Accounting for strategic management & control

Accounting for strategic management & control

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Capabilities
relates to an organisation’s ability to use these resources effectively e.g. bringing a pro
duct to
market faster than competitors, excellence in distribution etc. These capabilities are embedded within the
organization, therefore difficult to replicate.These resources and capabilities together form its
distinctive
competencies
which can be leve
raged to create a cost advantage or differentiation advantage.
RESOURCES: WHAT WE HAVE
COMPETENCES: WHAT WE DO WELL
Machines, buildings, raw
materials, products, patents,
databases, computer systems
PHYSICAL
Ways of achieving utilization of plant,
effic
iency, productivity, flexibility, marketing
Balance sheet, cash flows,
suppliers of funds
FINANCIAL
Ability to raise funds and manage cash
flows, debtors, creditors
Managers, employees, partners,
suppliers, customers
HUMAN
How people gain and use experie
nce, skills,
knowledge, build relationships, motivate
others and innovate
Long term survival and competitive advantage
Source: Johnson, Whittington, Scholes
But not all resources and competences give competitive advantage, some just allow you to pla
y the game
Target scope
Resources
Competences
Threshold capabilities (Same as
competitors or easy to imitate)
Threshold Resources
Threshold Competences
Capabilities for competitive
advantage (Better than competitors
& difficult to imitate)
Unique
resources
Core Competencies
Source: Johnson, Scholes
&
Whittington
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To be a core competence or a unique resource it must meet the following criteria.
They must be Valuable

are capabilities valued by customers?
They must be Rare

Do competitors posse
ss them?
They must be Inimitable

Can competitors imitate them?
They must be Non

substitutional

Can the capabilities substituted?
Source: Barney, J. Firm Resources and Sustained Competitive Advantage. Journal of Management 1991
Activity

at the end of
the 90’s HMV and Amazon appeared to be in direct competition selling cd’s and books (HMV
owned Waterstones). Yet it appears that Amazon enjoyed a competitive advantage. List the unique resources and core
competencies that Amazon were able to leverage to
give such exceptional returns.
Reconciling the Position view and the Resource view
“Strategy is the
direction
and
scope
of an organisation over the
long

term:
which
achieves
advantage
for the
organisation through its configuration of
resources
withi
n a challenging
environment
, to meet the needs
of
markets
and to fulfil
stakeholder
expectations”.
As we can see from the definition of strategy above, Johnson, Scholes and
Whittington
see both views as vital. The
positional view tells us where to compete
and the resource view tells us how to compete
Adapted from Thompson JL (2001) Strategic Management, 4
th
Ed London. Thomson Learning
Values
Resources
(strengths &
weaknesses)
Environment
(opportunities
& threats
)
Matching
strengths/weaknesses
opportunities/threats
to
generate strategy
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Video Link

Reconciling the positional school & the core competence views


Strategy Evaluation

Apart from deciding how we aim to gain competitive advantage the only other area of strategic
choice we are going to look at is how we decide which of the many options available we should take.
Johnson, Scholes
and
Whittington
propose
a model in which str
ategic options are evaluated against three key success criteria:
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Suitability;
Does the strategy address the mission/Does it reflect the organization’s capabilities/Does it
make economic sense

clearly accountants play an important role here, who is going
to produce the
models to test if a strategy makes economic sense. ( Financial modelling/NPV analysis/decision
trees/breakeven/shareholder value analysis)
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Feasibility;
this asks if the organization has the resources required to implement the strategy. Agai
n the
accountant would play an important (cash flow forecasting/capital forecasting)
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Acceptability;
Acceptability is concerned with the expectations of the stakeholders. Stakeholders are
interested in 2 things return and risk, once again very much the dom
ain of the accountant. (Expected
values/std deviation/NPV).
Strategy in action

the final element of the process is implementing strategy . As
accountants we
are
particularly interested in controlling strategic performance. In
teaching block two we
look at
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How organization
s
use control systems to help them meet strategic objectives
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The nature of management accounting control systems,
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Designing performance measurement systems and
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Incentivizing performance,
“Control is the process of ensuring that an
organisations activities conform to
its plan and that its objectives are achieved”
Source: Drury. C (2004) Cost and Management Accounting (6th Edition)
Summary
What we have studied over the last two sessions is fundamental to your understanding of the
course.
But remember it is
also a very simplified version of the strategic planning process.
Do try to read around the subject area and make use of
some of the excellent video resources available
Videos:
http://www.youtube.com/watch?v=5GSrLhRElOsandfeature=BFaandlist=PLB49A3D90DB17089E
(watch the
playlist)
http://www.youtube.com/playlist?list=
PLB49A3D90DB17089E
(watch the playlist)
http://www.youtube.com/watch?v=rJ2tmqRkiCMandfeature=related
http://www.youtube.co
m/watch?v=mYF2_FBCvXw
http://www.youtube.com/watch?v=

