The Implementation of Strategic Management - Essay Example

Issues in Management Accounting Student’s Name Tutor’s Name Grade Course: 18th May 2011 There is little doubt in accounting circles that acquiring the information needed for the implementation of strategic management accounting is costly; however, there is contention among scholars, accounting professionals, as well as researchers about the actual cost of obtaining such information. In the same manner, strategic management accounting benefits organisations by providing them with a sustainable competitive advantage. However, scholars, researchers and accounting professionals are still debating whether these advantages cover the costs incurred while implementing strategic management accounting. Based on this debate, this research paper seeks to conduct a review of existing literature in an attempt to draw closer to the truth about whether the benefits of competitive advantage gotten by firms upon implementing strategic management cover the cost of information acquirement. Specifically, the research paper seeks to answer the question: Are the benefits of strategic management greater than the cost of acquiring the information needed for the implementation of strategic management? The scope of information acquiring Before any organisation implements strategic management accounting, it must gather and evaluate market data, which includes information about demand, supply and competitors (Hoffman & Wompener, 2006, p. 235). Wheetman (2010, p.138) cites techniques such as competitor cost assessment and attribute costing as the main instruments used to gather information about competitors and customers. To gauge the strategic advantage that a product has on the firm, Wheetman (2010, p. 154) further notes that firms can use life-cycle costing techniques. The latter is a technique that businesses use to calculate costs incurred in the different stages of product development. Citing Dixon (1998, p. 278), Hoffman and Wompener (2006, p. 237) swiftly argue that the costs associated with “capturing, collating, interpreting and analysing appropriate data outweighs the benefits”. Notably however, Hoffman and Wompener (2006, p. 237) state the views expressed by Dixon are not unchallenged. Citing Guilding, Cravens and Tayles (2000, p. 128) Hoffman and Wompener (2006, p. 237) note that there are indications that there is unexploited potential in strategic management accounting, which is not factored by scholars and researchers who argue that the costs of the process outweighs its benefits. The scope of information acquiring process undertaken prior to the implementation of strategic management accounting is better understood from the definition of the SMA concept. According to Hoffman and Wompener (2006, p. 237), SMA involves the gathering, analysis, and presentation of data, which is acquired from the competitive environment. By its very nature, the competitive environment is made up of customers and competing organisations. As such, a company interested in implementing strategic management accounting must undertake to gather information from the customers as well as from the competitors. This can be a daunting and costly undertaking especially considering the expansive possibility of customers and competitors in any given market. As Fu (20006, p. 11) observes, issues to consider during the information-gathering phase include financial and non-financial factors. Such include costs, revenues, new products in the market, quality if such products, and customer satisfaction. More specifically, Currie (n.d, p. 5) identified the information to be collected from competitors to include: i) Market information (segmentation strategies, branding, advertising, customer service, potential growth vectors and market research capabilities) ii) Information regarding competing products and services iii) Information about the competitors’ strategies iv) Information regarding human resources in the competing firms v) Information about the operations of competing firms vi) Technological information vii) Managerial profiles viii) Social-political intelligence of competing organisations ix) Financial information x) Customer value analysis and ; xi) Information about managerial structure in the competing firms But why is acquiring information such an important undertaking in strategic management accounting? Well, according to Fu (2006, p. 11) it is impossible to identify opportunities or threats contained in the environment without obtaining the relevant information first. Specifically, Fu argues that strategic management requires the organisation to identify the threats and identify ways through which they can be prevented or turned into opportunities. Based on the information acquired from the market environment, the organisation then coordinates its manufacturing methods, products and marketing techniques in a manner that will affect its bottom-line in a positive manner. Putting management accounting into perspective According to Bhimani and Roberts (2003), management accounting differs from accounting because the latter creates, develops and reports information to the managers of an organisation, while the former seeks to provide information-based intelligence to the same (or different) managers. While traditional accounting is straightforward, management account is more complex, often requiring organisations to research and accumulate as much information about their operating environment as possible (Bhimani and Roberts, 2003, p. 1). Putting cost on the entire process of information acquirement is even more complex; as Bhimani and Roberts (2003, p.2) observe, “Knowledge production differs from the production of physical output in that it does not replenish resources. Instead, knowledge ...can be abstracted, diffused and propagated... and made meaningful in a multitude of information spaces... ”. As such, information acquired during a specific phase does not necessarily lose its worth immediately. Rather, the organisation can still use it in future. Costing information therefore would not be an easy thing to do considering that the same information could be used numerous times by the same organisation. Strategic