Impact Of Developments In Information Technology & ECommerce


Information needs of manufacturing businesses

All manufacturing businesses follow a simple model.

The information required by even modern manufacturing organisations is still based on the demands of this model.

A variety of performance indicators are used by manufacturing businesses, but there are some over-riding considerations.


Consideration Detail
Cost behaviour Labour is generally considered a variable cost. Machinery is a fixed cost. Modern technology requires more overheads. (With advanced manufacturing technology, there is a higher proportion of fixed equipment costs compared with variable labour costs.)
Quality Important in terms of output adherence to production specification.
Time Production bottlenecks; delivery times; deadlines; machine speed
Innovation Required in products and processes
Valuation Despite the tendency towards low inventory and just in time delivery, many businesses still have to give a value to inventories of raw materials or finished goods, as a major element in their profit calculations. Whether complicated tracking systems are needed is a different question.


We look at the first four of these considerations in more detail in the following paragraphs.          

Cost behaviour, quality, time and innovation

Cost behaviour


Uses Comment
Planning Standard costs can be outlined, and actual costs compared with them.
Decision making Estimates of future costs may be needed to assess the likely profitability of a product.
Control Total cost information can be monitored, to ensure the best rates for supplies.


Quality information is used to ensure that ‘customer satisfaction’ is built into the manufacturing system and its outputs.


Uses Comment
Planning Ensure that products are well designed and manufactured according to specification.
Decision making Businesses have a choice as to what level of quality they ‘build’ into a product. Quality need not be perfection, it is ‘fitness for the purpose for which intended’.
Control Falling levels of quality are an alarm bell – if products are not manufactured according to their design specification, there will be more rejects, more waste and more dissatisfied customers.

This means higher costs and lower profits.




Uses Comment
Planning Manufacturing time has to be scheduled to ensure the most efficient use of the system; if production can be smoothed over a period, this ensures effective capacity utilisation. Throughput time is thus important.
Decision making Time is relevant to decision making, as it indicates a firm’s ability to keep its promises to its customers for delivery and so on.
Control •                  New    product            development   (from   conception             to implementation) • Speed of delivery

•                  Bottlenecks

•                  In just-in-time systems, where firms hold little material inventories, time is a measure of a factory’s ability to function at all. Inventory levels will be measured not in units but in day’s supplies

•                  As a measure of efficiency (e.g. inventory revenue, asset turnover)


  1. Innovation
Uses Comment
Planning •      New product development

•      Speed to market

•      New process

Control This generally refers to the launch and design of new products.


The experience curve can be used in strategic control of costs and is relevant to ‘time’ and ‘innovation’. It suggests that as output increases, the cost per unit of output falls, for these reasons.

  • Economies of scale – in other words an increased volume of production leads to lower unit costs, as the firm approaches full capacity.
  • A genuine ‘learning effect’ as the workforce becomes familiar with the job and learns to carry out the task more efficiently. As a process is repeated, it is likely that costs will reduce due to efficiency, discounts and reduced waste.
  • Technological improvements.


This brings us on to target costing, covered in your study of Paper F5 Performance

Management or the previous syllabus Paper 2.4 

  • In the short run, because of development costs and the learning time needed, costs are likely to exceed price.
  • In the longer term, costs should come down (for example, because of the experience curve) to their target level.


Strategic, tactical and operational information

The information requirements of manufacturing businesses can also be considered in terms of three levels.


Information type Examples
Strategic Future demand estimates

New product development plans Competitor analysis

Tactical Variance analysis

Departmental accounts Inventory turnover

Operational Production reject rates

Materials and labour used Inventory levels



The information requirements of commercial organisations are influenced by the need to make and monitor profit. Information that contributes to the following measures is important.

  • Changeover times
  • Number of common parts
  • Level of product diversity
  • Product and process quality

Service businesses

Unlike manufacturing companies, services are characterised by intangibility, inseparability, variability, perishability and no transfer of ownership.

Before we delve into the detail, here’s the big picture. According to a 2006 Office for National Statistics ONS report, the service sector made up 73% of the UK economy. 32 of the top UK companies were in the service sector and one third of those employed over one million people in total.

Despite the apparent domination in the service sector as a whole by a few large companies, in reality most service organisations are very small (as normal experience would suggest): for instance: hair-dresser, restaurants, cafés, CPA businesses.. So we are talking of a very large number of organisations, many of them quite small, but collectively accounting for a powerful proportion of the workforce.

Types of service business

Mass services are standard services provided to large numbers of people, and are often automated. Personal services vary on the circumstances of the service delivery, and are generally one-to-one.

With this in mind, we can identify different types of service.


