What Are the Advantages of Using SMA Over Other Accounting Techniques - Case Study Example

STRATEGIC MANAGEMENT ACCOUNTING Table of contents Introduction 3 2. What is Strategic Management Accounting (SMA) 3 3. Where is it used and who uses it 4 4. What is its relevance to the companies 5 5. What are the advantages of using SMA over other accounting techniques 6 6. What are the key SMA models and concepts 7 7. What are the factors underpinning the use of SMA and relevance to decision-making in an organization. 9 8. Discuss and summarize the role of SMA in decision-making 11 9. Discuss the underlying theory behind the 11 a. Pricing products or services 11 b. Product mix and limiting factor analysis 12 c. Shutting down or keeping open part of the business and 12 d. Make or buy decisions 13 10. Conclusion 13 References 1. Introduction- This report discusses the role of Strategic Management Accounting (SMA) technique in an organization to determine the key decision-making strategies for its competitive advantage. The various definitions of SMA and the underpinning factors for its use are studied and analyzed. Further, the strategic decision-making issues related to the different factors like competitive pricing of products or services, the operational strategies of the business, the manufacture and development of products and the product costing are discussed in detail. As organizations have a decision-support system in place for continuous evaluation of their market position, business strategies and competitive analysis, there is a need for improved techniques for evaluating the same at regular intervals and SMA is one such tool that is increasingly being used as an appropriate tool for mangers to gauge the strategic position of their company and enhance it continuously. The issues related to the use of SMA and its resulting effectiveness is also studied and evaluated. It is seen that the use of SMA can be uniform for a set of similarly operating businesses which aids in the decision-making process of these businesses and hence this technique can be generalized and applied for a group of businesses with similarities in operational strategy. 2. What is strategic management accounting Strategic Management Accounting (SMA) has been defined by different authors in different perspectives. However, it is found that it serves the common goal of supporting the decision-making in any organization. Smith (2005: 15) observes that managers need to "take strategic decisions in a variety of areas like corporate strategy, competitive strategy and operational strategy". It boils down to the more mundane tasks of the manager to understand and make key strategic decisions on a regular basis to ensure profitability and sustainability of the business. Strategic decisions related to the corporate strategy include decisions as to what profile of business the company needs to be in, what products it should roll-out, the pricing of these products, the procurement, development and manufacture of the same, along with the operational strategy of the organization for enabling the business and its smooth running without being run over by competitors. This requires the managers to effectively equip themselves with the cost and income of the activities involved and the net profit from these activities on the whole. Further, these activities of the organization are to be ensured to be in-line with the "organizational goals, the mission statement, objectives, operational strategies and the performance measurement" (Smith, 2005: 15). Smith defines SMA as "an integral part of the establishment of a decision-support system providing information to decision-makers" while Drury quotes Innes definition of SMA as "the provision of information to support the strategic decisions in organizations and Cooper and Kaplan's definition as it being a technique to support the overall competitive strategy of the organization, principally by the power of using information technology to develop more refined products and service costs" (2007: 570). 3. Where is it used and who uses it Strategic management accounting is used more with an external perspective than with an internal perspective. Clarke notes that "the thrust of strategic management accounting is to focus on areas that traditionally have been perceived as being outside the domain of the management accountant" (2002: 203). Strategic management accounting offers an alternative to conventional management accounting in terms of analyzing the market for the cost and market share of the competitor to give an idea of the competitors' profit share in the market and also enables the accountant manager to calculate the future strategy for pricing the product against the competitor's product price. As the pricing of the competitor can be predicted by using this data from the cost and market share, future strategies for pricing one's own products against the competitor's enables the company to move ahead of the competition and also gain profit and a competitive edge. Management accountants are the one's keeping an eye on the pricing and market share of the company as well as the competitor. They are moving out of the confines of book keeping of scorecards and increasingly involved in assessing the internal and external economic factors like product costing and strategic cost drivers (Greenwood, 2003: 128). They also are responsible for assessing the environmental factors like the competitive analysis, sources of profit, etc. to ensure sustainability of the business. Apart from these factors, the management accountants are also responsible for gathering internal information on the operational costs and strategic data that is purely internal to the organization and align it to the strategic decision-making. Thus, the whole exercise of strategic management accounting by the management accountant can be considered to be a step towards providing information gathered internally and externally to aid in decision-making for making the products and processes to be low-cost (Drury, 2007: 6) and gain a competitive advantage in business. 