L3 - Strategic Management Accounting PDF

Preview

Summary

Lecture notes on SMA...

Description

Lecture 3 - Strategic Management Accounting As management accountants, it is essential to understand the organisation in which we work in order to contribute to the effective management of that organisation. This includes the characteristics, its history, its behaviours and the structure with which it tries to successfully determine and implement its strategy to achieve its mission. We need to appreciate why these factors exist, and determine if they are appropriate. There are a wide range of management accounting techniques / controls which can be used, and which may influence, or be influenced by, that organisation.. Hoque (2003) -“……….the process of identifying, gathering, choosing and analysing accounting data for helping the management team to make strategic decisions and to assess organisational effectiveness” History : 1950s - Long term planning - only started after the WW’s as people were previously planning day-to-day due to the steady state 1970s - Industry positioning, Mergers and Acquisitions - organisations looking to grow quickly by buying businesses 1980s - Strategic management, Planning at different levels - other people apart from managers making decisions, Entrepreneurial thinking - anyone can make a business if they wanted to. External partnerships 1980s -> Strategy, control and performance, systems now the most researched topic in management accounting Acquisitions - Hanson Trust In!1964!Hanson Trust was created out of the former Wiles Group by James Hanson and Gordon White. Hanson PLC went on to become one of the world's largest companies with annual profits of more than £1.5 billion and a strategy of growth through acquisition.! In the!1970s! and! 80s! Lords Hanson and White turned Hanson into a multi-national concern with interests across the world ranging from chemical factories in the US to electricity supply in the UK and gold mines in Australia. Hanson produced cigarettes and batteries, timber and toys, golf clubs and Jacuzzis, cod liver oil capsules and cranes. Difficult to Management accounting for the company due to the industries that they were in e.g. bricks, jacuzzis, batteries & cod liver oil. Entrepreneurs Philip Green (Arcadia) £20,000 -> £3.88bn Mike Ashley (Sports Direct) £10,000 -> £3.75bn Richard Branson (Virgin) £300 -> £3.6bn John Caudwell (Phones4U) £25,000 -> £1.5bn Alan Sugar (Amstrad) £100 -> £900m Clive Sinclair (Sinclair) - brought computers to the UK What is strategy? Michael Porter Seminar Link Organisation Strategy Ward (1992) - Hierarchy of Business Aims Organisation strategy can be described as the process undertaken in order to achieve the organisation’s mission Strategic decisions are likely to be concerned with : The scope of an organisation’s activities Matching the activities of an organisation to its environment Matching the organisation’s activities to its resource capability The allocation and re-allocation of major resources in an organisation Strategic decisions are likely to : Be affected by the values and expectations of those in power Affect operational decisions Affect the long term direction of an organisation Be complex in nature Johnson and Scholes (1989) Strategic Planning Review current situation (where are we now) Internal resources and external environment Consider opportunities and constraints relevant to the future (based on where we are now) Useful tool : SWOT analysis

