Strategic Management Accounting

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Strategic Management Accounting
Strategy without tactics is the slowest route
to victory. Tactics without strategy is the
noise before defeat. - Sun Tzu
Dr. Jatin Pancholi Website http//www.jatinpanch
oli.com
Dr. Jatin Pancholi has compiled and prepared this
note from various sources, as the basis for class
discussion rather than to illustrate either
effective or ineffective handling of a management
situation. The handling of a management
situation requires personal guidance by a
professional. To obtain copies, request
permission to reproduce and to send feedback,
please contact via website http//www.jatinpanchol
i.com. Those wishing to co-author next edition of
this handout are requested to contact via the
website.
2
Innovations Strategic Issues

• Transfer Pricing
• Strategic Management Accounting
• Balanced Score Card

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Transfer Pricing

• Mechanism useful in decentralized settings
• Method of accounting for transfer of goods and
  services from one profit center to another in
  organizations
• Also used for pricing of services that corporate
  staff units render to profit centers
• Transfer price determination more challenging for
  multinationals - considerations include taxation,
  government regulations, tariffs, exchange
  controls etc in both countries

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WHY Transfer Pricing?

• TO provide each business unit with relevant
  information to determine optimum trade-off
  between company costs and revenues
• TO induce goal congruent decisions to improve
  company profits as well
• TO measure economic performance of individual
  business units
• TO be simple to understand and easy to administer

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Meaning of TP

• TRANSFER PRICE - limited to value on transfer of
  goods and services in transactions where at least
  one of the two parties involved is a profit centre

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Types of Transfer Pricing

• 1. Market-based
• 2. Marginal cost
• 3. Full cost
• 4. Cost-plus a mark-up
• 5. Negotiated transfer prices

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Strategic Management Accounting

• use of cost information to do
• help formulate and communicate strategies
• carry out tactics that implement those
  strategies and
• develop and implement controls that monitor
  success at achieving strategic objectives

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Strategy?
Corporate strategy
Business Strategy
Three levels of strategy
Functional strategy
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Strategy?
business strategy an integrated set of actions
aimed at securing a sustainable competitive
advantage.
strategic management It is an iterative process
of analysis, planning and control in order to
achieve the long-term strategic aims of the
organisation but the organisation has to
establish a strategic plan.
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Strategic Management Accounting (SMA)?

• The phrase of strategic management accounting was
  first used by Simmonds in 1981
• There is no agreement between academics about
  what is meant by strategic management accounting.

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Strategic Management Accounting (SMA)

• The provision of information to support strategic
  decisions in organizations (Innes,1998).
• Lord (1996) identified the following strands
• Extension from internal focus of management
  accounting (MA) to include external information
  about competitors.
• The relationship between the strategic position
  chosen by the firm and the expected emphasis on
  MA.
• Gaining competitive advantage through exploiting
  linkages in the value chain.

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Strategic management accounting should help in

• Reflecting what competitors are doing.
• Achieving the required strategic position.
• Gaining competitive advantage.

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Competitor Accounting

• Simmonds defines SMA as
• the provision and analysis of management
  accounting data about a business and its
  competitors for use in developing and monitoring
  the business strategy, particularly relative
  levels and trends in real costs and prices,
  volume, market share, cash flow and the
  proportion demanded of a firms total resources.
  (p. 26)

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Competitor Accounting

• MA should help firm evaluate its competitive
  position relative to the rest of the industry.
• Managers require information that indicates by
  whom and by how much they are gaining or being
  beaten.
• The management accounting reports should be
  modified to a strategic format. For example
  budgets should include extra columns for
  comparisons with competitors

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Competitor Accounting
Sales Budget for year ending 2004
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Competitor Accounting
Sales Budget for year ending 2004
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Competitor Accounting

• The key issue in competitor analysis is to
  identify the relative differences between ones
  own business and each significant existing and
  potential competitor.
• The identification of these relative competitive
  strengths and weaknesses can make a major
  contribution to the development and
  implementation of a successful competitive
  strategy.

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Accounting for strategic positioning
Product differentiation
Cost leadership

• Offering products/services that are perceived by
  customers as being superior and unique relative
  to those of its competitors.
• Hewlett Packard in the electronics industry
• Coca-Cola in the soft drinks industry

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Accounting for strategic positioning
Product differentiation
Cost leadership

• Cost leadership is achieving low costs relative
  to competitors.
• How does a company achieve low costs?
• Productivity and efficiency improvements
• Elimination of waste
• Tight cost control

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Accounting for strategic positioning

• Evidence suggest that
• business units pursuing a low cost strategy
  should adopt results measures that emphasise cost
  reductions and budget achievement.
• business units competing on the basis of
  differentiation should require more information
  than a cost leader about new product innovations,
  design cycle times and research and development.

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Analysis of value chain to gain competitive
advantage
The value chain of a firm is the linked set of
value creating activities from basic raw material
sources to the ultimate product or service that
is delivered to consumers.
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Can traditional management accounting help in
this process?

• The role of Strategic analysis is to overcome
  these problems because the focus is on
• looking at external environment as well as
  internal environment.
• the determinants of relative position compared to
  competitors
• the ways in which a firm might secure a
  sustainable competitive advantage
• analysis of value chain activities for both ones
  own business and competitors.

• If traditional management accounting
• concentrates on manufacturing activities
• ignores the impact of other activities
• overlooks linkages between activities by
  analysing each activity in a discrete way
• fails to asses the cost positions of competitors
  in relative terms
• relies too heavily on existing financial
  accounting system.

The answer is NO
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Financial Perspective

• Linking Financial Objectives to Business Unit
  Strategy.
• Growth, Sustain, Harvest
• Revenue Growth and mix.
• Cost reduction, productivity improvement
• Asset utilization investment strategy.

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Customer Perspective

• Core Measures---
• Market Shares
• Customers Retention
• Customers Acquisition
• Customers Satisfaction
• Customer Profitability

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Beyond the Core Measures

• Measuring Customer Value Proposition
• Product/service attributes
• Customer Relationship
• Image and Reputation
• Quality

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Internal-Business-Process (IBP) Perspective

• Innovation Process
• Operations
• Post sale Services

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Learning Growth Perspective

• Employee Capabilities
• Core Employee Measurement Group Satisfaction,
  Retention, Productivity
• Information Systems Capabilities
• Motivation, Empowerment and Alignment

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Linking BSC Measures to Firms strategy

• Three main principles
• Cause and Effect relationships
• Performance Drivers
• Linkage to financials

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BSC IS v/s IS NOT
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BSC IS v/s IS NOT (2)
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BSC S O C

• Balanced Score Card
• Strategy
• Operations
• Change

(Doing the right things)
(Doing things right)
(Doing things differently)
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Thank you

• I have no special talents. I am only
  passionately curious. --Albert Einstein

Dr. Jatin Pancholi Website http//www.jatinpanch
oli.com
Dr. Jatin Pancholi has compiled and prepared this
note from various sources, as the basis for class
discussion rather than to illustrate either
effective or ineffective handling of a management
situation. The handling of a management
situation requires personal guidance by a
professional. To obtain copies, request
permission to reproduce and to send feedback,
please contact via website http//www.jatinpanchol
i.com. Those wishing to co-author next edition of
this handout are requested to contact via the
website.