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7/30/2019 PRESENTATION criticisms strategic management accounting.pptx
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MANAGEMENT ACCOUNTING (PAM 6014)
CRITICSMS OF STRATEGICMANAGEMENT ACCOUNTING
Presenter :AZRI BIN MOHAMED YUSOF
(M20121000309)
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QUESTION ASSIGNMENT
Since its introduction, the concept of
strategic management accounting
(SMA) has had its critics. Provide adiscussion on the criticisms of
strategic management accounting. In
your opinion, do the costs outweighthe benefits?
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OUTLINES PRESENTATION
1. Introduction of business strategy
2. Why traditional management accounting is
not sufficient to provide information for
strategic decision.
3. Definition of Strategic Management
Accounting
4. Components of Strategic Management
Accounting
5. Basic techniques of Strategic ManagementAccounting
6. Criticisms of Strategic Management
Accounting
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Business strategy was borrowed
from the military
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Objective / Mission / Strengthens / Weaknesses
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What is the Strategic Management ?
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1- Introduction
Business strategy produces long-term plans forthe business, taking into consideration plansand possible actions of competitors, the mainobjective being to position the firm so it has acompetitive advantage.
This discussion will describe business strategyand show why traditional managementaccounting is not sufficient to provideinformation for strategic decision.
Strategic Management Accounting (SMA).
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2- Strategy and Information Need
Bowman (1990) traced the development of strategic
planning from its internal focus on budgeting,
forecasting and portfolio analysis, to its external focus.From the 1970s onward, firms began to focus on their
place in their industry. Later this developed into
strategic management, characteristic by the following:
i) planning at different levels of the business
ii) cutting across organizational boundaries
iii) an emphasis on entrepreneurial thinking,
flexibility and creativity
iv) managers commitment to corporate strategy,
reinforced by teamwork, commitment to making
things happen, open communication and a
shared belief that ambitious goals can be
achieved.
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2- Strategy and Information Need
Competitive forces are not necessarily considered to be
enemies: there is the possibility of partnership with
suppliers, competitors and customers, with benefit to all.In his 1980 book, Porter listed several disadvantages
posed by competitors listed as follows:
i) the threat of new competitors entering themarket
ii) the intensity of rivalry among existing
competitors
iii) the pressure from substitute products
iv) the bargaining power of buyers and suppliers
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3- Traditional Management Accounting and Strategy
Several problems with trying to use traditional
management accounting information for strategicmanagement :
Traditional management accounting is too short-term
and emphases profit for artificial accounting period(such as the financial year or operating month).
Strategic management accounting has a long term
focus, viewing profit in the context of the firms
competitive position over time.
Most traditional management accounting is back-ward
looking, focusing on past results, whereas strategic
management accounting is forward looking.
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Traditional management accounting is inward looking,focusing on costs within the firm and particularlyemphasizing precise product costs and manufacturingactivities. Strategic management needs internal
information about marketing, other support costs andlinkages between activities and external informationon customers, suppliers and competitors. Strategicmanagement also requires non-financial as well asfinancial information and approximations may besufficient.
Traditional management accounting systems tend tobe programmed or reactive, dealing with regular events(such as the preparation on budgets) or one-off
decision (such as the choice between making or buyinga component). Strategic management accountingneeds to be proactive and able to contribute to allstages of strategic decision making, which is usuallyun-programmed.
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Comparison of traditional management accounting and
strategic management accounting characteristics
Traditional Management Accounting Strategic Management Accounting
Historical Forward-looking
Introspective Outward-looking
Narrow scope Broad scope
Internal performance Performance relative to competitors
Single period Multiple periods
Manufacturing focus Competitive focus
Existing activities Possibilities
Reactive Proactive
Programmed (often) Un-programmed
Overlook linkages Exploits linkages
Based on existing system Unconstrained by existing system
Built on conventions Ignores conventions
Financial measures Financial and non-financial measures
Exact figures Approximations
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4- What is the Strategic Management Accounting ?
