It reveals the total co~;r of product or service that do not conform with quality requirements. Target Costing. A predetermination of the total cost of a product or ...
STRATEGIC MANAGEMENT ACCOUNTING '
PRACTICES IN A COMPETITIVE ENVIRONMENT:
A THEORETICAL EXPOSITION
By
PROFESOR EMI\1/\ OKOYE Department ~)r !\l'COllllt~lIl\':y
Nnamdi Aziki\Vl' Univel':;ity,
;\ wka
and
CLETUS .0. AKENBOR The Strategic Research Centre,
Port Harcourt
ABSTRACT Thi s paper examines a theoretical exposition of strategic management accounting practices in a competitive environment with a view to determining its relevance in achieving competitive advantage . To achieve this objective, a critical review of extant literature on the concept of strategic management accollnting, forms of strategic management accounting und the role 01' slr,llegic manugement accounting in developing competitive strategies, was made. It was revealed from our analysis that the strategic management accounting is superior to the traditional management accounting in the provision of il1formation that meet environmental demands, particularly in the area of competition. It was therefore concluded that corporate e:-.:ecutives should take advantnge of the strategic management accollnting as an infonl1ation system if they must gain competitive edge ovel' their rivalries.
INTRODUCTION Business organizations must be competitive to sell their goods :i nd services in the marketplace. Competitiveness therefore, describes he. w effective a business meets the need of customers relotive to other A BSU Journal of Mal1a!:;,:.mellt Sciences, Vol. 4, No.2 I
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businesses that offer similar goods and services. Business organizations compete with one another in a variety of ways. Stevenson. (1996) identified the following urcas or compclition in business organizations-price, quality, product and !'s ervice differentiation, flexibility, and time. This implies that for a business to gain a competitive advantage, the price and quality of its products and services must be better than those of the competitors; its prod .lcts and services must have unique features, designs and packages; it mllst be t1exible ill its operations and process; and also timely in performing certain activities. AU these are better achieved through on effective information system (Tampidok, 2004). Information is the fuel that drives management thoughts and actions. In the absence of accurate and relevant information, management would be incapacitated in the formulation and implementation of business strategies for competitive 'advantage. Ottih (1996), Oladele (2001), Tampidok (2004), and Nwaeke (2005), have emphasized the need to gatber, sort, analyze, evaluate, and use information accurately and timely in order for business organizations to survive and gain competitive advantage in the environment in which they operate. The management of an organization depends largely on specialists to provide its information needs : economists for instance, provide information on contemplated economic conditions, marketers provide information essential for the effective prom'otion and distribution of goods and services; accountants provide financial data for budgets, performance reports, cost analysis, and information experts manage the entire information system. The traditional management accounting system, which provides information for strategy formulation, is in-ward looking thereby excluding external information particular about competitors. If information about the competitors is not available, taking advantage of them becomes impossible. The traditional management accounting lacks relevance in this direction. As a result, accountants have been seeking for an alternative to the traditional managdnent accounting system for this purpose until 1989 when Bromwich drew attention to strategic management accounting, based on the find,ings of an investigation commissioned by the UK chartered institute of mariagement accountants in the 1980s Therefore, the objective of thi.s paper is to examine the application of strategic managemtat accounting for competitive advantage in business organizations.
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CONCEPT OF STRATEGIC ~IANAGEMENT ACCOUNTING A.. ccording to Coad (1996), strategic management accounting is an emerging field whose boundaries are loose and, as yet, there is no '':. ified view of what it is or how it might develop. Though it has been 3. vocated as a potential area of development that would enhance the ::;.:-ure contribution of management accounting extant literature reveal :~,:at the meaning of strategic management accounting has no bound . .:.. ~ ording to S immond (1981), strategic management accounting is :.~ :in ed as the provision ~ll1d an:11ysis of management accollI1ti11g data . J t a business ;.md its compditors, which is of use in the :~·.- e\opl11ent and monitoring of the strategy of that busine.ss. He . ~\\" profits as emerging not from internal efficiencies qut fr6m the :_-::.' s competitive position in its markets. Bromwich (19'90) defined ~:~ :e gic management accounting as the provision and analys;s of :--:":--.3._ ial information on the finn's product markets and competilm's' .. ~ ~ : 5 and cost structures and the monitoring of the enterprise's _ : :egies and those of its competitors in these markets over a number .1
::
: ~'-'::e.iods.
