November 20, 2019 98
November 20, 2019 98
There are two simple and typical definitions are ‘a system is a set of interrelated components directed to some purpose’. ‘The system is a set of parts coordinated to accomplish a set of goals.’ Various other definitions are existing but they all contain the essential elements of parts and relationships and, in the case of organizational systems, they seek to accomplish agreed objectives.
Systems exist in every facet of life. There are mechanical systems, biological systems, information systems, social systems, organizational systems, and innumerable others.
The systems approach avoids taking a piecemeal approach to problems and directs the activities of the components or subsystems of the total system towards meeting overall objectives.
The systems approach recognizes that changes cannot be made to some parts of the system without considering the effect on the system as a whole and that the overall system characteristics are greater than the sum of the separate parts.
About a particular organization the systems approach would require consideration of the following factors:
Types of Systems
This is where the objectives of sub-systems are pursued to the detriment of the overall system goals. Each sub-system may be working at peak efficiency but this does not necessarily mean that the system as a whole is acting optimally.
This is probably more common than is realized and may be caused by departmental pressures and rivalries, poor communications, lack of coordination, poor information systems, or lack of centralized direction and control. The avoidance of sub-optimization is an important objective of the planning and control process.
The perfect way to avoiding sub-optimization is to ensure that the overall objectives of the organization dominate the objectives of each of the subsystems. This factor must be borne in mind when planning, controlling and monitoring performance.
Planning precedes control and planning without consideration of the type, frequency, and method of control will largely be a waste of time. It follows from this, that part of the planning process involves the design of an appropriate control system.
Control is an important element of the work of the management accountant. Planning is an inescapable part of all rational human activity because of its importance to organizations their planning processes have become refined and structured to improve their efficiency.
This is variously termed ‘long-range planning’, ‘strategic planning’ or when applied to organizations, ‘corporate planning’. Long-term planning covers periods longer than one year and typically embraces 3, 5, 10 years or even longer periods.
Long-term planning is the formulation evaluation and selection of strategies to prepare a long-term plan of action to attain objectives. Also known as corporate planning and long-range planning, it is a systematic identification of all phases of action required for deciding on the future position of the company.
The process of corporate planning consists of various stages which focus attention on four key areas:
This is also known as a position audit and seeks to provide detailed answers to the following questions.
The four aspects of the assessment stage are:
This includes an assessment of:
Undoubtedly, the most difficult to assess yet the most crucial over the medium to long-term covered by the corporate plan period. There is a very wide range of factors to be considered including:
The major influences on corporate objectives are the expectations of the diverse groups involved, such as the stakeholders. Their expectations of dividends, capital growth, and company expansion’s expansion plan.
Objectives stage is the key stage in the Corporate Planning process and seeks to answer the question “where does the organization want to go?”
The essence of Corporate Planning is to define objectives first then consider how they can be achieved. This approach avoids major errors of sub-optimization by ensuring that the long-term corporate objectives are defined before the short-term tactical objectives covering various facets of operations.
The short-term objectives and targets contribute towards the achievement of the long-term corporate objectives thus encouraging coordination and goal congruence on the part of management.
There are very real problems in establishing corporate objectives because of the multi-faceted nature of modem business.
Below are the areas in which objectives of performance and results have to be set:
The setting of objectives is a detailed, interactive, task involving much discussion but eventually, the objectives must be set, within each area, quantifiable and measurable terms.
For example, within the ‘market standing’ area-specific statements would need to be made about such matters as:
Similar detailed objectives will be set for each of the other areas. The area most familiar to accountants, relating to profitability and finance, include:
It will be apparent that objectives covering the whole range of organizational activities are extremely diverse and because of this, it is unlikely that a single performance measure, such as return on capital employed could adequately represent the whole spectrum of corporate objectives.
Top management will also establish corporate policies that provide guidelines on how the organization expects its objectives to be achieved. Policy statements reflect the organization’s culture and belief system and can be powerful influences on the ways activities are carried out and decisions are taken. For example, the difference in policies between two local authorities; on a labor controlled inner-city authority and the other one a conservative controlled rural area.
This is colloquially known as SWOT analysis (i.e. Strengths, Weaknesses, Opportunities, and Threats). SWOT involves an analysis and comparison of internal factors. The planning team should attempt to rank what are considered to be the main strengths and weaknesses of the organization.
These could be found in any area of the organization. They could, for example, relate to the price, range reliability (or otherwise) of the products the training, age structure, morale of the workforce; size capability of equipment and so on.
The planning team should consider the environment within which the organization operates to try to identify the trends and factors which will have a material effect on the organization in the medium to long term.
This process will involve considerable discussion with outside experts and analysts, perhaps special investigations, the examination of national and international statistics and so on. Depending on the size and scope of the organization the appraisal could include local national or international factors. Threats and opportunities may be identified in various aspects of the environment, for example:
It has to be recognized that all these appraisals mean trying to peace into a misty and uncertain future. When change is in a continuous pattern, it is possible to project existing trends and thus make reasonable assumptions as to the actions and reactions required.
The problem is that much change is discontinuous and unexpected. It has been said that the only thing we know for certain about the future is that the unexpected will happen. This unpredictability means that judgment and intuition play an important part in long-term forecasting.
Statistical forecasting of whatever level of sophistication is based on the implicit assumption that existing trends patterns and cycles will continue. Of course, they may but on the other hand, they may not.
