Strategic Management Accounting
STRATEGIC
MANAGEMENT ACCOUNTING
During the last years issues of strategic management accounting have received widespread attention in the accounting literature. Adapting to the changing needs of business in the 1990's is one of the main challenges facing management accountants today. One dramatic change, in how many organisations operate, is the growing shift towards strategic alliances and partnering agreements with suppliers. However, there is still no comprehensive framework as to what constitutes strategic management accounting. Basically the management accounting practices has one or more of the following characteristics: environmental or marketing orientation, focus on competitors and long term forward-looking orientation. To implement these criteria there are twelve main key recommendations have been identified: attribute costing, brand value budgeting and monitoring, competitor cost assessment, life cycle costing, quality costing, strategic costing, competitive position monitoring, competitor appraisal based on publish financial statements and value chain analysis. This paper will review some of these recommendations that have had impact on development of strategic management accounting.
The term SMA was coined by Simmond (1981, 1982). Simmonds (1981) defines the concept as 'the provision and analysis of management accounting data for use in developing and monitoring business strategy, particularly relative levels and trends in real costs and prices, volume, market share, cash flow and the proportion demanded of a firm's total resources'.
Unlike the conventional cost and management accounting, strategic decisions usually involve the longer-term, have a significant effect on the organization and, have not only an internal element, but also have an external element. Adopting this definition suggests that the provision of information that supports an organization's major long-term decisions, such as the use of activity-based costing information for product profitability analysis, falls within the domain of strategic management accounting. This view is supported by Cooper and Kaplan (1988) who state that strategic accounting techniques are designed to support the overall competitive strategy of the organization, principally by the power of using information technology to develop more refined product and service costs.
Because of the lack of consensus on what constitutes strategic management accounting Lord (1996) takes the external competitor focus a little further and outlines the different strands or emphasis in understanding of SMA. These are:
-Competitor Focused Accounting (CFA): The key question being to determine what a company's competitors are doing.
-Accounting for strategic position where the relationship between the strategic position chosen by a firm and the expected emphasis on management accounting is examined.
-Cost Reduction: Based on analysing the different ways of decreasing costs and/or enhance differentiation of a firm's products, through exploiting linkages in the value chain and optimizing cost drivers.
acc 104 business financeDuring the last years issues of strategic management accounting have received widespread attention in the accounting literature. Adapting to the changing needs of business in the 1990's is one of the main challenges facing management accountants today. One dramatic change, in how many organisations operate, is the growing shift towards strategic alliances and partnering agreements with suppliers. However, there is still no comprehensive framework as to what constitutes strategic management accounting. Basically the management accounting practices has one or more of the following characteristics: environmental or marketing orientation, focus on competitors and long term forward-looking orientation. To implement these criteria there are twelve main key recommendations have been identified: attribute costing, brand value budgeting and monitoring, competitor cost assessment, life cycle costing, quality costing, strategic costing, competitive position monitoring, competitor appraisal based on publish financial statements and value chain analysis. This paper will review some of these recommendations that have had impact on development of strategic management accounting.
The term SMA was coined by Simmond (1981, 1982). Simmonds (1981) defines the concept as 'the provision and analysis of management accounting data for use in developing and monitoring business strategy, particularly relative levels and trends in real costs and prices, volume, market share, cash flow and the proportion demanded of a firm's total resources'.
Unlike the conventional cost and management accounting, strategic decisions usually involve the longer-term, have a significant effect on the organization and, have not only an internal element, but also have an external element. Adopting this definition suggests that the provision of information that supports an organization's major long-term decisions, such as the use of activity-based costing information for product profitability analysis, falls within the domain of strategic management accounting. This view is supported by Cooper and Kaplan (1988) who state that strategic accounting techniques are designed to support the overall competitive strategy of the organization, principally by the power of using information technology to develop more refined product and service costs.
Because of the lack of consensus on what constitutes strategic management accounting Lord (1996) takes the external competitor focus a little further and outlines the different strands or emphasis in understanding of SMA. These are:
-Competitor Focused Accounting (CFA): The key question being to determine what a company's competitors are doing.
-Accounting for strategic position where the relationship between the strategic position chosen by a firm and the expected emphasis on management accounting is examined.
