Analyzing MCS

of New &
Ongoing
Programme
Submitted to- SRF. Sonali By-Anushka
 Strategic Planning
• A Strategic Plan : a formal statement of specific
plans about how to get there. They are the
documents that describes how the strategic decision
is to be implemented
• Strategic Planning = Long-range planning and
programming
 Strategic Planning
• Strategic Planning : the process ofpreparing and
revising this statement. This is the process of
deciding on the programs that the organization will
undertake and on the approximate amount of
resources that will be allocated to each programs
over the next several years
 Benefits Of Strategic
Planning
• A framework for developing the annual budget
• A management development tool
• A mechanism for forcing managers to think long
term
• A means of aligning managers with corporate
strategies of the company.
 Strategic Planning
• Amazon:
Known for its long-term focus and customer
obsession, Amazon utilizes a budgeting process
heavily influenced by its strategic plan. Their
"working backwards" approach prioritizes
customer needs and future trends, influencing
budget allocation towards research and
development, technology infrastructure, and
innovative initiatives aligned with their long-term
vision. This strategic budgeting approach has
contributed to their continuous growth and
dominance in e-commerce and beyond
 Strategic Planning
• Toyota:
Committed to continuous improvement and
environmental sustainability, Toyota's strategic plan
emphasizes research and development in hybrid and
electric vehicle technologies. Their budgeting reflects
this commitment, with significant resources allocated
to developing new eco-friendly technologies and
production processes. This strategic focus on
innovation has positioned Toyota as a leader in the
electric vehicle market and solidified their reputation
for eco-conscious practices.
 Strategic Planning
• Netflix:
As the streaming giant transformed the
entertainment landscape, their strategic
planning played a crucial role. Their budgeting
decisions, informed by subscriber data and
content analytics, prioritized original content
production and global expansion. This strategic
investment in high-quality, localized content
fueled their subscriber growth and solidified
their position as a leader in the streaming wars.
Strategic Planning
Strategic Planning
 Analyzing Ongoing
Programme
• Ongoing Programme
1. Value Chain Analysis
2. Activity Based Costing
 Value Chain Analysis

Value Chain Analysis- The linked set of value creating

activities of which it is a part from acquiring the basic raw
materials for component suppliers to making the ultimate end-
use product and delivering it to the final consumers.
 Value Chain Analysis

Value Chain Analysis

Linkages with suppliers
Linkages with customers
Process linkages within the value chain of the firm
The objective: to move materials from vendors, through
production, and to the customer at the lowest cost, in the shortest
time, and of acceptable quality.
 Value Chain Analysis
Value Chain Analysis
• Process linkages with Value Chain of the Firm:
• Individual activities within a firm are not independent but
rather are interdependent.
• Efficiency of design portion of value chain can be
improved by reducing number of separate parts and
increasing their ease of manufacture.
• Efficiency of inward portion i.e. preceding production, can
be improved by reducing number of vendors, by Just-in-
time deliveries , by having computer system placing
automatic orders etc.
 Value Chain Analysis

Value Chain Analysis

• Efficiency of production portion can be improved by
increased automation, by rearranging machines into cells and
by better production control systems
• Efficiency of outward portion (i.e. from factory door to
customer) can be improved by having customers place orders
electronically, by changing locations of warehouses etc.
• Such efficiency-oriented initiatives involve trade-offs e.g.
direct computer orders may speed up delivery but order filling
costs may increase
 Value Chain Analysis

Linkage With Suppliers Linkage with Customers

 Activity Based Costing

• Activity-Based Costing (ABC) is a cost accounting method that

identifies and assigns costs to activities and processes based on
their actual consumption of resources. Unlike traditional costing
methods that allocate overhead costs based on a single cost
driver, ABC considers various cost drivers associated with
different activities, providing a more accurate and detailed view
of cost distribution
 Activity Based Costing
Key Aspects Of The Activity-based Costing (ABC) System:

• Inclusion of Conversion Costs: ABC includes conversion costs, which consist of direct
labor and manufacturing overhead, in its allocation process.
• Allocation Basis or Cost Driver: ABC uses a specific basis of allocation or cost driver
for each cost center. Cost drivers are factors that cause costs to be incurred, and ABC aims
to link costs more accurately to the activities that drive them.
• Cause-and-Effect Relationship: The advocates of ABC emphasize the importance of
establishing a cause-and-effect relationship between activities and costs.
• Meaningful Assessment of Full Cost: ABC proponents argue that a meaningful
assessment of the full cost of products or services involves assigning overhead costs in
proportion to the activities that generate those costs.
• Long-Run Considerations: ABC takes into account long-run considerations by aligning
costs with activities that have a sustained impact on an organization's operations.
• Inclusion of Non-Manufacturing Costs: Unlike traditional costing methods that often
focus solely on manufacturing costs, ABC extends its scope to non-manufacturing costs,
such as research and development (R&D), general and administrative expenses, and
marketing costs.
 Activity Based Costing
Use Of Activity-based Costing (ABC) Information
 Complex Products and Design Costs :ABC helps identify the specific activities
and resources involved in designing and producing complex products. It may
show that complex products with many separate parts have higher design and
production costs than simpler products
 Volume-related Costs: ABC considers the volume of activities associated with
each product. Products with low volume have higher unit costs than high-volume
products.
 Setups and Change Orders:ABC reveals the impact of setups and changes on
unit costs, prompting organizations to streamline processes and reduce associated
expenses. Products with many setups or many engineering change orders have
higher unit costs than other products
 Product Life Cycle Costs: ABC captures costs throughout the entire life cycle of
a product, including development, production, and possibly discontinuation.
Products with short life cycles may have higher unit costs due to the need for
rapid development and marketing efforts and than other products
 Activity Based Costing
Importance
 Optimize Product Mix: Organizations can assess the profitability of
different products and prioritize those with more favorable cost
structures.
 Improve Cost Management: By understanding the factors
contributing to higher unit costs, companies can implement cost
management strategies.
 Strategic Pricing: ABC assists in setting prices that accurately reflect
the costs associated with designing, producing, and maintaining
products.
 Enhance Decision-Making: Decision-makers can make informed
choices about resource allocation, process improvements, and product
redesign based on detailed cost breakdowns.
 Analyzing proposed new
programme
• New Programme
• Proactive Proposals:
• Proactive proposals are initiatives that organizations voluntarily
undertake to pursue opportunities, enhance competitiveness, or
achieve strategic goals.
• They stem from internal assessments, strategic planning, and a
forward-looking vision rather than external pressures.
Examples:Launching a new product or service in anticipation
of market trends
 Analyzing proposed new
programme
• New Programme
Ideas for new programs can originate anywhere in the
organization i.e. CEO , planning staff etc.
Planners should have full implementation and its consequent
significant investment only if tests indicate about proposal’s
good chance of success.
 Analyzing proposed new
programme
• New Programme
• Proactive Proposals:
• Proactive proposals are initiatives that organizations voluntarily
undertake to pursue opportunities, enhance competitiveness, or
achieve strategic goals.
• They stem from internal assessments, strategic planning, and a
forward-looking vision rather than external pressures.
Examples:Launching a new product or service in anticipation
of market trends
 Analyzing proposed new
programme
• New Programme
Capital investment analysis-
NPV-NPV is the difference between the present value of cash
inflows and the present value of cash outflows over a specific
period.It assesses the profitability of an investment by
considering the time value of money.
IRR
PBP
 Analyzing proposed new
programme
There are specialized techniques like risk analysis, sensitivity
analysis, simulation, scenario planning, game theory, option
pricing models etc.
Planning staff should know such methods and use them in
situations when required.
 Analyzing proposed new
programme
Capital investment analysis-
1. NPV (Net Present Value):
NPV is the difference between the present value of cash inflows
and the present value of cash outflows over a specific period. If
NPV is positive, the project is considered financially viable. A
negative NPV indicates potential losses
 Analyzing proposed new
programme
2. IRR (Internal Rate of Return):
IRR is the discount rate that makes the present value
of cash inflows equal to the present value of cash
outflows. If IRR is greater than the cost of capital or
hurdle rate, the project is considered acceptable. The
IRR is the discount rate that makes the NPV of cash
inflows and outflows equal to zero.
 Analyzing proposed new
programme
3. PBP (Payback Period):
• PBP is the time it takes for the initial investment to
be recovered from the project's net cash inflows. A
shorter payback period is generally preferred, and
it's often used as a screening criterion.
 Analyzing proposed new
programme
• Capital investment analysis-
There are at least four reasons for not using PV in analyzing all
proposals:
 Proposal is Obviously Very Attractive: If a proposal is clearly
and significantly attractive, the decision-makers may not feel the
need to conduct a detailed present value analysis.
 Estimates Involved are so Uncertain that PV Calculations
Cannot Draw Reliable Conclusions: In situations where the
estimates of future cash flows are highly uncertain, relying solely
on present value calculations may not provide reliable
conclusions.
 Analyzing proposed new
programme
 Rationale for the Approach is Something Other Than
Increased Profitability: If the primary objective of a proposal
is not solely increased profitability, but rather strategic,
operational, or non-financial objectives, present value analysis
might not capture the full scope of the decision criteria.
 There is No Feasible Alternative to Adoption:In some
instances, there might be a proposal for which there is no
feasible alternative. If a particular project is crucial for the
organization's survival or strategic positioning, the decision-
makers may proceed with the project without extensive present
value analysis. Example: Environmental Laws may require
investment in new program
 Analyzing proposed new
programme
• Rules
Companies usually publish rules and procedures
for approval of capital expenditure proposals of
various magnitudes
Rules also contain certain guidelines for preparing
proposals and general criteria for approving
proposals
 Analyzing proposed new
programme
• Avoiding Manipulation
 Sponsors who know that their project with negative NPV is
not likely to be approved may have a gut feeling that project
should be selected
 In some cases, sponsors may make optimistic estimates of
sales revenues or reduce allowances for contingencies in
some of cost elements
 Analyst may place reliance on sponsors having an
excellent track record
 Analyzing proposed new
programme
• Models
There are specialized techniques like risk analysis,
sensitivity analysis, simulation, scenario planning,
game theory, option pricing models etc.
Planning staff should know such methods and use
them in situations when required.
 Analyzing proposed new
programme
Key steps and considerations in analyzing proposed new programs:
 Identification of Proposals
 Reactive vs. Proactive Analysis
 Assumptions and Guidelines
 Implementation Testing
 Strategic Alignment
 Financial Analysis
 Risk Assessment
 Feasibility Studies
 Stakeholder Involvement
 References

• Management Control Systems by Robert N.

Anthony and Vijay Govindarajan (Harvard
Business School Press, 2014)