Porter’s Five Forces Model Strategic Planning - “Understanding the nature of each of these forces gives organisations the necessary insights to enable them to formulate the appropriate STRATEGIES to be successful in their market”. Thurlby (1998) Strategic Planning Porter went on to say : Current situation - Good relative strengths v existing competition means a good competitive position, which could be developed into a competitive advantage There are many potential strategies, such as Do nothing (stay the same) Growth (eg Ansoff Matrix) Stop Each alternative strategy needs to be evaluated and selected in terms of : The extent to which it will achieve the mission of the organisation The risk that the strategy will succeed and fail in respect of the organisation’s goals What companies do and don’t do can be defined in the two above statements - just depends on how risk adverse managers Other writers………. Mintzberg (1978) - Queries if deliberate planned strategies are achievable - Yip (1989) Global strategies Harari (1994) (regarding competitive strategy) Like looking at “competitor” cars on the highway and ignoring the road ahead. Problem with businesses is that they spend too much time focusing on competitors & not concentrating on own company So who undertakes strategic planning and decision making in an organisation ? It may be determined by organisation structure Strategy and Structure The structure of an organisation should enable it to be managed in a way that allows it to implement its strategy It should facilitate the activities that need to occur in order for strategy to be implemented successfully If organisation has functions, the MA will be in accounts department. If organisation has divisions, the MA will be in a division role of a MA changes if structure changes Functional structure - Specialised, similar resources in one area of the business, efficiency and economies of scale, may lack a market focus, particularly if wide range of products in a diverse markets Divisionalised structure - specified range of products in a specific market, strategies in each division, cannot achieve same economies of scale Decentralised structure - decisions spread throughout the organisation Strategic Planning and Structure Summarised by Merchant and Van der Stede (2007) Generally, strategic planning processes can be described by six steps : Develop a corporate vision, mission and objectives for the firm Understand the firm’s present position, its strengths and weaknesses, and its opportunities and risks (threats) Decide on a corporate diversification strategy that identifies what businesses the firm should and should not be in Decide on a strategy for each Strategic Business Unit (SBU), the path of action that best takes advantage of each businesses opportunities and strengths Prepare the strategic plan, which is a qualitative and quantitative representation of the strategic options to be taken and the likely outcomes Monitor performance and update the strategic plan as necessary Strategic Management Ward (1992) - “An integrated management approach drawing together all the individual elements in planning, implementing and controlling a business strategy” Strategic Management is a continuous process of analysis, planning and control. It requires the support of a large amount of very varied information from many sources

Strategic management decisions are typically : Long term Cyclical (done annually ?) - continuous process High impact Internal considerations - resources External considerations - competitors, markets, environment, stakeholders etc So where does Management Accounting fit in to all of this ? According to Lord, the problems wi th traditional management accounting are: Too short term, emphasis on profits for artificial accounting periods. backward looking / Inward looking, focussed on costs, reactive, programmed If too short term focussed - project based or annual based & don’t think of anything longer than a year therefore cannot be involved in strategy - everything is profit related - all accounting periods are artificial e.g one year whereas a product may last for a few years rather than one year. Ward (1992) states that - “If management accounting is to be of value to this process, it must be capable of providing the required information within the available time to the right level of decision maker” So what must management accountants be involved in? Overall corporate strategy, strategy for each SBU, strategy for each function, financial strategy, strategic planning process at any stage (remembering involvement will still depend on other factors such as structure, culture etc) Dependant if company is family owned or large PLC Tools a Strategic MA needs Appraisal stage - Analytical information to determine SWOT, Competitive advantage assessment - Compare other organisations, compare to industry Tools such as - Balance Scorecard, benchmarking - comparing different data for differences and why Not just numbers but more non financial information tools as well Evaluation and Selection stage Porter’s generic strategy - Costs (standard, ABC), cost efficiencies, controls, Investment appraisal, Market research, marketing costs and revenues, Target pricing Ansoff Matrix - Market penetration – market, advertising, sales mix, Product development – R&D, Investment, new product development, Market Development – Market research, target pricing, Diversification – R&D, Investment, NPD, market development Implementation stage Capital investment – DCF, NPV, IRR, PP Budgetary planning - Shorter term plans, Action plan of how resources are to be acquired and used over a specific time period expressed in terms of numbers and monetary values, Guides managers on responsibilities, resources, outputs Key to successful strategy - monitor, appraise and change if not happening Monitoring/Appraisal stage - Balanced scorecard, SWOT, Economic Value Added, Return on Investment, Variance Analysis etc As management accountants, it is essential to understand the organisation in which we work in order to contribute to the effective management of that organisation. This includes the characteristics, its history, its behaviours and the structure with which it tries to successfully determine and implement its strategy to achieve its mission. We need to appreciate why these factors exist, and determine if they are appropriate. There are a wide range of management accounting techniques / controls which can be used, and which may influence, or be influenced by, that organisation....