MODULE 1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING ... · Strategic Management Accounting – 2019 version Edition 2 of CPA Australia textbook 4 PART B: The strategic management

Strategic Management Accounting – 2019 version Edition 2 of CPA Australia textbook

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MODULE 1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING

Part A: Value

Shareholder value

Customer value

Stakeholder value

Which viewpoint should be taken when determining ‘value’?

26

27

27

27

27

Part B: The strategic management process

Strategic management

Operational management

30

30

32

Part C: The role of management accountants in strategic management

Analyst, business adviser, partner

Contemporary skills and techniques

38

39

40

Part D: The key challenges facing management accountants

Challenges

Causes of change in the business environment

The global economy

Technology

Sustainability

43

43

46

47

54

58

Part E: Analytical techniques available to management accountants

Value analysis

Strengths, weaknesses, opportunities and threats

Internal analysis

External analysis

Porter’s five forces model

67

68

70

71

76

77


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PART A: Value P26

Value is a broad concept. It can be described as combining resources together in a manner that creates

desirable outcomes.

Shareholder value: generate wealth for the owners of the business

Customer value: create an output that has customer value (need to produce at a price lower than the price the

customer is willing to pay, which leads to profitability)

Stakeholder value: a by-product of generating value in other areas.

To create products or services, an organisation will require community permission to operate, infrastructure,

customers and employees—who will only supply their effort if the wages and conditions are adequate. That is,

the organisation must provide suitable value to its stakeholders.

Types of value for stakeholders

Owners Financial returns, employment / career opportunities (if also employees)

Lenders Receive a return (interest) for the amount loaned to the company (would destroy vale if the company did not have sufficient funds to repay)

Customers Products that comply with safety, environmental standards etc, reasonable price, warranty

Suppliers Contracts that generate sufficient revenue for the costs involved, strong and reliable working relationships

Employees Appropriate reward for the effort contributed to the company (both monetary and qualitative items, such as recognition and job satisfaction)

Community Groups Products safe to use, sustainable raw materials, recycled at end of use

Which viewpoint should be taken when determining ‘value’? (p27)

Consider an organisational view vs a stakeholder view.


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Strategic management and strategic management accounting (p29)

Strategic management accounting is aimed specifically at improving organisational outcomes.

Strategic management describes the process by which an organisation decides:

the direction it will take

the industry it will operate within

the types of products or services it will provide

its structure, systems and processes

its goals and objectives.

Strategic management accounting aims to provide forward-looking information to assist management in decision-making.


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PART B: The strategic management process P30

Defines strategic management accounting and examined the contemporary environment and its impact on organisations and management accountants

Evolution of management accounting to a strategically focused role.

Creating sustainable value by:

supporting the formation, selection, implementation and evaluation of organisational strategy; and

providing information that captures financial and non-financial perspectives for both the internal and external environments to enable effective resource allocation.

Strategic management accounting – supporting managers p30

Management activities can be classified into the broad categories of:

- strategic management, which focuses on determining the direction and structure of the organisation

and developing plans and objectives for achieving this; and

- operational management, which can be considered as the implementation phase of strategic

management—turning the strategy into reality.

Strategic management

The strategic management process involves:

addressing key issues, including determining the vision, mission and purpose of an organisation

setting specific objectives

creating and implementing the strategies to achieve these objectives.

Strategic analysis Through scanning the internal and external organisational environment

Organisations must continuously analyse the external environment to understand trends and changes that affect the industry and the economy.

Organisations must also analyse their own resources and capabilities to understand how they might react to changes in the environment.

Strategy planning and choice

Strategy formulation is the next step in the strategic management process. This includes developing specific strategies, actions and measures.

Strategy implementation Entails crafting an effective organisational structure, organisational processes and culture.

Strategy evaluation This involves measuring performance, providing feedback and undertaking continuous review for improvement.


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Operational management (for middle managers) – p32

Focus on short to medium term tasks

Key differences between strategic and operational management

Strategic management accounting and line managers

Flatter hierarchies have resulted in greater authority and decision making delegated to lower level employees.

Management accountants are required to provide support and training to line managers to enable them to

prepare the information required for the MA to analyse

Strategic management accounting and service industries – p35

The same approaches and tools are used to analyse services, but the main characteristics of services can make

this analysis more difficult. Services differ from products in the following ways:

- A service is intangible, so it can be more difficult to define or measure systematically.


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- Once a service is provided, it cannot be consumed or used again in the same way as a product. This

means there is no ability to store a service as inventory, which makes it more difficult to manage

supply and demand levels.

- A service is more of a unique offering than a product. So providing it in a systematic and identical way

is much more difficult.

- Unused capacity is lost forever. It cannot be used to create something that is stored for later (i.e.

inventory cannot be created).