In recent times, after a careful analysis of the scope of strategic accounting, the Chartered Institute of Managem~nt -. : :-J ntants (CIMA) in the United Kingdom, defines strategic -=-_2gement accounting as a form of management accounting in - :-: _ emphasis is placed on information, which relates to factors .. :-::-:: I to the firm, as well as non-tinancial information, and ':-:-:-.311y generated information (CIMA, 2000). In a nutshell, -..2E;e. 1ent accounting is defined as an outward-looking and future - :-:-_:~~ accounting system designed by management in the provision .. -,:,. _:. ation or the formulation, implementation, and evaluation of _-:-; y to cope with environmental demands. r e characteristics of strategic management accounting as .: .. ~~ d by Lord (1996) are: (1) it is an extension of the traditional _ ;~ __ ent accounting because it focuses on both internal' and _--=-.:.: . 1fonnation; (2) it examines the relationship between the :-; =:: _osition chosen by a firm and the expected emphasis on _-=:-... e t accounting (such as accounting in relation to strategic . -,::.J ; and (3) it analyzes ways to decrease costs and or .. : :: e differentiation of a firm's products, through exploiting :.:-: ~g ement
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linkages in the value chain and optimizing cost drivers to gaining comp~lilivc adv~lIllagc.
Simmonds (1982) asserted that management accounting should be more outward looking and should help the firm evaluate its. competitive position relative to the rest of the industry by collecting data on costs and prices, sales volumes and markets shares, and cash flows and resources availability for its main competitors. To protect an organization's strategic position and determine strategies to improve its future competitiveness, managers require information that indicates by whom, by how much, and why they are gaining competitive edge or are being taking advantage of. This information signals the need for a change in competitive strategy.
FORMS OF STRATEGIC MANAGEMENT ACCOUNTING TECHNIQUES It has always been difficult to present a unified view of the va,ious forms strategic management accounting could be practiced. A sur-ley · conducted among ditTerent companies in the United Kingdom, United States of America, and New Zealand by Guilding et at (2000), provided an insight into the various forms of strategic management accounting. A review of extant literature revealed that strategic management accounting exists in many forms. These are as follow3: Competitor Accounting This involves the collection of data on costs, prices, sales vOlumes, market shares cash flows, and published financial statements of competitors to enable the organization take advantage of them. Competitor accounting entails- competitive position monitoring, competitor performance appraisal, and competitor cost assessr'i1cnt. Competitive position monitoring is the analysis of competitor positions within the industry by assessing and monitoring trends in competitor sales, market shares, volume, unit costs, and return on sales. Competitor performance appraisal is the numerical analysis of a competitor's published statements as part of an assessment of the . competitor's key sources of competitive advantage competitor cost assessment is the provision of regularly updated estimates of a competitor's costs based on, for example, appraisal facilities, technology, and economies of scale.
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Strategic Pricing
This hus to do with the ~llwlysis or str~ltcgic j;lctors ill the pricing decision process. These t~lclors may includc- competitor price reaction, price elasticity, market grovdh, cconomies of scale and experience. Strategic Costing
This has to do with the use of cost data based on strategic and marketing information to develop and identify superior strategies that will sustain a competitive advantage. Bute Costing
This entails the use of cost data on product quality elements reliability, dependability and performance; physical featui'es-designs and packaging; and service factors-assurance of supply and after-sale service. Quality Costing
This involves ascertaining the costs of product and service quality and how they are changing ever- time. It reveals the total co~;r of product or service that do not conform with quality requirements. Target Costing
A predetermination of the total cost of a product or service. It i;; a customer-oriented technique. Life-cycle Costing
The accumulation and determination of costs over a product's entire lifecycle in order to determine whether the profit earned during the manufacturing phase will cover the cost incurred during pre and post manufacturing stages. "
Value-Chain Costing
An activity- based costing approach where costs are allocated. to activities required to design, procure, produce, market, distribute and v service a product or service.
