STRATEGIC MANAGEMENT

ACCOUNTING

Learning objectives
Identify the strategic issues in MA
Describe the issues conceptually
Explain approaches used in handling the
strategic issues
Discuss the role of management accountant
in confronting the issues
Discuss strategic environmental MA

BKAM 3033 Topic 2

n
o
i
t
c
u
d
Intro
Strateg
y

an integrated set of actions aimed at

securing a sustainable
competitive advantage.

Strategi
c
pl
a
n
ni
n
g

- a process of designing a mission

statement, setting long-term
goals and objectives, and
establishing strategies.
- a long term plan.

BKAM 3033 Topic 2

n
o
i
t
c
u
d
ro
IntStrategic
man
age
men
t
Strategic
man
age
men
t
acco
unti
ng

long term planning, implementation and

controlling which provides a
framework for all the actions
managers take and how they are
assessed.

the role of mgt accounting in the

strategic analysis, planning and
control of org.

BKAM 3033 Topic 2

Why Traditional Management Accounting is

not sufficient to provide information
for strategic decisions?

BKAM 3033 Topic 2

Comparison between SMA and

Conventional MA
Conventional
Historical

SMA
Prospective

Manufacturing focus

Competitive focus

Existing activities

Possibilities

Reactive

Proactive

Overlook linkages

Embraces linkages

Data orientation

Information orientation

BKAM 3033 Topic 2

The Needs of SMA

Ability to acquire, allocate and utilize
resources in line with the needs of
environment is very crucial, so the focus of
management accountant, therefore,
should be outwards and forward.

BKAM 3033 Topic 2

What is SMA

The provision of information to support strategic

decisions in organizations (Innes,1998).

Review of literature by Lord (1996) identified the

following strands:

Target costing is also identified as falling within the

domain of SMA.

Strategic role of MA emphasized in formulating and

supporting the overall strategy of an organization by
developing an integrated framework of performance
measurement.
BKAM 3033 Topic 2

Strategic Issues & Techniques in

Management Accounting
Life

Cycle Costing (LCC),

Kaizen Costing
Target Costing (TC)
Benchmarking.

BKAM 3033 Topic 2

Strategic Issues in Mgt Accounting

LCC strategic analysis tool/discussed

in form of life cycle cost management
and life cycle cost analysis.

Kaizen Costing effort to reduce costs

of existing products and processes
continually.

TC the difference between the sales

price needed to capture a
predetermined market share and the
desired per-unit profit.
BKAM 3033 Topic 2

Strategic Issues in Mgt

Accounting

Benchmarking a close phenomenon to

competitor accounting. Competitor
accounting is a special accounting-based
form of strategic level benchmarking,
which does not include cooperation with
the object of this comparison activity.

BKAM 3033 Topic 2

Strategies and Techniques in

Management Accounting- LCC

Life Cycle defined as the period of a

product in the market. Life cycle analysis
should consider the period between birth
and decease which studies the phases of
life, the repeated patterns that occur
during life, and the causes an effects of
incidences, aiming at something that can
be recognized and learned from the earlier
life cycles of the items under study.
.

BKAM 3033 Topic 2

Strategies and Techniques in

Management Accounting- LCC

Life cycle costing defined as the total cost of

ownership of a system during its operational
life where it embraces all costs associated with
the feasibility studies, research, development,
production, maintenance, replacement and
disposal as well as support, training and
operating costs generated by acquisition of the
equipment (accumulates the actual costs
attributable to each product form start to finish
Whole life cost, the total cost of ownership
over the life of an asset, also commonly
referred to as "cradle to grave" or "womb to
tomb"
BKAM 3033 Topic 2

Strategies and Techniques in

Management Accounting- LCC
Traditional management accounting procedures have focused primarily
on the manufacturing stage of a product s life cycle.
LCC focuses on costs over the product s entire life cycle to determine
whether profits earned during the manufacturing phase will cover
the costs incurred during the pre-and post-manufacturing stages.
A large proportion of a product s costs can be committed or locked in
during the planning and design stage (see Figure 2.1).
Cost management can be most effectively exercised during the planning
and design stage.
BKAM 3033 Topic 2

Figure 2.1 Cost committed and incurred during a

products lifecycle

Strategies and Techniques in

Management Accounting - Kaizen

Kaizen Costing defined as the maintenance

of present cost levels for products currently
being manufactured via systematic efforts to
achieve the desired cost level.

