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When setting strategy, managers must consider the opportunities and threats provided
by the entity’s customers, competition, and environment and must analyze
those opportunities and threats relative to the entity’s strengths and weaknesses.
Such an analysis is the first part of the model shown in Exhibit 1–10. Next, management
must consider the impact the selected strategies will have on organizational
stakeholders. In a profit-oriented business, strategies should promote a primary
goal of profit generation so that customers are served effectively, shareholders
can obtain wealth maximization, employees can retain their jobs and increase their
personal human capital, and creditors can be paid. Therefore, management must
consider the financial implications of its chosen strategies.
Profitability is typically achieved by delivering to customers the products and
services they desire, on time, and at reasonable prices. Profit measurement is one
function of the accounting information system. To best assess financial implications
of organizational strategies, detailed, short-term tactical plans should be prepared
in the form of a budget. If the projected financial results are unacceptable, management

will revise either the objectives or the strategies selected to achieve those
objectives.
Although the financial accounting system is extremely important in assessing
current or projected profitability, that system does not provide all the information
needed by management to make decisions. “Exclusive focus on the financial results
and budgets does not encourage managers to invest and build for longer-


term competitive advantage.”25 Also, according to noted management author Peter
Drucker:
The standard concepts and tools of [traditional financial reporting] are inadequate
to control operations because all they provide is a view of the skeleton
of a business. What’s needed is a way to examine the soft tissue.
Financial accounting, balance sheets, profit-and-loss statements, allocations
of costs, etc., are an X-ray of the enterprise’s skeleton. But in as much as the
diseases we most commonly die from—heart disease, cancer, Parkinson’s—do
not show in a skeletal X-ray, a loss of market standing and failure to innovate
do not register in the accountant’s figures until the damage is done.26
Organizations now have the technological capabilities to easily expand data
collection activities to satisfy both external and internal information requirements.
Accounting information is often a primary basis for making strategic decisions and
for measuring and evaluating managerial efficiency and effectiveness. To provide
the correct management incentives, accounting measurements should be tied to
the established mission. In large organizations, an individual segment (or division)
may pursue one of three generic organizational missions: build, hold, or harvest,
as defined in Exhibit 1–11.
Segments with a build mission require the most strategic planning because they
are to be operated for the long run. Segments with a harvest mission require little
strategic planning; their role is to generate cash, and at some point, they will
probably be sold or spun off as other company segments begin to mature.
Segment mission is directly related to the product life cycle or the sequential
stages that a product passes through from idea conception until discontinuation
of the product. The five stages of the product life cycle are design and development,
introduction, growth, maturity, and decline. The build mission is
appropriate for products that are in the early stages of the product life cycle, and
the harvest mission is appropriate for products in the final stages of the life cycle.
Accordingly, long-term performance measures are more appropriate for build missions,
and shorter-term performance measures are more appropriate for harvest
missions. For example, increase in market share would be a long-term measure,
while annual profitability would be a short-term measure.

Additionally, the measurement system will need to be modified when an organization
begins to empower its employees and use work teams. Group (rather than
individual) performance will need to be assessed, and nonfinancial measures are
often more appropriate than financial ones to make this assessment. Accounting
can help derive the new measurements, tie them to organizational goals and objectives,
and integrate them with an organizational pay-for-performance plan.
The degree of decentralization must reflect consideration of, among other
things, how rapidly decisions need to be made, the willingness of upper management
to allow subordinates to make potentially poor decisions, and the level of
training required so that workers can understand and evaluate the consequences
of their decisions. Decisions should be made only after comparing implementation
costs (such as employee training) with expected benefits (such as better communication,
more rapid decisions, and higher levels of employee skills).
In evaluating core competencies, an organization must analyze its activities and
compare them to internal or external benchmark measurements. Some comparison
metrics will often relate to costs: how does the cost of making a product or performing
a service internally compare to the price of external acquisition? To make
fair comparisons, a company must be reasonably certain of the validity of its costs.
Unfortunately, a recent survey of over 200 financial and operating executives in
North America showed that less than half of the respondents were confident of
their cost data. They wanted “more accurate, timely, and detailed information from
their systems.”27 To help provide such information, some companies use activitybased
costing, which is discussed in Chapter 4.
In assessing alternative strategies that require substantial monetary investments
(such as investing in new technology or opening a foreign production facility),
managers compare the investment’s costs and benefits. Often, as with other strategic
decisions, cost details may be more attainable than benefit details. Managers,
aided by financial personnel, must then make quantitative estimates of the investment’s
qualitative benefits (for instance, allowing the company to be the first to
bring a product or service to market). The accompanying News Note addresses
the significance of estimating future benefits from investments.
From an accounting standpoint, there is frequently a mismatch in the timing
of costs and benefits. Costs are recorded and recognized in the early years of many
strategic decisions, whereas benefits created by these decisions are either recognized
in later years or possibly not at all because they are nonmonetary in nature.
For example, financial accounting does not recognize the qualitative organizational
benefits of faster delivery time, customer satisfaction, and more rapid development
time for new products. Consequently, measurement methods other than traditional
financial accounting ones are necessary to help managers better evaluate the strategic
implications of organizational investments.
Strategic resource management (SRM) involves the organizational planning
for deployment of resources to create value for customers and shareholders. Key
attributes in the success of SRM are the management of information and of change
in responding to threats and opportunities. SRM is concerned with the following
issues:28
• how to deploy resources to support strategies;
• how resources are used in, or recovered from, change processes;
• how customer value and shareholder value will serve as guides to the effective
use of resources; and
• how resources are to be deployed and redeployed over time.