Lecture 4
Learning objectives
1. Explain the role played by accounting in formulating multinational business strategy
2. Demonstrate an understanding of multinational capital budgeting
3. Describe the factors that influence strategy implementation within a multinational
corporation
4. Discuss the role of accounting in implementing multinational business strategy
5. Identify issues involved in the design and implementation of an effective
performance evaluation system within a multinational corporation.
Management accounting – provides information to management for formulating and
implementing strategy
Strategic planning
- Strategic issues;
o Strategy formulation involves determining organizational goals and strategies to
achieve those goals
o Strategy implementation involves managerial efforts to influence employees to attain
organizational goals
- Accounting has a significant role to play in strategy formulation and implementation
Accounting and strategy formulation
Budgeting
- Budgeting is the primary use of accounting information in strategy formulation
- Budgeting assists strategy formulation by providing managers with information about
short-term and long-term planning responsibilities.
- Budgeting also provides expectations against which future results can be judged.
- Short term budgets (1 year) (operating budgets) and long term budgets (capital budgets)
What is capital budgeting?
- It’s the process of identifying, evaluating and selecting projects that require
commitments of large sums of funds and generate profits in the future.
- Large, long-term investments are referred to as capital investments
- Capital budgeting involves three steps:
o Project identification and definition
o Evaluation and selection
o Monitoring and review
Capital budgeting techniques
- Payback period
- Return on investment
- Net present value
- Internal rate of return
Net present value (NPV)
= present value of future cash flows – initial investment.
,Example:
Multinational capital budgeting
Can those previous 4 methods be used for international situations?
yes but cautiousness is required and some additional information is needed.
Which information?
- Capital budgeting in an international context is complicated by several factors
- These factors relate primarily to the risk associated with future cash flows
- These risks are generally categorized as political risk, economic risk and financial risk
o Political risk
Likelihood that political events will impact cash flows
This risk can vary significantly from one country to another
Nationalization and expropriation of assets is the most extreme form of political risk
Political risk is also associated with changes in foreign exchange controls,
repatriation restrictions, tax rules and labor laws.
o Economic risk
Likelihood that changes in the host country economy will impact cash flows
Inflation and country’s balance of payments
Inflation is the most significant of economic risks
Inflation affects the ability of the local population to purchase goods and also
impacts the overall cost structure of a business
There are also costs associated with manager time and effort to respond to
inflation
o Financial risk
This refers to the likelihood that changes in currency values, interest rates, and other
financial factors will impact cash flows
Foreign exchange risk is also a component of financial risk
Whether to evaluate the project based on host country or parent country cash flows
is affected by foreign exchange risk
- Taxes, import duties, dividend restrictions and cash flow limitations imposed by
governments also must be considered.
What is the connection between management control and strategy implementation?
- Aims to evaluate the implementation and effectiveness of strategy
- Accounting is involved in management control primarily through its role in operating
budgets and performance evaluation
, - Operating budgets provide a link between strategy and performance
Factors affecting management control
- Organizational structure (ethnocentric, polycentric and geocentric) and culture
- Levels of control and delegation (influenced by the organizational structure and the roles
of each division in the structure) are factors that influence management control
- One major type of management control system is bureaucratic control which employs a
significant amount of structure
- The other major type is cultural control which is more informal and less structured
Designing performance evaluation system
- Depends on:
o Which performance measures to include?
Performance evaluation – measures
Financial measures are based directly on financial statement data
o Net profit
o Return on investment
o Comparison of budgeted to actual profit
Nonfinancial measures are based on data not obtained directly from financial
statements
o Market share
o Labor turnover
Performance evaluation – balanced scorecard
This approach gives ‘’balanced’’ consideration to both financial and nonfinancial
measures
It considers the perspectives of four stakeholder groups
o Shareholder’s perspectives – in financial performance measures
o International business perspective is reflected in business process measures
o Customer’s wishes and interests in customer perspective
o Employee’s and future generations in an innovation and learning perspectives.
o The treatment of foreign operations as a cost, profit or investment center
Performance evaluation – responsibility centers
The idea of responsibility centers is to identify the activities that individual units
perform and for which they should be held accountable – classification:
o Cost centers; are responsible for producing output using a certain amount of
resources
o Profit centers; are responsible for costs and revenues
o Investment centers; have the responsibilities of a profit center plus
responsibility for investment decisions
Return on investment (ROI) is the most common performance measure for
an investment center
o Evaluation of foreign operations versus the manager of the unit
Separating managerial and unit performance
In an international context a number of factors exist that cause a disconnect
between manager performance and unit performance
These factors that the manager cannot control are known as uncontrollable items
Learning objectives
1. Explain the role played by accounting in formulating multinational business strategy
2. Demonstrate an understanding of multinational capital budgeting
3. Describe the factors that influence strategy implementation within a multinational
corporation
4. Discuss the role of accounting in implementing multinational business strategy
5. Identify issues involved in the design and implementation of an effective
performance evaluation system within a multinational corporation.
