Strategic Management Accounting

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Strategic Management Accounting

• Topic 5
• AN OVERVIEW OF STRATEGY

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Goals of Topic 5

• To introduce different approaches to
  conceptualising strategy
• To appreciate the contribution that strategy can
  make towards successful performance
• To review the origins and development of strategy
• To consider the different levels of strategy that
  exist within an organisation

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THIS SESSION
WHAT IS STRATEGY?
LEVELS OF STRATEGY
IMPLICATIONS OF THE RBV
A HISTORY OF STRATEGY

• What are the components of strategy?
• How might we conceptualise strategy?
• Why do we distinguish between strategy
  formulation strategy implementation?

• How has the concept of strategy emerged over
  time?
• What has been the contributions of the main
  approaches?
• Where are we at now?

• What levels of strategy apply in organisations?
• What is the significance of these levels?

• What are the key elements of the RBV?
• What actions does this view suggest?

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WHAT IS STRATEGY?
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For our purposes, Strategy must possess four
elements or qualities
ELEMENTS OF STRATEGY
Major commitment of major resources
COMPONENTS OF STRATEGY
Commitments are irrevocable
Game or conflict against competitors
Capitalises upon Competitive Advantage
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A MAJOR COMMITMENT OF MAJOR RESOURCES

• Resources do not just include financial, but also
  human, capital and information resources.
• By committing significant resources, any change
  in the strategy will lead to losses because of
  the commitment of capital, human resources etc.

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THE COMMITMENTS ARE IRREVOCABLE

• Choices being made are not free from costs
• For example establishing a new plant costs money
  and to close the plant will lead to losses
• Directions taken options pursued are, for all
  intents purposes, irrevocable

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A GAME OR CONFLICT AGAINST COMPETITORS

• There are games of luck, skill and strategy.
  Roulette is luck, golf is skill, but war games
  can be strategy (with a bit of luck).

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CAPITALISATION UPON COMPETITIVE ADVANTAGE

• Competitive advantages are firm specific
  advantages that cannot be imitated by other firms
  or can only be mimicked at a very high cost
• There are three sources of competitive advantage
• Cost position
• Differentiation
• Time

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DEFINITIONS OF STRATEGY

• Strategy is the direction and scope of an
  organisation over the long term which achieves
  advantage for the organisation through its
  configuration of resources within a changing
  environment to meet the needs of markets and to
  fulfill stakeholder expectations.
• Strategy describes those few actions which, if
  taken, will allow the individual or organisation
  to achieve maximum leverage and advantage from
  the unique combination of circumstances present
  internally and externally.

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DEFINITIONS OF STRATEGY

• Strategic Management is about acting today
  in order to improve viability into the future.

• Strategies are commonly developed in order
  to bring about a fit between the external
  environment and the internal environment to
  improve the chance that the organisations
  long term goals can be achieved.

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DEFINITIONS OF STRATEGY

• The determination of basic long-term goals and
  objectives organisation and the adoption of
  courses of action and allocation of resources
  necessary to achieve these goals
• The organisations response to external
  opportunities, threats and challenges consistent
  with its competence and resources
• A Game Plan or Grand Design.

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Many authors distinguish strategy formulation
from strategy implementation. The demarcation
between strategy formulation and strategy
implementation does not really exist. It is
impossible to develop an effective strategy
without considering certain implementation
elements. That said, it can be useful for
teaching purposes to study issues relating to
formulation and implementation separately.
FORMULATION AND IMPLEMENTATION
STRATEGY FORMULATATION (Developing the Strategy)
STRATEGY IMPLEMENTATION (Executing the
Strategy)
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STRATEGY FORMULATION
Purpose to attain and then sustain Competitive
Advantage General methodology - build on your
strengths - fix your weaknesses - take
advantage of your opportunities - avoid the
threats - solve your problems
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STRATEGY IMPLEMENTATION - THE SIMPLE FACTS

• Strategies that are not implemented are little
  more than an academic exercise
• US Managers spend 10 Billion annually on
  strategic analysis and strategy formulation. The
  same managers report that less than half of the
  resulting planned strategies are ever
  implemented. Observers say that the success rate
  is more like 10.

Source Alex Miller, Strategic Management (3rd
Edition), McGraw-Hill, 1998, p315
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WHY IS IT SO DIFFICULT?

• People and organizations resist change
• To be effective, many factors have to be
  changed at once
• Attaining significant change requires sets of
  complex activities they are all
  interconnectedand their outcomes are
  unpredictable.

