1) Is SMA the interface between strategy and management accounting or

strategic management and accounting? Explain.

Article Lord (1996), Roslender and Hart (2010)
SMA is the interface between strategic management and accounting.
Strategic management involves the formulation and implementation of an
organization’s long term goals and objectives, while accounting deals with recording,
classifying and summarizing financial transactions. SMA brings together these two
fields by providing strategic information to managers to support decision-making and
help achieve organization’s strategic objectives.
SMA helps in aligning the organization’s strategy with its financial resources by
providing management with insights into the financial implications of strategic
decisions. It involves identifying key performance indicators that are aligned with the
organization’s strategy and developing management accounting techniques.
SMA serves as the bridge between strategic management and accounting by providing
the tools, techniques and information needed to align the organization’s strategy with
its financial resources.

Example of strategic management and accounting:

Customer relationship management (CRM) is not a fully accounting concept
(strategic management). It incorporates with customer profitability analysis to make it
as accounting. Hence, Customer profitability is a combination of strategic
management and accounting.
Customer relationship management (CRM) is a popular concept in marketing, part
of strategic management, it is new marketing concept (Management). It incorporate
customer profitability analysis to make it have the Accounting elements. This make
sure which group of customers that are profitable to your business. (Management +
accounting)

TQM is a strategic management concept + accounting - how you manage the cost of
quality, how efficient to use resources to maximize the quality (accounting --- access
cost of quality)
He suggested that accounting plays a role in interactive control systems. Data are
collected about strategic uncertainties. Dialogue and debate in response to that data
trigger organizational learning which may cause ‘new (and often unanticipated)
strategies to emerge’ (p. 48).
Example of strategy and management accounting:
Performance management (strategy + management accounting) is a balance scorecard
used to implement strategy. The balanced scorecard is a management system aimed at
translating an organization's strategic goals into a set of organizational performance
objectives that, in turn, are measured, monitored and changed if necessary to ensure
that an organization's strategic goals are met.
Cost oriented strategy (Target costing)
Cost reduction strategy (Cycle costing)
Activity Based Management (ABM) incorporate strategy issue
Value chain analysis - 1st interface (SM + MA) / 2nd interface (MA)

Balance Scorecard // Target costing // Life cycle costing

Use to implement strategy, choose customer oriented strategy. Need to include cost
reduction strategy. It’s about cost reduction strategy – need to minimise the cost and
resources.
Value chain analysis
2) Describe SMA from the perspective of Lord (1996)
Define SMA by Lord
SMA refers to the use of accounting information and techniques to support strategic
decision-making within an organization. It is a process that involves identifying and
evaluating various strategic options and determining which one would be most
beneficial for the organization.

3 Characteristics of SMA and elaboration

a) External information about Competitors.
Getting external information from competitors, buyers, suppliers. Compare the firm
with competitors, information about competitors’ pricing, costs and volume, and
information to enable determination of market share would have to be collected.
Competitors are outside of the organization
SMA is focus on outward looking/externally focus eg: competitors
- More outward looking – analyze competitors position, obtain information
from many sources (external information). For instance, public, formal
sources, such as published reports and the business press, or through informal
channels, such as the firm’s sales force, its customers and its suppliers.
- Therefore, SMA is no more internal, cost-centered accounting
- Knowledge of a competitor’s costs enables a firm to detect when the
competitor is trying to change relative competitive positions, for example,
by manipulating prices. Knowledge of relative market share and cost structure
enables decisions to be evaluated in the light of possible competitor reactions.
- Seek strategic advantage – e g. pricing, quality, costs, market share.
- Provides advance warning of the need for a change in competitive strategy.

