Student ID: 2015768
Managing Business Performance (MBP)
Analytical Report
Student ID: 2015768
Word count: 2720
Assessment code: 010
Module Title: Managing Business Performance (MBP)
Module Code: MOD003460
Academic Year: 2022/2023
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Student ID: 2015768
Table of Contents
Task 1 ...................................................................................................................................................... 3
Task 1.1 ............................................................................................................................................... 3
Budgeting: public sector vs private sector. ......................................................................................... 3
Task 1.2 ............................................................................................................................................... 4
Budgeting: ‘incremental’ vs ‘zero based’. ........................................................................................... 4
Task 1.3 ............................................................................................................................................... 5
Zero-based budgets – stages. ............................................................................................................. 5
Task 1.4 ............................................................................................................................................... 6
Incremental vs zero-based budgeting public sector – discussion. ..................................................... 6
Task 1.5 ............................................................................................................................................... 7
Budgeting – participative approach. ................................................................................................... 7
Task 2 ...................................................................................................................................................... 8
Task 2.1 ............................................................................................................................................... 8
Nature of the product life cycle (PLC) concept and its impact on businesses operating in an
advanced manufacturing environment. ............................................................................................. 8
Task 2.2 ............................................................................................................................................. 12
Market-based pricing strategies. ...................................................................................................... 12
References ............................................................................................................................................ 14
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Task 1
Task 1.1
Budgeting: public sector vs private sector.
Public sector organisations are primarily owned and under control by the government or
local authorities. They aim to provide (often free-of-charge) high-quality public services, for
instance, state schools (Drury, 2021). The private sector comprises businesses owned by
individuals or other companies, such as Toyota, powered by the desire to make a profit
(Bragg, 2022). The type of organisation is one of the determinants of the budgetary system
(Gogia, 2023).
Difficulties in budgeting for the public sector may include:
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Different objectives
Non-financial objectives that are core in public sector organisations are challenging
to account for in a budget. It can be more qualitative goals difficult to measure. For
example, ensure that every outpatient is given an appointment within eight weeks of
being referred to the hospital (Anon., 2023b). Determining the level of sales and
profit is much simpler in a private company budget.
Less control over expenditure
In the private sector, the output might be expressed in terms of sales revenue. The
amount that must be spent to produce the specified output level is directly related
to the input costs. Defining a measurable relationship between inputs and outputs,
e.g. in a hospital, can be challenging(Anon., 2023b).
Less control over funding
Most funding comes from tax receipts, which can be challenging to manage. For
instance, even though a school enrols more students, funding may be shortened due
to a financial crisis. Businesses have more control because they can alter their
activity levels, boost their pricing, or obtain a loan from the bank.
Political pressure
Politicians can make decisions in the public sphere. When making budgetary
decisions, they can prioritise political criteria (like the popularity of a programme) for
economic ones (like cost-benefit analyses). In the private sector, economic criteria
are always the first consideration.
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Task 1.2
Budgeting: ‘incremental’ vs ‘zero based’.
Incremental budgeting
Incremental budgeting is a procedure in which the budget for this year is established by
using the actual results from the previous year after adjusting for anticipated changes like
inflation and other incremental considerations (Drury, 2021).
Advantage:
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It is a simple process that may be completed quickly. That means that a person with
less professional experience can prepare for it.
There is relatively little need for quantitative analysis because the information is
easily accessible.
Suitable in not rapidly changing business.
Disadvantage:
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It increases needless expenditures (inefficiencies).
Encourages organisations to spend as much as is permitted.
It can be challenging to determine the increment's exact size.
That may result in poor budgeting by ignoring a cost's real (activity-based) drivers.
Zero based budgeting (ZBB)
ZBB presents an approach to budgeting that requires managers to explain every budgeted
expense by starting expected expenditure for ongoing activities at zero rather than the
previous year's budget (Drury, 2021).
Advantage:
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The inefficiencies are eliminated.
It highlights the requirement to get value for money from utilising organisational
resources.
Disadvantage:
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Having the skills to create decision-making packages is essential, which means
additional training may be needed, which costs time and money.
The volume of paperwork produced by ZBB may become unmanageable in a large
organisation by reason of the number of activities.
Finding decision packages and determining their function, costs, and advantages
takes lots of effort and is consequently expensive.
Managers may be unable to react to changes during the year due to decisions being
taken at budget time.
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Task 1.3
Zero-based budgets – stages.
Zero-based budgeting (ZBB) stages (Borad, 2016):
1. Identifying the Decision Unit.
An activity or group of activities that can be independently and meaningful identified
can be considered decision units, e.g., the marketing or production departments.
Every decision unit has to be separate from the other. Each decision unit's manager
is responsible for justifying the costs and needed budget allocation.