Kaizen means improvement which contain two

elements- improvement and continuity. One
important advantage is its low cost setup.
There is basically not much investment in
terms of equipment. It is more of using the
already existing resources and information to
reduce cost.

BKAM 3033 Topic 2

Strategies and Techniques in Management

Accounting - Kaizen Costing
Kaizen costing is applied during manufacturing stage
whereas target costing is during planning stage.
Kaizen costing focuses on production processes whereas
target costing focuses on the product.
Kaizen costing aims to reduce costs of processes by a prespecified amount relying on employee empowerment.

BKAM 3033 Topic 2

Strategies and Techniques in

Management Accounting - Target

Target Costing is a relatively new concept first

adopted by some Japanese companies in the
early 1970s. it is a procedural approach to
determining a maximum allowable cost for an
identifiable, proposed product assuming a given
target profit margin.

Has two objectives:

To lower the costs of new products so that the
required profit level can be ensured while the
new products meet the levels of quality, delivery
timing, and price required by the market.
To motivate all company employees to achieve
the target profit during new product development
by making target costing a company wide profit
management activity.

i)

ii)

BKAM 3033 Topic 2

Strategies and Techniques in

Management Accounting - Target
Focusescosting
on managing costs during a product/services planning and
design phase.
Involves the following stages:
1. Determine the target price which customers will be prepared to
pay for the product.
2. Deduct a target profit margin from the target price to determine
the target cost.
Estimate the actual cost of the product.
If estimated actual cost exceeds the target cost investigate ways
of driving down the actual cost to the target cost.

1.

Iterative process involving:

1. Tear-down analysis
2. Value analysis and functional analysis

It is important that target costing is supported by an accurate costing

An example of target costing

Strategies and Techniques in

Management Accounting Benchmarking

Benchmarking defined as a process of studying

and adapting the best practices of other
organizations to improve the firms own
performance and establish a point of reference by
which other internal performance can be
measured.
Also referred as best practice benchmarking or
process benchmarking.
Types of benchmarking:

Internal benchmarking
Functional benchmarking
Competitive benchmarking
Strategic benchmarking
Product benchmarking
Process benchmarking

BKAM 3033 Topic 2

Strategies and Techniques in

Management Accounting Benchmarking
Stages of the benchmarking process:

Stage 1 : Internal study and preliminary

competitive analyses
Stage 2: developing long-term commitment to
the benchmarking project and coalescing the
benchmarking team
Stage 3: Identifying benchmarking partners
Stage 4: Information-gathering and sharing
methods
Stage 5: Taking action to meet or exceed the
benchmark.
BKAM 3033 Topic 2

Strategies and Techniques in

Management Accounting Benchmarking

In 2008, a comprehensive survey on

benchmarking was commissioned by the (a
network of benchmarking centers representing 22
countries). Over 450 organizations responded
from over 40 countries. The results showed that:

Mission and Vision Statements and Customer (Client)

Surveys are the most used (by 77% of organisations) of
20 improvement tools, followed by SWOT analysis(72%),
and Informal Benchmarking (68%). Performance
Benchmarking was used by (49%) and Best Practice
Benchmarking by (39%).
The tools that are likely to increase in popularity the most
over the next three years are Performance
Benchmarking, Informal Benchmarking, SWOT, and Best
Practice Benchmarking. Over 60% of organizations that
are not currently using these tools indicated they are
likely to use them in the next three years.

Approaches in Handling
Strategic Issues
Porters Approach
Michael Porter in 1980s.
Premised on two basic questions:
How attractive, from the viewpoint of longterm profitability, are different industries?
What is the enterprises relative position in
its industry?

Porters 5 Forces in formulating & implementing

strategy:
The threat of new entrants

Do certain factors such as economics of scale,

product differentiation, capital requirement, protect
the firm fr newcomers?
Do other factors such as govt regulations & policies
restrict competition?
To what degree is the firm protected fr competition fr
new entrants to the industry?

The threat of substitutes

Will the presence of readily substitutable products

increase the level of intensity of competition for the
firm?
Eg. plastics, glass & fiber-foil exert pressure on the
metal can market., electronic alarm system vs
security guard market, fax machines & electronic
mail vs express delivery.