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Tesco has realized that its main fixed assets are its stores. With
this type of asset base, the company aims to reduce the cost of building
good quality new stores through strategic partnering with construction
companies.
In order to check its market positioning, the company is
constantly monitoring the prices of its merchandise relative to theprices charged by its main competitors.
As well as promoting customer loyalty, it uses its store card as
a database for targeting the specific needs of individual customers as
revealed through their purchase patterns.
It also keeps a close eye on non-financial indicators such as
the length of queues at the check-outs.
Tescos approach in linking its goals and its management
information systems demonstrates many of the principles of SMA. The
company has decided how it is going to compete, reviewed its internal
and external operations and chosen key performance indicators (KPI)
that enable it to monitor the development of its chosen business model.
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Definition of Strategic
Management Accounting
The term strategic management accounting
(SMA) has been used to describe the process
of provision and analysis of management
accounting data about a business and its
competitors for use in developing and
monitoring business strategy.
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Strategic choice means that companies can
choose which industries and products they want
to compete in but it also means that different
companies in the sameindustry may decide toadopt different strategies with quite different
implications for management accounting and
control.
placed on bought-in goods and services, a higher
proportion of costs are generated by a firms
suppliers, which suggests that major
improvements in cost, quality and innovation arepotentially available through the effective
management of the firms supply chain.
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5- Basic Techniques of Strategic Management Accounting SMA has an orientation towards the firms
environment. The relevant environment may be in itsvalue chain, that is, its upstream relations withsuppliers and downstream relations with itscustomers.
The other relevant environment is its competitive
position relative to both existing and potentialcompetitors. Its competitive position will not justdepend on price but on a marketing mix.
For example: the increased emphasis on marketing
may involve the use of techniques such as attributecosting that costs product attributes that appeal tocustomers, using brand value as a basis formanagerial decisions and measuring the costs ofquality.
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The competitive position is monitored through
competitor cost assessment through estimates of
competitors costs based on an appraisal of facilities,technology, economies of scale, market share,
volume, unit costs, and return on sales.
Strategic management accounting is also concerned
with the long-run through the use of target and life-cycle costing that looks at the costs incurred
throughout the life of a product as it goes through
various stages such as development and full
production.
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6- Component of Strategic Management Accounting
a) Competitor Information
Simmonds (1981), who coined the name strategicmanagement accounting, saw profit arising not
from how efficiently the firm operated internally,
but from the firms competitive position over time.
Thus he advocated the following process:
i) collecting and estimating cost, volume andprice data on competitors,
ii) determining whether competitors products
are in the build, maintain or harvest phase of
their life cycles
iii) calculating market share in order to assess
the strategic position of ones own firm in
relation to its competitors.
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6- Component of Strategic Management Accounting
a) Competitor Information
Bromwich (1990) suggested that management accountants
gather information about the costs of barriers to entrysuch as economies of scale, product differentiation, cost
advantages, capital requirements, strategic pricing byincumbents, intensive research and development, excess
capacity, vertical integration and existing sales networks.
Coad (1996) gave a detailed description of the collection
and use of competitor information by a service department
in a city council. Information was obtained in a number of
ways via the grapevine from:
i) former employees, suppliers and customers of thecompetitors.
ii) publicly available information such as company
accounts, new releases, promotional material, trade
journals, commercial analysts reports and database.
iii) council records of previous tenders.
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6- Component of Strategic Management Accounting
a) Competitor Information
Collier and Gregory (1995) provided some examples of
strategic management accounting being used in thehotel sector. Accountants were involved in several
processes such as:
i) analyzing strengths, weaknesses, opportunities
and threats (SWOT Analysis)
ii) monitoring cost structure and pricing policies of
competitors
iii) comparing the performance of the company
against its competitors.
