UMACRQ-15-M

Strategic Management
Accounting

SESSION 1: WHAT IS STRATEGIC MANAGEMENT

ACCOUNTING (SMA)?
 Objectives for this Session

1. Explore strategy and the strategic context

2. Examine the definition of strategic management accounting (SMA)

3. Discuss the contribution of SMA to strategic decision-making

Question/Activity

 What is meant by ‘Strategy’?

 What are strategic decisions faced by an organisation?

 Definitions of strategy

 ‘..thedetermination of the long-run goals and objectives of an

enterprise and the adoption of courses of action and the allocation of
resource necessary for carrying out these goals’ - Alfred D. Chandler

 ‘Competitive strategy is about being different. It means deliberately

choosing a different set of activities to deliver a unique mix of value’. -
Michael Porter

Sources: A.D. Chandler, Strategy and Structure: Chapters in the History of American Enterprise, MIT Press, 1963, p. 13 M.E. Porter, What is
strategy?, Harvard Business Review, 1996, November–December, p. 60
 Definitions of strategy

• ‘..a pattern in a stream of decisions’

Henry Mintzberg

• ‘..the long-term direction of an organisation’

Exploring Strategy
Strategic decisions
 The strategy hierarchy
Key strategic Influences on
decisions decision-making
What business to be in? Economic environment
Corporate What to acquire? Social environment
strategy What to divest? Political environment
How to allocate cash? Company values and ethics

What is the mission? Customer/market dynamics

Business What are the strategic Competitor activity
objectives of the firm? Core technology dynamics
strategy
How to compete? Financial constraints

How to contribute to the Skills of function’s staff

Functional strategic objectives? Current technology
strategy How to manage the Recent performance of the
function’s resources? function
The Strategy model
CIMA
Strategic
Scorecard
Activity

 Write down your definition of what is Strategic Management Accounting?

 What do you think Strategic Management Accounting is concerned with?

 What elements does it comprise?

 What is its primary focus?

 Activity

 The Chartered Institute of Management Accounting (CIMA) defines management

accounting as follows: “management accounting is the sourcing, analysis,
communication and use of decision-relevant financial and non-financial information to
generate and preserve value for organizations.”

 According to CIMA, Strategic Management Accounting is defined as “a form of

management accounting where emphasis is placed on information which relates to
factors external to the entity, as well as non-financial information and internally generated
information.”

Question/Activity - What are the key differences between the two definitions?
 Definitions of SMA

Simmonds • “the provision and analysis of management accounting data bout a business
(1981) and its competitors for use in developing and monitoring business strategy”

Bromwich • the provision and analysis of financial information on the firm’s product markets
and competitors’ costs and costs structures and the monitoring of the enterprise’s
(1990) strategies and those of its competitors in these markets over a number of periods

Ma and
• the body of management accounting concerned with strategically orientated
Tayles information for decision making and control”
(2009)
 Strategic Management Accounting (SMA)

 Strategic Management Accounting (SMA) describes the process of provision and

analysis of management accounting data about a business and its competitors for use
in developing and monitoring the business strategy (Seal et al., 2006: 754).

 SMA facilitates greater levels of information to support management decisions on

strategic choices, through for example, assessing relative market positioning, through
analysing competitors or suppliers costs.

 In addition, SMA is also concerned with the implementation of chosen strategies and
establishing control systems that support the chosen strategies.
 Definitions of SMA

 Analysis of definitions among scholars set out above demonstrates that there is no consensus on the
SMA definition but SMA adopts a strategic approach in the identification, collection, analysis, and
report, and in the use of information needed for strategic management, marketing, and other
managerial functions.
 SMA adopts:
i. a more outward-looking orientation in focusing on the customers, actual and potential
competitors, and markets in general;
ii. an orientation to the internal resources and organizational capabilities (intellectual capital);
iii. a forward-looking orientation that allows to create and achieve competitive advantages and
enhance organizational performance; and,
iv. both financial and non-financial measurement typologies.
Traditional Management Accounting
versus Strategic Management Accounting

Traditional MA Strategic MA
Inghirami (2014) provides the following comparative analysis:
Historical Prospective
Single entity Relative
Introspective Out-ward looking
Manufacturing focus Competitive focus
Existing activities Possibilities
Reactive Proactive
Programmed Un-programmed
Data oriented Information oriented
Based on existing systems Unconstrained by existing systems

Built on conventions Ignores conventions

The evolution of
strategic
management
The evolution of
strategic
management
 The Essence of SMA

SMA is essentially the provision of information to support the strategic decisions in the
organization. According to Lord (1996), the functions commonly associated with SMA are:
1. To collect information related to competitors.
2. To use accounting for strategic decisions.
3. To cut costs on the basis of strategic decisions.
4. And, to gain competitive advantage through it.

