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SU 15
Strategic Planning and Budgeting Concepts
115
Accounting
Undergraduate 4
05/16/2015

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Term
mission
Definition
company's reason for existing.
Missions tend to be most effective when they consist of a single sentence.
Missions tend to be stated in general terms; setting specific objectives in the mission statement can limit an entity's ability to respond to a changing marketplace.
Term
strategy
Definition
plan for achieving that mission
Term
What is the appropriate budgeting method for a company?
Definition
depends upon that organization's situation.
Term
strategic management
Definition
sets overall objectives for an entity and guides the process of reaching those objectives; responsibility of upper management
Term
What is the planning horizon for strategic planning?
Definition
strategic management and strategic planning
Term
mission statement
Definition
summarizes the entity's reason for existing and provides the framework for formulation of the company's strategies
Term
core competencies
Definition
what the company does well in or has a great abundance of
Term
distinctive competencies
Definition
an entity gains a competitive advantage in the marketplace by developing one or more of these, since many firms have the same core competencies
Term
strengths and weaknesses
Definition
internal environment
Term
opportunities and threats
Definition
external environment
Term
How are strategic plans implemented?
Definition
through the execution of component plans at each level of the entity (incentive systems and employee performance evaluations must be designed so that they encourage employees to focus their efforts on achieving the entity's objectives.
Term
strategic controls and feedback
Definition
used to monitor progress, isolate problems, and take corrective action. Over the long term, feedback is the basis for adjusting the original mission and objectives.
Term
Porter's Five Forces Analysis
Definition
threat of new entrants
bargaining power of customers
bargaining power of suppliers
availability of substitutes
level of rivalry
Term
Intensity of rivalry depends on:
Definition
Economies of scale (and learning curve effects) are not significant.
Brand identity of existing products is weak.
Costs of switching suppliers are low.
Existing firms do not have the cost advantages of vertical integration.
Product differences are few.
Access to existing suppliers is not blocked, and distribution channels are willing to accept new products.
Capital requirements are low.
Exit barriers are low.
The government's policy is to encourage new entrants.
Term
Most favorable industry condition exists when...
Definition
entry barriers are high and exit barriers are low.
When the threat of new entrants is minimal and exit is not difficult, returns are high, and risk is reduced in the event of poor performance.
Low entry barriers keep long-term profitability low, increasing competition and lowering prices and the market shares of exiting firms.
Term
threat of substitutes
Definition
threat of substitutes are: relative prices, costs of switching to a substitute, and customers' inclination to use a substitute.
Term
As buyers' bargaining power increases...
Definition
As the threat of buyers' bargaining power increases, the appeal of an industry to potential entrants decreases.
Term
Factors affecting buyer bargaining power...
Definition
When purchasing power is concentrated in a few buyers or when buyers are well organized, their bargaining power is greater.
Low switching costs increase it.
Threat of backward integration increases it.
Increased when supplier's product is undifferentiated.
The less important the product to buyers, the more buyer bargaining power.
Term
Suppliers' bargaining power is greater when...
Definition
Switching costs are substantial.
Prices of substitutes are high.
They can threaten forward (downstream) vertical integration.
They provide something that is a significant input to the value added by the buyer.
Their industry is concentrated, or they are organized.
Term
buyers' best responses
Definition
develop favorable, mutually beneficial relationships with suppliers or to diversify their sources of supply.
Term
cost leadership
Definition
generic strategy of entities that seek competitive advantage through lower costs and that have a broad competitive scope
Term
differentiation
Definition
generic strategy of entities that seek competitive advantage through providing a unique product and that have a broad competitive scope
Term
cost focus
Definition
generic strategy of entities that seek competitive advantage through lower costs and that have a narrow competitive scope
Term
focused differentiation
Definition
generic strategy of entities that seek competitive advantage through providing a unique product and that have a narrow competitive scope (regional or smaller market)
Term
cost strategy
Definition
successful when the entity is the low-cost producer. However, the product tends to be undifferentiated in these cases, the market is often very large, and the competition tends to be intense because of the possibility of high-volume sales.