Type Comment
Mass service The delivery of the same, very standardised service to many people, as a transaction, for example cheque processing.
Personalised service This service is unique to the recipient, such as dentistry: every mouth is different, even though standard procedures are adopted to ensure best practice.


Examples of service businesses include:

  • Mass serviceg. the banking sector, transportation (bus, air), mass entertainment
  • Either/org. fast food, teaching, hotels and holidays, psychotherapy
  • Personal serviceg. pensions and financial advice, car maintenance


Service activities therefore cut across all sectors of the economy. In the UK, healthcare is provided by the public sector but also by the private sector (for-profit). The objectives may differ even though the activities remain the same.

‘Services are any activity of benefit that one party can offer to another that is essentially intangible and does not result in the ownership of anything. Its production may or may not be tied to a physical product.’                 (P Kotler, Social Marketing)

There are five major characteristics that distinguish services from manufacturing.

  • Intangibility refers to the lack of substance, which is involved with service delivery. Unlike goods (physical products such as confectionery), there is no substantial material or physical aspects to a service: no taste, feel, visible presence and so on. For example, if you go to the theatre, you cannot take the ‘play’ away with you.
  • Inseparability/simultaneity. Many services are created at the same time as they are consumed. (Think of dental treatment.) No service exists until it is actually being experienced/consumed by the person who is buying it.
  • Variability/heterogeneity. Many services face the problem of maintaining consistency in the standard of output. It may be hard to attain precise standardisation of the service offered, but customers expect it (such as with fast food).

Here also is the paradox: Is fast food a service or not?  – the customer walks out with a burger or whatever (the tangible product), but cannot simply lift it off the shelf until it has been prepared and cooked – the intangible element.

  • Services are innately perishable. The services of a beautician are purchased for a period of time.
  • No transfer of ownership. Services do not result in the transfer of property. The purchase of a service only confers on the customer access to or a right to use a facility.


Most ‘offers’ to the public contain a product and service element.

Exam Focus Point

You could be asked to discuss any of these characteristics in the exam and use examples from your own experience.

Quantitative/qualitative information and services

Service businesses need the same aggregate information as manufacturing firms, but also need performance data as to their cost and volume drivers. Operational information is likely to be more qualitative.


A dental practice needs a mix of quantitative and non-quantitative information to price its services properly, to optimise capacity utilisation and to monitor performance. Many small service businesses have similar concerns, for example garages or beauty parlours.

  • They need to control the total cost of providing the service operation.
  • They need positive cash flow to finance activities.
  • They need operating information to identify how costs are incurred and on what services.

Arguably, small service businesses, whose expenses are mainly overheads, provide a model, in miniature, of the requirements of activity based costing, mentioned in Study Unit 1.

Are ‘mass services’ any different?

  • Because mass services, such as cheque clearing, are largely automated, there may be a large fixed cost base.
  • Even if a service is heavily automated, each time the service is performed is a ‘moment of truth’ for the customer. Ensuring consistency and quality is important but this is true for small service businesses too.

Quantitative information is information that can be expressed in numbers. A sub-category of quantitative information is financial information (also known as monetary information), which is information that can be expressed in terms of money.

Qualitative information is information that cannot be expressed in numbers.

Non-financial information (or non-monetary information) is information that is not expressed in terms of money, although this does not mean that it cannot be expressed in terms of numbers.

Below are a few examples of monetary and non-monetary information for a monthly report for a dentist practice. (Hint. Ask yourself what is the key resource of the practice).

Monthly receipts and payments

    • Receipts include payments from the government for publicly-funded work, fees for private work and so on. Dentists are measured on Units of Dental Activity (UDA) and are given annual targets for UDAs that they must undertake.
    • Payments include operating costs such as wages for nursing staff, reception staff, rent, insurance, electricity, telephone expenses, medical equipment, medicine and so on.


  • Capacity utilisation. In other words, how busy has the practice been? Have all available appointments been booked or were there times when the dentist and his/her staff were kicking their heels? Just by looking at the appointments diary you can make comparatives.
  • Treatment costs. Simple treatments such as teeth cleaning can be performed by the dental hygienist. Other treatments, such as root canal surgery, require the dentist and perhaps a dental nurse in attendance.

The cost of providing these different treatments will vary depending on the level of staff and complexity of the treatment.

The cost driver is time.

The mix of treatments offered is thus significant in the total profitability of the practice.

The practice will probably profit more from relatively expensive treatments, such as ‘crowns’, but these come at a cost. Patients can also have several treatments within a price band and be charged a single fixed price. This may also have an effect on just how much work the dentist is willing to do for a single fixed charge.

The new treatment charges introduced in the UK in April 2006 have also affected how dental services are provided. Patients now pay one of three fixed charges based on the type of care and treatment required.

