MANAGEMENT ACCOUNTING (PAM 6014)

CRITICSMS OF STRATEGIC MANAGEMENT ACCOUNTING

Presenter : AZRI BIN MOHAMED YUSOF (M20121000309)

QUESTION ASSIGNMENT

Since its introduction, the concept of strategic management accounting (SMA) has had its critics. Provide a discussion on the criticisms of strategic management accounting. In your opinion, do the costs outweigh the benefits?

OUTLINES PRESENTATION
1. Introduction of business strategy 2. Why traditional management accounting is not sufficient to provide information for strategic decision. 3. Definition of Strategic Management Accounting 4. Components of Strategic Management Accounting 5. Basic techniques of Strategic Management Accounting 6. Criticisms of Strategic Management Accounting

Business strategy was borrowed from the military

Objective / Mission / Strengthens / Weaknesses

What is the Strategic Management ?

1- Introduction

Business strategy produces long-term plans for the business, taking into consideration plans and possible actions of competitors, the main objective being to position the firm so it has a competitive advantage.

This discussion will describe business strategy and show why traditional management accounting is not sufficient to provide information for strategic decision.
Strategic Management Accounting (SMA).

2- Strategy and Information Need

Bowman (1990) traced the development of strategic planning from its internal focus on budgeting, forecasting and portfolio analysis, to its external focus. From the 1970s onward, firms began to focus on their place in their industry. Later this developed into strategic management, characteristic by the following: i) ii) iii) iv) planning at different levels of the business cutting across organizational boundaries an emphasis on entrepreneurial thinking, flexibility and creativity managers commitment to corporate strategy, reinforced by teamwork, commitment to making things happen, open communication and a shared belief that ambitious goals can be achieved.

2- Strategy and Information Need

Competitive forces are not necessarily considered to be enemies: there is the possibility of partnership with suppliers, competitors and customers, with benefit to all. In his 1980 book, Porter listed several disadvantages posed by competitors listed as follows: i) ii) iii) iv) the threat of new competitors entering the market the intensity of rivalry among existing competitors the pressure from substitute products the bargaining power of buyers and suppliers

3- Traditional Management Accounting and Strategy

Several problems with trying to use traditional management accounting information for strategic management : Traditional management accounting is too short-term and emphases profit for artificial accounting period (such as the financial year or operating month). Strategic management accounting has a long term focus, viewing profit in the context of the firms competitive position over time.

Most traditional management accounting is back-ward looking, focusing on past results, whereas strategic management accounting is forward looking.

 Traditional management accounting is inward looking, focusing on costs within the firm and particularly emphasizing precise product costs and manufacturing activities. Strategic management needs internal information about marketing, other support costs and linkages between activities and external information on customers, suppliers and competitors. Strategic management also requires non-financial as well as financial information and approximations may be sufficient.

Traditional management accounting systems tend to be programmed or reactive, dealing with regular events (such as the preparation on budgets) or one-off decision (such as the choice between making or buying a component). Strategic management accounting needs to be proactive and able to contribute to all stages of strategic decision making, which is usually un-programmed.

Comparison of traditional management accounting and strategic management accounting characteristics

Traditional Management Accounting Historical Introspective Narrow scope Internal performance Single period Manufacturing focus Existing activities Reactive Programmed (often) Overlook linkages Based on existing system Built on conventions Financial measures Exact figures Strategic Management Accounting Forward-looking Outward-looking Broad scope Performance relative to competitors Multiple periods Competitive focus Possibilities Proactive Un-programmed Exploits linkages Unconstrained by existing system Ignores conventions Financial and non-financial measures Approximations

4- What is the Strategic Management Accounting ?

Tesco has realized that its main fixed assets are its stores. With this type of asset base, the company aims to reduce the cost of building good quality new stores through strategic partnering with construction companies. In order to check its market positioning, the company is constantly monitoring the prices of its merchandise relative to the prices charged by its main competitors. As well as promoting customer loyalty, it uses its store card as a database for targeting the specific needs of individual customers as revealed through their purchase patterns. It also keeps a close eye on non-financial indicators such as the length of queues at the check-outs. Tescos approach in linking its goals and its management information systems demonstrates many of the principles of SMA. The company has decided how it is going to compete, reviewed its internal and external operations and chosen key performance indicators (KPI) that enable it to monitor the development of its chosen business model.

Definition of Strategic Management Accounting

The term strategic management accounting (SMA) has been used to describe the process of provision and analysis of management accounting data about a business and its competitors for use in developing and monitoring business strategy.

 Strategic choice means that companies can choose which industries and products they want to compete in but it also means that different companies in the same industry may decide to adopt different strategies with quite different implications for management accounting and control.

placed on bought-in goods and services, a higher proportion of costs are generated by a firms suppliers, which suggests that major improvements in cost, quality and innovation are potentially available through the effective management of the firms supply chain.

