Management Accounting - Information for Decision Making and Strategy Execution - Literature review Example

SWOT analysis is a tool for corporate planning which enables an organization to set a long-term strategy that takes into account strengths, weaknesses, opportunities, threats, CSFs and performance indicators. By addressing these issues, SWOT analysis enables corporate planners to analyze the organization’s present position in the market place so as to match strengths with market opportunities, address weaknesses and overcome threats, as suggested by Atkinson et al (2011). Drury (2008) suggests that the management accountant contributes to this strategic process by providing both financial and non-financial information. First introduced by Albert S. Humphrey, the SWOT analysis is defined as a tool to assess an organization’s internal strengths and weaknesses and its position relative to the external environment’s opportunities and threats (Atkinson et al, 2011). From this viewpoint, a SWOT analysis may be defined as the process of analyzing 1) an organization’s internal resources for strengths and weaknesses 2) an organization’s external environment for opportunities and threats. Ross, Westerfield and Jaffe (2012) suggest that organizations carry out position appraisals in order to facilitate strategic management of opportunities and threats in the external environment. Drury (2008) have stated that a position appraisal enables the management to assess the resource position of the organization so that the resource base can be capitalized upon. Carrying out a position appraisal is a critical success factor inasmuch as it enables the organization to adapt to the changing demands of the environment that it operates in. Carrying out a position appraisal is necessary for ensuring an organization’s continued success in the future (Horngren, Datar and Rajan, 2012). It is a well-known fact that the external environment that the organization operates in is characterized by a constant process of change. In this situation, the organization must change also in order to remain competitive. The process of managing change is facilitated by carrying out position appraisals. That is why organizations carry out position appraisals. This leads to a learning process so that the organization can adapt to the future. SWOT analysis as a tool has both advantages and problems. One of the advantages, suggested by Ahrens and Chapman (2006: 110), is that it is cost-free as the management does not have to rely on outside expertise. Anyone in the organization can do it. Therefore it is an effective investment of the organization’s capital. According to Pearce and Robinson (2012), the SWOT analysis is a relatively simple process of compiling lists of an organization’s strengths, weaknesses, opportunities and threats but it leads to valuable results. They are valuable inasmuch as they enable the organization to set a strategic course for the future so it remains competitive. Brigham and Ehrhardt (2013) suggest that the advantage of a SWOT analysis is that it presents new ideas to the management for capitalizing upon opportunities and minimizing the potential impact of threats. As managers go through the information, they are able to form a picture of the organization’s internal resource base in terms of strengths and weaknesses and thus of how to tackle the environmental opportunities and threats. As mentioned before, an organization must manage change to remain competitive. According to Hopper, Koga and Goto (1999), the process of managing change may be defined as enhancing an organization’s capabilities by facilitating the transition to a desired outcome. This involves four parts of an organization: 1) organization structure 2) processes 3) systems 4) job roles. In all these cases the SWOT analysis is an important tool for managing the transition process. Change management will fail unless the people are involved in it. Therefore employee engagement is an important concept in change management. This objective is facilitated by SWOT analysis. As the employees go through the results of the SWOT analysis, they are able to see the importance of managing change so that they can cooperate with the management in making a successful transition. Zimmerman (2010: 110) state that the advantage of conducting a SWOT analysis is that it provides the organization with a framework for managing capabilities and resources for a long-term competitive advantage. From this viewpoint, the SWOT analysis is a tool that enables the management to improve organizational success by responding to the environmental threats and opportunities through the best possible use of its tangible and intangible resources. Examples of the former are fixed and current assets and of the latter are goodwill and brand recognition, as classified in financial statements prepared by the accounting department. The SWOT analysis is a tool for managing both forms of resources to the best competitive advantage for an organization. Ross, Westerfield and Jaffe (2012: 65:76) state that the SWOT analysis yields valuable results in terms of identifying strengths and weaknesses in tangible and intangible assets so that the management is able to manage them most effectively in relation to the external opportunities and threats also identified in the process. In this respect the advantage of conducting the SWOT analysis is that the management is able to capitalize on the strengths and minimize the weaknesses so as to take advantage of the external opportunities and overcome threats. This leads to the creation of a sustained competitive advantage. Sisaye and Birnberg (2010) have defined competitive advantage as the favourable position that an organization enjoys relative to its competitors. The creation of the competitive advantage is one of great value that is generated by the SWOT analysis. Therefore the SWOT analysis is a valuable tool the advantage of which is to generate valuable results allowing the organization to attain the desired outcome of a long-term competitive advantage. The