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Notes
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ACCA Paper P5
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Advanced Performance Management

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For exams in 2015

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ExPress Notes
ACCA P5 Advanced Performance Management
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Contents
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About ExPress Notes 3
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1. Strategic planning and control 7
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2. External Influences on Organisational Performance 18
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3. Performance management systems and design 24
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4. Strategic performance management 28
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5. Performance evaluation and corporate failure 42
Current developments and emerging issues in performance W

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6. 51
management
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ExPress Notes
Chapter 1
Strategic Planning and Control
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The Big Picture
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This Paper is concerned with management accounting issues at a strategic level. It is built
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on issues and methods contained in Paper F5.

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The main idea is that management accounting has experienced an upgrade in importance
and status, given that its approach can be applied at a total company level with a time
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frame that extends well beyond the next financial/accounting/budgeting period.

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It is therefore vital that all levels of management are well-acquainted with these issues and
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that the senior management accountant is present at the strategy-planning process from the
outset.
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The management accounting discipline is therefore inseparable from the corporate planning
processes at a company.
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Here is a review of key concepts of the strategy-planning process:

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Strategy: Various definitions exist but a straightforward view is Strategy is a plan of action
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designed to achieve a particular goal.
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Strategic planning: An organisations process for ascertaining the strategy it should adopt,
taking into account what they want to do, how they are going to do it and what resources
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they will need. Strategic planning covers where the organisation is planning on going,
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impacts on the whole organisation and involves the long term view. Note the distinction in
what is meant by long term (for example the long term is different when comparing the
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airline industry with the fashion industry.)
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Strategy is made at different levels of the organization (recall Anthonys hierarchy):
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Corporate
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Business
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Functional
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Corporate strategy: covers the big view of the organisation. It answers the question What
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business or businesses should we be in?

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Business strategy: the strategy of a single business organisation or the strategies of

strategic business units (SBUs)
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Functional (or operational) strategy: the functional strategies involving items such as
marketing, IT and HRM that support the business strategy.
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It is important that the strategies support each other. For example, if the Business Strategy
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of a SBU revolves around providing high quality consultancy advice on certain areas, a
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functional strategy for HRM of minimising labour costs would cause problems.
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Johnson & Scholes describe the strategic planning process as consisting of three
stages:
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1. Analysis
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2. Choice; and
3. Implementation
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ExPress Notes
Note: Interactions exist between all three stages:
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Analysis
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Choice Implementation
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Johnson & Scholes propose that strategic options are evaluated using:
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1. Suitable. Would it help? Does it fit in with the strategic position of the
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organisation. e.g. does it take advantage of an opportunity or reduce a threat

(within SWOT analysis)
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2. Feasible. Would it work? Use of techniques such as cash flow analysis and
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working capital reviews.

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3. Acceptable. Is it acceptable to the relevant stakeholders? Techniques to use

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include NPV, ROCE, sensitivity analysis and ratio analysis.

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It is useful throughout this Paper to keep in mind the financial implications of strategic
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choices:
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Efficiency ratios (e.g. asset turnover, debtor days and creditor days);
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Gearing ratios (e.g. debt equity ratio);

Liquidity ratios (e.g. current ratio and quick ratio);
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Profitability ratios (e.g. gross margin, operating margin and ROCE);

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Interest ratios (e.g. interest coverage).

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ExPress Notes
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Other analytic techniques covered in earlier papers (F5) are relevant to this one:
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KEY KNOWLEDGE
SWOT analysis
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Strengths (internal) Weaknesses (internal)
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e.g. resources and capabilities e.g. lack of certain resources or capabilities
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Opportunities (external) Threats
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e.g. arrival of new technology e.g. arrival of substitute product
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Alternative budgeting models

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The strengths and weaknesses of the various models in existence should be considered:
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Fixed
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A fixed budget is not adjusted to the actual volume of output (activity level)
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Flexible vs. Flexed

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The distinction is sometimes overlooked:

Flexible: designed to change according to actual volumes of output; usually done
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before the start of the budgetary period as a sort of scenario planning;