However, this information, while useful to monitor the financial health of the practice, does not give us a sufficiently detailed picture of the operating performance. The key resource is time, the dentist’s time, and staff time.

For the long-term health of the practice, matters such as customer satisfaction and repeat business must be considered. (Does your dentist remind you to have a check up every six months?)

Colin Drury (Management and Cost Accounting) describes qualitative factors as those ‘that cannot be expressed in monetary terms’. Thus the information ‘German people are very fond of bananas’ could be expressed as ‘The value of the German banana market is Rwf x million pa’, but the value of x is very questionable.


Example: qualitative information

As a more elaborate example, consider a firm that is thinking of sacking many of its customer service staff and replacing them by automated telephone answering systems. Now consider how difficult it would be to obtain the following information in order to appraise a decision whether or not to replace staff with an untested system.

  • The cost of being sure that the new system would do the job as well as people can
  • The cost of loss of morale amongst other workers if large numbers are made redundant
  • The cost of compensating the redundant staff for the psychological and financial impact of the decision on themselves and their families
  • The cost of relocating people
  • The cost of retraining staff made redundant to improve their job prospects
  • The cost to the community in social and financial terms of unemployment or relocation


These are not just political points. The company’s treatment of its staff may have a profound impact upon its ability to recruit skilled employees in the future and on the way the company is perceived by potential customers. Whether the costs can be established or not, the questions need to be considered.

Service industries, perhaps more than manufacturing firms, rely on their staff. Front-line staff are those who convey the ‘service’ – and the experience of the brand – to the consumer. They convey the ‘moment of truth’ with the customer.


Case Study

In 2005 in the UK, BA (Brirish Airways) ground staff went on strike in support of sacked catering workers. This cost BA up to £40m in refunds and loss of flight revenue as well as a loss in reputation.

Management information therefore has to include intangible factors such as how customers feel about the service, whether they would use it again, and so on.

There are some demonstrable relationships between staff revenue and positive customer experiences. High staff revenue not only means higher recruitment and training costs but it may also have an adverse impact on the firm’s ability to retain customers (which is cheaper than finding new ones).

For service businesses, management accounting information should incorporate the key drivers of service costs.

  • Repeat business
  • Churn rate (for subscriptions)*
  • Customer satisfaction surveys, complaints
  • Opportunity costs of not providing a service
  • Avoidable / unavoidable costs


* For any given period of time, the number of participants who discontinue their use of a service divided by the average number of total participants is the churn rate. Churn rate provides insight into the growth or decline of the subscriber base as well as the average length of participation in the service.


Case Study


Banks  typically have high fixed costs of running a network of branches. At the same time, they are trying to promote Internet and other services, as they are competing with internetonly banks.

The traditional banks have responded in a number of ways

  • Set up their own Internet operations, which offer higher rates of interest for savers
  • Closing down branches, at a cost of adverse publicity at times


However, there have been some opposing trends

  • A bank might advertise that it will put a moratorium on closure programmes
  • Most of the internet banks are not making money; some see the benefit of opening branches


The key issue is productivity. The expensive branch networks are useful for selling other services.

A third alternative to branch and Internet banking is the telephone banking service. The banking service is conducted by telephone and lately over the Internet. There is no formal branch network although customers may be offered the use the branch network of the parent company.

This service operates at a lower cost than the traditional branch network but offers some branch facilities and an alternative service for users who want 24 hour access and do not require face to face banking.



Strategic, tactical and operational information

Just as we did for manufacturing businesses, we can consider the strategic, tactical and operational information requirements of service businesses.


Information type Examples
Strategic Forecast sales growth and market share Profitability, capital structure
Tactical Resource utilisation such as average staff time charged out, number of customers per hairdresser, number of staff per account Customer satisfaction rating
Operational Staff timesheets

Customer waiting time

Individual customer feedback


Organisations have become more customer and results oriented over the last decade or so. As a consequence, the differences between service organisations’ and other organisations’ information requirements has decreased. Businesses have realised that most of their activities can be measured, and many can be measured in similar ways regardless of the business sector.



Access to data has been facilitated by groupware, intranets, extranets, databases, data warehousing and data mining.

Via distribution of data

Developments in IT have facilitated the distribution of data, making it instantly available to those who require it. Such developments are known generally as office automation systems.

  • Word processing/spreadsheets
  • Electronic schedules
  • Desktop databases (see below)
  • Web publishing
  • Voice mail
  • E-mail


Via sharing of data

There have also been significant developments in the ways in which data can be shared.



Groupware is a term used to describe software that provides functions that can be used by collaborative work groups.


Typically, groups using groupware are small project-oriented teams that have important tasks and tight deadlines.


Features might include the following.

