Strategic Management Accounting and Finance - Essay Example

Strategic Management in Accounting and Finance Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information that assists managers in specific decision-making within framework of fulfilling the organizational objectives (The ICFAI University Press). Like water, this rising tide of data can be viewed as an abundant, vital and necessary resource. With enough preparation, we should be able to tap into that reservoir -- and ride the wave -- by utilizing new ways to channel raw data into meaningful information. That information, in turn, can then become the knowledge that leads to wisdom. The idea is that information, knowledge, and wisdom are more than simply collections. Rather, the whole represents more than the sum of its parts and has a synergy of its own. In an organizational context, data represents facts or values of results, and relations between data and other relations have the capacity to represent information. Patterns of relations of data and information and other patterns have the capacity to represent knowledge. For the representation to be of any utility it must be understood, and when understood the representation is information or knowledge to the one that understands. The value of Knowledge Management relates directly to the effectiveness with which the managed knowledge enables the members of the organization to deal with today's situations and effectively envision and create their future. Without on-demand access to managed knowledge, every situation is addressed based on what the individual or group brings to the situation with them. With on-demand access to managed knowledge, every situation is addressed with the sum total of everything anyone in the organization has ever learned about a situation of a similar nature. Why is Knowledge Management Important in Today's Business Climate Today's business environment is characterized by continuous, often radical change. Such a volatile climate demands a new attitude and approach within organizations-actions must be anticipatory, adaptive, and based on a faster cycle of knowledge creation. Movement from a manufacture to a knowledge context Most of today's companies are built around organizational structures ranging from bureaucracy to adhocracy (Brezillon). According to Weber, Henderson, and Parsons, the attributes of a modern bureaucracy include impersonality and the implementation of a system of authority that is practically indestructible. Toffler sees it as a network of roles fulfilled by individuals. Bureaucratic organizations usually deal with routine operations. At the other end of the spectrum, an adhocracy represents any form of organization capturing opportunities, solving problems, and getting results. One crucial difference between both structures is the way information and knowledge flow inside the structure. In the bureaucracy, they flow bottom-up along a hierarchical path, before coming down again along a different hierarchy. In the adhocracy, hierarchical ties are relaxed and information and knowledge mostly flow through lateral relations (Brezillon). Some of the current challenges businesses face includes: - A growing emphasis on creating customer value and improving customer service; - An increasingly competitive marketplace with a rising rate of innovation; - Reduced cycle times and shortened product development times; - A need for organizational adaptation because of changing business rules and assumptions; - A requirement to operate with a shrinking number of assets (people, inventory, and facilities); - A reduction in the amount of time employees are given to acquire new knowledge; and - Changes in strategic directions and workforce mobility that lead to knowledge loss. All of these factors make knowledge management a necessity rather than a luxury. Organizations must have a clear handle on how knowledge is discovered, created, dispersed, and put to use. In some ways, knowledge management is more essential to agency success than capital or labor, yet often it is the most overlooked. The supply chain, for example, relies upon knowledge from diverse areas including planning, manufacturing, warehousing, and distribution (Ponzi). Importance of Stakeholders In the highly competitive environment, the survival of an organization may depend on how well stakeholders are managed. However, when managers delegate this responsibility of managing the stakeholder interests, there is no systematic way to evaluate their performance. With an evaluation method, such as a report card, managers no longer rely on observations regarding the outcomes of stakeholder management; they receive direct information from their stakeholders and can plan interventions accordingly (Slovensky). Strategic management involves the planning, directing, organizing and controlling of a company's strategic-related decisions and actions. An important aspect of the controlling function of a company's strategy is the fourth task, analyzing the company's options by matching its resources with the external environment (Badu). The fundamental purpose of management accounting is to help an organization achieve its strategic objectives. Meeting these objectives satisfies the needs of its customers and other stakeholders. Typical stakeholders include shareholders, creditors, suppliers, employees, and labor unions. Strategy is the way that a firm positions and distinguishes itself from its competitors. Positioning refers to the selection of target customers or markets. Distinctions are made on the three dimensions of quality, cost, and time. Different customers have different expectations about the features and performance reliability (quality) they want in a product, the price (cost) they are willing to pay, and when and how quickly they want the product or services delivered (time). An ice cream company, such as Hagen Dazs, specializes in premium high butterfat content and high priced ice creams. Hagen Dazs is quite different from Lady Lee which makes an everyday variety of low butterfat and lower priced ice creams. The two companies compete for different types of ice cream consumers. Hagen Dazs also competes more directly with Ben & Jerry's on providing a high quality premium ice cream, at the best price (cost), with timely introduction of new flavors. To have strategic value, management accounting must help accomplish the three strategic objectives of quality, cost, and time by providing information that: 1. Links the daily actions of managers to the strategic objectives of an organization. 