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Flexed: This is done after the fact and is based on the actual level of activity
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achieved.
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ExPress Notes
Rolling
A rolling budget is one which is revised on an on-going basis by comparing actual results
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with the original budget when one period has expired, while simultaneously adding a new
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period to the budget period.
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Example
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An annual budget which is kept rolling on a quarterly basis, for example, may start with an
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(original) January December forecast. At the end of March, the entire budget is revised on
the basis of the first quarter, and a new set of forecasts relating to April (current year)
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March (next year) are prepared, i.e. always with a 12 month range into the future.
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Zero-based (ZBB)
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Each year, budget owners must justify the entire budget (build it from zero)
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At odds with incremental budgeting (where only changes need justification, hence
encouraging the spend it or lose it mentality)
A three-step approach to ZBB: W
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1. Define decision packages (i.e. activities that result in costs or revenues),
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distinguishing between mutually exclusive packages (alternative activities to

achieve the same result) and incremental packages (base level of input needed
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+ additional inputs)
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2. Evaluate and rank packages (based on the benefit to the organisation)

3. Allocate resources across packages, considering ranking and seniority of
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responsible managers
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Activity-based (ABB)
No budget owners (departments, functions), but budgeted activity cost (ABC costing)
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Budgeted activity cost = demand for activity * unit cost of activity

More detailed and accurate than traditional budgets, especially regarding indirect
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costs
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Incremental
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Such budgets are based on what went on during the period before. Typically, this approach
results in modest changes and adjustments to the earlier budget. At worst, they retain and
perpetuate inefficiencies and old assumptions. This might be termed the lazy mans
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budget.
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Beyond budgeting: The future of budgets and alternatives to budgeting
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ExPress Notes
Can you imagine a budget process that takes up to six months and 20 percent of
management's time?
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Problems encountered when using conventional budgets:
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They invite gaming of the system;
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They can be inflexible;
They are often imposed from the top Top Down;
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There is an indirect connection with the companys strategy;
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They are used for too many different purposes;
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They reinforce a centralizing tendencies in the company
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The rationale for moving beyond budgeting
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Context: Rapidly changing markets triggering the need for real-time response to events
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Aim of alternatives to budgeting

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Eliminate redundant elements of the traditional budgetary process, that is, elements
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performed at least as effectively and rigorously within other strategic management

processes (e.g. communication and control)
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The pre-requisites of the beyond budgeting model, as alternative to traditional budgeting

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Decentralization and divisional management empowerment within leaner

organisational structure
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Clear communication of company goals, of performance targets and of boundaries

within which local/divisional managers have the freedom to act
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Strong management performance evaluation system, based on dissipated

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responsibility, authority and accountability across responsibility centres

Head-office acts as provider of internal support services to responsibility centres,
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with most of co-ordination among centres achieved through market forces

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ExPress Notes
Implementation
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Implementation of a Beyond Budgeting capability has decisive organizational implications.
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These include:
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Decentralisation
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Customer focus
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Management philosophy
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Managing without budgets requires consideration of the following:
Planning
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Coordination
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Information

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Target setting
Performance management
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Rewards
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Business structure and management accounting

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Management accounting systems must be appropriate to the structure of the businesses

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they serve.
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We have seen that that beyond budgeting is based on the recognition of the limitations of
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traditional management accounting techniques, particularly in rapidly changing business

environments.
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The way in which a business is organized e.g. a functional, divisional or network form
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has implications for the way in which performance is managed and measured.
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Modern approaches to business structure are integrative in nature, as they explicitly

take into account the linkages between people, operations, strategy and technology.
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One example is:

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Porters value chain

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ExPress Notes
Strategic Choice to Purchase Some Activities From Outside Suppliers
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Firm Infrastructure
Support
Human Resource Management
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Support
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Activities
Technological Development
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Procurement
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Service
Operations
Outbound
Marketing
Logistics
Primary
Inbound
& Sales
Logistics
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Primary Activities
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The value chain was introduced by Porter and represents an approach to looking at the
development of competitive advantage within an organisation. All organisations consist of
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activities which link together to develop the value of a business. Together these activities
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represent the value chain.
The value chain represents a series of activities that both create and build value. Combined
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they represent the total value delivered by an organisation. The margin in the diagram is
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the added value (the difference between the total value of the activities and the cost of
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performing them).
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Primary activities: related with production.
Support activities: provide the background for the effectiveness of the organisation (e.g.
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HRM)
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Business Process Reengineering (BPR)

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BPR is a cross-departmental effort of innovation, aimed at elimination of non-value-added

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activities within key business processes.
Non-value added activity: increases the time spent on a product or service but do
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not increase its worth to the customer (e.g. inspection, transfer, storage
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ExPress Notes
The Business Process Reengineering (BPR) Cycle:
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Identify
Processes
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Review,
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Test &
Update
Implement
Analyze
To-Be
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As-Is
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Design
To-Be W
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Running a full BPR cycle usually involves substantial investment in information technology
and retraining
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Effects of adopting BPR

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If successful, it brings dramatic improvement in operating performance, operating

versatility and customer service.
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Process teams replace functional departments

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More multi-skilled staff needed

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More staff empowerment, flatter organization structures

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McKinsey 7S Model
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The organisation can be understood as the sum of the following parts:

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Structure
Systems
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Strategy
Shared values
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Style
Skills
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Advanced Performance Management

For exams in 2015

Current developments and emerging issues in performance W

Components of an effective study system

The ExPress notes for that paper

The ExP recommended exam kit for that paper.

are able to spend practising past questions.

the classroom course that was actually attended.

phase the ExPress notes each chapter after have studied we

you then work being efficient in

Dont try to feel well, but also make

about to study. questions,

the ExPress notes

learning phase for

Your stage in These ExPress ExP ExP ACCA online

stage (e.g. there are any

listening to CDs). he/ she makes.

Highlight the bits revise, avoid examiners

think you are most up on any areas taking tomorrow.

likely to forget. that you still dont

too late now.

the exam room through the full them in detail,

before you go set of ExPress especially if the

areas youve It will scare you.

About The ExP Group

one of the various professional exams or professional development courses.

graduate recruits through to senior board level positions.

Strategic Planning and Control

on issues and methods contained in Paper F5.

frame that extends well beyond the next financial/accounting/budgeting period.

Here is a review of key concepts of the strategy-planning process:

designed to achieve a particular goal.

business or businesses should we be in?

Business strategy: the strategy of a single business organisation or the strategies of

Note: Interactions exist between all three stages:

organisation. e.g. does it take advantage of an opportunity or reduce a threat

working capital reviews.

3. Acceptable. Is it acceptable to the relevant stakeholders? Techniques to use

include NPV, ROCE, sensitivity analysis and ratio analysis.

Gearing ratios (e.g. debt equity ratio);

Profitability ratios (e.g. gross margin, operating margin and ROCE);

Interest ratios (e.g. interest coverage).

Alternative budgeting models

Flexible vs. Flexed

The distinction is sometimes overlooked:

before the start of the budgetary period as a sort of scenario planning;

distinguishing between mutually exclusive packages (alternative activities to

2. Evaluate and rank packages (based on the benefit to the organisation)

Budgeted activity cost = demand for activity * unit cost of activity

Beyond budgeting: The future of budgets and alternatives to budgeting

They are often imposed from the top Top Down;

Aim of alternatives to budgeting

performed at least as effectively and rigorously within other strategic management

The pre-requisites of the beyond budgeting model, as alternative to traditional budgeting

Decentralization and divisional management empowerment within leaner

Clear communication of company goals, of performance targets and of boundaries

Strong management performance evaluation system, based on dissipated

responsibility, authority and accountability across responsibility centres

with most of co-ordination among centres achieved through market forces

Business structure and management accounting

Management accounting systems must be appropriate to the structure of the businesses

traditional management accounting techniques, particularly in rapidly changing business

Modern approaches to business structure are integrative in nature, as they explicitly