  • A scheduler allowing users to keep track of their schedules and plan meetings with others
  • An address book
  • To do’ lists
  • A journal, used to record interactions with important contacts, items (such as e-mail messages) and files that are significant to the user, and activities of all types and track them all without having to remember where each one was saved
  • A jotter for jotting down notes as quick reminders of questions, ideas, and so on
  • File sharing and distribution utilities


There are clearly advantages in having information such as this available from the desktop at the touch of a button, rather than relying on scraps of paper, address books, and corporate telephone directories. It is when groupware is used to share information with colleagues that it comes into its own. Here are some of the features that may be found.


  • Messaging, comprising an e-mail in-box which is used to send and receive messages from the office/home/on the road and routing facilities, enabling users to send a message to a single person, send it sequentially to a number of people (who may add to it or comment on it before passing it on), or sending it to everyone at once.
  • Access to an information database, and customisable ‘views’ of the information held on it, which can be used to standardise the way information is viewed in a workgroup.
  • Group scheduling, to keep track of colleagues’ itineraries.
  • Public folders. These collect, organise, and share files with others on a team or across the organisation.
  • Hyperlinks in mail messages. The recipient can click the hyperlink to go directly to a Web page or file server.



Intra- means within so an intranet is an internal network used to share information within the company or group. Intranets utilise Internet technology. A firewall surrounding an intranet fends off unauthorised access.


The idea behind an ‘intranet’ is that companies set up their own mini version of the Internet. Intranets use a combination of the organisation’s own networked computers and Internet technology. Each employee has a browser, used to access a server computer that holds corporate information on a wide variety of topics, and in some cases also offers access to the Internet.

Potential applications include company newspapers, induction material, online procedure and policy manuals, employee web pages where individuals post details of their activities and progress, and internal databases of the corporate information store.


The benefits of intranets are diverse.

  • Savings accrue from the elimination of storage, printing and distribution of documents that can be made available to employees on-line.
  • Documents on-line are often more widely used than those that are kept filed away, especially if the document is bulky (e.g. manuals) and needs to be searched. This means that there are improvements in productivity and efficiency.
  • It is much easier to update information in electronic form.
  • Wider access to corporate information should open the way to more flexible working patterns, as material available on-line may be accessed from remote locations.


Remote access to intranets can be available quickly and easily. This means that people working at different parts of the organisation or away from the office can access data when they need it. Developments in IT allow information from a data warehouse (see below) to be displayed and Excel has facilities to post spreadsheets straight to the intranet and for users to drill down to the detail from a summary level.


An extranet is an intranet that is accessible to authorised outsiders.

Whereas an intranet resides behind a firewall and is accessible only to people who are members of the same company or organisation, an extranet provides various levels of accessibility to outsiders.

Only those outsiders with a valid username and password can access an extranet, with varying levels of access rights enabling control over what people can view. Extranets are becoming a very popular means for business partners to exchange information.


A typical accounting application package processes only one sort of data. A payroll file processes only payroll data and an inventory file only inventory data. An organisation might end up with separate files and processing subsystems for each area of the business. However, in many cases the underlying data used by each application might be the same. A major consequence is that data items are duplicated in a number of files (data redundancy). They are input more than once (leading to errors and inconsistencies) and held in several files (wasting space). For example, data relating to the hours which an hourly-paid employee has worked on a particular job is relevant both to the payroll system, as the employee’s wages will be based on the hours worked, and to the job costing system, as the cost of the employee’s time is part of the cost of the job.

The problem of data redundancy is overcome, partly at least, by an integrated system. An integrated system is a system where one set of data is used for more than one application. In a cost accounting context, it might be possible to integrate parts of the sales ledger, purchase ledger, inventory control systems and nominal ledger systems, so that the data input to the sales ledger updates the nominal  ledger automatically.

The integrated systems approach, where different applications update each other, is a halfway house between a system based on separate application-specific files and a database approach.

Broadly speaking, a database is a file of data organised in such a way that it can be accessed by many applications and users.

Using the example of hours worked given above, the following situations are possible.

  • The employee’s hours are input twice, once to the payroll application, once to the job costing system, in a non-integrated system of application-specific files.
  • In an integrated system, the data would have been input once, to the HR database which is used by the payroll application and by the job costing application.
  • In a database system it would only be input once and would be immediately available to both systems.


A database provides a comprehensive file of data for a number of different users. Each user will have access to the same data, and so different departments need not keep their own data files, containing duplicate information but where the information on one file disagrees with the corresponding information on another department’s file.


Database management systems

The database management system (DBMS) is a complex software system that organises the storage of data in the database in the most appropriate way to facilitate its storage, retrieval and use in different applications. It also provides the link between the user and the data.

