Chapter 22 - Strategic management accounting and emerging issues Flashcards
1 Recognise that different conceptions of strategy exist. How can we define strategy (according to Marcus)?
Strategy is an elusive concept. Many definitions and notions of strategy exist in the management literature.
Strategy: How does an organization match its own capabilities with the opportunities in the marketplace to accomplish its overall objectives?
What is prescriptive or normative approach and the descriptive approach to strategy?
Some management theorists view strategy in terms of how it is supposed to be according to them (prescriptive or normative approach) while others prefer to explore how strategies arise in organisations (the descriptive approach). While the prescriptive approach has tended to dominate writings on the design of strategic management accounting systems and techniques, the descriptive perspective has been useful in explaining the process by which such techniques emerge and are operationalised.
Normative/prescriptive approach: How is strategy supposed to be?
Descriptive approach: How do strategies arise?
In formulating its strategy, an organisation would seek to understand the industry in which it operates. Industry analysis might focus on five forces, what are they and what is the collective effect?
The five forces are (a) competitors, (b) potential entrants into the market, (c) equivalent products, (d) bargaining power of customers, and (e) bargaining power of input suppliers. The collective effect of these forces shapes an organisation’s profit potential. In general, profit potential decreases with greater competition, stronger potential entrants, products that are similar, and tougher customers and suppliers.
2 Describe how some organisations adopt identifiable generic strategies such as product differentiation and cost leadership
Two popularised notional strategies that some organisations may be considered to use are product differentiation and cost leadership. Product differentiation refers to offering products and services that are perceived by customers as being superior and unique. Cost leadership refers to the pursuit of low costs relative to those of competitors.
Define strategic management accounting
A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information.
3 Identify key aspects of SMA practices
Strategic management accounting (SMA) places particular emphasis on blending external with internal organisational information. SMA encompasses both financial and non-financial information. SMA may be viewed as an attempt to integrate insights from marketing management and management accounting within a strategic management framework.
What are some key differences between conventional management accounting and SMA?
Conventional management accounting adopts a historical orientation coupled with a focus on single decisions, single periods and single entities. SMA is oriented towards the future. Moreover, it seeks to emphasise the cohesiveness and consistency of macro- and micro-level activities and short- and long-term decisions. Emphasis in SMA is also placed on an enterprise’s position relative to that of its competitors in the context of sequences of decisions over multiple time periods.
4 What are the objectives of balanced scorecards as systems of performance measurement?
The balanced scorecard seeks to translate an organisation’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic performance management and measurement system. The balanced scorecard does not focus solely on achieving financial objectives. It also highlights the non-financial objectives than an organisation must achieve in order to meet its financial objectives. The scorecard measures performance from four key perspectives: (1) financial, (2) customer, (3) internal business process, and (4) learning and growth. A company’s strategy influences the measures used in each of these perspectives.
What is financial and the customer perspective of the balanced scorecard?
Financial perspective: operating profit, revenue growth, revenues from new products, gross margin percentage, cost reductions in key areas, economic value added (EVA®), ROI
Customer perspective: market share, customer satisfaction, customer retention percentage, time taken to fulfil customer’s requests
What is the internal process and the learning and growth perspective of the balanced scorecard?
Internal business process perspective: innovation process (manufacturing capabilities, number of new products or services, new product development times, number of new patents), operations process (yield, defect rates, time taken to deliver product to customers, percentage of on-time deliveries, average time taken to manufacture orders, set-up time, manufacturing downtime), after-sales service (time taken to replace or repair defective products, hours of customer raining for using the product)
Learning and growth perspective: employee education and skill levels, employee satisfaction scores, employee turnover rates, information system availability, percentage of processes with advanced controls, percentage of employee suggestions implemented, percentage of compensation based on individual and team incentives
Why does the balances scorecard reduce managers’ emphasis on short-run financial performance?
Because the non-financial and operational indicators measure fundamental changes that a company is making. The financial benefits of these changes may not be captured in short-run earnings, but strong improvements in non-financial measures signal the prospect of creating economic value in the future. By balancing the mix of financial and non-financial measures, the balanced scorecard focuses management’s attention on both short-run and long-run performance.
What is reengineering?
Reengineering is the fundamental rethinking and redesign of business processes in seeking to achieve improvements in critical measures of performance such as cost, quality, service, speed and customer satisfaction.
Name five features of a good balanced scorecard
(1) It tells the story of a company’s strategy by articulating a sequence of cause-and-effect relationships. Each measure in the scorecard is part of a cause-and-effect chain, a linkage from strategy formulation to financial outcomes.
(2) It helps communicate the strategy to all members of the organisation by translating the strategy into a coherent and linked set of understandable and measurable operational targets. Guided by the scorecard, managers and employees take actions and make decisions that aim to achieve the company’s strategy.
(3) In for-profit companies, the balanced scorecard places strong emphasis on financial objectives and measures. A balanced scorecard emphasises non-financial measures as a part of a programme to achieve future financial performance.
(4) The balanced scorecard limits the number of measures used by identifying only the most critical ones. Focuses management’s attentional on those that are key to the implementation of strategy.
(5) The scorecard highlights suboptimal trade-offs that managers may make when they fail to consider operational and financial measures together.
Correct implementation is key to the successful deployment of a balanced scorecard. It is particularly important that some common objectives drive the desire to use a balanced scorecard within an organisation.
Name five pitfalls to avoid when implementing a balanced scorecard
(1) Do not assume the cause-and-effect linkages to be precise, they are merely hypotheses. Hence, an organisation must gather evidence of these linkages over time and alter their scorecards.
(2) Do not seek improvements across all of the measures all of the time. This approach may be inappropriate because trade-offs may need to be made across various strategic goals.
(3) Do not use only objective measures in the scorecard.
(4) Do not fail to consider both costs and benefits of initiatives such as spending on information technology and R&D before including these objectives in the scorecard. Otherwise, management may focus the organisation on measures that will not result in overall long-run financial benefits.
(5) Do not ignore non-financial measures when evaluating managers and employees. Think carefully about linking balanced scorecard categories to performance measures.
What should managers and accountants consider when evaluating the success of a strategy?
They need to evaluate the success of a strategy on the basis of whether the sources of operating profit increases are the result of implementing the chosen strategy. To use operating profit numbers for evaluating the success of a strategy, a company needs to isolate the operating profit due to cost leadership from the operating profit due to product differentiation. To evaluate the success of a company’s strategy, one can subdivide changes in operating profit into components that can be identified with growth, product differentiation and cost leadership. Subdividing the change in operating profit to evaluate the success of a company’s strategy is similar to variance analysis.