Strategic management accounting and the public sector – p35

Public sector does not use profit as its primary measure.

Strategic management accounting can help establish metrics for measuring:

- economy—the extent to which resources of a given quality were acquired at the lowest cost;

- efficiency—the maximisation of outputs for a given set of inputs; and

- effectiveness—the extent to which an organisation achieved its objectives


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PART C: The role of management accountants in strategic management P38

Management accountants are seen as information providers for business processes, organisational planning and control, resource management and utilisation, and creation of value through effective use of financial and non-financial resources.

Trusted business partners

The role of management accountants p38


supporting the formation, selection, implementation and evaluation of organisational strategy; and

providing information that captures financial and non-financial perspectives for both the internal and external environments to enable effective resource allocation.

Role features include target costing, life cycle costing, competitor cost analysis, activity based costing and

management, and strategic performance measurement systems (Langfield-Smith 2008)

Target costing: determines the selling price being charged by competitors, deducts the required margin to

calculate a target cost for producing the product

Analyst, business adviser, partner – p39

- traditional roles of costing, variance analysis and budgeting

- risk management (implementing controls to manage risk is a valuable role of MA (Cooper 2002)

- design and manage information systems

- develop effective reporting methods

Alternative view-point is the ‘overseer’

- Adviser role can result in a loss of independence (if too closely involved in setting strategy & making

decisions)

- Instead needs to provide oversight, set effective controls etc

- Note that increased pressure and perceived or actual loss of objectivity are some of the biggest issues

facing accountants as they become more heavily involved in the decision making process (CIMA 2010)


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Contemporary skills and techniques – p40

A matrix of skills has been prepared by the International Accounting Education Standards Board (IAESB 2004).

It details what is required of today’s professional accountant in business. The main categories include:

Intellectual skills: Research and organise information

Critical analysis and logical reasoning

Solve unstructured problems

Monitor internal financial performance

Designing performance management tools

Technical skills: Numeracy (mathematical and statistical)

IT and software ability (spreadsheets and databases)

Compliance requirements Cost analysis and control;

Personal and interpersonal skills:

Self-management and initiative Influence and assess priorities

Meet deadlines and adapt to change

Work in teams and interact with a diverse range of people

Negotiate and listen effectively

Communication skills:

Deliver and defend opinions

Use formal and informal approaches

Listen, read and speak effectively

Written communication

Cultural sensitivity;

Organisational or business management skills:

Organise and delegate tasks

Lead and motivate people

Project evaluation

Information for planning and decision making.

A report by IFAC (2011) looked at how management accountants drive sustainable organisational success. It identified four specific ways in which management accountants support an organisation:

1. Creators of value—developing the plans and strategies that set the direction of the organisation 2. Enablers of value—by supporting management decision-making and implementation 3. Preservers of value—protecting value through effective risk management, controls and compliance 4. Reporters of value—clear and detailed reporting.

Some of the key challenges facing management accountants include:

- using technology effectively while guiding others to effectively use management accounting systems;

- managing resources; and

- promoting innovation.


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Example question

Management accounting has traditionally supported the different levels of internal decision-making of

organisations. In its early history, the emphasis of the management accounting role was on planning and

control with a particular focus on budgeting and cost management. Organisations and their environments

were typically stable and decisions were made under conditions of relative certainty. However, strategic

management accounting goes beyond this and helps to create and manage value.

In Module 1, we defined strategic management accounting as:


– supporting the formation, selection, implementation and evaluation of organisational strategy; and

– providing information that captures financial and non-financial perspectives for both the internal

and external environments to enable effective resource allocation.

In Table 1.2 of Module 1, decisions managers make:

Strategy: competitive approach, organisational structure and target setting.

Products: product mix (flight destinations and additional benefits provided) and pricing.

Supply chain: choosing suppliers for fuel, aircraft and maintenance.

Infrastructure: information systems and website capability.

Financing: obtaining finance, ensuring dividend payments are appropriate and structuring leases and

loans for aircraft.

Resource allocation: staffing of flights and other functions, route planning and ensuring that assets

(e.g. fuel) are carefully managed and controlled.

Strategic management accounting provides a wide range of tools and techniques that support these decisions,

including:

BSCs for supporting the analysis of organisational performance and guiding strategy choice;

activity-based costing and activity analysis to identify and cost non-value adding activities that may be

eliminated or reduced;

capital budgeting tools, such as discounted cash flows, that enable project evaluation;

project management tools to consider both the time and cost of implementation; and

customer profitability analysis to identify which segments the organisation should be focusing on.