Data warehousing 

A data warehouse contains data from a range of internal (e.g. sales order processing system, nominal ledger) and external sources. One reason for including individual transaction data in a data warehouse is that if necessary the user can drill-down to access transaction-level detail. Data are increasingly obtained from newer channels such as customer care systems, outside agencies or websites.

The warehouse provides a coherent set of information to be used across the organisation for management analysis and decision-making. The reporting and query tools available within the warehouse should facilitate management reporting and analysis.

The reporting and query tools used within the warehouse need to be flexible enough to allow multidimensional data analysis,  also known as on-line analytical processing (OLAP). Each aspect of information (e.g. product, region, price, budgeted sales, actual sales, time period and so on) represents a different dimension. OLAP enables data to be viewed from each dimension, allowing each aspect to be viewed in relation to the other aspects. So, for example, information about a particular product sold in a particular region during a particular period would be available on-line and instantly.

Organisations may build a single central data warehouse to serve the entire organisation or may create a series of smaller data marts. A data mart holds a selection of the organisation’s data for a specific purpose.

A data mart can be constructed more quickly and cheaply than a data warehouse. However, if too many individual data marts are built, organisations may find it is more efficient to have a single data warehouse serving all areas.


Advantages of setting up a data warehouse system include:

  • Decision makers can access data without affecting the use of operational systems.
  • Having a wide range of data available to be queried easily encourages the taking of a wide perspective on organisational activities.
  • Data warehouses have proved successful in a number of areas.
    • Quantifying the effect of marketing initiatives
    • Improving knowledge of customers
    • Identifying and understanding an enterprise’s most profitable revenue streams
  • Information can be made available to business partners. For example, if customer sales order information is in the data warehouse, it could be made available to customers and even suppliers. Internal information on products and services could also be provided.

Data mining

Data mining software looks for hidden patterns and relationships in large pools of data.

True data mining software discovers previously unknown relationships. Data mining provides insights that cannot be obtained through OLAP. The hidden patterns and relationships the software identifies can be used to guide decision-making and to predict future behaviour.

Case Study

  • The American retailer Wal-Mart discovered an unexpected relationship between the sale of nappies and beer! Wal-Mart found that both tended to sell at the same time, just after working hours, and concluded that men with small children stopped off to buy nappies on their way home, and bought beer at the same time. Logically therefore, if the two items were put in the same shopping aisle, sales of both should increase. WalMart tried this and it worked.
  • Some credit card companies have used data mining to predict which customers are likely to switch to a competitor in the next few months. Based on the data mining results, the bank can take action to retain these customers.



To make use of data, a suitable reporting framework is needed. Enterprise resource planning packages aim to integrate all of a company’s applications to give a single point of access. A problem is that accessing source data is difficult if it is held in different formats and systems.

Case Study

Time and time again finance directors say that their key IT issue is lack of reporting capabilities in the systems they are using. Reporting problems tend to fall into three categories.

First, the inability to access the source data. This is either because it is in a format that cannot be accessed by PC technology or it is held in so many places that its structure is incomprehensible to a member of the finance team.

Second, the tools to make the enquiries or produce the reports are often difficult to use and do not produce the reports in a ‘user friendly’ format with ‘drill down’ capabilities.

Third, there is the issue of consistency of information across systems. In order to get an overall picture of your organisation’s performance you will usually need to access data from different operation applications. All too often the data is not the same across these systems.

The argument for replacing what you have is well rehearsed. New systems promise the latest technology for reporting and enquiries. Enterprise Resource Planning (ERP) packages promise to integrate your different applications smoothly and give you a single point of access to all data. Customer Relationship Management (CRM) software has been added to this recipe to give this approach a better chance of happening.

“There are a myriad of reporting tools costing from a few pounds to hundreds of thousands of pounds. One that is regularly overlooked is the spreadsheet. Excel is the product most commonly used by accountants. With the advent of Microsoft Office 2000 there is a bewildering array of features to present information on your desktop or paper. Pivot tables are starting to be used more widely for multi-dimensional analysis and can be combined with the increasingly powerful graphical capabilities of Excel. Spreadsheets are much underrated and it is surprising how many organisations go out and buy expensive new knowledgemanagement tools when they already have a product on their computer that will deliver all the reporting/enquiry performance they require.

So, see how far your spreadsheet will take you and see if you can avoid the cost of another new IT tool.”

Adapted from an article by John Tate, Management Accounting, April 2000


Developments in IT have enabled the remote input of data.

It is no longer the case that data input requires someone to sit at a desk and to tap away at a keyboard. There is a wide range of data capture techniques, a number of which allow staff to input data into the organisation’s system whether or not they are in the office.

