

the ICMS framework but with a higher degree of risk and less

certa inty that optimality w ill be achieved over the long term. Similar

issues motivate the development and integration of information w ith

the product decision doma in.

Product D eci si on Domain

91 The development of a strategy brings, by definition, the need to

identify and provide specific product/service bundles to the market.

These bundles need to have specific attributes and features that

reflect the chosen segmenta tion strategy. Within the product decision

domain, then, market strategies are translated into detailed

specifications and requirements for performance that will drive

ongoing decision making and activities.

92 For instance, if the stated customer/market strategy is to a chieve

a dominant market share in the computer printer and peripheral

market by o ffering low cost and high functiona lity, t he decisions

a t the product doma in have to d rive tow ard optimizing the blend

of functions per dollar o f cost incurred. Achieving these goa ls may

require the use of common parts, such as computer circuits, w here

all functions are already programmed but specific features are

blocked for lower-end models. It may seem illogical to hide theadded functionality, but it may provide the low est-cost solution

for the entire product family. The approach used to execute the


48/81

42

strategy needs to reflect the critical success factors of the

segmenta tion a pproach, minimizing the complexity and variety

to the production process w hile maximizing the variety of fered to

the customer.

93 The translation of strategy into specific product/service design and

development goals and their achievement requires a tremendous

amount of information and analysis. Beginning with a detailed

mapping of va lue a tt ributes to specific product/service features,

decisions w ithin this doma in require the ongoing assessment o f the

cost/performance trade-offs tha t a re inherent in each potential product

or service a lternat ive.

94 As the product moves off the draw ing board and into production,

Statements on Management Accounting

Documents

Transcript of Statements on Management Accounting