b) Gaining competitive advantage through exploiting linkages in the value

chain
Instead of merely meeting standards, there would be a focus on continuous
improvements. These would include finding ways of reducing costs and/or enhancing
differentiation by exploiting linkages in the value chain, increasing executional cost
drivers and getting structural cost drivers to the optimal level. Different, and in some
cases non-financial, performance measures may be employed to measure and monitor
improvements in all these areas
Value chain analysis to gain competitive advantage. The aim of value chain analysis is
to find linkages between value-creating activities which result in lower costs and/or
enhanced differentiation. These linkages may be within the firm or between the firm
and its suppliers, channels and customers.
Value chain analysis is a strategic cost management
 - Competitive advantage can be obtained through value-chain analysis
- By analyzing ways to decrease costs and enhance the differentiation of a
firm/s products through exploiting linkages in the value chain and optimizing
cost drivers.
- Value-chain activities – a linked set of value-creating activities all the way
from basic raw material sources (suppliers) to the ultimate end-use
products/service (customers).
- A firm which performs the value chain activities more efficiently and a lower
cost than its competitors will gain a competitive advantage.

c) Strategic positioning of firm

Strategic positioning is the process of identifying and selecting a unique and favorable
position in the market that enables an organization to achieve its strategic objectives.
Porter’s strategy: product differentiation, cost leadership, focus strategy
Attributes of cost leadership strategy: make sure cost efficiency to reduce cost,
narrowly focus/internally-focus, short-termism, having lower costs than all
competitors
Companies which use cost leadership strategy tend to use traditional
management accounting practices which rely on financial information, financial
measures. They would use standard costs to assess performance, product cost as an
input to pricing decisions, and flexible budgeting for manufacturing cost control.
They would perceive meeting budgets and analysis of competitors’ costs to be of great
importance.
Attributes Product differentiation strategy: innovative (design), superior products,
quality, premium pricing (more expensive)
Management accounting technique: customers relationship to know customers’ needs
Companies tend to use more sophisticated accounting techniques. They consider
marketing cost analysis to be critical to their success. They would consider flexible
budgeting and meeting budgets to be of only moderate importance, and rank standard
costing for performance assessment, product costing for pricing decisions, and
competitor cost analysis of little importance.
- Essential for firms to attain a position of competitive advantage.
- Strategic management accounting, therefore, should be concerned with the
relationship between the strategic position chosen by a firm and the expected
emphasis on management accounting information or techniques.
- Relationship between strategy and mgt accounting & control systems.
- The emphasis on particular accounting techniques depends on which strategic
position firms adopt.
- Different strategies demand different accounting techniques.
- Generic strategies:
1. Cost leadership, differentiation, and focus (Porter, 1985)
2. Defender, prospector, and analyzer (Miles & Snow, 1978)
Strategy Explanation

Cost leadership Aims to be the lowest cost producer within the industry
Differentiation Offers some unique dimension in its products/service which
can command a premium price.
Focus Seeks advantage in a narrow segment of market either by
way of cost leadership or by product differentiation
Prospector Focus on new product innovations and market development
Defender Focus on efficiency through cost, quality and service, engage
in little R&D
Analyzer A combination of prospector and defender strategy – Hybrid
strategy
Prospector strategy Tends to place a greater emphasis on forecast data and
reduced importance on cost control (Simons, 1987) and use
non-financial measures for determining executive bonuses
(Ittner et al., 1997)
Defender strategy Tends to place a greater emphasis on the use of financial
measures (e.g., short-term budget) (Simons, 1987)
- A firm pursuing a product differentiation strategy is likely to require more
information than a cost leadership strategy about new product innovations,
R&D, and marketing cost analysis
- How you position yourself in the market depends on the strategy type.
3) Describe Porter’s Five Forces Model and why it is important in SMA.
Porter’s Five Forces model is to evaluate the competitiveness of a particular
industry/marketplace. Companies analyze their competition and decide how to
compete better.

Forces Definition Example

Threat of new New companies can enter It is high as there are many small
entrants into the industry and compete airlines trying to enter the market.
with the existing companies.