-Cost Reduction: Based on analysing the different ways of decreasing costs and/or enhance differentiation of a firm's products, through exploiting linkages in the value chain and optimizing cost drivers.
The comprehensive categorization framework proposed by Lord shall constitute the central analytical foundation of this review. Other categorization approaches will be either be mapped to or taken as complementary to this approach.
Competitor analysis and external focus was central to the definition of SMA provided by Simmond (1981). Lord (1996) outlines the elements contained in competitor focused accounting. These include:
-Monitoring market share to determine the extent to which a firm is losing or gaining market share and an examination of relative market shares will indicate the strength of different competitors. Including market-share details in management accounting reports helps to make management accounting more strategically relevant. Competitor information may be obtained through public, formal sources, such as published reports and the business press, or through informal channels, such as the firm's sales force, its customers and its suppliers.
-Monitoring competitor pricing cost and volume profiles to determine the competitor's strategies. Here the management accounting function can assist by attempting to assess each major competitor's cost structure and relate this to their prices. In particular, Simmonds suggests that it may be possible to assess the cost-volume-profit relationship of competitors in order to predict their pricing responses.
-Product benefit assessment: The evaluation of benefits of the products to the customer and firm. To protect an organization's strategic position and determine strategies to improve its future competitiveness managers require information that indicates by whom, by how much and why they are gaining or being beaten. This information provides advance warning of the need for a change in competitive strategy.
Various classifications of strategic positions that firms may choose have been identified in the strategic management literature. Lord further illustrates how different strategic positioning results in or necessitates the type of SMA information that is required. Based on strategic literature developed by Porter, he refers to Shank (1989) and Govindarajan (1989) who analysed the relative importance of several management accounting methods depending on whether the firm was pursuing cost leadership or differentiation. According to these authors firms pursuing a cost leadership strategy would put the most emphasis on traditional cost accounting applications. They would use standard costs to assess performance, product cost as an input to pricing decisions, and flexible budgeting for manufacturing cost control. They would perceive meeting budgets and analysis of competitor costs to be of great importance. Those companies pursuing product differentiation would consider marketing cost analysis as critical. They would consider flexible budgeting and meeting budgets to be of only moderate importance and rank standard costing for performance assessment, product costing for pricing decisions, and competitor cost analysis of little importance.
Porter (1985) advocated using value-chain analysis to gain competitive advantage. The aim of value chain analysis is to find linkages between value creating activities which result in lower cost and enhanced differentiation. These linkages express the relationships between the performance of one activity and its effects on the performance of another activity. The value chain comprises primary activities and a number of support activities. Costs and assets are assigned to each activity in the value chain. The cost behaviour pattern of each activity depends on a number of causal factors which Porter calls cost drivers. These cost drivers operate in an interactive way and it is management's success in coping with them which determines the cost structure. Strategic cost analysis also involves identifying the value chain and the operation of cost drivers of competitors in order to understand relative competitiveness. Porter advocates that organizations should use this information to identify opportunities for cost reduction, either by improving control of the cost drivers or reconfiguring the value chain. The latter involves deciding on those areas of the value chain where the firm has a comparative advantage and those which it should source to suppliers. It is essential that the cost reduction performance of both the organization and its principal competitors is continually monitored if competitive advantage is to be sustained.
Lord's overall categorization framework is consistent with the understanding of SMA put forward by Hart and Ghosh (1999) in their analysis of a broad range of literature definitions. These authors refer to Bromwich's expansive view of SMA. Where over and above gathering information about a firm and it's competitors, SMA seeks to 'evaluate the enterprise's competitive advantage or value added relative to its competitors and to evaluate the benefits the enterprise's products yield over their lifetime to customers and the benefits which these sales yield to the firm over a long decision horizon'. The attributes might include a range of quality elements (such as operating performance variables, reliability and warranty arrangements, the degree of finish and trim, and service factors such as the assurance of supply and after-sales service). A firm's market share depends on the match between the attributes provided by its products and consumer's tastes and on the supply of attributes by competitors. The purpose of the analysis should be to attribute those costs which are normally treated as product costs to the benefits they provide to the consumer for each of those attributes which are believed to be of strategic importance. Hence included in this expansive view are concerns on customers, products and the emphasis on the long term. As succinctly stated by Hart and Ghosh, there are three main focuses: competitors, customers and products. This simply reinforces the above categorization of SMA. They however differentiate the type of SMA information based on the quantitative nature of the data. Hence, they refer to hard accounting information as contained in financial reports, non financial information in the form of softer e.g. on cash flows or sales volumes and finally on soft numbers e.g. on product appeal or brand loyalty.