management accounting As Guilding (***) aptly puts it, the term ‘strategy’ defies any single definition. However, the term relates to a larger scenario pertaining to short-term or long-term effectiveness. Organisational strategy on the other hand has been defined as “the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action, and allocation of resources necessary for carrying out these goals” (Chadler, 1962, p. 13 cited by Guilding, p. 115). The description by Chadler stresses the future orientation of the term strategy. Basing this notion on strategic management accounting and of information acquirement, one can argue that the cost of the exercise cannot be quantified in the short-term. This is especially the case when one considers that the impact of the information acquired will be used to create knowledge, which will be used to form future organisational strategies intended to benefit the firm in the future. According to Simmond (1981, p. 26) cited by Guilding (***, p. 116), strategic management accounting provides and analyses management accounting data relating to a firm and its competitors. Such data is valuable to organisations because it enables them to develop and monitor business strategies that they initiate. According to Guilding (***, p. 116), Simmonds came up with the SMA concept and though he acknowledged that internal organisational efficiencies partly contributed to the overall profits, he believed that competitive positioning of firms had a far greater effect on profitability. This can be interpreted to mean that the pioneer of the SMA concept was convinced that the benefits that firms could access after implementing it would outweigh the cost incurred during (and probably before) its implementation. Though the cost of acquiring information needed to implement SMA may be high initially, it is worth noting that the strategic management accounting functions to maximise the profits in any given organisation. According to Walden University (2010), SMA accomplishes its profit maximisation task by focusing on the reduction of costs. Specifically, companies with SMA in place make the minimisation of costs associated in the production of goods and service a priority area. Low production costs on the other hand increase the competitiveness of products and services, since the producing organisation can sell them at a fairer price than the competing brands. Even where the products or services are priced at the same level with competing brands, the organisation is able to realise a higher profit margin than its competitors do. Additionally, Walden University (2010), notes that SMA enables organisations to institute suitable cost allocation, something that has positive impact on the production costs incurred by an organisation. By acquiring information about the consumer market, the organisation is able to develop or manufacture products that are within the consumers’ payment abilities. As Porter ( cited by Inman, 1999, p. 2) observes, SMA will probably focus its attention on the value chain. The value of the product manufactured by organisations should not exceed what consumers are able or willing to pay. Information acquired in the course of implementing the SMA, which relates to the value of items, is therefore likely to provide the management with information, which can benefit them the organisation in future. As such, the cost of acquiring such information can only be calculated by considering all the benefits that it would have both in the short and long-term decision-making in the organisation. While evaluating the value chain Inman (1999, p. 4-5), notes that a firm must consider nine elements, which include i) infrastructure; ii) human resource capacity and management; iii) technology development levels; iv) procurement; v) marketing and sales; vi) outbound logistics; vii) operations; viii)inbound logistics; and ix) services. Each of the identified elements has associated costs. In strategic management accounting, the nine elements need to give the organisation a satisfactory margin when compared to the same elements in a competing firm, if they are to be perceived as having a satisfactory strategic advantage (Inman, 1999, p. 6). Should information acquired before the implementation of SMA show that the nine elements are more costly than the competitor’s is, then the organisation embarks on a cost-cutting strategy. Alternatively, Inman (1999, p. 5) notes that organisations can retain the same costs, but improve their productivity in order to counter any strategic advantage that competing businesses may have on the organisation. The advantages of data acquirement In SMA literature, the importance of obtaining data about the market, competitors and the consumer has received a lot of attention. Heinen and Hoffjan (2005, p. 21) for example argues “obtaining and processing the cost data of competitors allows a company to assess its own strengths and weaknesses in terms of costs”. From the assessment, the company is able to rate its cost performance in comparison with its competitors hence giving it information that can be use in making strategic decisions. Notably, however, Heinen and Hoffjan (2005, p. 22) argues that not all information gained from the competitors and consumers can serve the strategic needs of an organisation. There is always a probability that (some of the) information acquired by an organisation can be irrelevant to strategic decision-making, or could even have a negative influence on the quality of decisions made by the management (Heinen & Hoffjan, 2005, p. 22). Several stages must be followed if the information acquired by a firm is to be made into useful intelligence necessary in strategic decision-making. Saayman et al. (2008, p. 385) list the stages as- planning and focus; collection; analysis; communication; process/structure; and organisational awareness or culture. In the first stage, the firm must plan and focus on the specific intelligence needed for strategic decision-making. On identifying its needs, the firm must then set out to collect the information from identified credible and reliable sources. The third phase involves analysing the acquired information and converting