PRESENTATION criticisms strategic management accounting.pptx

7/30/2019 PRESENTATION criticisms strategic management accounting.pptx

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MANAGEMENT ACCOUNTING (PAM 6014)

CRITICSMS OF STRATEGICMANAGEMENT ACCOUNTING

Presenter :AZRI BIN MOHAMED YUSOF

(M20121000309)


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QUESTION ASSIGNMENT

Since its introduction, the concept of

strategic management accounting

(SMA) has had its critics. Provide adiscussion on the criticisms of

strategic management accounting. In

your opinion, do the costs outweighthe benefits?


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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 ManagementAccounting

6. Criticisms of Strategic Management

Accounting


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Business strategy was borrowed

from the military


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Objective / Mission / Strengthens / Weaknesses


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What is the Strategic Management ?


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1- Introduction

Business strategy produces long-term plans forthe business, taking into consideration plansand possible actions of competitors, the mainobjective being to position the firm so it has acompetitive advantage.

This discussion will describe business strategyand show why traditional managementaccounting is not sufficient to provideinformation for strategic decision.

Strategic Management Accounting (SMA).


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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) planning at different levels of the business

ii) cutting across organizational boundaries

iii) an emphasis on entrepreneurial thinking,

flexibility and creativity

iv) 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.


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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) the threat of new competitors entering themarket

ii) the intensity of rivalry among existing

competitors

iii) the pressure from substitute products

iv) the bargaining power of buyers and suppliers


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3- Traditional Management Accounting and Strategy

Several problems with trying to use traditional

management accounting information for strategicmanagement :

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.


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Traditional management accounting is inward looking,focusing on costs within the firm and particularlyemphasizing precise product costs and manufacturingactivities. Strategic management needs internal

information about marketing, other support costs andlinkages between activities and external informationon customers, suppliers and competitors. Strategicmanagement also requires non-financial as well asfinancial information and approximations may besufficient.

Traditional management accounting systems tend tobe programmed or reactive, dealing with regular events(such as the preparation on budgets) or one-off

decision (such as the choice between making or buyinga component). Strategic management accountingneeds to be proactive and able to contribute to allstages of strategic decision making, which is usuallyun-programmed.


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Comparison of traditional management accounting and

strategic management accounting characteristics

Traditional Management Accounting Strategic Management Accounting

Historical Forward-looking

Introspective Outward-looking

Narrow scope Broad scope

Internal performance Performance relative to competitors

Single period Multiple periods

Manufacturing focus Competitive focus

Existing activities Possibilities

Reactive Proactive

Programmed (often) Un-programmed

Overlook linkages Exploits linkages

Based on existing system Unconstrained by existing system

Built on conventions Ignores conventions

Financial measures Financial and non-financial measures

Exact figures Approximations


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4- What is the Strategic Management Accounting ?


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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 theprices 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.


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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.


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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 sameindustry may decide toadopt 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 arepotentially available through the effective

management of the firms supply chain.


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5- Basic Techniques of Strategic Management Accounting SMA has an orientation towards the firms

environment. The relevant environment may be in itsvalue chain, that is, its upstream relations withsuppliers and downstream relations with itscustomers.

The other relevant environment is its competitive

position relative to both existing and potentialcompetitors. Its competitive position will not justdepend on price but on a marketing mix.

For example: the increased emphasis on marketing

may involve the use of techniques such as attributecosting that costs product attributes that appeal tocustomers, using brand value as a basis formanagerial decisions and measuring the costs ofquality.


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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 life-cycle 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.


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6- Component of Strategic Management Accounting

a) Competitor Information

Simmonds (1981), who coined the name strategicmanagement 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 andprice 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.


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Bromwich (1990) suggested that management accountants

gather information about the costs of barriers to entrysuch as economies of scale, product differentiation, cost

advantages, capital requirements, strategic pricing byincumbents, 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 thecompetitors.

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.


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Collier and Gregory (1995) provided some examples of

strategic management accounting being used in thehotel 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.


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b) Strategic Position & Management Accounting

Emphasis

Primary Strategic Emphasis

Product Differentiation Cost Leadership

Role of standard costs in assessing

performance

Not very important Very important

Importance of such concepts as flexible

budgeting for manufacturing cost

control

Moderate to low High to very high

Perceived importance of meeting budget Moderate to low High to very high

Importance of product cost an input to

pricing decisions

Critical to success Often not done at all on

a formal basis

Importance of product cost as an input

to pricing decisions

Low High

Importance of competitor cost analysis Low High


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c) Value Chain Perspective

i) Value Chain Analysis

The firms value chain is joined to the value chains ofsuppliers 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 cyclemanufacturer 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.


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ii) Cost Driver Analysis

Porter (1985) Shank (1989)

Structural cost drivers

Scale Scale

Integration Scope

Learning Experience

Technology

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 Exploiting linkages

Interrelationships


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iii) Competitive Advantage Analysis

Porter (1985) suggested collecting as much

information as possible about competitors so theirvalue chains can be estimated, including bothactivities performed and their costs.

The total costs of competitors vale chains can thenbe compared. If the total cost of performing all thevalue activities in the firms value chain is lower thanthat of its competitors, the firm has a cost advantage.

This cost advantage is sustainable if the firmssources of cost advantage are difficult for competitorsto copy.

If the firm does not have a cost advantage, they mayachieve it by reducing costs through controlling costdrivers of value chain activities, or by reconfiguringthe value chain activities, or by reconfiguring thevalue chain, for by adopting a more efficient way todesign, produce, distribute and market the product.


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d) Market-oriented Information

Bromwich (1990) suggested analyzing the attributes

of products and what differentiates them and makesthem 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 thefirm, 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.


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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 questioningwhat 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 inpapers 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 beachieved 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.


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a) The Strategic Planning Process

Dermer (1990) labeled the strategic planning or

positioning school teleological that is predicated on theassumption 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 byaccountants. 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.


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b) Competitor Analysis

The promoters of competitor analysis also do not seemto 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, valuechain, 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.


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c) The Value Chain Perspective

Lord (1996) showed how small cycle manufacturerexploited linkages in the value chain without the need

for financial analysis.

She claimed that firms with effective operational

management processes would already be finding costsaving 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 uponwithout accounting analyses being carried out, that is,

without the need for strategic management accounting.


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d) The Role of the Accountant

Rickwood et al. (1990) presented an example of strategicmanagement 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 ofaccountants being involved in collecting competitor

information.

i i i f i i


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Lord (1996) described a firm that was using manycomponents 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 theaccounting function and are performed by persons who

do not consider themselves to be accountants.

6 C i i i f S i M A i


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Chenhall and Langsfield-Smith (1998b) examined a

company, Cleanco, had identified strategic priorities ofenhancing 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, themanagement 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 theirstudy, Chemco and FoodInc, in which management

accountants were closely involved in the development of

performance measures to support changes in strategy.

6 C iti i f St t i M t A ti


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Coad (1996) claimed that strategic management

accountants need to be oriented towards learningnew 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 wholeorganization to be committed to it.

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