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6- Component of Strategic Management Accounting
b) Strategic Position & Management Accounting
Emphasis
Primary Strategic Emphasis
Product Differentiation Cost Leadership
Role of standard costs in assessing
performance
Not very important Very important
Importance of such concepts as flexible
budgeting for manufacturing cost
control
Moderate to low High to very high
Perceived importance of meeting budget Moderate to low High to very high
Importance of product cost an input to
pricing decisions
Critical to success Often not done at all on
a formal basis
Importance of product cost as an input
to pricing decisions
Low High
Importance of competitor cost analysis Low High
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6- Component of Strategic Management Accounting
c) Value Chain Perspective
i) Value Chain Analysis
The firms value chain is joined to the value chains ofsuppliers and customers. Thus linkages are not only
to be found within the value chain of a firm, but also
between firm and their suppliers and customers.
For example, Lord (1996) found that the cyclemanufacturer achieved cost savings on freight by
arranging with overseas suppliers in the same
country to consolidate their orders into one shipping
container and by positioning it after sales, warehouse
where it could obtain cheaper airfreight rates.The cycle manufacturer also enhanced its desirability
to customers and its points of differentiation by
offering customized products, high quality and fast
delivery.
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6- Component of Strategic Management Accounting
ii) Cost Driver Analysis
Porter (1985) Shank (1989)
Structural cost drivers
Scale Scale
Integration Scope
Learning Experience
Technology
Complexity
Timing (first mover or follower)
Location
Discretionary policies (product mix, delivery time, production
scheduling)
Institutional factors (government regulation, unionization, tariffs)
Executional cost drivers
Workforce commitment
Total quality management
Capacity utilization Capacity utilization
Plant layout efficiency
Linkages Exploiting linkages
Interrelationships
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6- Component of Strategic Management Accounting
iii) Competitive Advantage Analysis
Porter (1985) suggested collecting as much
information as possible about competitors so theirvalue chains can be estimated, including bothactivities performed and their costs.
The total costs of competitors vale chains can thenbe compared. If the total cost of performing all thevalue activities in the firms value chain is lower thanthat of its competitors, the firm has a cost advantage.
This cost advantage is sustainable if the firmssources of cost advantage are difficult for competitorsto copy.
If the firm does not have a cost advantage, they mayachieve it by reducing costs through controlling costdrivers of value chain activities, or by reconfiguringthe value chain activities, or by reconfiguring thevalue chain, for by adopting a more efficient way todesign, produce, distribute and market the product.
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6- Component of Strategic Management Accounting
d) Market-oriented Information
Bromwich (1990) suggested analyzing the attributes
of products and what differentiates them and makesthem desirable to customers.
These attributes include operating performance,
reliability, warranty arrangements, the degree of
finish and trim, assurance of supply and after sales
service.
One tool to enable this is target cost: determined by
subtracting the desired profit margin from the selling
price.
Then a team made up from many functions in thefirm, such as designers, production supervisors,
engineers, marketing personnel and finance people,
carries out an iterative process of designing the
product and production process so that the product
can be made for the target cost.
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6- Criticisms of Strategic Management Accounting
a) The Strategic Planning Process
Nyamori et al. (2001, p. 63) criticized the literature on
strategic management accounting for not questioningwhat strategy is, how it is formed, how it comes to
change and how strategic change constitutes and is
constituted by accounting. They argued that there is
a considerable body of literature on strategy and
strategic management, but only parts of it are cited inpapers on strategic management accounting.
Minztberg (1978) pointed out that strategies are not
always a result of strategic planning. The types of
organization in which strategic plans are likely to beachieved as planned are those with highly ordered,
neatly integrated processes, or entrepreneurial firms
where a powerful leader makes bold, risky decisions
to implement his or her vision.