Threat of The alternative of using other It is high as it can be substituted

substitute products or services which with trains, buses, and cars.
products/services are offered by companies
within the industry.

Bargaining The ability of suppliers to It is low because airlines have

power of increase the price of inputs many suppliers of fuel and
suppliers used by companies within the aircrafts.
industry.

Bargaining The ability of buyers to It is high as the consumers have

power of buyers decrease the prices and many options for travel and may
negotiate favorable terms compare prices.
with companies within the
industry.

Rivalry among The intensity of competition It is high as most of the airlines are
existing among existing companies trying to cut off the prices to
competitors within the industry. compete with each other.

The meaning for strategic management accounting is an approach of management

accounting that focuses the strategic issues on several disciplines such as strategy,
marketing, & management. Therefore, the porter's Five Forces model is an important
framework in strategic management accounting because it helps organizations to
analyze the competitive forces in their industry and develop effective strategies to
remain competitive.

The Five Forces model is a tool used in strategic management accounting to analyze
the competitive landscape of an industry. It is commonly used along with other tools
such as SWOT analysis and value chain analysis to create a more complete
understanding of the industry and identify areas of growth and improvement. By
using these tools together, companies can create a strategic plan that is well-informed
and takes into account their competitive position within the industry.

Porter's Five Forces Model is important in SMA for several reasons:

1. Understanding the competitive environment: SMA practitioners can use
Porter's Five Forces Model to analyze the competitive environment of an
industry and identify the key drivers of competition. By understanding the
industry dynamics, firms can identify potential threats and opportunities and
develop strategies to improve their competitive position.

2. Identifying key success factors: The Five Forces Model can help SMA
practitioners identify the key success factors in an industry. These factors are
the things that determine success in the industry, such as innovation, customer
service, or cost structure. By understanding the key success factors, firms can
focus on the areas that are most important to their success.

3. Informing resource allocation: The insights gained from applying the Five
Forces Model can inform decision-making about resource allocation. Firms
can use the model to understand which areas of the business require the most
investment or which areas are the most critical to their success.

4. Supporting strategic positioning: The Five Forces Model can help firms
understand their competitive position in the industry and identify opportunities
to differentiate themselves from competitors. This can inform decisions about
strategic positioning, such as whether to focus on cost leadership,
differentiation, or a niche strategy.

How relate to SMA

- Relate to Lord’s 3 perspectives (external info about competitors)
- Part of value chain (3rd perspectives). Fits very well with perspective of SMA
by lord.
4) Describe the generic strategies by Porter (1985) and discuss Ryann Air – A
highly effective overall cost leadership strategy.
Generic strategies by Porter (1985) (Focus on cost + differentiation 2 enough)
In his book "Competitive Advantage: Creating and Sustaining Superior
Performance" (1985), Michael Porter proposed three generic strategies that firms can
use to achieve competitive advantage. These strategies are:
1. Cost leadership: In this strategy, firms aim to achieve the lowest cost of
production in their industry. This allows them to offer their products or
services at a lower price than their competitors, while still making a profit.
Cost leadership can be achieved through economies of scale, efficient
operations, or sourcing cheaper inputs.

Focus on financial information. Hence, it will put the most emphasis on the
traditional cost accounting applications. They would use standard costs to
assess performance, product cost as an input to pricing decisions, and
flexible budgeting for manufacturing cost control. They would perceive
meeting budgets and analysis of competitors’ costs to be of great
importance. Narrow minded & internally focus because just focus on cost
only. Short - term.

2. Differentiation: In this strategy, firms aim to differentiate their products or

services from those of their competitors in a way that is valued by customers.
This allows them to charge a higher price for their products or services than
their competitors, while still attracting customers. Differentiation can be
achieved through unique features, superior quality, or exceptional
customer service, quality products. Premium pricing.

