STRATEGIC MANAGEMENT ACCOUNTING

Strategic Management Accenting

Strategic Management Accenting

Strategic Management Accounting has been defined as "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."

Back in 1981, Ken Simmonds, probably the pioneer writer on the subject, developed the above definition. He saw it as the collection of management accounting information about a business and its competitors for use in developing and monitoring the business strategy. The emphasis was placed upon relative levels and trends in real costs and prices, volume, market share, cashflow and stewardship of the resources available to the business.

More recently (1994) Professor Bromwich pointed out that adding the strategic perspective to traditional management accounting required the role of accounting to extend in two directions. First, costs need to be integrated into strategy through strategic cost analysis, and thus align costs with strategy. Secondly, to ascertain, albeit in a fairly general way, the cost structure of competitors and to monitor the changes over time. In achieving this, Bromwich also sees two distinct approaches:

costing product attributes provided by the company's products;

cost the functions in the value chain which are perceived as giving value to the customer.

Traditional management accounting is perceived as inadequate since it:

concentrates on the manufacturing and neglects the high cost post-conversion activities;

ignores the impact of other activities;

fails to assess the relative cost positions of competitors;

over-reliance on existing accounting systems;

By contrast, strategic management accounting purports to place emphasis on:

the relative cost position;

the ways in which a company may secure a sustainable cost advantage;

costs of differentiation i.e., what makes their product different and hence more attractive.

This article will take two approaches. First we will look at how Strategic Management Accounting adopts a different emphasis. Secondly, we will look at areas that need to be the focus of a management accounting view.

1 Strategic management accountingOne of the main exponents of Strategic Management Accounting is the American M.E. Porter. As you progress in your studies at final level, you will become very familiar with that name. His 1985 text on strategic management is regarded as a corner-stone. Porter takes a two pronged approach.

First he assesses different industries in terms of their long-term profitability. He sees five competitive forces that will contribute to a strategic equation.

(a) The threat of new entrants into the market

While it is influenced by the cost of entry into a market and perhaps the opportunity to make a profit, this threat remains. In principle, the larger the organisation and the more investment required, the less likelihood of any competition. However, students have only to look at the recent history of commercial aviation, where deregulation has allowed small airlines to enter the market and compete successfully, while the UK telecommunications industry has seen a monopoly situation turned into one of fierce competition.

New entrants can have another implication. They can expand the number of competitors without expanding the ...