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Brand Value Monitoring The financial valuation of a brand through the assessment of brand strength factors such as leadership, stability, market, internationality, trend , support, and protection combined with historical brand profits. Brand Value Budgeting i This has to do with the use of brand value as a basis for managerial decisions on the allocation of resources to support and enhance a brand position, thus placing attention on management dialogue on brand issues.
ROLE OF STRATEGIC MANAGEMENT ACCOUNTING IN DEVELOPING COMPETITIVE STRATEGIES Business managers evaluate and choose strategies that they think will make their business successful. Businesses become successful because they possess some advantage relative to their competitors. A firm has a choice of different generic strategies in order to achieve sustainable competitive advantage. These are: cost leadership; products and services differentiation; speed; and market focus (Porter, 1985; Stevenson, 1996; Pearce and Robinson, 2000).
Cost Leadership Competitive advantage built on cost leadership requires a business organization to be able to provide its product or service at a cost below what its competitors can achieve. Lung-Smith (1997) identified the following benefits of cost leadership to a business: (1) it redu ~es the likelihood of pricing pressure from buyers; (2) it lessens price competition by pushing rivals into other areas of business (alternafive industry); (3) it eliminates the experience of new entrants in the industry to replicate every cost advantage; (4) it lessens the attractiveness of substitute products; and (5) it allows businesses to 'withstand supplier cost increases and orten gain supplier loyally over time, as a result of higher margins. Products and Services Differentiation This requires that a business achieves sustainable advantage that allows it to provide buyers with something uniquely valuable to them. Pearce and Robinson (2000) argued that successful differentiation strategy allows the business to provide a product or service of
s~ :: -, =
.-... =~ -=
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perceived higher value to buyers at a differentiation cost below the value premium to the buyers. In other words, the buyer feels. the additional cost (0 buy the product or service is well below wh;!\ the product or service is worth compared to other available alternatives. The following are the benetits of differentiation: (1) it reduces rivalry in the industry; (2) it makes buyers less sensitive (0 price (hey tolerate price increases; and (3) it creates brand loyalty, which :s hard for new entrants to overcome (Potier, 1985; Pearce and Robinson, 2000).
as
=~ rial
:-:.::::e a " on
- --c: w ill _: -:3sful :::-5. A ~
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__ : _'ship;
Speed Speed which is a rapid response to customer requests or market and technological changes, has become a major source of competitive advantage for numerous firms in today's intensely competitive global economy. Welch (1993) states that speed is really the driving force that everyone is after. Faster products, faster product cycles to market, better response time to customers, satisfying customers, getting faster communications, moving with more agility, aU these things are easier when one is small. And these are all characteristic one needs in a fast-moving global environment. According to Welch (1993), and Pearce and Robinson (2000), speed-based competiiive advantages can be created around several activities:
1.
Customers Responsiveness:- Virtually all consumers have encountered hassles, delays, and frustratlon dealing with various businesses from time to time. Quick response with answers, information, and solu1ion to mistakes can become the basis for competi'jve advantage, one that builds customer loyalty quickly.
2.
Product Development Cycles:- Business organizations with short product development cycle do have competitive edge over others with long development cycle (Roslender, 1995). Simmonds (1981) and Coad (1996) argued that obsolescence may catch up \'vith products of long development cycle thereby resulting to market failure. I
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3.
Product or Servicc Improvclllcnt:- Like development
time, business organizations that cnn rapidly adapt lheir
producls or services ami do so in a way lhal bcnl~lils
their cllslomers or creales new cuslomers have a major
competitive advantnge over rivClls thal cannol do this.
4.
Speed in Delivery and Distribution:- Firms that can
get the customers what they need at the right time even
when it is immediate, realize that buyers have come to
expect that level of responsiveness. For instance, Fedex
realizes the importance customers place on spf?ed in
inbound and outbound logistics, and takes advantage of
it.