Term
quality strategy
Definition
involves competition based on product quality or process quality.
Term
product quality
Definition
relates to design
Term
process quality
Definition
concerns the degree of freedom from detects
Term
delivery strategy
Definition
may permit an entity to charge a higher price when the product is consistently delivered rapidly and on time.
Term
flexibility strategy
Definition
involves offering many different products. This strategy also may reflect an ability to shift rapidly from one product line to another.
Term
service strategy
Definition
seeks to gain a competitive advantage and maximize customer value by providing services, especially post-purchase services such as warranties on automobiles and home appliances
Term
5 operations strategies
Definition
cost, quality, delivery, flexibility, and service
Term
precommercialization (product development) stage & strategy
Definition
strategy for this stage is to innovate by conducting R&D, marketing research, and production tests. During product development, the entity has no sales, but it has high investment costs.
Term
introduction stage & strategy
Definition
slow sales growth and lack of profits because per-customer marketing and sales costs are high. Competitors are few and cost-plus prices are charged.

Strategy for this stage is to infiltrate the market, plan for financing to cope with losses, build supplier relations, increase production and marketing efforts, and plan for competition.
Term
growth stage & strategy
Definition
sales and profits increase rapidly, cost per customer decreases, customers are early adopters, new competitors enter, new product models and features are introduced.

Strategy for this stage is to penetrate the market, extend distribution channels, advertise to the mass market, and achieve economies of productive scale.
Term
maturity stage & strategy
Definition
sales peak but growth declines, competitors are most numerous but may decline in number, and per-customer cost is low. Profits can be high or low.

Strategy for this stage is to defend market share and maximize profits through diversification to enter new market segments. Also, emphasize customer service.
Term
decline stage & strategy
Definition
sales and profits drop as prices are cut, and some entities leave the market; customers include late adopters (laggards), and per-customer cost is low.

Strategy for this stage is to withdraw by reducing production, promotion, and inventory.
Term
market analysis
Definition
must identify potential customers and determine their needs
Term
value proposition
Definition
benefits offered to satisfy customer needs
Term
customer value triad
Definition
quality, service, and price
Term
customer satisfaction
Definition
relation between the offering's perceived performance and the customer's expectations. High customer satisfaction tends to create high customer loyalty that results in repurchases. However, at lower satisfaction levels, customers are more likely to switch when a superior alternative becomes available.
Term
expectations
Definition
function of a customer's experience, marketing information, and other factors. Do not raise expectations above which can be satisfied.
Term
high customer loyalty
Definition
emotional as well as rational bond that develops when an entity provides high customer value.
Term
How do you obtain high customer loyalty?
Definition
To obtain such loyalty, the entity needs to develop a value proposition that has superior competitiveness in the target market segment.
Must be supported by an effective value delivery system, the accumulation of all the experiences the customer has with the offering. Thus, brand value must be supported by core business processes that actually deliver the promised customer value.
Term
value creation chain
Definition
consists of the activities of an entity that create customer value and incur costs
Term
inbound logistics
Definition
involve the entity's capture of materials to be processed
Term
outbound logistics
Definition
include shipment of products, marketing and sales activities are the promotion ad sale of final products, service activities provide customer service.
Term
How do you sustain customer value?
Definition
By always improving value-creating activities; benchmarking is a way to do this.
Term
market sensing
Definition
consists of obtaining, distributing, and acting upon market intelligence.
Term
customer acquisition
Definition
defines target markets and researches customers
Term
customer relationship management (CRM)
Definition
process of managing detailed information about individual customers and carefully managing all of the customer touchpoints with the aim of maximizing customer loyalty.

seeks to increase the value of the customer base by developing long-term relationships with individual customers by such methods as customer service, customized offerings, and choice of marketing messages and media.
Term
fulfillment management
Definition
relates to order processing, on-time delivery, and collection.
Term
partner relationship management (PRM)
Definition
involves coordinating with suppliers and distributors in this network (the supply chain) to provide better customer value.