 SMA evaluates external information, such as trends in costs, prices, market share and cash
flow, and their impact on resources, to determine the appropriate tactical response.

 The strategic element of management accounting therefore requires enhanced intelligence

about competitors, suppliers and technologies
 Strategic Elements

 The primary strategic elements of organizations are based on quality, cost and time
(QCT).

 A business uses these factors to differentiate itself from competitors, such as higher
quality, faster delivery, lowest cost.

 A business will evaluate the relative importance of the QCT factors for its customers
and the preferences or demands made by its market.
 Stages of SMA

Dixon and Smith (1993) identify four stages to their SMA process: strategic business: unit
identification, strategic cost analysis, strategic market analysis, and strategy evaluation.

Lord (1996) describes SMA as a six-stage process as follows:

1) Collection of competitor information.
2) Exploitation of cost reduction opportunities.
3) Matching of accounting emphasis with strategic position.
4) Collection of competitor information.
5) Exploitation of cost reduction opportunities.
6) Matching of accounting emphasis with strategic position.
 Essentials of SMA

Brouthers and Roozen (1999) stated that information provided by a strategic accounting system should
support:
 Environmental analysis;
 Strategic alternative generation;
 Strategic alternative selection;
 Planning the strategic implementation;
 Implementing the strategic plan; and
 Controlling the strategic management process.

This information should, therefore, be:

 Mostly non-financial;
 Focused on the future;
 Internal and external
 Elements of SMA

Cinquini and Tenucci (2010) summarise the techniques that comprise SMA:
 Activity-based-costing (ABC)
 Life-cycle costing
 Quality costing
 Target costing
 Value-chain costing
 Customer appraisal
 Competitive position monitoring
 Competitor cost assessment
 Competitor performance appraisal
 Performance benchmarking
 Integrated performance measurement (BS)
Elements
of SMA
 Using the techniques of SMA

 To what extent do organisations use the SMA techniques to support strategic decision
making?

 See CIMA Report, Vol 11, Iss. 1, Management Accounting in support of the Strategic
Management Process.
 Linking SMA to Strategic Position

Lord (1996, p.355) provides the following connections between strategic position and the
requirements of SMA:
 Product differentiators would attach high importance to marketing cost analysis:
Flexible budgeting for manufacturing cost control and meeting budgets would be of
moderate to low importance.
 As products may have to change frequently to meet market demand, little or no
importance would be attached to detailed standard costing for performance assessment,
using product costs for pricing decisions and performing competitor cost analysis.
 Cost leaders, on the other hand, would attach high importance to standard costing
for performance assessment, flexible budgeting for manufacturing cost control,
meeting budgets, using product costs for pricing decisions , and competitor cost
analysis.
 Linking SMA to Strategic Position

Miles and Snow (1978) classified organizations by their way of responding to the
environment , and according to their ‘particular configuration of technology, structure , and
process’.
 Defenders are prominent in a stable, narrow product-market. In order to maintain
prominence in the chosen segment, defenders will aggressively pursue technological
efficiency. Because of the stability of their markets, defenders can concentrate on
reducing costs and / or improving quality.

 Prospectors, on the other hand, are ‘organizations which almost continually search for
market opportunities’ (p . 29). For the prospector, flexibility is more important than
efficiency and perhaps even than high profitability.

 Analysers are a combination of defender and prospector, having a core of traditional

products while pursuing new product and market opportunities .
Activity

 Read the given case study: Penang Mutiara (Operations Management by

Slack et al., 2016, p.70-71), and consider yourself in the position of a senior
management accountant in order to address the following:
 What are the important competitive factors for the hotel?
 What strategic management accounting information would you prioritise
for strategic decision-making purposes and why?
References

 Brouthers, K.D. and Roozen, F.A. (1999), “Is it time to start thinking about
strategic accounting?” Long Range Planning, Vol. 32, pp. 311-22.
 Lino Cinquini, Andrea Tenucci, (2010) "Strategic management accounting
and business strategy: a loose coupling?", Journal of Accounting &
Organizational Change, Vol. 6 Issue: 2, pp.228-259
 Dixon, R. and Smith, D. (1993), “Strategic management accounting”,
Omega, Vol. 21 No. 6, pp. 605-18.
 Lord, B. (1996), “Strategic management accounting: the emperor’s new
clothes?”, Management Accounting Research, Vol. 7 No. 3, pp. 347-66.
 Miles , R . E . and Snow , C . G ., 1978 . Organizational Strategy , Structure ,
and Process , New York , McGraw-Hill