P3: ACCOUNTING AND ORGANISATIONAL CULTURES – (Graham Morgan, 2008)

- Relevant to all P3 (ACCA) candidates

ACCOUNTING AND ORGANISATIONAL CULTURES – (Graham Morgan, 2008)

Pic 01: Graham, why are you messing me up?

Pic 02: I have already studied well enough.


First and foremost, I personally feel that Graham Morgan has unnecessarily ruffled and mess up students brains, causing low confidence, by incorporating a mix-mashed article and still not tell you clearly what is his emphasis in relations to P3 exam applications. So to neutralize this unsettling feeling among my students, a systematic approach is outline with no new stuff inserted. You don’t need this in view of perilously close exam date.

The entire article is summarized to “parenting styles” in which Headquarters should be INVOLVED or DEVOLVED. In exams, I have consistently emphasise the usefulness of “Organisation Configurations”. So here is the answer structural plan:

TYPE A CASE STUDY :
Mass manufacturing of homogenous products (bottled water, generic drug making, assembling electronics products like handphones, DVDs, food packaging) Headquarters believe that success depends on achieving efficiency by having a well- managed/administered organisation in which good management information systems support cost planning and control systems. In this kind of culture, an accounting view of activities is dominant, with a centralised accounting system based on the annual budgeting process. The managerial structure in these organisations is hierarchical, with an emphasis on departmental performance where vertical patterns of communication dominate. There is an annual cycle of budget preparation, negotiation, and implementation, with review against monthly management accounts. The fundamental objective of the organisation is to deliver the budgeted outcome. Departments are viewed as responsibility centres – principally cost centres with control focused on budget headings such as salaries and other expenses.

Question Type A : Evaluate the Headquarter’s approach on managing its SBUs. Your answer should include as to how the Headquarters communicate, coordinate and controls its SBUs’ performance. Marks will be awarded for demonstration to link your arguments in the context of case study. [ 20 marks]

ANSWER PLAN FOR TYPE A

Fixed Performance Contract (Financial Control Culture)

I) PARENTING STYLE: Financial Controls
Targets : imposed strict financial returns expectations such as (sales/profit) target is fixed at ($x million).

Rewards: Your rewards for reaching this target are (y%) of profits. No bonus.

You trust us to assess your rewards by a peer review panel based on is payable unless 80% of targets are met with a cap at 120%. your performance ‘with hindsight’ at the end of each year.
II) PROCESS CONTROLSPRIMARY TOOL: DIRECT CONTROLS (administrative controls)
Plans: Your agreed-upon action plans are attached to this contract.

Resources : The agreed resources to support the capital and operating budgets

Coordination: Your activities will be coordinated with other budget holders

Controls: Your performance will be monitored monthly. Any variations will be reviewed, and executives reserve the right to take further action.
Apply ‘gaps-analysis’ to determine bonus performance based on employment contract.

III) STRUCTURES
SBU heads adopts a standalone centralized management at SBU level.
Facilitates close compliance with Headquarters expectations.

IV) CONFIGURATIONS
Mintzberg stereotypes is Divisionalisation with key component being “Middle Line” who will standardize output expectations. Tendency to have short termism view to hit a short term financial target instead of long term sustainability through customer loyalty.

CONCLUSION
Weaknesses:
- short term planning horizon
- unsuitable to growth industry as likely customers trend change over time
- unsuitable for changing dynamics of PESTEL
- Inefficient structure with little support from Headquarters
Pic 03: No sweat! You can do it!
TYPE B CASE STUDY :PESTEL has changed without warning and unexpectedly. Example recently ‘discovered’ that customers willing to pay bottled water with designer shape and colours. Or in drugs making industry, customers demand greater information content on drugs side effects and demand to know what alternatives health care methods like physiotherapy, holistics medicines. All of this means customers are dictating to company management. Thus mere budgetary control is ‘less relevant’ as it merely puts a tight leash on costing without considering value added activities that should be imposed.

Headquarter wants to enhance organisation’s core competences by developing collective expertise which is directed to the provision of ‘solutions’ for customers. Considerations for a looser management structure, the emphasis being on the creation of customer-orientated teams that are accountable for customer profitability, which is the key measure of performance. The management of intangible assets, knowledge systems, and brands are key to long-term success. Performance is evaluated and rewarded by comparing teams against benchmarks, peers, and prior years, and rewards are based on the performance of teams rather than individuals. The intention is to foster a philosophy of enterprise and learning.

QUESTION TYPE B: Assume the company proceeded to adopt a differentiation strategy from cost leadership strategy by investing heavily on marketing research and human talents retention and innovative culture, write a report detailing the proposal incorporating case study fats. (20 marks)


ANSWER PLAN FOR TYPE B
Relative Improvement Contract (Excellence/Service Culture)

I) PARENTING STYLES: Strategic Planning – close cooperation between Headquarters and SBUs
Targets SBU to maximise your profit potential to continuously improve against the agreed-upon benchmarked KPIs and to remain in the top (quartile) of your peer group.

Rewards: HQ to assess your rewards by a peer review panel your performance ‘with hindsight’ at the end of each year.
.
II) PROCESS CONTROLS
PRIMARY TOOL: SOCIAL CONTROLS (culture controls)
Plans - SBU to take whatever action is required to meet your medium‑term goals within agreed upon governance principles and strategic boundaries.

Resources - HQ to provide the resources you need when you need them are set out in the attached budget statements. SBU to keep within agreed KPI boundaries.

Coordination - HQ and SBU to coordinate activities with other SBU according to according to the agreed plan or as redirected by your superior. periodic agreements and customer requirements.

Controls - SBU to provide forecasts based on the most likely outcome.
Apply Balance Scorecard and link to individual SBU manager’s performance evaluation.
HQ to monitor performance and interfere only when indicators/ Forecasts in the form of revised budgets will be required on a trends move out of bounds.
III) STRUCTURESSBU heads adopts a matrix or Project teams structure at SBU level. HQ has close involvement in ‘mentoring’ each project teams as to supportive roles of resources allocation
Facilitates close cooperation with Headquarters leveraging on group’s core competencies.
Application to case study: Have a team comprising of HQ’s appointed R&D personnel and marketing Director to jointly develop new products according to identified recent customers trends. If necessary, HQ will consider injecting resource allocation (as opposed to budgetary controls) so as to “strategically fit” on customers needs.
IV) CONFIGURATIONSMintzberg stereotypes is Adhocracy with key components being “Operating Core” and “Support Staff” who will have “mutual adjustments” according to customers and PESTEL trends.

CONCLUSION
Advantage
Tendency to have long term “evolutionary” changes according to external pressures. Customers dictate to management’s decision, hence avoiding the paradox of

“it is the customers, not managers, who supply all important intelligence about market changes. Thus, paradoxically the more budget minders try to enforce control through numbers and budgets, the more they make real control, in the sense of rapid adoption to a changing market, impossible.” (Caulkin and Alec Reed)