By this stage the planning team will be aware of:
The team is then able to consider alternative corporate strategies which will form the basis of the agreed corporate plan. The strategies should be sufficient so that they can be evaluated as to whether they have been achieved or not, but not so specific that they constrain the organization. Specific targets can only set at tactical and operational levels for shorter periods of, say up to one year.
The information system of the organization can be of considerable assistance to the planning team when considering alternative strategies. The team will continually require answers to a series of questions beginning, with what would happen if possible answers to these and similar questions are provided by the process.
At this stage, the corporate plan is a consensus on the strategies for the organization so that the remaining stages add increasing amounts of practical details. The task is to prepare action plans for the various departments and functions of the organization. These plans contain targets and in sufficient detail so that tactical level management knows the task they have to perform.
The plan should show only the new tasks, but how existing operations will merge into the new targets over, say, the next five years. The strategic plan will be used by tactical management to prepare operational plans budgets set short term targets and so on.
There is no point in any planning exercise if progress is not monitored after the plans have been implemented. This is to see whether activities need to be adjusted to bring them into line with the original strategies or to see whether, because of unforeseen circumstances, it is time to review the strategies themselves.
Monitoring and control at all levels work by the feedback of information which is a major function of the information system of the organization.
Informal systems are more flexible and adaptable. They deal with information which is more current and significant and, because of the social contact involved they can convey a nuisance which formal systems cannot handle. They do, however, suffer from bias, noise and do not always provide a complete picture.
What is required is a blend of formal and informal so that the completeness, accuracy, and detail of the formal systems complement the flexibility the adaptability of the informal. To achieve the right mixture is difficult for both managers and information specialists but to be aware that there is no single all-embracing simple solution is an important first step.
Various reviews of formal planning procedures suggest that they encourage inflexibility whereas the real requirements, especially at the strategic level are responsiveness and adaptability. The greatest care must be taken to ensure that the environment is continually scanned and monitored so that the organization can adapt in a progressive, controlled fashion. This is always more efficient than enforced traumatic changes made after a period of stagnation.
The types of information and their sources will naturally vary from organization to organization but there is one general principle. For long-term planning, environmental information is of critical importance. At lower levels and in the short-term, internal information is important but for planning the long-term direction of the organization and ensuring survival and success, external information is all-important.
The following questions provide examples of the types of information that might be required for strategic planning and typical sources of such information.
Types of Internal Information
In spite of the wealth of external information available and its obvious importance in planning, there is evidence that organizations fail to explore the sources in a thorough comprehensive manner.
Corporate plans are developed using forecasts, judgments, and assumptions about an increasingly uncertain future. This uncertainty must be recognized and frequently forecasts and assumptions are shown as ranges of values rather than a single point estimate. The inherent uncertainty also requires that the plan itself may need modification and adjustment in the light of unexpected major occurrences. The process of corporate planning must be dynamic and flexible and not static and inflexible.
The process of reviewing the plan would be done regularly and typically plans might require updating:
The systems approach emphasizes objective setting the necessity of taking an overall view, the avoidance of sub-optimization and the installation of appropriate controls to monitor performance against the plan. It will be apparent that Corporate Planning aligns itself very closely indeed to the systems approach and is the prime organizational example of systems principles being applied in practice.
A budget is a short-term plan (usually extending over a year), developed within the framework of the medium to long-term Corporate Planning. The budgetary process provides for estimates of income and expenditure for the year. It is futuristic and as such a viable instrument in Corporate Plan. Budgets provide the comprehensive Corporate Plan qualitatively in dollar and cent/naira or kobo. Without a budget, a firm cannot operate at all.
The preparation of a full Corporate Plan complete with comprehensive statements of all the financial consequences is a daunting task to carry out manually. It becomes even more difficult and time-consuming to prepare if it is also required to show the effects of changes in the assumptions upon which the plan has been based.
For example, a minor change in the assumed inflation rate from 10% to 12% projected over the life of the Corporate Plan is likely to involve many thousands of calculations, changes in operating, statements, balance sheets, cash flow projections, and many other such alterations.
It is because of this that many organizations use computer-based models to assist in the overall corporate planning process. The models are sometimes called corporate models or financial models or planning models.
Simply these models are computer programs that depict the operations and relationships of the organization. Usually, the model consists of a large number of interrelated equations representing various facets of the organization’s activities. The input of primary assumptions (e.g., sales level, sales price, wages cost, etc) into the model enables the resulting operating statements projections balance sheets to be quickly and easily produced by the machine.
The real power and advantage of such computer-based models are not merely to produce a single result but to enable management to ask and obtain answers to the following questions.
The computer would speedily calculate the results of such questions and it is this capacity to handle enormous data with speed and efficiency that makes this development so important for the management accountant.
It should be recognized that whilst computer-based models help to illustrate and quantify the uncertainties attached to long-term planning they do not eliminate them. Managerial judgment and expertise are still key factors.
To develop a model that is realistic and has adequate predictive qualities is a collaborative effort between management and information specialists such as systems analysts and accountants.
The key points are:
The best model is the simplest one with few variables that have adequate predictive qualities. To obtain this ideal, there must be a thorough understanding of the system. The management who operates the system has this understanding and must be involved in the model building otherwise over-elaborate and overly mathematical models may result if this exercise is left to systems professionals.
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