KN81_oYl1s
Articles
http://www.accaglobal.com/content/
dam/acca/global/pdf/sa_oct10_p3.pdf
http://www.ashridge.org.uk/website/content.nsf/FileLibrary/1E056A249006492B8025742E003605
49/$file/360_S
pring08.pdf
http://www.accaglobal.com/content/dam/acca/global/PDF

students/2012/sa_apr06_johnsonACCA.pdf
http://www.cimaglobal.com/Documents/ImportedDocuments/fm_nov_05_p38

40.pdf
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Activity

using PESTEL Analysis

analyse the macro environment issues facing
a low

cost airl
ine
Political
Will governments tax airlines to cut carbon omissions/will they build more high
speed rail links/will they build more airports or relax flight times
Economic
Will fuel prices rise again/ will there be a economic recovery/exchange rates
Soci
al
Are there demographic changes which could affect demand, such as more retired
people or people taking more short breaks/ an increased student population/
changing work patterns
Technological
Will new fuel efficient planes significantly reduce costs/ Wi
ll faster trains impact
demand/ will telecommunications cut business travel
Environmental
Will there be planning constraints on the construction and use of airports/Will
customers become more concerned about their carbon footprint
Legal
Will employment l
egislation be introduced which results in a reduction in flight
hours for pilots/monopolies legislation/Office of fair trading (transparent pricing)
*
See pg 333 of core text for a more complete example
Video Link !

this video uses a mind map to help
us consider all of the factors which might be used in a PESTEL
analysis

Analysing the industry or sector (Porters 5 forces model)

Michael Porter‘s 5 F
orces framework suggests that an
industry is subject to 5 competitive forces (see diagram) This model has 3 uses :
1.
Firstly, the framework acts as a useful check list to help organisations consider opportunities and threats
2.
Secondly, we can use the mode
l to assess the potential returns of an industry. If the forces are strong the
organisation will struggle to make significant profits, if these forces are weak the organisation should be able to
make significant returns.
3.
Finally the model, can suggest pote
ntial strategies. For example a company may decide to create ‘barriers to
entry’ by investing in IT or building massive economies of scale, this in turn could deter new entrants.
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So it
is said that if you know your enemies and
know yourself, you can win a hundred battles
without a single loss.
If you only know yourself, but not your
opponent, you may win or may lose.
If you know neither yourself nor your enemy,
you will always endanger y
ourself.
Sun Tzu

The Art of War
(6
th
Century BC)
Michael Porter‘s 5 Forces

the model suggests that an industry is subje
ct to 5 competitive force. If the forces are weak it
is suggested that returns will be high. The trick is to identify industries with weak competitive forces
ACTIVITY:
Consider 5 forces for
major
airline
s are they weak or are they strong (then watch
the video below)
Video Link !

5 Forces framework. Listen to Michael Porter

Competitor Analysis

We have established that sensible organisations n
eed to analyse their external environment.
Competitor
analysis is an important part of that analysis because:
1.
Organisations achieve higher returns by having sustainable
competitive advantage. This ‘competitive advantage’ is a
relative concept, this means
that organisations must
compare themselves to their competition
2.
When an organisation understands its relative strategic
capability it can set a strategy to exploit its strengths and
overcome its weaknesses
3.
Competitor analysis provides insight into compet
itors’
strategies. With this knowledge they position themselves to
make higher returns.
4.
An understanding of the competition helps predict how profitable future investments will be (will competitors
respond by reducing prices or introducing a new product)
Video Link !

Why should you analyse the competition? The CEO of Domino Pizza’s may know!

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What do organisations need to know about their competito
rs?
1.
Who are our competitors
2.
What are their objectives
3.
What are their strategies
4.
What are their major strengths and weaknesses
5.
How well are they doing
6.
How will they react to our future strategies
What data is available?