The rivalry amongst existing companies

Intense rivalry can be result of high entry barriers,
rapid product innovation, slow growth in total market
demand.
How intense is the overall industry rivalry facing the
firm?

The bargaining power of supplies

The greater the bargaining power of a firms suppliers,
the greater the overall level of competition facing the
firm.
The bargaining power of suppliers will be higher when
the group of suppliers to the firm is dominated by a
few large firms, and when these suppliers have other
good outlets for their products.
Eg. soft-drink firms sell to fast-food restaurant chains
& athletic teams that hv strong bargaining power.

The bargaining power of consumers

The greater the bargaining power of a firms
customer, the greater the level of competition facing
the firm.
Barg. power of cust. will likely be higher if there are
relatively low switching costs and if the products are
not differentiated.

Porters Competitive Advantage

Competitive Strength/ Strategic

Advantage

No.of
Strategic
options/
Targets

Industry Wide

Specific
Segment Only

Uniqueness
Perceived by the
customer

Low Cost
Position

DIFFERENTIATION

COST
LEADERSHIP

FOCUS STRATEGY

Cost leadership strategy:

aims to be the lowest-cost

producer

*product design *scale economics *experience

curve

To provide the same or better value to

customers at a lower cost than offered by
competitors.
Example: A company might redesign a
product so that fewer parts are needed,
lowering production costs and the costs of
maintaining the product after purchase.

Focus strategy:

directed at narrow segments

*avoid strategy distraction *compete with limited
resources *reduce competitive pressure *bypass
competitor skills/assets

Example: Paging Network, Inc., a

paging services provider, has targeted
particular kinds of customers and is in
the process of weeding out the
nontargeted customers.
Competitive advantage is based on
either cost leadership or product

Differentiation strategy:
offer some unique dimension
*generate customer value *be difficult to
copy
Strives to increase customer value by
increasing what the customer receives
(customer realization).
Example: A retailer of computers might
offer on-site repair service, a feature not
offered by other rivals in the local market.

Value Chain Analysis

Is a strategic analysis tool used to
identify where value to customers can
be increased or costs reduced & to
better understand the firms linkage
with suppliers, customers & other firms
in the industry.

The value chain

Value chain analysis

Steps required in under-taking value-chain
analysis:
Identify the appropriate value-chain and
assign costs and assets to it
Diagnose the cost driver of each activity
and how they interact
Identify competitor value-chains, and
determine the relative cost of competitors
and the sources of cost differences
Develop a strategy to achieve a lower
relative cost position through controlling
cost drivers or reconfiguring the value-chain
Ensure that cost reduction efforts do not
erode differentiation
Test the cost reduction strategy for
sustainability
3

Example Cost Driver in Value

Chain

Value Chain Analysis

Organizational activities:

Structural activities: activities that determine

the underlying economic structure of the
organization.
Executional activities: activities that define the
processes and capabilities of an organization and
thus are directly related to the ability of an
organization to execute successfully.

Value Chain Analysis

VC analysis is identifying a and exploiting
internal and external linkages with the
objective of strengthening a firms strategic
position.
The exploitation of linkages relies on
analyzing how costs and other nonfinancial
factors vary as different bundles of activities
are considered.

Value Chain Analysis

Value-chain framework linkages

Internal linkages: relationships among activities

that are performed within a firms portion of the
value chain
External linkages: the firms value-chain
activities that are performed with its suppliers and
customers
Supplier linkages
Customer linkages

Value Chain Analysis

Exploiting Internal linkages

Relationship between activities are assessed

and used to reduce costs and increase value.

Example: Product design & development

activities are occur before production and
are linked to production activities.

The way the product is designed affects the

costs of production.
How production costs are affected requires a
knowledge of cost drivers.
Thus, knowing the cost drivers of activities is
crucial for understanding and exploiting
linkages.

Value Chain Analysis

Exploiting external linkages supplier

& customer

Means managing these linkages so both the

company and the external parties receive an
increase in benefits.

Exploiting supplier linkages

Example: in Total quality control,

relationship between company and supplier
is very important to ensure raw materials
are delivered on time and high quality.
Activity-based supplier costing
3

Value Chain Analysis

Exploiting customer linkages
Customers can also have a significant
influence on a firms strategic position.
Managing customer service costs

Identify which profitable and unprofitable

customers
Customer profitability analysis
Activity-based customer costing

Gaining competitive advantage through exploiting linkages in the value

chain:

Focuses on each link in the chain from the customers perspective.