it into ‘usable’ intelligence necessary for tactical and strategic decision-making. On obtaining the intelligence, communication should then take place in order to inform the decision-makers in a firm. Notably, intelligence cannot benefit a firm maximally if appropriate policies or procedures are not in place. Specifically, Saayman et al. (2008, p. 386) argue that employees in a firm need to be empowered in such a manner that they can actively contribute to the attainment of information from both the competitors and the market. Additionally, the firm must create awareness or a culture that utilises the intelligence obtained from the information. According to Saayman et al. (2000, p. 386) if competitiveness is not embedded in a firm’s business culture, acquiring information about the competitors or the consumers does not serve any strategic goals. This is especially the case if the management does consider the information acquired as either legitimate or important. Firms that utilise the intelligence obtained from information gathered from competitors and consumers are according to Saayman et al. (2008, p. 386), are better positioned to determine the best way to position themselves in the market. The management in such firms relies on the intelligence to determine whether to make strategic improvements on their businesses based on innovations, quality improvement or cost improvements. The benefits of strategic management accounting no doubt provide reprieve to the accounting profession, which according to Ahrens (2005, p. 11) has always received criticism about its failure to recognise strategic priorities that decision-makers in organisations need. The information gathered has contributed to these benefits since it has changed the tasks associated with accounting profession from being based on financial reports only. Consequently, the profession generate intelligence based on information acquired from customers and competitors thus equipping decision-makers with knowledge needed to make strategic choices. As Ahrens (2005, p. 14) admits however, acquiring information about the market is a time consuming undertaking. Still, more time is consumed in the production of relevant information. Additionally, accounting professional must not only collect the costs, but must also estimate revenues earned by numerous competitors who are perceived as posing a threat, analyse them, and communicate a logical strategic plan to the management (Ahrens, 2005, p. 14). Conclusion Attaining competitive advantage is a mileage for most firms, which have to wrestle against the forces presented by a hard-to-satisfy consumer market and the competitive environment. Once attained, sustaining a firm’s competitive advantage position is an even greater challenge. However, as has been argued in this paper, information gathered from the consumer and competitors can serve as an invaluable survival strategy for firms. Based on the intelligence attained from the information acquired, a firm is able to decide which of the three strategic approaches to take. As argued elsewhere in this paper, firms can adopt innovative products that are incomparable to the competitor’s, and which serve the consumers’ needs well. Alternatively, firms can choose to advance or maintain their competitive position through cost-related tactics. Such include reducing the cost of production in a manner that enables them (firms) to price their products or services competitively. Finally, firms can chose to advance or maintain their competitive advantage through quality-related tactics. Notably however, none of the identified competitive advantage-maintenance strategies can work without specific firms having enough intelligence about the competitors or the consumers. Seeing the important role that information acquirement has in strategic management accounting, and the subsequent intelligence generated by accountants, this paper holds the opinion that the costs of acquiring such information is not greater than the benefits acquired through maintaining a strategic advantage in the market. Notably, even when information acquired does not serve the immediate strategic needs of a firm, there is always a probability that the firm could use the same intelligence for future strategic needs. As such, any information acquired based on already established strategic needs does not go to waste. However, for the information (and the intelligence) to have any significance in the strategic decision-making, the management and other employees in the organisation must consider it significant and important to the strategic competitive advantage of a firm. Without acceptance of recognition from the management, efforts to acquire information on the market cannot serve the strategic needs of the firm. References Ahrens, T. (2005). Management Accounting- A guide. London: University of London Press. Bhimani, A., & Roberts, H. (2004). Management accounting and knowledge management: in search of intelligibility. Management Accounting Research.15, 1-4. Currie, J. (n.d.). Focusing on competitors in strategic performance management. Certified Public Accountants. Pp. 1-6. Fu, Y. (2006). Cyber –Coordinating mechanism and strategic management accounting. Working Paper, 08-01, 1-19. Guiding, C. Heinen, C., & Hoffjan, A. (2005). The strategic relevance of competitor cost assessment- an empirical study of competitor accounting. JAMAR, 3(1)17-34. Hoffjan, A., & Wompener, A. (2006). Accounting in German-and English-language general management accounting textbooks. Schnamenbach Business review. ZFBF58, 234-258. Inman, M. L. (1999). Strategic Management Accounting. 1-12 Saayman, A., Pienaar, J., Pelsmacker, P., Viview, W., Cuyvers, L.,Muller, M., & Jegers, M. (2008). Competitive intelligence: construct exploration, validation and equivalence. Aslib Proceedings: New Information Perspectives. 60(4), 383-411. Walden University. (2010). The role of strategic management accounting. Retrieved May 18, 2011 from: http://thinkup.waldenu.edu/finance-and-accounting/accounting/item/11938-role-of-strategic-management-accounting Weetman, P. (2010). Financial and management accounting: an introduction. New York: Financial Times Press. Read More