5.
Information Sharing Technology:- Speed in sharing information that becomes the basis for decisions, actions, or other important activities taken by a customer, supplier, or partner has become a major source of competitive advantage for many businesses. Telecommunications, the internet, and networks are but a part of vast infrastructure that is being used by knowledgeable managers to rebuild or create value in their businesses through information sharing. .,
The rapid response capabilities of firms create competitive advantage in several ways. They create a way to lessen rivalry because they have availability of something that a rival may not have.~It can aLlow the business to charge buyers more and engender loyalty. Fina!Jy, substitute products and new entrants find themselves trying to keep up with rapid changes rather than introducing them (Pearce and Robinson, 2000). lVlarket Focus
This involves seeking advantage by directing attention on a narrow
segment of the market that has special needs that are poorly served by
other competitors in the industry. According to Baker (1999), focus
allows some businesses to compete on the basis of low cost,
differentiation, and rapid response. Focus enables a business learn its
target customers- their needs, special consideration they want
t:~ ;: _ ~ _
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accommodated, and establish personal relationships in ways that differentiate the smaller firm or make it more valuable to the target customer. \\lith enhanced knowledge of its customers and intricacies · of their operations, the small, focused company builds up organizational knowledge about timing sensitive ways to work w:.th a customer. Often the needs of that narrow set of customei's represent a large part of the small, focused business's revenues. Robinson and Pearce (1988) stated that businesses that create competitive advantages from all of the above strategies usually experience the highest level of profitability within their industry. Businesses that lack one or more of the strategies usually experience below- average profitability, while businesses that do not have either form of strategy perform the poorest among their peers. Miles and Snow (1978) identified two strategic positioning of business organizations. These are the defenders and the prospectors. Defenders operate in relatively stable areas, have limited product lines and employ a mass production routine technology. They compete through making operations efficient through cost, quality and 3ervice leadership, and engage in little product and market development. Prospectors compete through new product innovations and market development and are constantly looking for new market opportunities. Hence, they face a more uncertain task environment. The accounting literature suggests that firms will place more emphasis on particular accounting techniques, depending on which strategic position they adopt. Porter (1980) suggested that tight cost controls are more appropriate when a cost leadership strategy is followed. Simmonds (1982) found that business units that follow a defender strategy tend to place a greater emphasis on the use of financial measures (such as short-term budget targed;) for corhpensating financial managers. Prospector firms placed a greater emphasis on forecast data and reduced importance on cost control. Ittner et ol (1997) also observed that the use of non-finan~ial measures for determining executive's bonuses increaS'es with the extent to which firms follow an innovation-oriented prospector strategy. Shank (1989) stresses the need for management accounting to support a tlrm's competitive strategies, and illustrates how ;wo different competitive strategies- cost leadership and product/service differentiation- demand different costs analysis perspectives. For instance, carefully engineered product cost standards are likely to be
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very important management control tool for a firm that pursues a cost leadership strategy in a mature commodity business. In contrast, carefully engineered product cost standards are likely to be less important for a firm l()llowing a product dilTerentialion strategy in
J
Source:
Porler, M.E. (1985) Competitive Advantage-Creating and Sustaining Superior Performance; New York; Free Press.
FIGURE 1: COMPETITIVE STRATEGY THROUGH COST LEADERSHIP
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APPENDIX II
Teclll1010g)'
Develo pment Human Resource Management General Administration Procurement Purchase superior quulity, wcll- kn own components, raising the qual ity and im age of final products .
lnbound Logisti cs
Source:
FIGURE 2:
CUlling-edge production technol ogy and product fe atures to nwinlilin a di stinct image and nctual product. Programs to ensure technical competence of sales staff and a marketing orientation of service personnel. Comprehensive, personal ized database to build knowledge of groups of customers and individual buyers to be used in customizing how products arc sold, se rviced , and replaced Quality control presence at key supplier facilities; work with suppliers' new product devel opment activities Carcful ins[lcction J IT coonJin