4. What is its relevance to the companies Companies are increasingly using strategic management accounting as a tool to increase their market share and beat competition by framing excellent strategies for the future based on the analysis done by the management accountants. While the data collected by the managers for the pricing and market share of the competition can be used to assess the cost effectiveness of the company's products in the same market, it is also beneficial in terms of comparing the chances of one's own company's product pricing and its chances of surviving and clinching the market share. And this needs a strategy based on the information gathered from the market on the competition. Srikanthan notes that "it is not enough to just monitor an manage costs but it is also important to relate the data collected to the market and the competition to give a direction to the business by way of formulating strategies through decision-making" (2002: 9). Hence, it enables the company to relate to its external environment based on which it can adapt its own costing and business strategy. 5. What are the advantages of using SMA over other accounting techniques While conventional financial accounting is concerned with the book keeping activity of balance sheets of the company, Strategic management accounting is concerned with effectively respond to external environment and monitor the activity on the balance sheet to ensure productivity and profitability of the business. Clarke notes that companies must adapt themselves quickly to changes in the market place for their survival and for this, they need to continuously scan their environments to analyze their strengths and weaknesses and position themselves in the market so as to minimize threats and maximize their ability to take advantage of the opportunities that the changing market preposition throws open" (2002: 202). It is further observed that Strategic management accounting offers a "stable strategic pattern when the three problems faced by the management are addressed. These three problems are in the three dimensions of entrepreneurial, concerned with the strategic management of markets and products, the technological aspects of production and distribution of products and the third aspect of administration wherein it has to support the entrepreneurial and technical decisions" (Lino, Andrea, 2007: 6). Strategic management accounting is found to enable the managers the unique advantage of risk management (Srikanthan, 2002:10), which no other technique like conventional financial accounting offers. As changing market scenarios often pose an element of risk to the business, Strategic management accounting offers the flexibility to adapt to the changes and thus reduce the risk to the market preposition. It allows alignment of the costs with the company's strategy, goals, performance management, etc. Using Strategic management accounting, customer satisfaction has taken prominence and providing value to customers is recognized as the key to gaining increased market share. Simon and Chris note that the "horizontal and vertical fit of the strategic management accounting enables the organizations to achieve their goals. While the vertical fit refers to the organization's ability to sync the strategic management accounting system with its strategy, horizontal fit refers to the consistency of its operational practices" (2008: 6). On the other hand, conventional financial practices do not offer this advantage to align the strategic management accounting system to the organizational goals effectively. 6. What are the key SMA models and concepts Models are used to represent collected data for analysis and interpretation to aid the decision-making process of the organization. Some of the key strategic management accounting models are simulated and they can be descriptive or deterministic, prescriptive or probabilistic. These models are used to depict the integration of accounting and the budgeting systems (Greenwood, 2003: 99). Further, there are scores of practices that can be implemented in strategic management accounting, of which most of them are dependent on external factors. They are competitive position monitoring, strategic pricing, competitor performance appraisal, competitor cost assessment, strategic costing, quality costing, value chain costing, brand value monitoring, life cycle costing and brand value budgeting (Srikanthan, 2002:10). Any company has a set strategy to determine the standard cost of a product and the services it offers. "Standard costs are realistic estimates of costs based on analysis of both projected and past operating costs and conditions and further used for cost planning and control by the management" (Beavers, 2007: 1). As the management of any company needs to effectively plan its budget for profitability, it can be seen that standard costing is a necessary tool for organizations, big or small, which develop products or sell services. "Variance analysis is the process of computing the differences between standard cost and the actual cost and also identifying the causes of those differences" Beavers, 2007: 3). Since any company owing to its management accounting practices needs to implement these tools for simple budgeting, it can be inferred that the standard costing and variance analysis are appropriate to any type and size of organization. The variance analysis gives the measure of performance of the company. However, the extent to which these tools are utilized along with other tools to accurately frame the budgetary control plan to effectively integrate it with the strategic management practices is of importance. The simple costing model is used by any organization to determine the product price and is found to be volume-driven. However, Cooper and Kaplan note that "there is a need to look at product costing as a more complex process that reflects the cost drivers" (Chapman, et al., 2007: 534). Strategic management accounting uses the costing model of product pricing with the complex pricing drivers taken into account for forming the business strategy. Since there are bound to be changes in the external environment due to various political, economic and other conditions, businesses need to equip themselves with strategies to tackle the effects if the changes on the performance. Here, the variance analysis is particularly useful to leverage the information on the market to change the costing and operational strategies to ensure profitability and gain a competitive advantage in the market. 