Question

Discuss the concept of strategic management accounting in particular focus on three approaches to external measurement a firm can use to evaluate future strategic development (These could include: Balance scorecard, PEST, SWOT) -

Answer 1

The term 'strategic management accounting' was introduced in 1981 and was defined as ‘the provision and analysis of management accounting data about a business and its competitors, for use in developing and monitoring business strategy’.

Lord has identified the following components of strategic management accounting:-

(i) Extension of traditional management accounting’s internal focus to include external information about competitors.

(ii) Relationship between the strategic position chosen by a firm and the expected emphasis on management accounting (i.e. accounting in relation to strategic positioning).

(iii) Gaining competitive advantage by analysing ways to decrease costs and/or enhance the differentiation of a firm’s products, through exploiting linkages in the value chain and optimising cost drivers.

The essential and the most popular business strategy tools used by companies to implement their strategic plans and achieve a sustained competitive advantage:-

1). PEST analysis is an analysis of the political, economic, social and technological factors in the external environment of an organization, which can affect its activities and performance. PEST or PESTEL analysis is a simple and effective tool used in situation analysis to identify the key external (macro environment level) forces that might affect an organization. These forces can create both opportunities and threats for an organization. Therefore, the aim of doing PEST is to:-

• find out the current external factors affecting an organization;
• identify the external factors that may change in the future;
• to exploit the changes (opportunities) or defend against them (threats) better than competitors would do.

The outcome of PEST is an understanding of the overall picture surrounding the company.

2). SWOT analysis involves the collection and portrayal of information about internal and external factors which have, or may have, an impact on business. SWOT is a framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths and weaknesses with those from an analysis of external opportunities and threats. Swot tool has 5 key benefits:-

• Simple to do and practical to use;
• Clear to understand;
• Focuses on the key internal and external factors affecting the company;
• Helps to identify future goals;
• Initiates further analysis.

3). GE-McKinsey nine-box matrix is a strategy tool that offers a systematic approach for the multi business corporation to prioritize its investments among its business units. GE-McKinsey is a framework that evaluates business portfolio, provides further strategic implications and helps to prioritize the investment needed for each business unit. Advantages:-

• Helps to prioritize the limited resources in order to achieve the best returns.
• Managers become more aware of how their products or business units perform.
• It’s more sophisticated business portfolio framework than the BCG matrix.
• Identifies the strategic steps the company needs to make to improve the performance of its business portfolio.