added advantage is that this information has no cost. Lillis (2008: 20) state that the limitation of the SWOT analysis is that it does not enable prioritizing the information. The organization has a limited resource base. Therefore it cannot deploy its resources equally to all the weaknesses and threats identified in the analysis. This limits the effectiveness of the strategic management process. If the management is not able to focus on the most important weaknesses and threats, then the strengths and opportunities are not addressed fully. According to Bardy (2006), the SWOT analysis is not able to provide guidance for individual organizations. There is an advantage in its flexibility in that it can be applied to a wide range of organizations operating in different sectors. But individual organizations may not be able to identify the strengths and opportunities for themselves. An example of this problem is that an organization may believe that its customer service is a strength but may be unaware of weaknesses in the same because it does not have all the information. It does not provide a clear guidance on how to distinguish strengths from weaknesses. Ribeiro and Scapens (2006: 78-88) state that the problem associated with the SWOT analysis is that it lacks sufficient detail. In some cases the identified elements may be short statements which are not sufficient for a detailed analysis. An element may be identified as a strength, a weakness, an opportunity or a threat but there is no justification why it is identified as such. Therefore the management may not be able to make use of the information to the maximum extent possible. Fleischman, Walker and Johnson (2010: 45-65) state one further problem in that the SWOT analysis does not facilitate ranking of the identified elements in terms of their impact upon organizational success. This leads to a lack of focus in asset management. With these advantages and problems, the SWOT analysis fits into position appraisals by providing information on the internal resource base and the external environment. Atkinson et al (2011: 23-56) state that positions appraisals must take into account both the macro-environment and the micro-environment. The factors that operate in these environments are identified in the SWOT analysis. Suggested by Ahrens and Chapman (2006), the effectiveness of the SWOT analysis can be enhanced by adding weights to the strengths, weaknesses, threats and opportunities so that they can be prioritized. More detail in the analysis also helps to make the process more strategic-oriented. Thus, the SWOT analysis becomes a major tool in achieving strategic fit. The strategic fit can be defined as the process of matching an organization’s resources and capabilities to the opportunities in the external environment. Horngren, Datar and Rajan (2012) contend that the SWOT analysis can also assist in organization development. Atkinson et al (2011) have defined organization development as the process by which organizational effectiveness is enhanced through human resource management. In this area the SWOT analysis becomes an effective tool by identifying those factors in the internal and the external environment which affect the HRM practices of the organization. Therefore the management can take steps according to the results from the SWOT analysis leading to organization development. Brigham and Ehrhardt (2013) state that organization development can make the organization more competitive by matching its resources and capabilities to the opportunities and threats in the business environment. The organization’s competitiveness is increased through the strategic utilization of its resources and capabilities. In this process the SWOT analysis is a useful tool for identifying the areas of strengths and weaknesses in the internal environment and the opportunities and threats in the external environment. This information is essential for conducting position appraisals. Ribeiro and Scapens (2006) suggest that position appraisals are conducted in order to better understand the organization’s internal and external environment. The factors operating in these two environments are identified by the SWOT analysis. Therefore conducting position appraisals must incorporate SWOT analysis. This is supported by Fleischman, Walker and Johnson (2010) when they state that position appraisals are carried out by an organization to facilitate strategic management of opportunities and threats in the external environment. This involves thinking about the organization’s internal strengths and weaknesses, which are two of the key findings from the SWOT analysis. The fit between SWOT and position appraisals is of strategic concern and this is addressed by the modern day management accountant. Modern day management accounting gains its strategic relevance by ensuring that the organization’s strategic focus is aligned to the opportunities and threats in the external environment (Ribeiro and Scapens, 2006). The authors have discussed the balanced scorecard as one of the methods used in strategic management accounting to assess the organization’s relative position in the external environment. The balanced scorecard has four perspectives: the learning and growth perspective, the customer perspective, the business process perspective and the financial perspective. Thus it can be seen that strategic management accounting collects both financial and non-financial information. The authors have stated that this provides strategic relevance to the fit between SWOT and organizational position appraisals. Fleischman, Walker and Johnson (2010: 45:65) state that the role of the modern day management accountant is one of strategic relevance. PESTLE, Porter’s five forces and resources audit are three analytical frameworks also used in position appraisals. Horngren, Datar and Rajan (2012) suggest that SWOT analysis must incorporate information from the three models in order to identify strengths, weaknesses, opportunities and threats. The modern day management accountant contributes to this process by