7. What are the factors underpinning the use of SMA and relevance to decision-making in an organization Cadez and Guilding observe that there are two varied dimensions of strategic management accounting and groups of organizations share a common profile of key characteristics such as strategy, structure and decision processes (2005: 5). Every business needs to develop its own strategy and make decisions for performance management. Srikanthan (2002: 10) further notes that "a company needs to be competent at activity based costing and management by providing decision-focused information to help understand the effects of key variables of business that affect the product profitability". Hence, decision-making is also a key factor underpinning the use of strategic management accounting in an organization. Management accountants also need to understand the behaviour of the key variables in business to effectively aid in framing operational strategies along with product pricing. Srikanthan (2002: 10) notes that the strategy for sustainable competitive advantage to increase profits, minimize resources and reduce costs is one major reason that drives the companies to use strategic management accounting. This kind of an approach also helps in reducing the risk factor in the business and hence makes the use of strategic management accounting more desired by all businesses. Here, it is to be noted that the cost and income of a product of an organization are the key driving factors for all decision-making, strategy formation and costing to ensure the reduction of risk on the capital invested and the increase in the profit for all the stakeholders. With income measured in terms of profit on cost of the product, the decision-making is aided by strategic management accounting which focuses on the competitive analysis which in turn gives the manager an understanding of the benchmark for pricing his product. Strategic management accounting is an effective tool to know the reasons for the competitors pricing and the breakeven for the competitor for a particular product. This in turn gives an idea of the profit that the competitor is aiming and in turn gives an insight into the operating costs of the competitor. This information can be useful for the management to gauge the market potential for their particular strategic product and pricing of the same. It offers the business to minutely consider their own strategy and if needed improve or change the strategy of operation and thus increase the performance. To ensure product or business profitability, the company can leverage the potential of the information from strategic management accounting on the environmental and competitive analysis and also the relevant internal data to gain an insight into their own strategies and their effectiveness in the current context and efficiently change the strategies accordingly. This involves decision-making on the available data and the information on the competitor analysis is the major driving factor to decision-making with or without the changes in environment. With just the competitor's pricing analysis, we can gain a lot of insight into the changes that we can make to ensure profitability by making a decision to gain an advantage in the market either by increasing the product cost or by reducing the operational costs of the product. For this, key strategic decisions have to be made and involve the effective use of cost of the company's product or service and the income generated by its market. Coupled with the analysis of the environmental and inside data, there are a number of strategic decisions that can be made by an organization to ensure profitability and gain a competitive advantage in the market place. This practice also ensures increased Return on Investment (ROI) and shareholder value which are the modern time concerns of a business (Srikanthan, 2002: 10). 8. Discuss and summarize the role of SMA in decision-making- Intelligent decision-making by considering the key factors that contribute to the volatility of markets, products and customers is the need of today's business and have to be understood to be able to effectively use the strategic management accounting technique as a tool. As strategic management accounting focuses more on the external factors of volatility in business, and since the global competition drives businesses to respond to changes in the market with immediate internal strategic changes, decision-making is enhanced by the use of this technique of management accounting. Clarke (2002: 202) observes that "increasing global competition favors pre-emptive strategic planning over management by reaction and to survive companies must have the capability to respond to changes in the market place, to respond to technological changes and product innovations". 9. Discuss the underlying theory behind the a. Pricing products or services b. Product mix and limiting factor analysis c. Shutting down or keeping open part of the business and d. Make or buy decisions. a. Pricing products or services- Organizations that introduce new or products with a differentiation have to extensively use the cost of the product to make the pricing decision for that product. It can be noted that this decision will primarily depend on the internal data gained from the strategic management accounting technique which normally focuses on the external factors. Although the importance of the external factors is retained, the company needs to use more of the internal data for determining the product pricing. Further, the pricing of product which is not new depends more on the market pricing and the company has less control over the decision making on the pricing. However, the basis for setting selling price for any product is the cost information of the product. This can take an activity-based approach to product costing. Further, as Drury observes, there are companies that are price-takers which