Introduction to Strategic Management Accounting PDF

MODULE 1 INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING PREVIEW INTRODUCTION Contemporary organisations face significant internal and external challenges that must be addressed in order to operate and function effectively. It is essential for them to create value for multiple stakeholders, includi...

MODULE 1 INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING PREVIEW INTRODUCTION Contemporary organisations face significant internal and external challenges that must be addressed in order to operate and function effectively. It is essential for them to create value for multiple stakeholders, including customers, employees, management, regulators and their shareholders or owners. This must be achieved in a global environment that is continuously changing and becoming more competitive. This subject focuses on the role strategic management accounting plays in creating, managing and protecting value. For the purposes of this subject, strategic management accounting is defined as follows: Creating sustainable value by: supporting the formation, selection, implementation and evaluation of organisational strategy synthesising information that captures financial and non-financial perspectives for both the internal and external environments, to enable effective resource allocation. Strategic management accounting requires that management accountants embrace new skills that extend beyond their traditional practices. They must collaborate with general management (operational departments), corporate strategists (senior management team) and product development, in creating, managing and protecting value. Fostering organisational capabilities leads to value creation. Value creation is essential in contemporary organisations. One way of thinking about commercial organisations, government bodies and not-for-profit entities is as ‘linked chains’ of resources and activities. These chains produce products and services of value to consumers and end users. The essential requirements for successful performance are: to generate products and services with value that consumers are willing to pay for to constantly develop and improve the resources, activities and processes used to generate that value (Anderson and Narus 1998). This module first considers management accounting and its role in supporting management. It then describes the key changes that have led to the development of strategic management accounting. The module also identifies the challenges that management accountants face and describes the skills required to perform their role, at present and in the future. The ability to support managers at a strategic level has become critically important for organisational survival, and management accountants must broaden their role from traditional scorekeeping tasks to business advisory positions. Advances in technology and information systems now help with capturing and processing the routine events within an organisation. This allows management accountants to spend more time understanding the organisation’s external environment and work on non-routine, complex decisions. This module concludes with an examination of the various analytical techniques available to manage- ment accountants that will assist them to support management in their decisions about strategic direction. OBJECTIVES After completing this module, you should be able to: Explain what is involved in a strategic management process and its various stages. Identify the role of management accounting in strategic management and the mindset and values required to transit from a management accountant to a competent business partner. Assess the key challenges facing management accountants in today’s business environment. Identify various analysis techniques used in strategic management and their functions. SUBJECT MAP Figure 1.1 provides an overview of the important concepts in this subject and how they link together. The highlighted sections show the concepts that are the focus of Module 1. FIGURE 1.1 Subject map highlighting Module 1 rnal environment Exte VISION VALUE INFORMATION STRATEGY STRATEGY MANAGEMENT ACCOUNTANT VALUE INFORMATION OPERATIONS E xte r nal environment Source: CPA Australia 2019. An organisation decides on a strategic direction, where it believes value can be created. This value may be shareholder value, customer value or broader stakeholder value—depending on the type of organisation involved. Creating value for organisations helps sell products and services, increases the share price, and ensures the future availability of capital to fund operations. For value creation to occur there must be a clear strategy, based on a vision and mission that combine resources (including people, technology and time) and their effective use to achieve goals and objectives. The day-to-day activities and projects that are performed must be linked to the organisation’s overall strategy to drive towards its desired outcomes. It is important to perform the work required, but it is also necessary to continuously review, monitor and improve activities and processes. As shown in Figure 1.1, while there must be an information flow from the strategic level to the operational level, there must also be clear feedback and reporting from the operational level. This can be used as a control mechanism to ensure the organisation’s day‐to‐day activities stay in agreement with its vision and mission. The organisation must also be aware of the external environment in which it operates. Competi- tor activity, the broader economic and regulatory environment, technological advancements, alliances, management capabilities, employee and customer relations, and social changes may all affect the organi- sation. So, monitoring these influences and adapting to change are critical activities. 2 Strategic Management Accounting  The management accountant is at the centre of all these activities. Understanding what creates value helps management accountants focus capital and talent on the most profitable opportunities for survival and growth of an organisation. PART A: VALUE The main theme of this part of the module is value. The analysis and activities, the tools and techniques, the reporting and evaluation—all of these take place in the pursuit of value. Value is a broad concept and has a major influence on an organisation’s behaviour and drive to achieve its vision, mission and goals. It can be described as combining resources in a manner that creates desirable outcomes. Examples of value creation include growing food, generating energy, providing health care and building new machines, software programs and infrastructure. The role of management accountants is to support management in creating, managing and protecting value. Value is usually described as increasing shareholder wealth. However, this is both narrow and simplistic because it ignores other important and interested parties or stakeholders, as shown in Figure 1.2. FIGURE 1.2 A broad range of stakeholders Shareholders Community Lenders groups Stakeholders Regulators Customers Employees Suppliers Source: CPA Australia 2019. Each group has its own interests and desires and therefore its own definition of the ‘value’ it wishes