2. Enables managers to effectively involve the entire extended enterprise of customers, suppliers, dealers, and recyclers in achieving the strategic objectives (Bell). 3. Takes a long-term view of organizational strategies and actions. Achieving strategic goals requires linking the daily actions of everyone in an organization to the larger strategic objectives. The Japanese refer to this as hoshin planning or "policy deployment." Appropriate use of Systems In a small business fir the owner-manager can monitor business activities largely on the basis of visual and personal contact. As the size of the size of the business grows and the complexity of operations increases, managers have to rely more and more on a formal information and reporting system. Indeed, in a large firm manufacturing several products, with plants in different locations, with several levels of managers, and which confronts a wide array of alternatives, managers depend almost completely on the information communicated to them through formal channels (The ICFAI University Press). Hence, the formal management information and reporting system has a significant bearing on the effectiveness of managerial performance. Management Information System refers to the data, equipment and computer programs that are used to develop information for managerial use. All organizations may have some type of information system or other but the concept of Management Information System places particular emphasis on the availability of organizational data and the ease with which the data can be analyzed and made meaningful for managerial decision-making. Thus the key ingredient in the concept of Management Information Systems is the transformation of data into information. A system is a set of elements joined together for a common objective. It is the one which receives inputs, works upon them and converts them into outputs which meet the objectives of the system. This is not carried in isolation but within an environment alongside or linked with other systems. The system approach is nothing but looking at a given problem as a whole. This approach emphasizes that any organization is made up of segments each having its own goals. In the systems approach, efforts are made to achieve the overall goals of the organization by viewing the entire system and seeking to understand and measure the inter-relationships and integrate them in a proper fashion. An Information System can be defined as the means by which the information is generated and communicated to managers at various levels to help them in the decision-making process. Therefore Management Information System is to apply scientific analysis in complex organizations for developing and managing operating systems and designing information systems for aiding in the decision making process. Decision making process can be divided into three main phases: Intelligence: Searching the environment for conditions calling for decisions, i.e., determining that a problem exists. Design: A set of alternative solutions are generated and tested for feasibility. Choice: In this phase the decision maker selects one of the solutions identified in design phase. Therefore, the Information System will help a manager in identifying problems in the environment beforehand. A problem exists when the real situation is different from the expected one. After the problem is identified, causes of the existence of the problem must be identified, and then the solution to it must be found out. Conclusion Knowledge Management caters to the critical issues of organizational adaptation, survival, and competence in face of increasingly discontinuous environmental change. Essentially, it embodies organizational processes that seek synergistic combination of data and information processing capacity of information technologies, and the creative and innovative capacity of human beings." In simpler terms, Knowledge Management seeks to make the best use of the knowledge that is available to an organization, creating new knowledge, increasing awareness and understanding in the process. "The goal of commercial knowledge is not truth, but effective performance: not 'what is right' but 'what works' or even 'what works better' where better is defined in competitive and financial contexts." Knowledge Management is an umbrella term for making more efficient use of the human knowledge that exists within an organization. Knowledge Management is the 21st century equivalent of information management. It is essentially an industry trying to distinguish itself with specialized groupware and business intelligence (BI) products that offer a wide range of solutions. The major focus of Knowledge Management is to identify and gather content from documents, reports and other sources and to be able to search that content for meaningful relationships. Today's volatile business environment demands a new attitude and approach within organizations-actions must be anticipatory, adaptive, and based on a faster cycle of knowledge creation. Bibliography 1. Badu, Edwin Ellis. "Macro Environment Analysis for Strategic Management." Libri (2002): 2-6. 2. Bell, Shahid Ansari &Jan. "Strategy and Management Accounting." Exclusive modules (2002): 5-7. 3. Brezillon, Alexandre Gachet & Patrick. "A Context-Based representation of Organizational Structures." Ph.D. Thesis. 2005. 4. Ponzi, Michael Koenig & Leonard J. "Knowledge Management: Another Management Fad" Information Research Journal (2002): 8-12. 5. Slovensky, Dr. "Managing Stakeholders." Healthcare Management Review (2002): 1-2. 6. The ICFAI University Press. Introduction to Management Accounting. Hyderabad: The ICFAI University Press, 2004. Read More