providing information on company, customers and competitors. Without management accounting information, none of the models can be implemented. The management accountant conducts the budgeting process which provides valuable information for the resources audit which enables identification of the strengths and the weaknesses in the internal environment. In this manner the modern day management accountant contributes strategically to the relationship between SWOT analysis and resources audit. Ross, Westerfield and Jaffe (2012) have defined strategic management accounting as the process by which the cost structure of an organization is aligned to the strategic focus. In order to achieve this objective, the modern day management accountant interacts with the top management in corporate planning sessions. As suggested by Drury (2008), accounting information becomes more strategically oriented through this interaction. Therefore the modern day management accountant contributes to the relationship between SWOT analysis and the other three models by providing strategically oriented information. The modern day management accountant has a strategic role to play in providing information that matches the resources and the capabilities of the organizations with the opportunities and threats in the external environment that it operates in. The management accountant gains this information by preparing data that are internally reviewed. The application of SWOT analysis and other analytical frameworks mentioned above in management accounting leads to greater analysis of the accounting data and this improves the decision making process. The application of position appraisals also leads to more strategically-oriented data and therefore the decision making process is improved. This is an important factor given the competitive nature of the external environment. By analyzing the financial information, the management accountant contributes to the strategic process of ensuring organizational fit within the larger external environment. For example, management accounting can provide information on customers in terms of how well the organization is meeting their demands. Therefore a position appraisal in this area will lead to results indicating whether the organization has a strength or a weakness in the customer perspective. Modern day management accounting gains its strategic relevance from developing performance measures that assist in conducting position appraisals. Conducting position appraisals must incorporate information from both the external environment and the internal environment. This information is collected by strategic management accounting. This indicates the role that the modern day management accountant plays in ensuring strategic fit between the organization and the external environment. By collecting information from both internal and external sources, the management accountant contributes to the SWOT analysis. The modern day business environment is characterized by fast change and high competitive rivalry. Both situations are captured in such analytical frameworks as PESTLE and Porter’s five forces. The information thus captured is incorporated into the SWOT analysis for identifying opportunities and threats. Resources audit is conducted in order to assess the internal asset situation. This information is incorporated into the SWOT analysis for identifying strengths and weaknesses. Whether it comes to PESTLE, five forces Porter or resources audit, the information that is required by the analytical frameworks comes from strategic management accounting. This is the contribution made by the modern day management accountant to the strategic process of carrying out organizational position appraisals. References Ahrens T. & Chapman C. S. (2006) ‘Accounting for flexibility and efficiency: a field study of management control systems in a restaurant chain’, Contemporary Accounting Research, vol. 21, no. 2, August, pp.103-114. Atkinson, A. A., Kaplan, R. S., Matsumara, E. M. and Young, S. M. (2011) Management accounting: Information for decision making and strategy execution, 6th edition, London: Prentice Hall. Bardy, R. (2006) ‘Management control in a business network: New challenges for accounting’, Qualitative Research in Management and Accounting, vol. 3, no. 2, January, pp. 78-90. Brigham, E. F. and Ehrhardt, M. C. (2013) Financial management: Theory and practice, 14th edition, London: McGraw-Hill/Irwin. Drury, C. (2008) Management and cost accounting, 7th edition, London: Cengage. Fleischman, G., Walker, K. & Johnson, E. (2010) ‘A field study of user versus provider perceptions of management accounting system services’, International Journal of Accounting and Information Management, vol. 18, no. 3, November, pp. 45-65. Hopper, T., Koga, T. & Goto, J. (1999) ‘Cost accounting in small and medium sized Japanese companies: an exploratory study’, Accounting & Business Research, vol. 30, no. 1, February, pp. 73-87. Horngren, C. T., Datar, S. M. and Rajan, M. V. (2012) Cost accounting: a managerial emphasis, 14th edition, International: Harlow: Pearson Education. Lillis, A. (2008) ‘Qualitative management accounting research: Rationale, pitfalls and potential: A comment on Vaivio’, Qualitative Research in Management and Accounting, vol. 5, no. 2, June, pp. 15-25. Pearce, J. and Robinson R. (2012) Strategic management, 6th edition, London: McGraw-Hill/Irwin. Ribeiro, J. A. & Scapens, R. W. (2006) ‘Institutional theories in management accounting change: Contributions, issues and paths for development’, Qualitative Research in Management and Accounting, vol. 3, no. 2, January, pp. 78-90. Ross, S., Westerfield, R. and Jaffe, J. (2012) Corporate finance, 10th edition, London: Mcgraw-Hill/Irwin. Sisaye, S. & Birnberg, J. (2010) ‘Extent and scope of diffusion and adoption of process innovations in management accounting systems’, International Journal of Accounting and Information Management, vol. 18, no. 2, August, pp. 14-24. Zimmerman, J. (2010) Accounting for decision making and control, 7th edition, London: McGraw-Hill. Read More