  • Sales staff can communicate sales orders directly to head office using laptop computers, ‘smart’ phones etc .
  • The use of hand-held computers, often with touch sensitive screens, means there is no need for subsequent manual entry of data, speeding up processes and reducing the chance of error, because there are no transcription errors and computerised data validation techniques can be employed.
  • EPOS (Electronic Point of Sale) systems (barcode scanners and tills) are primarily intended to speed up and avoid error in the check-out process in supermarkets, to allow customers to complete transactions, and to manage inventories. In addition, however, they collect precise and detailed information about how many of what products are being bought at what times. If linked to a loyalty scheme, ‘and by whom’ can be added since this allows the purchase data to be combined with demographic data.
  • Items such as pressure mats that sound a buzzer in smaller shops or sliding doors in larger ones have the practical purpose of either alerting staff to the fact that there is someone in the shop or simply for letting customers in and out, but if linked to a computer they also collect information about number and movements of customers. The same applies to ticket scanners in car parks, stations, and leisure facilities like sports venues.



Developments in IT have revolutionised the potential for management accounting data, increasing the volume and variety of possible reports.

Management information systems (MIS)

Most information is provided by an information system, or management information system (MIS).

Management information system is ‘a system to convert data from internal and external sources into information and to communicate that information, in an appropriate form, to managers at all levels in all functions to enable them to make timely and effective decisions for planning, directing and controlling the activities for which they are responsible’.(Lucey)

A management information system is therefore a system of disseminating information that will enable managers to do their job. It should provide managers with data that they can use for benchmarking and control purposes.

Management information is by no means confined to accounting information, but until relatively recently accounting information systems have been the most formally-constructed and well-developed part of the overall information system of a business enterprise. This is still the case in all but the most advanced organisations.

Most management information systems are not designed, but grow up informally, with each manager making sure that he or she gets all the information considered necessary to do the job. Much accounting information, for example, is easily obtained, and managers can often get along with frequent face-to-face contact and co-operation with each other. Such an informal system works best in small organisations.

However, some information systems are specially designed, often because the introduction of computers has forced management to consider its information needs in detail. This is especially the case in large companies.

Management should try to develop/implement a management information system for their enterprise with care. If they allow the MIS to develop without any formal planning, it will almost certainly be inefficient because data will be obtained and processed in a random and disorganised way and the communication of information will also be random and hit-andmiss.

  • Some managers will keep data in their heads and will not commit information to paper. Stand-ins/successors will not know as much as they could or should because no information has been recorded to help them.
  • The organisation will not collect and process all the information that it should.
  • Information may be available but not disseminated to the appropriate managers.
  • Information is communicated late because the need to communicate it earlier is not understood and appreciated by the data processors.


The consequences of a poor MIS might be dissatisfaction amongst employees who believe they should be told more, a lack of understanding about what the targets for achievement are and a lack of information about how well the work is being done.

Whether a management information system is formally or informally constructed, it should therefore have certain essential characteristics.

  • The functions of individuals and their areas of responsibility in achieving company objectives should be defined.
  • Areas of control within the company (e.g. cost centres, investment centres) should also be clearly defined.
  • Information required for an area of control should flow to the manager who is responsible for it. (Management structure of the organisation should therefore be considered.)


Types of MIS

Three particular types of management information system deserve special mention.


Type of MIS Detail
Decision support systems (DSS) Used by management to help make decisions on poorly defined problems (with high levels of uncertainty). They provide access to information with a wide range of information gathering and analytical tools. Decision support systems allow the manager to scan the environment, consider a number of alternatives and evaluate them under a variety of potential conditions. There is a major emphasis upon flexibility and user-friendliness.

information systems


Give executives a straightforward means of access to key internal and external data. They provide summary-level data, captured from the organisation’s main systems (which might involve integrating the executive’s desk top PC with the organisation’s mainframe), data manipulation facilities (such as comparison with budget or prior year data and trend analysis) and user-friendly presentation of data.
Expert systems Draw on a computerised knowledge base (such as details of the workings of tax legislation) and can give factual answers to specific queries, as well as indicating to the user what a decision ought to be in a particular situation.



Setting up a management accounting system

Taking a broad view, the following factors should be considered when setting up a management accounting system (which is just one part of an overall MIS).

  • The output required. This is just another way of saying that the management accountant must identify the information needs of managers. If a particular manager finds pie-charts most useful the system should be able to produce them. If another manager needs to know what time of day machinery failures occur, this information should be available. Levels of detail and accuracy of output and methods of processing must be determined in each case.
  • When the output is required. If information is needed within the hour the system should be capable of producing it at this speed. If it is only ever needed once a year, at the year end, the system should be designed to produce it on time, no matter how long it takes to produce.
  • The sources of input information. It is too easy to state that the outputs required should dictate the inputs made. The production manager may require a report detailing the precise operations of his machines, second by second. However, the management accounting system could only acquire this information if suitable production technology had been installed


The need for management accounting systems to develop

Globalisation and competition require an external, forward-looking focus, with greater facilities for modelling.