Need to consider financial and qualitative characteristics


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PART D: Key challenges facing by management accountants P43

Challenges p43

Some of the key challenges facing management accountants include:

Technology Includes keeping information secure and maintaining customer privacy Maintaining records and audit trails for data verification opportunity. Technology is transforming how people compete within an industry, which is forcing rapid change and innovation

Managing resources

Effective use and control of assets are required for superior results. Mastering areas such as cash flow management and SCM is essential. Includes forecasting capability to drive decision making Consider also the management of intangibles such as employee knowledge

Innovation Innovation drives competitiveness by creating efficiencies and new and better products. Innovation is both an outcome—that is, a new product or service—and a process—a combination of decisions, structures, resources and skills that produce outputs and outcomes. Needs to be customer focused. Consistently generating new and improved products, services and processes (e.g. Apple) is essential to creating customer value.

Causes of change in the business environment p46

In response to the significant changes that are happening with internal structures and externally, there has

been significant development in how management reporting occurs.

The management reporting role has also expanded from just producing the numbers, to analysing and

interpreting the numbers that are generated from the information systems.

Beyond this, the opportunity to have ongoing access to real-time data means that it is possible to report on

critical performance indicators in real-time. Weekly summaries and constant monitoring have replaced

monthly meetings, leading to rapid identification of issues and opportunities, as well as faster response times.


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Global economy (p47)

Economic turmoil Interconnected companies and markets can lead to global contagion

GFC has increased focus on cash flows, access to funding, supply chain

Importance of risk management, forecasting, cost control and rapid adaptation

Structural change Ongoing change in growth rates, government policy, consumer spending, new regulations (e.g. BASEL Accords p48)

Globalisation The integration of international economic activity and the creation of global production systems to service global markets

Impact on organisations by:

- significant reductions in trade barriers, - lower transport costs, - large multinationals, - unrestricted capital flows and - faster information transfers.

Drivers (per Lasserre 2003):

- Global competition (e.g. local market in decline, seeking rapid growth or lower cost raw materials and labour)

- Physical capability and factors (e.g. advances in comms reducing international communication costs, lower cost shipping makes outsourcing to cheaper markets attractive)

- Social factors and national cultures (convergence of tastes due to urbanisation and industrialisation, youthful demographics)

- Legal and political systems (removal of trade barriers)

Challenges:

- taxation - protection of intellectual property - cross-border money laundering - financing of illegal activities

Physical and capability factors

A series of breakthroughs, particularly rapid advances in transport and communication, have provided a technological platform for global activity. These advances, in turn, have encouraged:

economies of scale—because goods produced in a central location can be cheaply distributed around the world

outsourcing of component supplies to low-cost countries—because the transport costs across long distances are now more affordable.

Social factors and national cultures

This convergence of tastes is compounded by increasing urbanisation and industrialisation across the world, with populations adapting quickly to new products.

Legal and political systems

Trade barriers such as tariffs are one of the main obstacles to successful globalisation. These are usually enacted by countries wishing to protect their domestic economy from foreign competition.


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Technology (p55)

Capital equipment Advancement in technology, higher productivity (e.g. in manufacturing)

Note that technology costs are much higher and become obsolete at a much faster rate

Often requires significant capital investment

Information and communication technologies

Cloud computing: reduced costs on capital items, reduced need for in-house knowledge, can deploy employees globally. Privacy / info security concerns

Employee owned devices: flexible working environment, but risk to privacy / info security

Big data: record a lot of data, but key is ability to analyse and interpret the data to improve performance

Sustainability (p58)

Corporate social responsibility

Organisations are accountable to a range of stakeholders (rather than the usual shareholder / profit model) – which emphasises qualitative and non-financial factors

Environmental MA Increased level of scrutiny associated with use and disposal of resources

EMA: capture, analyse and report on environmental information

Can use:

- Input/output analysis (what goes in must go out or be stored) - Flow cost accounting (aims to reduce the quantities of materials – may

lead to ecological efficiency) - ABC (distinguishes between environment related costs and environment

driven costs - Life cycle costing

Ethics Incorporate ethical implications in decision-making e.g. safeguards for employees (OHS)

Internal structures (p62)

Flatter hierarchies Attempt to eliminate costs of middle managers, make organisations more flexible, will require more highly skilled individuals

Offshoring / outsourcing

Offshoring: move activities or sub to an overseas location

Outsourcing: pay another organisation to perform the work

Take advantage of cheaper labour in specific locations

Can also outsource activities that the business is not good at

See page 105 for pros and cons of outsourcing

Virtual office and global teams

Benefit is that you can use the best staff for the job, regardless of location.

Negative outcomes include language barriers, cultural differences, supervision challenges

Joint ventures / alliances

Allows the organisation to become actively involved in new markets, and can help implement faster, less-costly and lower risk market penetration strategies

Documents

MODULE 1: INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING ... · Strategic Management Accounting – 2019 version Edition 2 of CPA Australia textbook 4 PART B: The strategic management