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6- Criticisms of Strategic Management Accounting
a) The Strategic Planning Process
Dermer (1990) labeled the strategic planning or
positioning school teleological that is predicated on theassumption that organizations are purposeful cohesive
systems and that issues and support are controlled by
management. Under the teleological views, the success
of the system is measured by managerial effectiveness
in coping with external events.
Dermer (1990) claimed that, taking a view of strategic
change as an unplanned result of conflicting
stakeholder contending for control, protagonists may be
using accounting in ways not anticipated byaccountants. Accounting could be used as a language of
discourse, as a powerful way of establishing and
maintaining the credibility of those using it, and as a
way of providing a history establishing the context of
agenda setting.
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6- Criticisms of Strategic Management Accounting
b) Competitor Analysis
The promoters of competitor analysis also do not seemto recognize the possibility of alliances with competitors
the benefits of competitors stated by Porter (1985)
and the opportunities for cooperation illustrated by
Bengstsson and Kock (1999). Competitor analysis still
has military overtones of enmity.
Carr and Tomkins (1996) found that strategically
oriented German companies analyzed strategic
considerations thoroughly, but were critical of formal
strategic planning techniques such as SWOT, valuechain, competitor and market analyses. Instead they
used intuition, a feeling for the product and the market
and a knowledge of customer needs based on close
relationship with customers.
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6- Criticisms of Strategic Management Accounting
c) The Value Chain Perspective
Lord (1996) showed how small cycle manufacturerexploited linkages in the value chain without the need
for financial analysis.
She claimed that firms with effective operational
management processes would already be finding costsaving opportunities and firm with a focus on customer
and supplier relationship would automatically by
exploiting linkages without formal analyses.
In other words, value chain linkages and cost saving
opportunities may be being recognized and acted uponwithout accounting analyses being carried out, that is,
without the need for strategic management accounting.
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6- Criticisms of Strategic Management Accounting
d) The Role of the Accountant
Rickwood et al. (1990) presented an example of strategicmanagement accounting led by a management
accountant who, because of his position of authority in
the organization, was able to pressure the marketing
department into giving him the competitor information
they held. He used this information for strategic
decision making when the firm was threatened by a
competitors action.
Collier and Gregory (1995) also gave examples ofaccountants being involved in collecting competitor
information.
i i i f i i
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6- Criticisms of Strategic Management Accounting
d) The Role of the Accountant
Lord (1996) described a firm that was using manycomponents of strategic management accounting.
However, the techniques were employed by production,
marketing and management personnel with no input
from the management accountant.
Cunnighams (1992) field study of three transportation
companies found that marketing had an extensive
influence on the management accounting system and
the accounting type activities take place outside theaccounting function and are performed by persons who
do not consider themselves to be accountants.
6 C i i i f S i M A i
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6- Criticisms of Strategic Management Accounting
d) The Role of the Accountant
Chenhall and Langsfield-Smith (1998b) examined a
company, Cleanco, had identified strategic priorities ofenhancing customer satisfaction and reducing costs in
order to sustain their competitive advantage.
Measures were developed on the shop floor by team
members and manufacturing managers. Although these
measures did not always support strategic priorities, themanagement accountants were not interested in being
involved in the development of more strategically driven
performance measures.
Chenhall and Langfield-Smith found similar lack of
involvement at two further firms, Containers and Coalcorp.This contrasted strongly with the other two firms in theirstudy, Chemco and FoodInc, in which management
accountants were closely involved in the development of
performance measures to support changes in strategy.
6 C iti i f St t i M t A ti
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6- Criticisms of Strategic Management Accounting
d) The Role of the Accountant
Coad (1996) claimed that strategic management
accountants need to be oriented towards learningnew skills and mastering tasks.
They will prefer challenges, and consider errors and
mistakes to be part of the learning process. Strategic
management accountants also need good
communications skills and an ability to empathize
with others both within and outside the organization.
Coads case illustrated how a small part of the larger
organization could carry out strategic management
accounting without the need for the wholeorganization to be committed to it.