Term
marketing
Definition
seeks out unfulfilled customer needs and customer groups who might be interested in the entity's existing products
Term
sales
Definition
brings the products to the attention of the targeted customers and closes the sale
Term
customer service
Definition
provides after-the-sale support, such as product help and account information
Term
customer retention
Definition
through customer satisfaction is a key to profitability. The entity should seek to minimize customer churn (customer loss).
Term
Which is less costly? Finding new customers or retaining customers?
Definition
Repeat customer is less costly than a new customer and is more likely to provide helpful feedback.
Term
retention rate
Definition
percentage of customers that give the company repeat business. Higher retention rate is better because longer-term customer relationships are more profitable.
Term
customer lifetime value
Definition
NPV of the cash flows related to a particular customer.
Term
Is it cheaper to regain lost customers or to attract new ones?
Definition
Regain lost customers.
Term
customer profitability analysis
Definition
determines all revenues and all costs assignable to specific customers.
Term
platinum customers
Definition
most profitable (highest investments)
Term
gold customers
Definition
profitable (high investment with the goal of converting to platinum)
Term
iron customers
Definition
low profitability but desirable (lower investment)
Term
lead customers
Definition
not profitable nor desirable
Term
customer lifetime value
Definition
NPV of the cash flows related to a particular customer.
Term
Is it cheaper to regain lost customers or to attract new ones?
Definition
Regain lost customers.
Term
customer profitability analysis
Definition
determines all revenues and all costs assignable to specific customers.
Term
platinum customers
Definition
most profitable (highest investments)
Term
gold customers
Definition
profitable (high investment with the goal of converting to platinum)
Term
iron customers
Definition
low profitability but desirable (lower investment with the goal of converting to gold)
Term
lead customers
Definition
not profitable nor desirable
Term
planning
Definition
determination of what is to be done and of how, when, where, and by whom it is to be done.
Establishes the means by which organizational plans can be created.
Term
plan
Definition
serves to direct the activities that all organizational members must undertake and successfully perform to move the organization from where it is to where it wants to be (accomplishment of its objectives).
Term
means-end relationship
Definition
extends throughout the organizational hierarchy and ties together the parts of the organization so that the various means all focus on the same end.
One organizational level's ends provide the next higher level's means.
Term
management by objectives
Definition
identifies relationships between an individual's job objectives and the immediate superior's objectives. Thus, the subordinate can understand how his/her job is the means by which the superior's job is accomplished.
Term
long-range planning
Definition
includes strategic budgeting; it has a horizon of 1 to 10 years or more. Such planning is difficult because of uncertainty about future events and conditions.
Term
What must be done first? Strategic planning or strategic budgeting?
Definition
An entity must complete its strategic plan before any specific budgeting can begin. The strategic plan states the means by which an entity expects to achieve its stated mission.
Term
strategic analysis factors
Definition
Identifying and specifying organizational objectives.
Evaluating competitive advantages and weaknesses of the organization and its competitors.
Assessing risk levels.
Identifying and forecasting the effects of external factors relevant to the organization (forecasting is the basis of planning).
Deriving the best strategy for reaching the objectives, given the organization's strengths and weaknesses and the relevant future trends.
Capital budgeting
Capacity planning
Term
capital budgeting
Definition
a planning process for choosing and financing long-term projects and programs.
Term
capacity planning
Definition
an element of planning closely related to capital budgeting that includes, among other things, consideration of business combinations or divestitures.
Term
premises
Definition
underlying assumptions about the expected environment in which the strategic plan will be carried out; should be limited to those crucial to the success of the plans. Must be considered at all levels of the organization.
Term
premising
Definition
general planning assumptions
Term
How do objectives vary?
Definition
With size and style of organization.
Term
effectiveness
Definition
degree to which the objective is accomplished (doing the right things)
Term
efficiency
Definition
maximizing the output for a given quantity of input (doing things right)
Term
Objectives should be...
Definition
clearly and specifically stated, communicated to all concerned parties, and accepted by those affected.
Term
means-end hierarchy
Definition
objectives should be established at the top and retranslated in more specific terms as they are communicated downward in the means-end hierarchy.
Term
What's the next step after planning and objectives?
Definition
Developing policies, procedures, and rules.