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A BRIEF HISTORY OF STRATEGY
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1980, Gluck, Kaufman Walleck (1980) suggested
that strategy had gone through four major stages.
These stages were budgets, long-range planning,
strategic planning and strategic management. The
role of budgets in the strategy process was seen
in the 1940s and 1950s and long range planning
was the focus in the 1960s. The 1970s saw the
field moving in the direction of industrial
organisation economics through the papers written
by Michael Porter, culminating in Competitive
Strategy in 1980.
IN SEARCH OF STRATEGIC MANAGEMENT
STRATEGIC MANAGEMENT CAPABILITIES
STRATEGIC PLANNING
THINK STRATEGICALLY
MEET THE BUDGET
PREDICT THE FUTURE
BASIC FINANCIAL PLANNING The Past
Repeats Income Statement Balance Sheet Fund
Statements
LONG-RANGE PLANNING Past Trends Will
Continue Five Year Plans Delphi Forecasts
EXTERNALLY ORIENTED PLANNING New Trends and
Changes are Predictable SWOT 5-Force
Model Growth Share Matrix
CUSTOMER DRIVEN PLANNING Traditional Planning
Cycles are inadequate to cope with rapid
change Value-Based Planning The Balanced
Scorecard Risk Management
DESCRIPTION ASSUMPTIONS TOOLS
Source Gluck, F., Kaufman, S. Walleck, A.S.
(1982) The four phases of strategic management,
Journal of Business Strategy, Vol 2, Issue 3, pp
9-22.
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A more recent view of strategy is based on the
Resource Based View (RBV) of the firm. The RBV
views the firm as a bundle of resources and
capabilities. This view, based in the seminal
literatures of Coase (1937), Selznick (1957) and
Penrose (1959), sees the firm as a collection of
resources which confer distinctive competences,
so that the firms performance is dependent on
how it deploys them. The competitive advantage of
the firm is then attributable to a set of
specialized resources and capabilities that are
scarce, difficult to imitate and difficult to
trade
THE RESOURCE-BASED VIEW OF STRATEGY
RELATIONSHIPS BETWEEN ASSETS, CAPABILITIES AND
COMPETENCE
CompetitiveAdvantage
Source Alex Miller, Strategic Management (3rd
Edition), McGraw-Hill, 1998, p119, exhibit 4.1
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The resources of an Organisation are what the
organisation has. They comprise two categories
WHAT IS A RESOURCE?

• Tangible resources
• Financial
• Physical
• Human Resources
• Organisational resources
• Intangible resources
• Technology (patents etc)
• Innovation (including capacity to innovate)
• Brand names
• Corporate culture

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RESOURCES THAT CREATE VALUE

• How do we determine which resources create value?
• Valuable The resource must exploit opportunities
  present in the firms environment
• Rare The resource must be rare among a firms
  current and potential competitors
• Imperfectly Imitable Firms must not be able to
  copy or imitate the resource
• Substitutes Strategically equivalent substitutes
  must not exist.

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CAPABILITIES

• Capabilities represent the firms ability to
  integrate and/or deploy resources to achieve a
  desired objective
• Capabilities develop over time as a result of
  complex interactions that take advantage of the
  interrelationships between a firms tangible and
  intangible resources that are based on the
  development, transmission and exchange or sharing
  of information and knowledge, as carried out by
  firms employees.

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EXAMPLES OF CAPABILITIES

• Corporate Head Office
• Financial management
• Ability to effectively motivate and coordinate
  the activities of departmental/divisional etc
  managers.
• Management of acquisitions
• Information Management
• Ability to integrate activities through MIS or
  equivalent
• Research and Development
• Capability in basic research
• Fast-cycle developments in basic research
• Speed of new product development

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IMPLICATIONS OF THE RBV
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RESOURCE-BASED MODEL OF SUPERIOR RETURNS
The Resource-Based Model suggests that
above-average returns for any firm are largely
determined by characteristics inside the firm.
The Resource-Based view focuses on developing or
obtaining valuable resources and capabilities
which are difficult or impossible for rivals to
imitate.
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RESOURCES
Action required
Identify firm resources. Study strengths and
weaknesses relative to rivals.
Resources
Inputs to a firms production process.
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CAPABILITIES
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COMPETITIVE ADVANTAGE
Action required
Determine how firms resources and capabilities
may create competitive advantage.
Competitive Advantage
Ability of a firm to outperform its rivals
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AN ATTRACTIVE INDUSTRY
Action required
Locate an attractive industry.
An Attractive Industry
Location of an industry with opportunities that
can be exploited by the firms resources and
capabilities
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STRATEGY FORMULATION IMPLEMENTATION
Action required
Select strategy that best exploits resources and
capabilities relative to opportunities in
environs.
Strategy Formulation and Implementation
Strategic actions taken to earn above-average
returns
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Resource-Based Model of Superior Returns
Action required
Maintain selected strategy in order to outperform
industry rivals.
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LEVELS OF STRATEGY
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LEVELS OF STRATEGY
International Strategy
International Level
Corporate Strategy
Corporate Level
Business Level
Business Strategy
Functional Level
Financial Strategy
Marketing Strategy
Human Resources Strategy
Technology Strategy
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FUNCTIONAL BUSINESS LEVEL STRATEGY

• Concerned with
• competitive strategy
• developing market opportunities
• developing new products/services
• resource allocation within the SBU
• structure and control of the SBU

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CORPORATE STRATEGY

• Concerned with
• overall purpose and scope
• adding value to shareholder investment
• portfolio issues
• resource allocation between SBUs
• structure and control of SBUs
• corporate financial strategy

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GLOBAL OR INTERNATIONAL STRATEGY

• Concerned with
• Pressures for cost reduction
• Pressures for local responsiveness
• Choice of entry mode
• Development of strategic alliances

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IN SUMMARY

• Strategy should be, at one and the same time
• A guiding force for the development of the future
• A motivating force for the present time
• Strategy is built upon
• Unique strategic assets
• Strategy must fit with the internal and external
  environments of the organisation
• Operationally, strategy is about matching
  assets/resources with customer needs in a manner
  that is better than your rivals for a
  sustainable period of time.