Claimed that traditional management accounting starts too late and

finishes too soon in terms of the value chain.

Porter advocates identifying the value chain and operation of cost drivers of
competitors in order to understand relative competitiveness.

Simmonds approach

Definition of SMA by Simmonds:

The provision and analysis of management
accounting data about a business and its competitors
for use in developing and monitoring the business
strategy

Emphasizes on:
Real cost and price
Volume
Market share
Cash flow
The proportion demanded of an enterprises total
resources

The focus shifts from the analysis of cost per se to

the value of information
* Data orientation vs Information orientation

The significant of competitive position as being the

basic determinant of future profits & of the enterprise
value.

Bromwichs approach
Bromwich define SMA as;
- The provision and analysis of financial
information on the firms product markets and
competitors cost and cost structures and the
monitoring of the enterprises strategies and
those of its competitors in these markets over a
number of periods.

Focus on identifying the distinctive characteristics

of market offering in order that these might be
costed.

To secure competitive advantage, cost positioning

relative to rivals, should be conducted

Purpose of analysis: the attribution of costs which

are normally treated as product costs to the
benefits they provide to the customer

Recommended approach: List separately the

benefits to consumers contained in the market
offering, then to relate costs to these.

Ouchis approach

Dr William G.Ouchi, management theorist introduced

Theory Z in 1981. The CLAN based approach.

Traditionally, strategy has been viewed as the response of

an organization to environment.

A growing understanding that strategy of an enterprise, its

structure, people who hold power, its control system, the
way its operates reflect culture of org.

Ouchi suggested that Japanese commitment to democratic

leadership that resulted in increased quality, increased
productivity and decreased costs while making workers at
all levels full partners in business.

STRATEGIC ENVIRONMENTAL
MANAGEMENT ACCOUNTING

Environmental cost management

Becoming of increasing importance because:

1.

Environmental costs can represent a large proportion of

operating costs in some companies.

2.

Demands from society for companies to become

environmentally friendly

STRATEGIC ENVIRONMENTAL
MANAGEMENT ACCOUNTING

ENVIRONMENTAL COST

Incurred because of poor environmental quality

Environmental quality cost
Link to creation, detection, remediation and
prevention of environmental degradation
Type of environmental cost

Environmental prevention cost

Environmental detection cost
Internal failure environmental cost
External failure environmental cost

Cont..

Environmental prevention cost

Objective: to minimize, if not eliminated, the

amount of waste material generated.
Include: all costs associated with training
employees, evaluating and selecting suppliers,
evaluating and selecting equipment to control
pollution, designing process to reduce
environmental problems etc

Cont..

Environmental detection costs

Cost of activities executed to determine if

products, processes and other activities are in
compliance with environmental standards.
Environmental standards:
Regulatory laws of governments
ISO 14001
Environmental policies developed by management

Examples: auditing environmental activities,

inspecting product and processes, carry out
contamination test etc

Cont..

Internal failure environmental costs

Cost of activities performed because of

contaminants and waste have been produced but
not discharged into the environment.
Examples: operating equipment to minimize or
eliminate pollution, treating and disposing of toxic
materials, maintaining pollution equipment etc

Cont..

External failure environmental costs

Costs of activities performed after discharging

contaminants and waste into the environment
Two types: realized and unrealized
Realized: incurred and paid for the firm
Unrealized: caused by the firm but incurred and
paid by parties outside

Sustainable development
and competitive
Definition by the Brundland Report
advantage
To meet the needs of the present without

compromising the ability of future generations to

meet their own needs

Combines three dimensions: social,

economic and environment

Main goal of sustainable

development

Eco

Socio-

Ju
sti
ce

e
ff
i
c
i
e
n
c
y
Eco-

Cont..
Sustainability the goal of the process of
sustainable development
Sustainable development balancing
concept between economic growth and
environmental protection

ECO-CONTROL
Application of the control system to
environmental management
Is about learning how people in the firm
manage to control environmental issues as a
whole
Ensures that environmental issues are dealt
with through a continuous process
Similar to management control system

Planning, action, measurement, comparison

between plans and actual outcomes, feedback and
revision of expectation for future periods

End of Chapter 2