Term
feedforward controls
Definition
policies and procedures anticipate and provide guidance on how an activity should be performed to best ensure that an objective is achieved.
Term
policies
Definition
general statements that guide thinking and action in decision making; policies may be explicitly published by, or implied by the actions of, management.
Term
procedures
Definition
specific directives that define how work is to be done
Term
rules
Definition
specific, detailed guides that restrict behavior
Term
management by objectives (MBO)
Definition
behavioral, communications-oriented, responsibility approach to management and employee self-direction. It is a comprehensive management approach and therefore is relevant to planning and control.
Term
MBO philosophy concerning employees
Definition
Want to work hard if they know what is expected
Like to understand what their jobs actually entail
Are capable of self-direction and self-motivation
Term
MBO requires...
Definition
Senior management participation and commitment to the program. These managers must
Determine the overall direction and objectives for the organization
Communicate these effectively in operational or measurable items
Coordinate subordinates' objectives with overall objectives
Follow up at the end of the MBO cycle period to reward performance and review problems
Integration of objectives for all subunits into a compatible, balanced system directed toward accomplishment of the overall objectives.
Provisions for regular periodic reporting of performance toward attainment of the objectives.
Free and honest communication between supervisor and subordinate.
A commitment to taking the ideas of subordinates seriously on the part of supervisors.
An organizational climate that encourages mutual trust and respect.
Term
steps necessary to implement the MBO program
Definition
include establishing objectives and action plans (the planning steps) and periodic review and final appraisal (the control steps).
Term
four uses of a budget
Definition
planning tool, control tool, motivational tool (realistic and degree of flexibility), means of communication and coordination
Term
budget
Definition
written plan for the future that forces management to evaluate the assumptions used and the objectives identified in the budgetary process.
Companies that prepare budgets anticipate problems before they occur.
budgeting is a strategic control because it quantifies an organization's progress towards fulfilling its strategic objectives.
Term
How are objectives achieved?
Definition
careful planning about the allocation of resources and the expected results.
Term
industry conditions
Definition
includes the company's current market share, governmental regulatory measures, the labor market, and the activities of competitors.
Term
How does the budget work?
Definition
specific revenue targets and expense limitations for each functional area and department of the organization on a month-by-month basis.
Term
sufficient lead time
Definition
for a budget to be useful, it must be finalized when the fiscal year begins.
It usually takes several months to create an organization-wide budget.
Term
budget planning calendar
Definition
schedule of activities for the development and adoption of the budget; includes a list of dates indicating when specific information is to be provided to others by each information source
Term
budget department
Definition
schedule of activities for the development and adoption of the budget; includes a list of dates indicating when specific information is to be provided to others by each information source
Term
budget manual
Definition
everyone involved in preparing the budget at all levels must be educate on the detailed procedures for preparing and submitting their part of the overall budget
Term
Does participative budgeting or top-down budgeting work better?
Definition
has a much greater chance of acceptance by those affected and thus of achieving ultimate success than does a budget imposed from above.
Term
What's the key to budget success? What's another key to success?
Definition
That senior management immediately buys into it and takes it seriously.
Accomodation to change as assumptions change.
Term
control loop (EMADR)
Definition
Establishing standards of performance (the budget)
Measuring actual performance
Analyzing and comparing performance with standards
Devising and implementing corrective actions
Reviewing and revising the standards
Term
Important reason for a budget
Definition
provide standards for the assessment of success or failure of individual managers and functional areas.
Term
top-down (authoritatitve) budgeting approach
Definition
apparent advantage of ensuring total consistency across all functional areas; also far less complex and time-consuming than coordinating input from the middle and lower levels.
Term
Participative budgeting adv. and disadv.
Definition
Adv. uses input from lower- and middle-levels, and it directly communicates rewards and penalties to employees for good/bad performance.
Disadv.: cost in time and money.
Term
budgetary slack
Definition
overestimation of expenses or underestimation of revenues; must be avoided if a budget is to have its desired effects.
Term
tendency of managers when budgeting
Definition
The natural tendency of a manager is to negotiate for a less stringent measure of performance so as to avoid unfavorable variances from expectations.
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