Customer relationship & quality & innovation. More contemporary &

sophisticated strategic management. Balanced Scorecard (BSC)

3. Focus: In this strategy, firms focus on serving a specific market segment or

niche within their industry. By focusing on a specific customer group, firms
can tailor their products or services to meet the specific needs of that group
and develop expertise in serving that market. This can allow them to charge a
higher price for their specialized products or services and avoid direct
competition with larger, more diversified firms.

(In the middle of differentiation & cost leadership)

Porter argued that these three generic strategies can be used by firms in any
industry, and that successful firms will typically choose one of these strategies and
pursue it consistently over time. By choosing a clear strategy and aligning their
resources and capabilities with that strategy, firms can achieve sustainable
competitive advantage and outperform their competitors.
Ryann Air – A highly effective overall cost leadership strategy
 Ryanair is a European low-cost airline that has become known for its highly
effective overall cost leadership strategy. The airline has been able to achieve
sustained profitability in a highly competitive industry by focusing on minimizing
costs across all aspects of its operations. Here are some of the ways in which Ryanair
has implemented a cost leadership strategy:
1. Efficient operations: Ryanair has been able to achieve very high levels of
efficiency in its operations, allowing it to minimize costs and maximize
profits. For example, the airline uses a single type of aircraft (the Boeing 737)
to reduce maintenance and training costs, and it operates from secondary
airports that are typically cheaper to use than major airports. Ryanair has also
streamlined its boarding process to reduce turnaround times and increase the
number of flights that can be operated per day.

2. No-frills service: Ryanair offers a no-frills service to passengers, meaning that

they pay only for the basic transportation service and must pay extra for things
like food, checked baggage, and seat selection. This allows Ryanair to keep its
base fares very low while generating additional revenue from these ancillary
services. The airline also does not offer free in-flight entertainment or other
amenities that are typically associated with traditional airlines.

3. Cost-conscious culture: Ryanair has instilled a culture of cost consciousness

throughout the organization, with every employee focused on finding ways to
minimize costs and maximize efficiency. This includes everything from using
energy-efficient lighting in offices to negotiating lower prices with suppliers.
The airline has also been able to keep labor costs low by negotiating with
employee unions and outsourcing certain functions like ground handling and
cleaning.

4. Use of technology: Ryanair has invested heavily in technology to reduce costs

and improve efficiency. For example, passengers are encouraged to check in
online and print their boarding passes at home, reducing the need for airport
staff and paper tickets. The airline also uses sophisticated revenue
management systems to optimize pricing and maximize revenue.
Overall, Ryanair's highly effective overall cost leadership strategy has allowed
it to become one of the most profitable airlines in Europe, with a large and loyal
customer base. While some passengers may be put off by the no-frills service and
additional fees, many are willing to sacrifice some comfort in exchange for lower
fares. By focusing on efficiency and cost control, Ryanair has been able to disrupt the
traditional airline industry and become a leader in the low-cost airline market.
Example in Malaysia: My airline + Air Asia (cost leadership also)
Explain which strategy (differentiation + cost) can provide what type of
information
NOTES:
characteristics of cost leadership strategy (suit for traditional mgmt acc) are: Lord
(2010)
 Accounting technic - std costing & flexible budgeting (traditioanl
mgmt acc)
 Cost reduction strategy - efficiency in using resources and cost
 Cost control: Cost leadership strategy involves strict cost control
measures to minimize costs and maintain low prices while still
achieving acceptable profit margins.
 Price sensitivity: Cost leadership strategy targets price-sensitive
customers who are willing to sacrifice product or service features for
lower prices.
Conclusion : tend to use tratidtional accounting practice

The key attributes of product differentiation are: innovative, superior, quality,

premium price (expensive) tend use sophisticated & contemporary management
system eg bal scorecard