2. Making Decision Packages.
Decision units are broken down into smaller decision packages. These decision
packages need to support the organisation's goals. Each decision package functions
as a separate proposal that is submitted for funding.
The decision package should:
- analyse the activity's cost
- identify its goal
- indicate additional ways to accomplish the same goal
- determine the activity's performance measures
- evaluate the impact of conducting the activity at various levels or not
performing it at all.
3. Ranking Decision Packages
Consist of ranking all the decision packages in order of significance and priority to
allocate resources effectively. The cost-benefit analysis figures out the ranking of
decision packages. All alternatives are reviewed to determine the best and most
economical. The decision packages that help the company achieve its predetermined
goals receive approval only. Furthermore, management ensures that each decision
package's cost is accurate and realistic.
4. Allocating Available Resources
Funds are assigned to the decision packages - better financing is allocated to the
most promising decision packages. That guarantees the best possible usage of
limited resources.
5. Controlling and Monitoring
In this step, decision package performance and output are monitored and assessed.
The management can determine whether or not the resource allocation is accurate
by measuring the performance of the decision packages.
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Task 1.4
Incremental vs zero-based budgeting public sector – discussion.
Incremental budgeting might encourage slack and inefficient expenditure by repeating
previous inefficiencies due to the frequent lack of scrutiny of cost levels. Nevertheless, the
concept that it no longer has a place in any organisation is somewhat exaggerated. Although
it is unsuitable for organisations in the public sector, where every expense should be
justified, to suggest that incremental budgeting is useless for any organisation is to ignore
the drawbacks of zero-based budgeting (ZBB) (Drury, 2021)
The analysis below shows the limitations of ZBB.
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Due to the frequent lack of scrutiny of cost levels, incremental Construction of
decision packages and the ranking procedure in ZBB require advanced skills and
managerial abilities. If management needs to catch up on these competencies, they
must complete time- and money-consuming ZBB training.
The amount of additional documentation produced is the following ZBB restriction.
Each package's assumptions regarding costs and benefits must be updated regularly,
and new packages must be created as new activities appear within the organisation.
The rating process itself can be complicated. For legal or practical reasons, it can be
challenging to prioritise packages. Activities that provide qualitative rather than
quantitative advantages are also difficult to rank.
ZBB may suggest that every beneficial choice must fit into the budget. Because new
concepts were not accepted by a decision package and did not make it through the
ranking procedure, managers might feel unable to implement them.
In practice, because all costs must be justified, it would appear improper to implement a
ZBB system as the only one within a private sector organisation where certain costs will
always be incurred to achieve fundamental organisation requirements. Since it is quick and
straightforward to understand, incremental budgeting will likely be more effective.
ZBB can be more suitable for organisations in the public sector. With these organisations,
the focus is on getting value for the money, and the majority of costs are discretionary. This
goal relates to the ZBB system's decision package ranking procedure. Furthermore, it is
simpler to incorporate activities into decision packages in organisations that carry out a few
defined set tasks. For instance, hospitals have designated areas for emergency rooms,
maternity wards, and children's wards.
ZBB has limitations that should not be ignored, even though it is more suited to public
sector organisations, especially in the current economic context. Some types of
organisations can still benefit from incremental budgeting.
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Task 1.5
Budgeting – participative approach.
The participatory (bottom-up) budgeting method is based on the involvement of lower-level
managers in setting budget targets (Kaplan, 2021). In other words, the initiative comes from
team leaders, who usually have more accurate information about their department's daily,
weekly or monthly needs and upcoming projects. This knowledge helps them to create a
strategic budget plan that allows growth but prevents overspending. Each department has
to produce a budget based on the typical costs of doing its job, but it must be in line with
the requirements and plans of the whole organisation. This budget is then presented to
higher-level management or the CFO for approval and allocation. Some of the departmental
projections will likely exceed the budget. That means it is necessary to review planned
expenditures and adjust each department's budget accordingly, using the most real-time
data possible. The master budget is collated from the budgets of all departments and then
comprehensively reflects the company's needs for the coming financial period. Importantly,
although responsibility and decision-making in the bottom-up budgeting approach rest with
the budget managers, budget control lies with the finance management teams.
Advantages of the participatory budgeting method:
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A high accuracy, as each department estimates its costs based on the necessary
expertise,
increased creativity and motivation to work due to awareness of having sufficient
financial support for each department.
Positively influences lower-level management due to a sense of ownership and
integration.
Reduction of the finance department or the CEO of budgeting burden.
Disadvantages of the participatory budgeting method:
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The tendency to over-budget, as every department wants to secure a sufficient
budget to achieve its objectives and leave space for unexpected situations.