means that they have no or less influence on the product pricing and then there are the price-setters who market products which are highly differentiated and determine the product pricing based on the product costing (2007: 248). b. Product mix and limiting factor analysis Whatever the focus for decision-making of the pricing of the product, the cost analysis is necessary and the individual cost of the products can be taken into consideration for determining the product mix that the company can market for profitability. However, cost information is also important for price-takers when the companies have to determine the mix of products that they can market for profitability of their business. Also, the short-term and long-term capital investments have to be taken into consideration and the profits for the same are to be considered while decision-making using cost and income data for product pricing and product mix pricing strategies of the company along with the interests of the different stakeholders. c. Shutting down or keeping open part of the business Drury further notes that "most organizations periodically analyze profits by one or more cost objects, such as products or services, customers and locations and equips the strategic management accounting tool with information of the profitability or unprofitable activity and need attention to make decision for discontinuing the same" (2007: 205). However, there are limitations to its use as the right information and analysis techniques have to be used for efficient decision-making. Further, the local and global environmental factors also play an important role in the effective use of this information to form efficient strategies and it is at the discretion of the managers to relate the information to the particular environmental conditions prevailing in a particular timeframe. The extent of value-creation strategies and their effective implementation are also key driving factors to limiting the usefulness of strategic management accounting as an innovative tool for decision making in any business organization. d. Make or buy decisions Strategic management accounting can effectively serve as a tool for decision-making in all kinds of organizations with all kinds of products or services by giving an insight into the various factors that directly or indirectly underpin the profitability of the business. Qualitative factors are those factors influencing the decision-making of the business that cannot be expressed it monetary terms (Drury, 2007: 192). These factors also play an important role in the decision-making process of a company and need to be gathered for the decision-making to be better informed while taking decisions that can affect the stakeholders of the company. Similarly, the make or buy decisions or the outsourcing decisions for a business depend on the profitability of the decision to obtain services or manufacture from an external source. This decision can depend on the internal data like the cost of manufacturing and the fixed costs and the variable costs. Also the availability of materials and services, cost of the finished product, etc. determine the make or buy decisions of a product or service. 10. Conclusion- It can be seen that the strategic management accounting technique is an effective tool used for decision-making in big and small organizations alike, to gain profitability in the market place by focusing externally on the competitive analysis and the environmental conditions along with the internal data in the organization. It can be found that the standard costing and variance analysis are appropriate to any type and size of organization as they are the key driving forces for product pricing and profit analysis. Further, the cost and income data can be used by this technique of strategic management accounting to facilitate a number of decision-making scenarios like the pricing of the product or service, product mixing, making or buying decisions and doing or discontinuation of businesses when unprofitable. There is a surprise finding in this report and that is that strategic management accounting enables risk management, which is critical for every business apart from ensuring profitability. References- 1. Beavers, RA "Managerial Accounting - Standard Costing and Variance Analysis". Published on August 06th, 2007. Accessed on June 18th, 2009 < http://www.laney.peralta.edu/Projects/30604/Business%201B%20-%20Managerial%20Accounting//Chapter_22.pdf>. 2. Chapman, SC et. al. (2007). "Handbook of management accounting research". Published by Elsevier. V2. 3. Clarke, JP (2002). "Accounting information for managers". Published by Oak Tree Press. Ed. 2. 4. Drury, C (2007). "Management and cost accounting". Published by Cengage Learning EMEA, Ed 7. 5. Greenwood, R (2003). "Handbook of financial planning and control". Published by Gower Publishing Ltd. Ed. 3. 6. Lino, C and Andrea, T (2007). "Is the adoption of strategic management accounting techniques really 'strategy-driven' Evidence from a survey". MPRA paper no. 11819, accessed on June 18th, 2009 http://mpra.ub.uni-muenchen.de/11819/. 7. Puolamaki, E and Lye, J (n.d.). "The role of strategic management accounting in the strategy formation". Accessed on June18th, 2009 < http://www.cardiff.ac.uk/carbs/news_events/events/past/conferences/ipa/ipa_papers/00247.pdf>. 8. Simon, C and Chris, G "Strategy and strategic management accounting:An investigation of organizational configurations". Manchester Business School, Research seminar on June 18th, 2008, accessed on June 18th, 2009 < http://www.mbs.ac.uk/research/accountingfinance/documents/CadezandGuilding2008-MBSseminar.pdf>. 9. Smith, M (2005). "Performance measurement and management", Published by SAGE. 10. Srikanthan, S "Success through strategic management accounting". Management Quarterly, Cranfield School of Management, Part 14, Published on January 2002, accessed on June 18th, 2009 < http://www.icaew.com/index.cfm/route/120448/icaew_ga/pdf>. Bibliography- 1. Belkaoui, RA (2002). "Behavioral management accounting". Greenwood Publishing Group. 2. Bhimani, A (2006). "Contemporary issues in management accounting". Oxford University Press. Read More