Strategic Accounting for Management - Essay Example

Course: Name: Date: Instructor: (2000 words) Introduction Strategic management accounting is an analysis of factors that affect an organization financially and making decisions based on that analysis. A company works in an environment consisting of both internal and external factors. Strategic management involves the provision and analysis of management accounting data about a business and its competitors for use in developing and monitoring of business strategy. It is driven by market forces, competition and a desire of the company to achieve its objectives. Strategic management accounting as opposed to traditional management accounting placed reliance on the relative cost position of the entity, ways in which an entity can secure a cost advantage in a situation and the cost of making their products different from their competitors. In other words, it is a form of financial accounting which uses accounting information in order to come up with strategies. In this question, I am going to deal with the issues of strategic management accounting touching on the processes involved and the cost of those processes. Finally I will tackle the advantages and the shortcomings of undertaking strategic management accounting practices by the management. The aim of this paper is to determine the processes involved in strategic management accounting and whether those processes are worth undergoing both in the long run and the short run. Analysis. The first step involved in strategic management accounting is the strategy formulation. This is step involves various other steps including the definition of the financial goals and objectives of an organization. The financial goals of an organization are the long term aims the organization wants to achieve while the objectives are the short term goals of an organization and usually annual. The next step in the strategic management accounting involves the implementation of the strategy formed in the above step. Implementation is the process of putting the strategy into action. It involves the designing of the organization structure, managing of human resources and labor relations, acquisitions and deployment of resources designed to implement the strategic management decisions and finally designing a suitable and effective decision making process. There is also the need to design effective communication system to channel key decisions and feedbacks. After implementation there is need to continually review the organization’s actions in order to determine whether the strategy put in place is working as desired or not. This is the strategic evaluation. During this step performance is measured and corrective steps are undertaken in order to ensure that it meets the organizational objectives. There are various challenges and disadvantages involved in the formulation and implementation of the strategic management accounting processes. Some of the challenges are inherent to the process itself while others can be mitigated. The first challenge involved in this process is that it is associated with a huge cost outlay. Most of these processes involve the hiring of external consultants who have specialized training on strategic management accounting. Strategic management accounting is a relatively new field and most accountants are conversant with the traditional management accounting. Consultants cost a lot of money to hire and it may not be possible for a small organization to afford. Strategic management accounting also costs a lot to the organization in the form of the time spent in meetings to formulate the strategies and measure performance. This time could be used in other operational functions of the organizations’. Another shortcoming of the strategic management accounting process is that it serves to address long term issues in entity. This involves the use of the firm’s current resources to further a long term objectives. It is not suitable for addressing the immediate needs of an organization. If an organization is facing a problem of employee turnover for example, immediate action is required because strategic management will not salvage the situation. Strategic management accounting also uses the past and the present environment to predict the future. Because strategic management accounting is long term in nature, it relies mostly on predicted information which may turn out not being true. The future may not unfold as it had been anticipated and this will invalidate any strategy which was formulated basing on it. Strategic management accounting also sets up certain procedures to be followed by the entity in its day to day activities. This means that some actions can be forfeited for the sake of adhering to the strategic management objectives. This presents opportunity costs to the entity. This impedes flexibility of the entity in the performance of its functions and may lead to a lack of innovation and creativity. Therefore a strategy should be reviewed from time to time to ensure that it does not bring obsoleteness to the entity. Strategic management accounting process also takes into consideration only quantitative factors in coming up with their deliberations. This ignores other qualitative and equally important factors affecting the organization (Prahalad 1900). An example of this is deciding to set up a branch in a certain place because the taxes and wages are relatively low. This is a valid reason for decision but it completely shuns the qualitative aspect of it such as environmental considerations. His may lead the entity into making losses in the future or coming in conflict with regulatory organizations. This also means that it does not take into consideration factors like employee welfare and issues like corporate social responsibility. Strategic accountants also place a lot of emphasis on the procedures to be followed in order to achieve the set profit targets. These procedures are set up by the management accountants and they may end up being marred by biasness. It looks at the procedures from the accounting departments’ perspective totally ignoring other perspectives. This may negatively impact the organization in that its actions will be biased towards certain goals which may not be viable. However these shortcomings of strategic management accounting come with an array of