Clearly competitors are not overl
y keen on supplying information, so competitor analysis is
often a process of building a picture through various bits of evidence.
Activity
: What are the sources of this competitor data:
Recorded Data
Observable Data
Opportunistic Data
Annual report a
nd accounts
Pricing / price lists
Shared customers/suppliers
Shareholder presentations
Advertising campaigns
Trade shows
Press releases
Web sites
Recruiting ex

employees
Newspaper articles
Tenders
Seminars / conferences
Analysts reports
Patent applicat
ions
How do management accountants help? (Competitor focused accounting )
There is a body of literature which suggests
that management accountants can offer a unique insight into an organisations competitors, the following extract makes
the case reaso
nably well:
“Simmonds believed that management accountants were in a better position to progress this highly desirable set
of activities than potential rivals such as marketing and business planning specialists. He argued that
management accountants were
in possession of the necessary skills and concepts to represent changes in
competitive position to senior management. All that was required was the exercise of a measure of ingenuity to
extend their present stock of financial management tools to the task o
f providing information on competitors.
Employing a more reconstructive form of financial analysis, one that did not place the same premium on the
accuracy of the information derived, it would be possible to model competitors’ cost

volume

profit performanc
es
for comparison with the results of internal analyses, and thereby contribute to the assessment of a business’s
competitive position (see also Simmonds 1982, 1986)”
Source: Roslender and Hart (2002)
How to perform competitor accounting

Research into
competitor focused accounting is sparse and few writers have
defined how competitor focused accounting is actually done. But the evidence suggests that there are a number of
potential ingredients:
1. Competitor cost assessment; competitor cost assessment
is defined as the provision of a regularly updated estimate of
a competitor’s unit cost. This can be done by appraising competitors’ manufacturing facilities, economies of scale,
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governmental relationships, and technology

product design.
(looking at the w
ay they do things to guess cost per unit,

techniques used may include Value Chain Analysis/reverse engineering)
2. Competitive position monitoring; this approach broadens the analysis to include appraising major competitors’ sales,
market share, volume,
unit costs and sales
3. Competitor appraisal based on published financial statements; the numerical analysis of a competitor’s published
statements as part of an assessment of a competitor’s key sources of competitive advantage
(a bit of ratio analysis)
4. Strategic costing; Strategic costing is defined as the use of cost data based on strategic and marketing information to
develop and identify superior strategies that will produce a sustainable competitive advantage.
5. Strategic pricing. Strategic pri
cing is defined as the analysis of strategic factors in the pricing decision process. These
factors may include: competitor price reaction, price elasticity, market growth, economies of scale, and experience.
Source: Guiding (1999) (the brackets are my wo
rds)
Summary

Organisations need to understand their environment, but at first glance it would appear that this has little to
do with management accounting. However organisations appear to want management accountants to come out of the
accounts office a
nd be part of the management team. In many ways
they need us, our financial training gives us a unique
insight and a unique opportunity to genuinely add value.
Further Reading:
Hoque, Z. (2005) Strategic Management Accounting,
2nd Edition, Harlow: Pearso
n
Guiding, C. 1999. Competitor

focused accounting: an exploratory note Accounting, Organizations and Society
Volume 24, Issue 7, October 1999, Pages 583

595
Moon, P. and Bates, K., 1993. Core analysis in strategic performance appraisal.
Management Account
ing Research
4,
pp. 139

152.
Roslender, R. and Hart, S . 2002Integrating management accounting and marketing in the pursuit of competitive
advantage: The case for strategic management accounting.. Critical Perspectives on Accounting, Vol 13, No. 2 255

277
Simmonds, K., 1981. Strategic management accounting.
Management Accounting
59, pp. 26

29
Simmonds, K., 1986. The accounting assessment of competitive position.
European Journal of Marketing
20, pp. 16

31.
Ward, K., 1992. Strategic management accounting.
Butterworth

Heinemann, Oxford
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Session 5

Internal appraisal

Value
C
hain Analysis
This session looks at the application of value chain analysis. Key objectives are:
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To identify the key attributes in Porter’s value chain
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To apply val
ue chain analysis to an organisation
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To identify the importance of the wider value system/network
Bruce Bowhill (2008) “Business Planning and Control”, Willey: Chapter 15 p.355

value chain
model
describes the categories of activities within an organisation which, together,
create a product or service. For o
rganisations to achieve competitive advantage by delivering value to customers,
managers should understand which of their organisation’s activities are especially important in providing such value and
which are less valued. The concept of the value chain
is to
think of an organisation in terms of a set of activities.
The value chain concept in relation to competitive strategy was initially developed by Michael Porter. A value chain
describes the categories of activities within and around the organisation
which together create a product or service. Each
activity needs to be viewed from the perspective of the customer. All activities will add cost and it is necessary to view
the value added by those activities.
Primary activities are directly concerned wit
h the creation or delivery of a product or service. They consist of those
activities to transform inputs into outputs. Support activities help to improve the effectiveness or efficiency of primary
activities.
value chain
analysis
http://www.youtube.com/watch?v=n6FlX_sz

t0
The value chain can help with the analysis of the strategic position of an organisation in 2 ways.
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As
generic descriptions of activities
that can help managers underst
and if there is a particular cluster of activities
providing benefits to customers located within particular areas of the value chain.
?
In terms of the
cost and value of activities

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