to receive from an organisation. Failure to consider stakeholder needs and desires will make it difficult to maintain and increase shareholder wealth. Value creation is just as relevant in the not-for-profit and public sectors. For example, national infrastructure, education, health and social welfare need to be managed just as effectively as privately run organisations. In the not-for-profit and public sectors, value is created for the members, citizens or residents (or taxpayers) of the nation, instead of wealth being increased for shareholders. Value creation in contemporary organisations is based on creativity and innovation. This includes the innovative ways that management adapt to take advantage of new materials, technologies and processes, as compared to value creation in the past, which was based on economies of scale and mass production. SHAREHOLDER VALUE The ultimate outcome for many organisations is to generate wealth for the owners. The owners have either started or invested in the organisation to obtain appropriate returns for the risk involved. As such, many measures of value focus on shareholder value. However, pursuit of shareholder value while ignoring other areas of value creation is not sustainable. To ensure that an organisation is able to create shareholder value MODULE 1 Introduction to Strategic Management Accounting 3 over a prolonged period, its actions and use of resources need to be sustainable. For example, if the impact on the natural environment is not acknowledged or minimised, long-term sustainable shareholder value is unlikely to be achieved. CUSTOMER VALUE The primary task for an organisation is to create an output that has customer value. A key requirement is to produce this output at a cost that is lower than the price the customer is willing to pay, which leads to profitability and creates shareholder value. Figure 1.3 shows a simple version of the organisational value chain. This provides an overview of how the organisation performs a sequence of activities to provide outputs or outcomes to create customer value. FIGURE 1.3 Organisational value chain Business cycle Operations (obtaining/producing goods or services) Sales Distribution After-sales service These activities are supported by a variety of business functions. Support activities Research and development, accounting, human resources, information technology and infrastructure Source: CPA Australia 2019. For a further explanation of and practice in the concept of value chains, please access the ‘Value chain’ learning task on My Online Learning. STAKEHOLDER VALUE Shareholder wealth is a by-product of generating value in other areas. To create products or services, an organisation will require community permission to operate, infrastructure, customers and employees— who will only supply their effort if the wages and conditions are adequate. So, consideration of stakeholders is critical to organisational success. WHICH VIEWPOINT SHOULD BE TAKEN WHEN DETERMINING ‘VALUE’? A significant philosophical issue that must be considered with regard to value is: ‘From which perspective should value be determined’? The most obvious perspective is from the organisation itself. Value is linked to the concept of ‘anything that is good for the business or organisation’. However, other perspectives also exist, including that of society. Some actions may bring value to the organisation as well as to other groups at the same time—for example, more efficient farming practices may lead to higher yields, lower prices and more nutritional food. However, other actions may benefit the organisation while causing significant harm to others, as shown by the examples in Figure 1.4. The development of corporate social responsibility (CSR) indicates that people are interested in more than just the pure economic value that organisations create. They are also interested in ‘how’ that economic value is created, and they assess the impact of those actions (or inactions). CSR reporting has increased to help people understand the sustainable value or effect of an organisation’s activities from a social and environmental perspective. Such reporting aims to increase the level of ethics and accountability demonstrated by organisations when making value-based decisions. Value is either created or destroyed by management through the business model they use. The business model is highly dependent on a broad range of relationships and activities that take place in the market, in a societal and environmental context within which the organisation operates. Therefore, to be truly valuable, something must offer economic value to the organisation and provide sustainable value to other stakeholders within society. 4 Strategic Management Accounting  FIGURE 1.4 Organisational value and potential impact Organisational viewpoint Society’s viewpoint Unemployment, Cost cutting—reducing financial pressure on the number of staff communities and additional by 10% to increase stress for employees who profitability remain employed Switching production Local unemployment, to cheaper offshore environmental degradation, locations with lower and an increase in injuries standards of employee and incidents among employees and environmental who receive little protection protections Massive price A small price reduction discounting of key items for individual consumers by supermarkets to gain but at the expense of market share, forcing producers who are suppliers to reduce prices unable to remain viable Selling addictive Social issues in products or services communities and an including gambling, increase in health- alcohol and cigarettes related costs Source: CPA Australia 2019. Strategic management and strategic management accounting While some areas of accounting, such as financial reporting and auditing, may have a regulatory compliance focus to inform and protect external stakeholders, strategic management accounting is aimed specifically at improving organisational outcomes. Strategic management describes the process by which an organisation decides: the direction it will take the industry it will operate within the types of products or services it will provide its structure, systems and processes its goals and objectives. It also includes the development of specific approaches or strategies as well as implementation plans and performance measurement that support this process. Strategic management accounting aims to provide forward-looking information to assist management in decision-making. Unlike typical cost or/and management accounting, which focuses on internal accounting information, strategic management accounting evaluates external information—for example, trends in costs, prices, market share, competitors, suppliers and technologies—and their impacts on resources. Strategic management accounting uses a wide range of tools and techniques that support each stage of the strategic management process. So, strategic management accounting becomes an enabler, or a catalyst, that helps initiate and drive strategic management activity. Strategic management accounting helps organisations in their desire to create long-term, sustainable value that is of benefit to all stakeholders. MODULE 1 Introduction to Strategic Management Accounting 5