In the Study Guide, the ACCA states that management accounting systems need to be defined and developed ‘in an increasingly competitive and global market’.

Environmental analysis is covered in detail in Paper P3 Strategic Business Analysis.

We shall now describe some pointers for issues of competition and globalisation. The key development is the use of management accounting systems for strategic decision making.



Impact Management accounting impact
• More competitors Better competitor intelligence

Model competitor cost structures

• More competing products Identify which features add most value; model impact on cost
• Faster response Management accounting information has to be produced speedily and be up-to-date for decision making


  1. Globalisation
Impact Management accounting impact
• Increases competition •       Similar impact to (a)

•       Attention    to         behavioural   impact on management accounting systems in different markets

• Access to overseas capital •       The cost of operating in different local markets

•       Aggregating information

• Overseas activities • Repaid for exchange differences


We consider management accounting systems later in the text in Parts C and F.



Scenario planning and foresight both highlight the inherent uncertainty in trying to predict the future. One particular aspect of this uncertainty comes from how competitors will react to any new strategy an organisation introduces.

Game Theory is the study of the ways in which the strategic interactions among rational players produce strategic outcomes which were not intended by any of the players.

Game theory approach to strategy

Game-based approaches to strategy treat strategy as an interaction between an organisation and its competitors. To this end, an organisation cannot simply develop its strategy by analysing its current position in the environment, and looking at its internal resources. Instead it also needs to look at its competitors, identify their strengths and weaknesses and examine how their responses to a strategy could affect the effectiveness of that strategy.

Anticipating competitors’ moves is a crucial part of strategic thinking: gauging competitors’ likely reactions to a strategy greatly improves an organisation’s ability to choose a strategy that will be successful.

We can illustrate this with a simple example.

Example: soft drinks market

Firms A and B are the local market-leaders in the soft drinks market, and between them they hold virtually 100% of the market share. Firm A is considering launching a major advertising campaign, because its marketing director believes this will not only increase its own sales and profit, but will also reduce those of its rival (B).


However, the marketing director has not considered B’s response. B has become aware of A’s campaign, and is now considering launching a campaign of its own to restore its market share.


At this moment, both A and B make profits of RWF250m per year. A is thinking of spending RWF25m on its campaign, because it wants a major campaign to generate a significant increase in revenue. The anticipated increase of revenue from the campaign is RWF75m.


Because A and B essentially share the market, A’s revenue increase is expected to come from customers who switch to it from B. therefore, alongside A’s revenue increase of RWF75m, B will suffer a revenue reduction of RWF75m.


Consequently, at the end of A’s initial campaign, and in the short term, B will have suffered a reduction in profit of RWF75m, while A will have enjoyed an increase in profit of RWF50m (RWF75m revenue less RWF25m marketing cost). This is a ‘win-lose’ situation, because A has ‘won’ while B has ‘lost’.


However, B then runs a rival campaign, also costing RWF25m, and which also generates RWF75m additional revenue following the logic from before, this is now a ‘lose-lose’ situation because although A has ‘lost’ and B has ‘won’, the contest has cost each them RWF25m to gain nothing..


Let us look at the impact these campaigns have on A and B’s profits, and the overall profits earned by the soft drink industry.


Option A’s profit B’s profit Industry profit
Currently (no advertising) RWF250m RWF250m RWF500m
A advertises RWF300m RWF175m RWF475m
B then launches counter advert


RWF225m RWF225m RWF450m

Interestingly, after the advertising campaigns both firms are worse off than they were before, and the industry profit has reduced by the cumulative cost of the advertising campaigns. So overall the advertising campaign, created a ‘lose –lose ‘  situation.

The figures show that although one firm can gain in the short run from a competitive strategy, in the long run both firms are likely to be better off by working together and not advertising, rather than competing with each other.

One of the assumptions of game theory is that the firms do not have any collusive agreements and do not know what the other is going to do. So A and B must select their strategies based solely on the outcome which they think is best for them regardless of the decision made by their rival.

Under these circumstances, both firms will choose to advertise, because their own campaign increases their own profit by RWF50m. However, collectively this course them both to lose RWF25m each.

In this way, game theory illustrates the key problem of interdependent decision-making which organisations face.

Organisations need to consider the possible responses of their competitors when  making strategic decisions or introducing new strategies.

Moreover, game theory also suggests that it may benefit firms to co-operate and negotiate with others in the search for optimal solutions rather than simply working alone and competing with all the other players in a market place. In order to create a ‘win-win’ scenario, firms are likely to have to compromise and co-operate rather than always seeking to compete with each other.

