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SMA goes beyond normal functions of management accounting. It focuses on external information such as competitors, customers, market analysis; as well as non-financial information and internally generated information and outlines how these data are used to improve the company's operations and deal with changes in the dynamic and hypercompetitive market.
It can be argued that SMA therefore has an important role of supporting the financial needs of management in their task of directing and controlling the business in the best interest of its owners and other stake holders.
A strategic management accountant in Jessup would take key roles as following:
The first key role emphasizes gathering of competitor information which would allow the company to make comparisons with market competitors, and to have more obvious view about its competitive position over time.
According to Simmonds (1981) - the first one used the term Strategic Management Accounting, the processes of information collecting are recommended to include:
Collecting and estimating cost, volume and price data on competitors.
Identifying the stage of competitors' current products in their life cycles.
Calculating market share to evaluate the firm's strategic position in the market.
Jessup is a fast growing advertising and PR company, so it faces intensive competition in the field. Knowledge of competitor's costs enables Jessup to be aware of when the competitor prepares to change relative competitive position such as manipulating prices, and to identify actions that would increase competitive advantage in its target market. Knowledge of cost structure, the stage of products in their life cycles, and relative market share enables decisions to be evaluated in the competitors' possible behaviors. The competitor information would be obtained in a number of methods: through the grapevine; from former employees, suppliers, and customers of competitors; from information available in public; and even from governmental agencies. (Coad, 1996)
Besides that, several processes of collecting competitor information are also able to consist of analyzing strengths, weaknesses, opportunities, and threats (SWOT analysis); checking and recording pricing policies of competitors; and comparing performance of the firm with competitors'. It is important for a medium to large scale enterprise like Jessup to estimate the prices offered by its main competitors; since this will allow the firm to bid lower than its competitors and then to win big advertising or event-planning contracts.
The second key role is to make the appropriate management accounting emphases to the strategic position chosen by the firm. There are two main ways suggested by Michael Porter (1980) to help businesses achieve and maintain strategic advantages over their competitors: differentiation and overall cost leadership strategies. To differentiate the product, the company needs to create a product or service which is perceived as unique throughout its industry. Cost leadership involves having costs lower than its competitors. A firm can pursue product differentiation or cost leadership strategies which focus on the entire market or a market segment.
Table 1 Porter's Genetic Strategies
In an organization, different strategic positions would have different management accounting emphases.
Table 2 Different Management Accounting Emphases
Primary strategic emphasis
Role of standard costs in assessing performance
Not very important
Importance of such concepts as flexible budgeting for manufacturing cost control
Moderate to low
High to very high
Perceived importance of meeting budgets
Moderate to low
High to very high
Importance of marketing cost analysis
Critical to success
Often not done at all on a formal basis
Importance of product cost as an input to pricing decisions
Importance of competitor cost analysis
Source: Shank (1989, p.55, Table 1).
According to the table, marketing takes a very important role to product differentiation. The company has to let people know how its product or service is differentiated. Therefore, ` it expects to put a great emphasis on marketing cost but little one on product cost when adopting differentiation strategy. By contrast, cost leaders will place a high importance on manufacturing cost control and competitor costs analysis because they want to have the lowest cost.
The company selecting differentiation position would normally benefit from such as benchmarking (both internal and competitive type), balanced performance measures, employee based measures, and strategic planning. Meanwhile, the firm focusing on low-cost strategy would obtain most benefits from traditional accounting, activity-base techniques, and also benchmarking. Adjusting the use of techniques to chosen strategic position enables the company to develop its competitive strategy to a high degree of success. (Chenhall and Langfield Smith, 1998)
The third role is taken under the value chain perspective including value chain analysis, cost driver analysis, and competitive advantage analysis.
Value chain analysis
The concept of value chain is defined as linked set of primary and support activities that a business organization undertakes to changes inputs into value-added outputs for its external customers. The company should analyze its own value chain, identify activities which will add more value within the organization and their relative costs. Identifying linkages, relationships between activities available in the value chain, could help to provide opportunities for optimizing, coordinating, and reconfiguring those activities (Porter, 1985). For example, exploiting linkages within the company such as …….
The linkages are not only to be found within the value chain of a firm, but also between the firm and its suppliers and customers. For example,
Taking advantages of linkages within the own value chain of the firm or between the value chains of the firm, its suppliers, and customers can create a great deal of cost savings and so increase competitive edges. Most value chain activities are potential sources of differentiation because they affect the specifications, quality and performance of the product offered by the company. Activity based costing could be applied to analyze linkages with suppliers. For example, using this technique could determine costs of batch activities in order process such as ordering, receiving, inspecting, returning, delivering, paying and storing so that the company can reveal whether those costs have added to purchase price and suppliers which suppliers are worth working with. Also, this technique is applied to analyze linkages with customers by calculating the revenues from customers and costs incurred in dealing with them to identify whether particular customers are profitable to the firm or not. By this way if the customers are unprofitable, the company will reduce costs to make them become profitable.
Cost driver analysis
A cost driver, as the definition of Wikipedia, is an activity that causes a cost to be incurred. A company is encouraged to determine the causes of costs for each value activity. Cost drivers are divided into two categories:
1 - Structural drivers: are come from the business strategic choices about its underlying economic structure.
2 - Executional drivers: are come from the execution of the business activities.
Table 3 Cost Drivers
Structural cost drivers
Executional cost drivers
Scale of operations
Scope of operations
Use of technology
Complexity of products
Total quality management
Plant layout efficiency
An improvement in executional drivers will always result in lower costs. Meanwhile, an increase in structural drivers could cause either increases or decreases in costs (Shank, 1989). For example, Jessup could decrease costs when increasing the scale or scope of the business but at some point there are diseconomies of scale and scope which cause Jessup to increase the per-unit costs to produce products or services. Shank stated that analysis and comparison of structural and executional cost drivers can be useful an important to management accounting information because they enable the firm to have batter strategic decision making. (Shank, 1989)
Competitive advantage analysis