Budgetary bias - is when management intentionally sets a lower revenue objective
and/or a greater expense forecast.
Time-consuming because every department has to create its forecast, which requires
separate approval.
Inexperienced managers may take wrong decisions.
Although the participatory budgeting method is based on a more efficient and often more
accurate estimation method, it may not work in some organisations. It can occur when
lower-level employees are unwilling or not technically prepared to participate in the
budgeting process or do not have access to commercially sensitive information necessary
for budgeting purposes.
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Task 2
Task 2.1
Nature of the product life cycle (PLC) concept and its impact on businesses operating
in an advanced manufacturing environment.
The product life cycle (PLC) applies to the series of distinct stages a product goes through
during its commercial life. PLC covers the period from product conception to market
withdrawal (Idowu et al., 2013). PLC can refer to an individual product, a broad category of
products, a brand or a particular model. As a management tool helps analyse product
behaviours at every stage of existence that, included: development, introduction, growth,
maturity and decline. Every stage is distinguished by a different correlation of costs, sales
and profit. That means the PLC concept considers the profitability on its whole life rather
than its yearly basis.
Diagram of a typical product lifecycle (Kaplan, 2021):
Development
The development stage is characterised by expenses incurred for research and development
(R&D). In Advanced Manufacturing Technology (AMT), designing the product and
constructing or equipping the production line need high costs. As the product has not yet
been launched, it is not sold. That means that the project is loss-making.
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Introduction
Once the product is launched, it enters the introduction phase with slow growth sales as it is
adopted on the market. However, not all customers know the product on this level, so
promotion costs to achieve consumer targets are significant. Low-capacity utilisation and
relatively high unit costs because of low demand and marketing costs requirement mean
that even if the sales are growing, the product is still not profitable.
Growth
The product gains market acceptance at this stage, reflected in fast-growing sales. More
consumers find and recognise the product, but the competitors also spot the product as a
winner and entry the market. Additional development costs can occur as a result of the
improvement of the product to make them more attractive. However, through increased
production and selling, unit costs start to fall, making the product profitable.
Maturity
It is characterised by continued sales increase, but not as rapid as during the growth phase.
Weaker competitors start to leave the market, but strong ones are still on the market. There
may be costs for extension strategies. Prices start to fall as well. Nonetheless, there is
strongly positive cash flow because there is less need for investment and marketing. Very
efficient low unit costs benefit high profits, especially those with high market share.
Decline
In the final stage, actual sales and the market start to decline. Excess capacity causes rising
unit costs. The product and the market as a whole become unsustainable. Reduction in
profits begins because revenue is not sufficient to cover the costs.
Example of the classic PLC curve shape example – Apple iPod (Anon., 2023a)
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The IBM floppy disk is an example of the product life cycle (Anon., 2023c).
Development IBM engineers created the first floppy disc in 1970. It had a 2MB storage
capacity and was an 8-inch flexible magnetic disc in a square housing.
Introduction It was first launched in 1971 and quickly established itself as the sole
method of data storage and transfer.
Growth
The greatest use of the floppy disk was in the 1980s and 1990s.
Maturity
Was sold well in the 1990s market. The 21st century saw the emergence
of significant competitors. People also had options for storing their data
thanks to the development of USB cables, external hard drives, and CDs.
Decline
The floppy disc experienced a sharp fall until Hewlett-Packard decided to
discontinue making them in 2009.
The impact of product life cycle on businesses operating in an advanced manufacturing
environment (AMT).
New product development is often complex, absorbs significant resources, may not be as
successful as expected, and may take a long time before sales are achieved. On the other
hand, in an AMT, rapidly developing technology and changing consumer needs are leading
to shorter product life cycles, which require companies to manufacture new goods more
swiftly and force them to reduce the product development phase (LaBahn, Ali and Krapfel,
1996).
Businesses using AMT have found that choices taken in the design stage of PLC account for
about 70% of the cost of a product (Kaplan, 2021). That means companies operating in AMT
should focus on Life Cycle Costing (LCC), which is relevant to manufacture products with
short life cycles and high R&D costs. Using LCC allows for estimating sales volumes and
prices with reasonable accuracy.
Depending on the PLC phase, different marketing and pricing strategies are required to
maximise sales and profitability of the product. In order to extend product life, the constant
improvement of the product should be considered, especially in the growth stage, such as
adding more features or new options.
The diagram below presents the benefits of implementing LCC for a company operating in
AMT.
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(Association of Chartered Certified Accountants (Great Britain), n.d.)
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Task 2.2
Market-based pricing strategies.
Discuss the market- based pricing strategies that should have been considered for the
launch of the Latest Computer Game (Interactive and is one of its own kind) and
recommend a strategy that should have been chosen to introduce this latest game in time
for its peak selling season.