 Unique features: Product differentiation involves the development of unique

and innovative product features that are not available in other products or
services in the market.
 Brand image: Product differentiation requires the development of a strong
brand image that is recognizable and associated with the organization's
products or services.
 Quality: Product differentiation focuses on offering high-quality products or
services that are superior to those of competitors in terms of performance,
reliability, durability, or other attributes.
 Customization: Product differentiation may involve offering customized
products or services that are tailored to the specific needs and preferences of
individual customers.
 Design: Product differentiation may involve focusing on product design to
make the product more visually appealing, easier to use, or more ergonomic.
 Customer service: Product differentiation may involve offering exceptional
customer service to differentiate the organization from its competitors.
 Marketing and promotion: Product differentiation requires effective marketing
and promotion strategies to communicate the unique features, benefits, and
value proposition of the organization's products or services.
5) Describe how management accounting information can be used to better
support strategy.
Management accounting information can be used in several ways to better
support strategy. Here are some examples:
1. Cost analysis: Management accounting information can help identify and
analyze costs associated with various products, services, and processes. This
information can be used to identify areas where costs can be reduced, such as
through process improvements, outsourcing, or changing suppliers. By
reducing costs, firms can improve profitability and potentially offer more
competitive prices.

2. Performance measurement (KPIs): Management accounting information

can be used to measure the performance of various business units,
departments, and individuals. This information can help identify areas where
performance can be improved and where resources should be allocated. By
setting performance targets and monitoring progress towards these targets,
firms can ensure that their activities are aligned with their overall strategy.

3. Budgeting and forecasting: Management accounting information can be used

to develop budgets and forecasts that are aligned with the firm's strategic
objectives. By forecasting future revenue and expenses, firms can plan their
operations and make informed decisions about investments, pricing, and
resource allocation.

4. Decision-making: Management accounting information can be used to

support decision-making at all levels of the organization. For example,
managers can use cost-benefit analysis to evaluate different options and make
informed decisions about investments or changes in strategy. By using data-
driven analysis to support decision-making, firms can reduce uncertainty and
increase the likelihood of success.

5. Strategic planning: Management accounting information can be used to

inform strategic planning by providing insights into the firm's strengths,
weaknesses, opportunities, and threats. For example, by analyzing customer
profitability or market trends, firms can identify new opportunities for growth
or areas where they may be at risk. By using management accounting
information to inform strategic planning, firms can develop more effective
strategies and make informed decisions about resource allocation.

One of the primary ways that management accounting supports strategy execution is
by helping to identify and track key performance indicators (KPIs).
2.1
KPIs can be used to measure progress toward strategic objectives and help to
highlight any )areas that may need attention. Management accounting also helps to
ensure that budgets are aligned with strategy. This means that resources are allocated
to support the organization's overall objectives.

Another important role of management accounting is to provide information on

profitability.
2.2
This can help managers make informed decisions about allocating resources and
which products or services to focus on. Financial information can also assess the
organization's overall financial health and identify potential risks or opportunities.

Management accounting is essential for strategy execution and leadership. By

understanding the company's financials, management can make better strategic
decisions that will lead to successful execution. Additionally, good leadership is
necessary to ensure that the strategy is communicated effectively through the ranks
and carried out in a coordinated manner.
A well-conceived strategy is only as good as its execution. Many companies have
failed because they could not execute their strategy correctly. Management
accounting plays a crucial role in strategy execution by providing accurate and timely
information about the company's financial status. This information can be used to
adjust the strategy as needed, ensuring that it remains on track.

Extra Question:
Weakness of standard costing

Time-consuming: The process of establishing standards and tracking actual costs can
be time-consuming, requiring significant resources and effort & cost. Eg: setting
direct labour cost standard, need to study motion study.

Need for revised standards: Management should not think that the job is done after
determining standard costs once. These standards must be revised from time to time
due to changes in technology, marketing conditions, and consumer habits.

Impact on manager behavior can be negative (top mgmt blame) - encouraging is

needed
Revenue standard: unfavorable variance, production manager unhappy (), top mgmt
will blame on the manager
Cost standard: complacent , standard is too high &over estimated