Target costing (Whiteley, 1995) is another approach that brings the management accountant into the process at the early planning stage. Particularly potent is the shift from the reactive traditional cost plus model where current costs are key drivers of the business model and trigger the increase in prices towards a proactive target costing approach where a strategically determined price dictates the cost. Roslender (1995) has identified target costing as falling within the domain of strategic management accounting. The justification for this is the external focus and that it is a market driven approach to product pricing and cost management. In addition it involves the diffusion of management accounting information throughout the organization and the active involvement of staff from across a broad spectrum of management functions. Their aim is to achieve the target cost which involves identifying, valuing and costing product attributes using functional analysis and examining cost reduction opportunities throughout the entire value chain.
Although overlapping in some respect with Lord, Guilding (1999) provides a more comprehensive definition of the elements of competitor accounting. These are competitor cost assessment: Jones (1988) provided a persuasive case that the long term commitment associated with such investment and the implied pursuit of improved competitive position, heightened the need for awareness of competitor's costs. Jones suggested appraising competitor's manufacturing facilities, economies of scale, governmental relationships, and technology product design. Guilding however confines the definition of this element to the provision of regularly updated estimate of a competitor's unit costs.
-Competitive position monitoring: Guilding's definition which is consistent with Simmonds (1986) broadens the analysis of cost to include competitor sales and market share volume, unit costs and return on sales. This information can provide a basis for the assessment of a competitor's market strategy.
-Competitor appraisal based on published financial statements: Moon and Bates (1993) described an approach of competitor appraisal which was based on published financial statement interpretation. This is amenable to existing accountant skill sets and can yield strategically significant insights.
-Strategic costing: Use of cost data based on strategic and marketing information to develop and identify superior strategies that will produce a sustainable competitive advantage.
-Strategic pricing: Analysis of strategic factors in the pricing decision process. These factors may include: competitor price reaction, price elasticity, market growth, economies of scale and experience.
Supplementing the above, Roslender and Hart did research which found budgetary and customer profitability analysis to be crucial to marketing professionals. The survey also revealed that brand management was increasingly important. Hence they advocated the development of brand profitability analysis.
Enriching the understanding on SMA, Smith and Lambell (1997) advocate the inclusion of environmental accounting into the domain of SMA. They cite the arguments put forward by Baker who argued that SMA tends to take the view that capital and production capacity are the only limiting factors and argue for the inclusion of environmental factors. Although they show that Baker probably had a limited understanding of SMA, they do concur with the view that environmental accounting is relevant as it is concerned with the long term sustainability of the organization. They advocate environmental accounting through
-Costing waste: Effective waste management provides benefits for both the
environment and company profitability.
-Energy costing: Energy costs could be allocated to cost centres on the basis of direct usage.
-Investment appraisal which takes into account environmental impacts, risks, liabilities and associated costs.
-Compliance with regulation
-Lifecycle assessment. Lifecycle assessment involves evaluating the environmental burdens associated with a product, process or activity.
-Pricing: Ensuring products environmental cost being reflected within its price.
The environmental accounting proposals entail the refinement of conventional management accounting tools.
Conventional management has been characterized as follows: historical, single entity focused, introspective, manufacturing focused, focuses on existing activities, reactive, data orientation, based on existing organizational systems, built on conventions.
Essentially the traditional approach has the management accountant contributing as a cost accountant, working introspectively. Much more incisive criticism was made by Kaplan and Johnson in Relevance Lost as they state 'Contemporary cost accounting and management control systems are no longer providing accurate signals about the efficiency and profitability of internally managed transactions. Consequently managers are not getting information to help them compare the desirability of internal versus external transactions. Without the receipt of appropriate cost and profitability information, the ability of the 'visible hand' to effectively manage the myriad of transactions that occur in a complex hierarchy has been severely compromised.'
