Strategic Management Accounting

What is Strategic Management Accounting?

And why, Strategic Management Accounting?

Simple definition: Management Accounting in the context of business strategies being planned and implemented by an organisation.

Strategy is the way that a firm positions and distinguishes itself from its competitors.

These business strategies must be developed in the context of the internal and external environments so that they are practical, or else they will remain a theoretical wish-list.

It is also important that business strategies are developed at the appropriate levels within an organisation - An overall corporate strategy is need for the organisation in total with separate but linked competitive strategies for each sub-division of the business which is competing in different markets with different products.

At the corporate level managers must ask questions such as:

What business should we be in? What structure should we use? How should the corporation be financed? What will be our approach towards forex hedging?

At competitive strategy level, SBU's/business managers must ask:

How should this business compete in a particular market?

How can a competitive advantage be established and maintained?

These strategies have then to be successfully implemented in a dynamic and continually changing environment. It is highly unlikely that all the predicted outcomes from these action plans will be achieved.

There is therefore need for a process of evaluation, control and modification, where necessary. Thus, strategic management is a continual, iterative process.

Diagram 1.1

Accounting for strategic management must operate successfully in this changing, evolving environment if it is to make a positive contribution to the financial aspect of this strategic analysis, planning and control process.

 Traditionally, little attention to strategic issues. Too much focus on internal issues

 Also a peanut-butter approach to cost allocation.

 Approach to cost management highly tactical

"When the money keeps rolling in , you don't keep books

You can tell by the happy grateful looks

Accountants only slow things down, figures get in the way .......

1. Conventional management accounting paid little regard to strategic issues, instead the information related largely to what was happening within the business.

2. Traditional costing systems with their peanut-butter approach of apportioning costs uniformly across products on the basis of direct labour hours nullified the effect of the advanced manufacturing techniques, that ushered in new efficiencies.

3. Cost management was Reaction-based. As long as companies were making money, no body cared. The word from the song in the musical Evita captured the mood: ---------

When the times are good, costs are allowed to go out of control since there is no motivation to cut them. However come tough times, we are scampering for information and realise that we did not collect information on:

What were our defect rates and sales return rates?

What caused our quality problems?

Which market segments and customers were more profitable?

What was it costing us to introduce new products late?

What was our on-time delivery record? What was the competition's record?

However, over the last decade or two, management accounting has evolved, at least in some organisations, to support the development and implementation of strategy.

I now wish to give an example that is relevant to us:

As a recession towers over the economic landscape, blotting out the rays of recovery, one question haunts the CFO?

How do I convert my fixed costs into variable ones?

i.e. how do you reconfigure your operations, your activities and your business to ensure that you spend money - as little of it as possible- only when it will bring back much more than what you have spent?

Strategic management accounting is a term now used to describe management accounting approaches which assist managers in evaluating current strategies, deciding on new strategies, and monitoring progress towards strategies.

Financial analysis is required to establish where the business is and to ensure that the strategic objectives are realistic and meaningful.

Since the business strategy is concerned with the external environment, a large part of the required financial analysis focuses

on external issues and particularly competitors and customers rather than more traditional areas such as internal performance compared against last year or even compared against the budget.

[Benchmarking, competitor accounting]

Instead of concentrating on the financial performance of the business as a whole, the relevant strategic financial analysis breaks the total business down into its main components and provides information on relevant sub-groups e.g. Product profitability analysis, customer [group] profitability analysis

Management Accounting is not an end by itself. It is an important tool for achieving an organisation's strategic goals.

There is a real danger that , as control of information in an organisation creates power, management accountants and senior financial managers see their primary role as strategic decision makers. Theirs is a decision support role and they are not the ultimate decision makers.

Decision support systems require that Right information is provided to the right person at the right time

Again since there is a hierarchy of strategy and sub-strategies, a good strategic management accounting system must supply