Management accounting – provides information to management for formulating and
implementing strategy
Strategic planning
- Strategic issues;
o Strategy formulation involves determining organizational goals and strategies to
achieve those goals
o Strategy implementation involves managerial efforts to influence employees to attain
organizational goals
- Accounting has a significant role to play in strategy formulation and implementation
Accounting and strategy formulation
Budgeting
- Budgeting is the primary use of accounting information in strategy formulation
- Budgeting assists strategy formulation by providing managers with information about
short-term and long-term planning responsibilities.
- Budgeting also provides expectations against which future results can be judged.
- Short term budgets (1 year) (operating budgets) and long term budgets (capital budgets)
What is capital budgeting?
- It’s the process of identifying, evaluating and selecting projects that require
commitments of large sums of funds and generate profits in the future.
- Large, long-term investments are referred to as capital investments
- Capital budgeting involves three steps:
o Project identification and definition
o Evaluation and selection
o Monitoring and review
Capital budgeting techniques
- Payback period
- Return on investment
- Net present value
- Internal rate of return
Net present value (NPV)
= present value of future cash flows – initial investment.
,Example:
Multinational capital budgeting
Can those previous 4 methods be used for international situations?
yes but cautiousness is required and some additional information is needed.
Which information?
- Capital budgeting in an international context is complicated by several factors
- These factors relate primarily to the risk associated with future cash flows
- These risks are generally categorized as political risk, economic risk and financial risk
o Political risk
Likelihood that political events will impact cash flows
This risk can vary significantly from one country to another
Nationalization and expropriation of assets is the most extreme form of political risk
Political risk is also associated with changes in foreign exchange controls,
repatriation restrictions, tax rules and labor laws.
o Economic risk
Likelihood that changes in the host country economy will impact cash flows
Inflation and country’s balance of payments
Inflation is the most significant of economic risks
Inflation affects the ability of the local population to purchase goods and also
impacts the overall cost structure of a business
There are also costs associated with manager time and effort to respond to
inflation
o Financial risk
This refers to the likelihood that changes in currency values, interest rates, and other
financial factors will impact cash flows
Foreign exchange risk is also a component of financial risk
Whether to evaluate the project based on host country or parent country cash flows
is affected by foreign exchange risk
- Taxes, import duties, dividend restrictions and cash flow limitations imposed by
governments also must be considered.
What is the connection between management control and strategy implementation?
- Aims to evaluate the implementation and effectiveness of strategy
- Accounting is involved in management control primarily through its role in operating
budgets and performance evaluation
, - Operating budgets provide a link between strategy and performance
Factors affecting management control
- Organizational structure (ethnocentric, polycentric and geocentric) and culture
- Levels of control and delegation (influenced by the organizational structure and the roles
of each division in the structure) are factors that influence management control
- One major type of management control system is bureaucratic control which employs a
significant amount of structure
- The other major type is cultural control which is more informal and less structured
Designing performance evaluation system
- Depends on:
o Which performance measures to include?
Performance evaluation – measures
Financial measures are based directly on financial statement data
o Net profit
o Return on investment
o Comparison of budgeted to actual profit
Nonfinancial measures are based on data not obtained directly from financial
statements
o Market share
o Labor turnover
Performance evaluation – balanced scorecard
This approach gives ‘’balanced’’ consideration to both financial and nonfinancial
measures
It considers the perspectives of four stakeholder groups
o Shareholder’s perspectives – in financial performance measures
o International business perspective is reflected in business process measures
o Customer’s wishes and interests in customer perspective
o Employee’s and future generations in an innovation and learning perspectives.
o The treatment of foreign operations as a cost, profit or investment center
Performance evaluation – responsibility centers
The idea of responsibility centers is to identify the activities that individual units
perform and for which they should be held accountable – classification:
o Cost centers; are responsible for producing output using a certain amount of
resources
o Profit centers; are responsible for costs and revenues
o Investment centers; have the responsibilities of a profit center plus
responsibility for investment decisions
Return on investment (ROI) is the most common performance measure for
an investment center
o Evaluation of foreign operations versus the manager of the unit
Separating managerial and unit performance
In an international context a number of factors exist that cause a disconnect
between manager performance and unit performance
These factors that the manager cannot control are known as uncontrollable items