Coad states that Bromwich and Bhimani (1994) observed that SMA does not generate the same level of excitement as that which was generated by Activity Based Costing. He states that SMA is an emerging and ill defined field and that the literature on the field is disparate and disjointed. However it has the following characteristics prospective, relative, outward looking, and competitive focus, proactive, information orientation, unconstrained by existing systems, ignores conventions
A research review commissioned by CIMA and co-authored by Bromwich, found that the case for an overhaul of the management accounting practice was not compelling. The profession was evolving and SMA represents one key step in this evolutionary process.
SMA contributes to company's strategic positioning and has a forward looking orientation and hence has contributed to management accounting as a discipline. The fact that, unlike conventional management accounting or external financial reporting, it is unconstrained by conventions makes it have a rather nebulous character. This in turn impacts on the consistency and comparability of information produced. But what cannot be argued against is that the philosophy that underpins the provision of SMA information has a pivotal role to play in ensuring that Management Accounting's relevance is regained. Hence it is a trade off between relevance against consistency and comparability.Essay on users of accounting cycle
Coad highlights factors that could impede the adoption of SMA
-It's forward looking, proactive, competitor focused characteristics make it suitable for strategic positioning, however it is difficult to implement due to the shortage of professionals who can combine the traits and competencies of both conventional and strategic management accounting.
-SMA makes difficult demands for information. Much of the data required is not the usual transaction based accounting input.
-Competitor focused information may give the false impression of precision whereas they are estimates.
-Problems with comparability based on the conjectural character of the information.
-SMA requires commercially sensitive, primary data. Notwithstanding the ease of collecting and analysis information thanks to computer technology, the costs of collecting information may exceed the benefits of the information.
What distinctly emerges from the literature and research review is that SMA as a philosophy or business practice has been in existent in contemporary organisations, albeit on a fragmented and ill defined basis (Roslender and Hart). What is needed is formalisation and unification of the different principles to boost consistency and comparability. Development and dissemination of a common understanding of SMA and ownership definition of SMA. Various authors have advocated a multidisciplinary approach while others seem slanted towards the management accountant taking a lead role and staking a role for himself within the organisation. The merits or demerits of either approach could be critically evaluated as it is unclear which of the two is more advantageous.
REFERENCES
Bromwich, M. (1990), The Case for strategic Management Accounting: the Role of Accounting Information for Strategy, Management Accounting Research, 14, 225-279
Coad, A.F., Smart work and hard work: Explicating a learning orientation in strategic management accounting, Management Accounting Research, 7, 1996, pp. 387-408.
Cooper, R. and W.B. Chew (1996), Control Tomorrow's Cost Trough Today's Designs, Harvard Business Review, Jan-Feb, 88-97.
Dekker, H.C. (2003), Value Chain Analysis in Interfirm Relationships: a field study, Management Accounting Research, 14, 1-23.
Guilding Chris. (1990), Competitor focused Accounting: an exploratory note, Accounting, Organizations and Society. Vol 24, 583-595
Hart Susan, Roslender Robin, Distinguishing Marques, Financial Management (CIMA), February 2002, p32.
Kaplan Robert and Johnson Thomas, (1987), Relevance Lost: The Rise and Fall of Management Accounting, Harvard Business School Press
Lord, B.R. (1996), Strategic Management Accounting: the emperor's new clothes? Management Accounting Research, 7, pp.347-366.
Roslender, R. and Hard S.J. (2003), In Search of Strategic Management Accounting: theoretical and field study perspectives, Management Accounting Research, 14, pp.225-279.
Simons R., (1987), Accounting Control Systems and Business Strategy, Accounting, Organizations and Society. Vol 12, 357-374
-Energy costing: Energy costs could be allocated to cost centres on the basis of direct usage.
-Investment appraisal which takes into account environmental impacts, risks, liabilities and associated costs.
-Compliance with regulation
-Lifecycle assessment. Lifecycle assessment involves evaluating the environmental burdens associated with a product, process or activity.
-Pricing: Ensuring products environmental cost being reflected within its price.
The environmental accounting proposals entail the refinement of conventional management accounting tools.
Conventional management has been characterized as follows: historical, single entity focused, introspective, manufacturing focused, focuses on existing activities, reactive, data orientation, based on existing organizational systems, built on conventions.