5- Basic Techniques of Strategic Management Accounting

SMA has an orientation towards the firms environment. The relevant environment may be in its value chain, that is, its upstream relations with suppliers and downstream relations with its customers. The other relevant environment is its competitive position relative to both existing and potential competitors. Its competitive position will not just depend on price but on a marketing mix. For example: the increased emphasis on marketing may involve the use of techniques such as attribute costing that costs product attributes that appeal to customers, using brand value as a basis for managerial decisions and measuring the costs of quality.

 The competitive position is monitored through competitor cost assessment through estimates of competitors costs based on an appraisal of facilities, technology, economies of scale, market share, volume, unit costs, and return on sales.
Strategic management accounting is also concerned with the long-run through the use of target and lifecycle costing that looks at the costs incurred throughout the life of a product as it goes through various stages such as development and full production.

6- Component of Strategic Management Accounting

a) Competitor Information b) Strategic Position & Management Accounting Emphasis c) Value Chain Perspective i) Value Chain Analysis ii) Cost Driver Analysis iii) Competitive Advantage Analysis

d) Market-oriented Information

6- Component of Strategic Management Accounting

a) Competitor Information Simmonds (1981), who coined the name strategic management accounting, saw profit arising not from how efficiently the firm operated internally, but from the firms competitive position over time. Thus he advocated the following process: i) collecting and estimating cost, volume and price data on competitors, ii) determining whether competitors products are in the build, maintain or harvest phase of their life cycles iii) calculating market share in order to assess the strategic position of ones own firm in relation to its competitors.

6- Component of Strategic Management Accounting

a) Competitor Information Bromwich (1990) suggested that management accountants gather information about the costs of barriers to entry such as economies of scale, product differentiation, cost advantages, capital requirements, strategic pricing by incumbents, intensive research and development, excess capacity, vertical integration and existing sales networks. Coad (1996) gave a detailed description of the collection and use of competitor information by a service department in a city council. Information was obtained in a number of ways via the grapevine from: i) former employees, suppliers and customers of the competitors. ii) publicly available information such as company accounts, new releases, promotional material, trade journals, commercial analysts reports and database. iii) council records of previous tenders.

6- Component of Strategic Management Accounting

a) Competitor Information Collier and Gregory (1995) provided some examples of strategic management accounting being used in the hotel sector. Accountants were involved in several processes such as: i) analyzing strengths, weaknesses, opportunities and threats (SWOT Analysis) ii) monitoring cost structure and pricing policies of competitors iii) comparing the performance of the company against its competitors.

6- Component of Strategic Management Accounting

b) Strategic Position & Management Accounting Emphasis
Primary Strategic Emphasis Product Differentiation Role of standard costs in assessing performance Importance of such concepts as flexible budgeting for manufacturing cost control Perceived importance of meeting budget Importance of product cost an input to pricing decisions Importance of product cost as an input to pricing decisions Importance of competitor cost analysis Low High Low Moderate to low Critical to success High to very high Often not done at all on a formal basis High Moderate to low High to very high Not very important Cost Leadership Very important

6- Component of Strategic Management Accounting

c) Value Chain Perspective i) Value Chain Analysis The firms value chain is joined to the value chains of suppliers and customers. Thus linkages are not only to be found within the value chain of a firm, but also between firm and their suppliers and customers. For example, Lord (1996) found that the cycle manufacturer achieved cost savings on freight by arranging with overseas suppliers in the same country to consolidate their orders into one shipping container and by positioning it after sales, warehouse where it could obtain cheaper airfreight rates. The cycle manufacturer also enhanced its desirability to customers and its points of differentiation by offering customized products, high quality and fast delivery.

6- Component of Strategic Management Accounting

ii) Cost Driver Analysis
Porter (1985) Structural cost drivers Scale Integration Learning Scale Scope Experience Technology Shank (1989)

Complexity
Timing (first mover or follower) Location

Discretionary policies (product mix, delivery time, production

scheduling) Institutional factors (government regulation, unionization, tariffs) Executional cost drivers Workforce commitment Total quality management Capacity utilization Capacity utilization Plant layout efficiency Linkages Interrelationships Exploiting linkages

6- Component of Strategic Management Accounting

iii) Competitive Advantage Analysis

Porter (1985) suggested collecting as much information as possible about competitors so their value chains can be estimated, including both activities performed and their costs. The total costs of competitors vale chains can then be compared. If the total cost of performing all the value activities in the firms value chain is lower than that of its competitors, the firm has a cost advantage. This cost advantage is sustainable if the firms sources of cost advantage are difficult for competitors to copy. If the firm does not have a cost advantage, they may achieve it by reducing costs through controlling cost drivers of value chain activities, or by reconfiguring the value chain activities, or by reconfiguring the value chain, for by adopting a more efficient way to design, produce, distribute and market the product.

