Accounting for strategic management & control

Accounting for strategic management & control ? 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 Accounting for strategic management & control 26 | P a g e 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 Accounting for strategic management & control 27 | P a g e Video Link - Reconciling the positional school & the core competence views https://www.youtube.com/watch?v=2X9IG38zOfw&list=PLB49A3D90DB17089E&index=23 http://www.youtube.com/watch?v=bl5cyZlay4k 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: ? 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) ? 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) ? 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 ? How organization s use control systems to help them meet strategic objectives ? The nature of management accounting control systems, ? Designing performance measurement systems and ? 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 Accounting for strategic management & control 29 | P a g e 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 http://www.youtube.com/watch?v=JXsA9GXgg_s 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. Accounting for strategic management & control 30 | P a g e 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 http://www.youtube.com/watch?v=mYF2_FBCvXw 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! http://www.youtube.com/watch?v=RQfcuR22IF0 Accounting for strategic management & control 31 | P a g e 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, Accounting for strategic management & control 32 | P a g e 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 Accounting for strategic management & control 33 | P a g e Session 5 – Internal appraisal - Value C hain Analysis This session looks at the application of value chain analysis. Key objectives are: ? To identify the key attributes in Porter’s value chain ? To apply val ue chain analysis to an organisation ? 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. ? 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 PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET AN AMAZING DISCOUNT :)