Essentially the traditional approach has the management accountant contributing as a cost accountant, working introspectively. Much more incisive criticism was made by Kaplan and Johnson in Relevance Lost as they state 'Contemporary cost accounting and management control systems are no longer providing accurate signals about the efficiency and profitability of internally managed transactions. Consequently managers are not getting information to help them compare the desirability of internal versus external transactions. Without the receipt of appropriate cost and profitability information, the ability of the 'visible hand' to effectively manage the myriad of transactions that occur in a complex hierarchy has been severely compromised.'
Coad states that Bromwich and Bhimani (1994) observed that SMA does not generate the same level of excitement as that which was generated by Activity Based Costing. He states that SMA is an emerging and ill defined field and that the literature on the field is disparate and disjointed. However it has the following characteristics prospective, relative, outward looking, and competitive focus, proactive, information orientation, unconstrained by existing systems, ignores conventions
A research review commissioned by CIMA and co-authored by Bromwich, found that the case for an overhaul of the management accounting practice was not compelling. The profession was evolving and SMA represents one key step in this evolutionary process.
SMA contributes to company's strategic positioning and has a forward looking orientation and hence has contributed to management accounting as a discipline. The fact that, unlike conventional management accounting or external financial reporting, it is unconstrained by conventions makes it have a rather nebulous character. This in turn impacts on the consistency and comparability of information produced. But what cannot be argued against is that the philosophy that underpins the provision of SMA information has a pivotal role to play in ensuring that Management Accounting's relevance is regained. Hence it is a trade off between relevance against consistency and comparability.Essay on users of accounting cycle
Coad highlights factors that could impede the adoption of SMA
-It's forward looking, proactive, competitor focused characteristics make it suitable for strategic positioning, however it is difficult to implement due to the shortage of professionals who can combine the traits and competencies of both conventional and strategic management accounting.
-SMA makes difficult demands for information. Much of the data required is not the usual transaction based accounting input.
-Competitor focused information may give the false impression of precision whereas they are estimates.
-Problems with comparability based on the conjectural character of the information.
-SMA requires commercially sensitive, primary data. Notwithstanding the ease of collecting and analysis information thanks to computer technology, the costs of collecting information may exceed the benefits of the information.
What distinctly emerges from the literature and research review is that SMA as a philosophy or business practice has been in existent in contemporary organisations, albeit on a fragmented and ill defined basis (Roslender and Hart). What is needed is formalisation and unification of the different principles to boost consistency and comparability. Development and dissemination of a common understanding of SMA and ownership definition of SMA. Various authors have advocated a multidisciplinary approach while others seem slanted towards the management accountant taking a lead role and staking a role for himself within the organisation. The merits or demerits of either approach could be critically evaluated as it is unclear which of the two is more advantageous.
REFERENCES
Bromwich, M. (1990), The Case for strategic Management Accounting: the Role of Accounting Information for Strategy, Management Accounting Research, 14, 225-279
Coad, A.F., Smart work and hard work: Explicating a learning orientation in strategic management accounting, Management Accounting Research, 7, 1996, pp. 387-408.
Cooper, R. and W.B. Chew (1996), Control Tomorrow's Cost Trough Today's Designs, Harvard Business Review, Jan-Feb, 88-97.
Dekker, H.C. (2003), Value Chain Analysis in Interfirm Relationships: a field study, Management Accounting Research, 14, 1-23.
Guilding Chris. (1990), Competitor focused Accounting: an exploratory note, Accounting, Organizations and Society. Vol 24, 583-595
Hart Susan, Roslender Robin, Distinguishing Marques, Financial Management (CIMA), February 2002, p32.
Kaplan Robert and Johnson Thomas, (1987), Relevance Lost: The Rise and Fall of Management Accounting, Harvard Business School Press
Lord, B.R. (1996), Strategic Management Accounting: the emperor's new clothes? Management Accounting Research, 7, pp.347-366.
Roslender, R. and Hard S.J. (2003), In Search of Strategic Management Accounting: theoretical and field study perspectives, Management Accounting Research, 14, pp.225-279.
Simons R., (1987), Accounting Control Systems and Business Strategy, Accounting, Organizations and Society. Vol 12, 357-374
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