Question

How Managerial Accounting Practices support Strategy and Strategic Management ?

Answer 1

MANAGEMENT ACCOUNTING VS STRATEGIC MANAGEMENT

MANAGEMENT ACCOUNTING

Management Accounting, as distinct from Financial Accounting generates the following type of information.

 Allocation of costs between the costs of goods sold and inventories for internal and external profit reporting.

 Generating and presenting information to the Management for effective decision making.

 Generating information for planning, controlling and performance measurement. Strategic Management Accounting has been gaining importance in the recent past. The role of Management Accountants has been enlarged and his job is not just restricted to performing control function. However, there is lack of consensus on what constitutes strategic management accounting. According to some experts, [Innes, Cooper & Kaplan] management accounting is vehicle to provide information for supporting the strategic decision making in the organization. Strategic decisions have a long term implications and hence they have internal and external element. Accordingly, Strategic Management Accounting consists of techniques like target costing, life cycle costing, activity based costing and activity based management. Simmonds describes strategic management accounting as the provision and analysis of management accounting data about a business and its competitors, which is of use in the developing and monitoring of the strategy of that business. According to Simmonds, profits emerge actually from the competitive position of a business firm and not from internal efficiencies. Bromwich has defined strategic management accounting as, ‘The provision and analysis of financial information on the firm’s product markets and competitor’s costs and cost structures and the monitoring of the enterprise’s strategies and those of its competitors in these markets over a number of periods’. The Chartered Institute of Management Accountants [CIMA], U.K. defines strategic management accounting as, ‘A form of management accounting in which emphasis is placed on information, which relates to factors external to the firm, as well as nonfinancial information and internally generated information’. If the above definitions are analyzed, the following features of strategic management accounting emerge. On analyzing the above definitions, the following features of Strategic Management Accounting emerge,

STRATEGIC MANAGEMENT ACCOUNTING

 Strategic Management Accounting performs an important role of not only providing information about internal affairs but also about the external factors like competitive environment.

 It provides information on product profitability and also helps to find out the rational behind the profitability of each product. In other words, a business firm can get answers to questions like why one product is making good profits while another equally good product is making a loss.

 Information about the price setting has a crucial implication on the success or failure of a product when it is launched in the market. Strategic Management Accounting provides information about the impact of various pricing strategies on the profits and cash flows.

 Another crucial area for any business firm is about the planning of the capacity. Strategic Management Accounting provides information about planning of capacity. It answers the questions like, whether the firm should expand capacity. If so by how much? Should the firm enter into new area of operations or market? What should be capacity utilization?  In the competitive market, which has the presence of global players, obtaining sustainable competitive advantage is of paramount importance. Porter [1985] has suggested that any business firm has a choice of three generic strategies to obtain a sustainable competitive advantage. These strategies are,

 Sustainable Competitive Advantage Cost Leadership Differentiation Focus

 Cost Leadership: The cost leadership is obtained when a firm is able to produce its products at the lowest cost as compared to its competitors. This will help the firm to offer its products at lower price as compared to its competitors. A firm can achieve this aim through reducing the input costs by obtaining advantage of scale, procurement of raw materials at favorable prices and use of advanced technology. In India, the prominent examples of this strategy are the producers of ‘Nirma’ washing powder, who entered the market by launching their product at 1/4th of the price, charged by their competitors and thus captured a large market share in the competitive market. The latest example of this strategy is that of TATA Motors who have announced the launching of their car ‘Nano’ at a price of Rs.1 lakh, which is the lowest as compared to the prices of other models in the small car segment.

 Differentiation: This strategy involves a differentiation in the product or service offered by a firm. A firm can create differentiation by offering products or services that are unique and superior in quality as compared to other products. Thus the competitive advantage is obtained by differentiating in the products or services. Price may be not an important factor in this strategy; in fact a firm may charge higher prices as compared to its competitors by differentiating in its products or services.  Focus: This strategy involves gaining competitive advantage by focusing on a narrow segment of a market, which is poorly served by competitors. In this strategy sustainable competitive advantage can be obtained either by following the strategy of cost leadership or product differentiation. The following techniques help a firm to achieve the competitive advantage.