advantages. By undertaking strategic management, an entity is able to get an overall picture of the entity as a whole. Strategic management accounting involves the study of the internal accounting information vis a viz the external accounting information such as the earnings of competitors. This will bring out an overall understanding of the entity and will also enable the firm to take immediate and necessary steps to counter any undesirable actions. An example of this is studying the market of the competitors and trying to come up with strategies to counter the competitors’ products. An entity may also study the products of the competitors and come up with similar but modified products which are more appealing to the customers. Another advantage which accrues to a company which undertakes strategic management accounting processes is that the management accountants will have a thorough investigation of the entity’s costs and try to come up with ways to cut down on the costs incurred by the entity in their day to day activities. This may involve doing away with unnecessary costs the entity incurs as well as negotiating with their creditors for discounts. They may also to take advantage of the economies of scale by purchasing in bulk. They may also suggest on how to improve on budgets to cut down on the entity’s cost. By studying the industries trends, the management accountants are able to predict the future trends in the market. An example will be an entity dealing with the manufacture of clothing. Such an entity will study the past and current trends of clothing styles and come up will the future anticipated designs and be the first ones to hit the market. This will enable them to gain a competitive advantage and they will sell most of their products before the competitors hit the market with similar designs. This will also ensure that it meets its consumer needs effectively and on time and this will give them goodwill. Strategic management accounting will also enable an entity to determine its cost and implement cost leadership strategies. Cost leadership strategies are those strategies adopted by an entity in order to ensure that it has the lowest costs in the market compared to its competitors for the same quality and quantity of products (Miles 1978). A firm can achieve this through strategic management accounting by determining the manufacturing and distribution processes and the resultant costs and thereafter doing away with those processes which add costs to the process without any considerable addition in value. An example of this is whereby an entity decides to operate a distribution outlet in a certain place, as opposed to fueling the company vehicles to take the goods around to the customers. According to Wilson (1995) strategic management accounting will help a company improve in its market share in the market place. This will be so if the company successfully implements the cost leadership strategy explained above. Consumers will prefer buying something cheaper if the price will be the only difference. Another factor which may aid a company to achieve an improvement in its market share is studying the market and coming up with unique products as compared to the competitors’ products. This is what is called product differentiation. Product differentiation strategy will only work if the products serve the same purpose as the competitors’ products, and at the same time having an advantage which the competitors’ products do not. Strategic management accounting will also help an entity to identify and enhance the effectiveness of its value chain processes (Porter 1980). Value chains processes are those processes which add value to the companies’ products. These processes include the research and development, manufacturing and marketing strategies. A company will be able to identify the above processes, attach a certain value to them and make a comparison of the value to the cost involved. This will enable an entity to determine which of its value chain activities are important and therefore are to be kept. It will also assist the management in identifying the missing processes which are applied by its competitors to gain advantage and apply them in the entity. Conclusion From the above analysis we defined what strategic management accounting is. Various processes of strategic management accounting are highlighted and it is from these processes that various shortcomings and advantages are highlighted. It can be seen that although the strategic management accounting involves a lot of costs and expertise to implement, the advantages which come along are worth the cost. Almost every entity is implementing strategic management accounting techniques. By doing this they are able to obtain a cutting hedge above their competitors and compete well in the product market. An entity is also able to cut on its costs and pass the advantages to its customers. However strategic management accounting should not be used to deny the company the opportunities to participate in other desirable functions of the entities. In trying to cut down on costs, the accountants may tend to focus only on the value adding processes of the firm in total ignorance of those processes that do not add value but are equally important. Strategic cost management accounting should thus be looked at in a whole rounded manner to take into consideration all factors such as employee welfare and corporate social responsibility. These are factors which may not add any immediate value to the entity but its benefits are long term (Ryan 1995). Strategic management accounting is a positive thing which I would recommend to any company to undertake. References Miles, R (1978). Organizational Strategy, Structure, and Process, New York: McGraw-Hill Porter, M., (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press. Prahalad, C.K. (1990). The core competences of the corporation, Harvard Business Review, May–June, 79–91 Ryan, R., (1995). Strategic Accounting for Management, London: The Dryden Press Wilson, R.M.S, (1995). ‘Strategic management accounting’, in Ashton, D. Hopper, T. and Scapens, R.W. (eds.) Issues in Management Accounting, 2nd edition, Prentice-Hall: Hemel Hempstead, , pp. 159–90 Spicer, B., Bowman, R., Emanuel, D. and Hunt, A., 1991. The Power to Manage, Auckland:Oxford University Press. Read More