In this context of networks and co-operation being preferable to constant competition, game theory can help explain the reasoning behind strategic alliances. Game theory also supports the cartel arrangement which the OPEC nations have established to control the production and price of oil

Case Study: GlaxoSmithKline’s strategy for the developing world:

“GlaxoSmithKline(GSK), the world’s second largest pharmaceutical company is  radically to shift its attitude to providing cheap drugs to millions of people in the developing world.

In a major change of strategy, Andrew Witty, the new head of GSK has announced [in 2009] he will slash prices of all medicines in the poorest countries, give back profits to be spent on hospitals and clinics and – most ground-breaking of all – share knowledge about potential drugs that are currently protected by patents.

Witty says he believes drug companies have an obligation to help the poor get treatment, and he has challenged other pharmaceutical giants to follow his lead.

Pressure on the industry has been growing over the past decade as drug companies have been repeatedly criticised for failing to drop their prices for HIV drugs while millions died in Africa and Asia. Campaigners have criticised the drug companies for defending the patents, which allow them to maintain high prices.

Campaigners have also been critical of the way drug companies have attempted to crush competition from generic manufacturers, who undercut them dramatically in countries where patents do not apply.

However, the moves which Witty has announced go a long way to addressing these concerns, and mark a significant change to the way GSK does business in the developing world.

He said that GSK will:

  • Cut its prices for all drugs in the 50 least developed countries to no more than 25% of the levels in the UK and US – and less if possible – and make drugs more affordable in middle-income countries such as Brazil and India.
  • Put any chemicals or processes over which it has intellectual property rights that are relevant to finding drugs for neglected diseases into a “patent pool”, so they can be explored by other researchers.
  • Reinvest 20% of any profits it makes in the least developed countries in hospitals, clinics and staff.

The extent of these changes is likely to stun not only critics of drug companies but also other pharmaceutical companies, who risk being left exposed.

Witty accepts that his stance may not win him friends in other drug companies, but he is inviting them to joy him in an attempt to make a significant difference to the health of people in poor countries.

Witty explained that the changes reflect his desire that GSK finds solutions for developing and developed countries alike. However he is aware that the move may raise concerns among GSK’s shareholders.

“I think the shareholders understand {the need to help the developing countries as well as the richer, developed countries) and it’s my job to make sure I can explain it. I think we can. I think it’s absolutely the kind of thing large global companies need to be demonstrating, that they’ve got a more balanced view of the world than short-term returns”.

The move on intellectual property, until now regarded as the sacred cow of the pharmaceutical industry, will be seen as the most radical of his proposals.”  I think it’s the first time anybody’s really come out and said we’re prepared to start talking to people about pooling our patens to try to facilitate innovation in areas where, so far, there hasn’t been progress” he said.

However, a key question now is how the other major pharmaceutical companies will respond.”

(based on an article by Sarah Boseley, 13 February 2009. Drug giant Glaxo Smith Kline pledges cheap medicine for world’s poor)

The value of game theory is that it highlights that both competition and co-operation can exist in an industry. An important part of an organisation’s strategy is how it interacts with the other players in an industry in this respect.

Although both scenario planning and foresight aim to assist an organisation in designing their future strategies, their effectiveness will depend in part on the organisation’s current strategic intelligence.

However, critics of game theory argue that its value to strategic management is limited because it focuses on only a small fraction of the strategy process. For example, it does not provide any insight into the development of the competitive resources or capabilities of an organisation. Equally, it does not provide any useful guidance as to how to actually implement whatever co-operative strategies may have been negotiated.           

Section summary

Game theory illustrates that an organisation cannot develop its strategy without considering the possible reactions of its competitors.  Competitor reaction may mean that the outcomes of a strategy are very different to what was initially intended.     


  • Unlike manufacturing companies, services are characterised by intangibility, inseparability, variability, perishability and no transfer of ownership.
  • Mass services are standard services provided to large numbers of people, and are often automated. Personal services vary on the circumstances of the service delivery, and are generally one-to-one.
  • Service businesses need the same aggregate information as manufacturing firms, but also need performance data as to their cost and volume drivers. Operational information is likely to be more qualitative.
  • Access to data has been facilitated by groupware, intranets, extranets, databases, data warehousing and data mining.
  • Developments in IT have enabled the remote input of data.
  • Developments in IT have revolutionised the potential for management accounting data, increasing the volume and variety of possible reports.
  • Globalisation and competition require an external, forward-looking focus, with greater facilities for modelling.
  • Game theory illustrates that an organisation cannot develop its strategy without considering the possible reactions of its competitors. Competitor reaction may mean that the outcomes of a strategy are very different to what was initially intended.
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