6- Component of Strategic Management Accounting

d) Market-oriented Information Bromwich (1990) suggested analyzing the attributes of products and what differentiates them and makes them desirable to customers. These attributes include operating performance, reliability, warranty arrangements, the degree of finish and trim, assurance of supply and after sales service. One tool to enable this is target cost: determined by subtracting the desired profit margin from the selling price. Then a team made up from many functions in the firm, such as designers, production supervisors, engineers, marketing personnel and finance people, carries out an iterative process of designing the product and production process so that the product can be made for the target cost.

6- Criticisms of Strategic Management Accounting

a) The Strategic Planning Process Nyamori et al. (2001, p. 63) criticized the literature on strategic management accounting for not questioning what strategy is, how it is formed, how it comes to change and how strategic change constitutes and is constituted by accounting. They argued that there is a considerable body of literature on strategy and strategic management, but only parts of it are cited in papers on strategic management accounting. Minztberg (1978) pointed out that strategies are not always a result of strategic planning. The types of organization in which strategic plans are likely to be achieved as planned are those with highly ordered, neatly integrated processes, or entrepreneurial firms where a powerful leader makes bold, risky decisions to implement his or her vision.

6- Criticisms of Strategic Management Accounting

a) The Strategic Planning Process Dermer (1990) labeled the strategic planning or positioning school teleological that is predicated on the assumption that organizations are purposeful cohesive systems and that issues and support are controlled by management. Under the teleological views, the success of the system is measured by managerial effectiveness in coping with external events. Dermer (1990) claimed that, taking a view of strategic change as an unplanned result of conflicting stakeholder contending for control, protagonists may be using accounting in ways not anticipated by accountants. Accounting could be used as a language of discourse, as a powerful way of establishing and maintaining the credibility of those using it, and as a way of providing a history establishing the context of agenda setting.

6- Criticisms of Strategic Management Accounting

b) Competitor Analysis The promoters of competitor analysis also do not seem to recognize the possibility of alliances with competitors the benefits of competitors stated by Porter (1985) and the opportunities for cooperation illustrated by Bengstsson and Kock (1999). Competitor analysis still has military overtones of enmity. Carr and Tomkins (1996) found that strategically oriented German companies analyzed strategic considerations thoroughly, but were critical of formal strategic planning techniques such as SWOT, value chain, competitor and market analyses. Instead they used intuition, a feeling for the product and the market and a knowledge of customer needs based on close relationship with customers.

6- Criticisms of Strategic Management Accounting

c) The Value Chain Perspective Lord (1996) showed how small cycle manufacturer exploited linkages in the value chain without the need for financial analysis. She claimed that firms with effective operational management processes would already be finding cost saving opportunities and firm with a focus on customer and supplier relationship would automatically by exploiting linkages without formal analyses. In other words, value chain linkages and cost saving opportunities may be being recognized and acted upon without accounting analyses being carried out, that is, without the need for strategic management accounting.

6- Criticisms of Strategic Management Accounting

d) The Role of the Accountant Rickwood et al. (1990) presented an example of strategic management accounting led by a management accountant who, because of his position of authority in the organization, was able to pressure the marketing department into giving him the competitor information they held. He used this information for strategic decision making when the firm was threatened by a competitors action. Collier and Gregory (1995) also gave examples of accountants being involved in collecting competitor information.

6- Criticisms of Strategic Management Accounting

d) The Role of the Accountant Lord (1996) described a firm that was using many components of strategic management accounting. However, the techniques were employed by production, marketing and management personnel with no input from the management accountant. Cunnighams (1992) field study of three transportation companies found that marketing had an extensive influence on the management accounting system and the accounting type activities take place outside the accounting function and are performed by persons who do not consider themselves to be accountants.

6- Criticisms of Strategic Management Accounting

d) The Role of the Accountant
Chenhall and Langsfield-Smith (1998b) examined a company, Cleanco, had identified strategic priorities of enhancing customer satisfaction and reducing costs in order to sustain their competitive advantage. Measures were developed on the shop floor by team members and manufacturing managers. Although these measures did not always support strategic priorities, the management accountants were not interested in being involved in the development of more strategically driven performance measures. Chenhall and Langfield-Smith found similar lack of involvement at two further firms, Containers and Coalcorp. This contrasted strongly with the other two firms in their study, Chemco and FoodInc, in which management accountants were closely involved in the development of performance measures to support changes in strategy.

6- Criticisms of Strategic Management Accounting

d) The Role of the Accountant Coad (1996) claimed that strategic management accountants need to be oriented towards learning new skills and mastering tasks. They will prefer challenges, and consider errors and mistakes to be part of the learning process. Strategic management accountants also need good communications skills and an ability to empathize with others both within and outside the organization. Coads case illustrated how a small part of the larger organization could carry out strategic management accounting without the need for the whole organization to be committed to it.