Market penetration pricing.
The penetration pricing strategy is based on launching a product on the market at a
relatively low price (Drury, 2021). The idea behind this is that by making the product more
affordable, more consumers will be able to purchase it, and as a result, the reduced price
will be made up for by the high volume of sales. The game would receive quick commercial
approval and quickly establish itself as the only game worth purchasing.
The penetration pricing strategy is useful if:
- The company aims to deter new competitors from entering the market.
- The business wants to shorten the product's initial life cycle.
- There are considerable economies of scale that can be reached.
Applying to the scenario:
- This is not supported by evidence that demand for the newest video game is highly
elastic.
- New entrants could have difficulty copying products and entering the market
because the game 'is one of its own kind', especially in the introduction stage of a
game's life cycle.
- There is no proof the firm wants to reduce the game's life cycle's initial stages so it
can move fast into the growth and maturity stages.
- It is difficult to determine whether, by achieving large economies of scale, higher
sales volumes could lead to appreciable cost savings.
Market skimming pricing.
A price-skimming approach aims to take advantage of market segments that are largely
insensitive to price changes (Drury, 2021). For instance, when demand is not particularly
sensitive to price fluctuations, high initial pricing may be paid to capitalise on the innovative
appeal of a product. A skimming pricing strategy protects against unexpected future cost
hikes or a significant drop in demand after the novelty appeal has worn off.
The skimming pricing strategy is useful if:
- Customers are willing to pay high prices since the product is novel and distinctive
and will provide them 'one up' over those who do not own it.
- The product should immediately turn a profit and recoup its development
expenditures due to its short life cycle.
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Applying to the scenario:
- As the game is unique and interactive (if the player wants to interact with other
players must to have the game) is a high probability that customers will willingly pay
a high price, especially in the peak selling season.
- Technologically advanced products such as computer games have a relatively short
product life cycle.
Recommendation:
Considering the innovative and unique nature of the game, the market skimming pricing
strategy would be far more suitable in the above scenario.
Early adopters would have been willing to pay high costs for the game given its novelty
appeal, making the demand for it inelastic. At the product introduction stage, there are
significant barriers to entry for competitors; this means a competitive advantage for the
product being introduced. Alternatively, prices may be lowered when the product enters
later life phases, e.g. the growth phase, to remain competitive once rivals appear on the
market.
The advantage of skimming pricing will be the possibility of recovering the research and
development costs, high marketing expenditure and potential improvement spending,
which can occur during the growth stage to make the product more attractive.
Furthermore, the peak selling time of the computer game would benefit the company to
maximise profits.
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References
Anon. 2023a. Apple iPod sales 2006-2014 | Statista. [online] Available at:
<https://www.statista.com/statistics/276307/global-apple-ipod-sales-since-fiscal-year-2006/>
[Accessed 23 February 2023].
Anon. 2023b. Comparing budgeting techniques | F5 Performance Management | ACCA Qualification
| Students | ACCA | ACCA Global. [online] Available at:
<https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-studyresources/f5/technical-articles/comparing-budgeting-techniques.html> [Accessed 2 March 2023].
Anon. 2023c. IBM100 - The Floppy Disk. [online] Available at:
<https://www.ibm.com/ibm/history/ibm100/us/en/icons/floppy/> [Accessed 25 February 2023].
Borad, S., 2016d. Zero Based Budgeting Steps / Process. [online] Available at:
<https://efinancemanagement.com/budgeting/zero-based/zero-based-budgeting-steps> [Accessed
4 March 2023].
Association of Chartered Certified Accountants (Great Britain), n.d. ACCA. Performance management
(PM) Workbook.
Bragg, S., 2022. Private sector definition — AccountingTools. [online] Available at:
<https://www.accountingtools.com/articles/private-sector> [Accessed 2 March 2023].
Drury, C., 2021. Management and Cost Accounting. 11th Edition ed.
Idowu, S.O., Liangrong, N.C., Ananda, Z. and Gupta, D., 2013. Encyclopedia of Corporate Social
Responsibility.
Kaplan, 2021. ACCA Management Accounting (MA). [online] Kaplan Publishing. Available at: <Kortext
2023 (Version 1.29.1)> [Accessed 2 March 2023].
LaBahn, D.W., Ali, A. and Krapfel, R., 1996. New product development cycle time: The influence of
project and process factors in small manufacturing companies. Journal of Business Research, 36(2),
pp.179–188. https://doi.org/10.1016/0148-2963(95)00120-4.
Gogia, N., 2023. Course: (3460T2) Managing Business Performance. [online] Available at:
<https://learnarul.uk/course/view.php?id=215389> [Accessed 11 March 2023].
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