Seal & Rohde, Management Accounting
6th edition
Chapter 16: Strategic management
accounting and the balanced scorecard
Strategic Management Accounting (SMA)
SMA is ‘The provision of information to support strategic
decisions in organizations’.
SMA moves away from the traditional, internal focus of
management accounting to include external information about
competitors.
SMA can help to inform strategies to gain competitive
advantage through exploiting linkages in the value chain.
In a strategic role, MA helps to formulate and support the
overall strategy of an organization by developing an
appropriate framework of performance measurement.
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Profit Planning, Cost structure and Business
Orientation
The first step to profit planning can be based on a combination
of techniques such as cost behaviour, CVP analysis, flexible
budgeting and pricing highlighted below:
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Profit Planning, Cost Structure and Business
Orientation
Cost behaviour analysis may help determine whether a business is ‘marketoriented’ or ‘cost-oriented’.
For example, if a business has a high proportion of fixed costs relative to
variable costs, then it may be seen as being ‘market-oriented’ because, as
CVP analysis indicates, it has to achieve high levels of capacity utilization to
break even.
Profit planning techniques not only help the choice of business orientation
but also help in sensitivity analysis. For example, finding the change in a
firm’s profit as a result of a 10% cut in price or fixed costs.
Profit planning techniques, such as yield management, may be used to
segment the market and offer different prices to different segments at
different times, while flexible budgeting ensures that variance analysis is
based on variable levels of activity rather than a single estimate.
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Value-Based Management (VBM)
VBM is ‘an integrated framework for measuring and managing businesses,
with the explicit objective of creating superior long-term value for
shareholders’.
VBM focuses on increasing shareholder’s wealth metric, such as residual
income or net present value, through the identification and management of
value-drivers.
Short-term decision-making based on profit has a number of limitations as
follows:
First, short-term profit increases may be made at the expense of long-term
profit; second, there is no analysis of the use of capital resources, for
example, from a shareholder perspective, a ‘company only makes a real or
economic profit after it has repaid the cost of capital that was used to
generate it’; and third, the approach is inward- rather than outward-looking
– for example, how would the firm’s competitors react to a 10% cut in price?
Finally, a focus on profit only neglects the interests of other stakeholders
such as consumers, employees or regulators.
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SMA and Strategic Positioning
The concept here is that firms should place more emphasis on particular
techniques depending upon the strategic position they adopt. Examples of
strategic models: Miles & Snow; Michael Porter.
Should the company be defender concentrating on reducing costs and/or
improving quality, a prospector continually searching for market opportunities
or an analyser, which combines the defender and prospector positions? (Miles
& Snow)
Should the company concentrate on cost leadership strategy, be the lowestcost producer in an industry? (Michael Porter)
With a differentiation strategy the emphasis may be on managing quality
through TQM programmes. (Michael Porter)
Prospecting new markets should require more information than a cost leader
about new product innovations, design cycle times and research and
development.
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Value Chain Analysis
The value chain, consists of the major business functions that add value to a
company’s products and services.
This is an analysis of own and competitors’, which helps a company understand
relative competitiveness.
With value-chain analysis, aims to find linkages between value-creating activities,
which result in lower costs and/or enhanced differentiation.
Shank advocates a cost-driver analysis, which suggests that costs are driven by
structural and executional factors.
Exhibit 16.2 Business functions making up the value chain
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Strategic Investment Appraisal
In the traditional financial investment model, strategic aspects
may be seen as unquantifiable ‘add-ons’ (Shank).
Shank argues that the finance framework sets up strategic
problems in a misleading way and highlights that pure NPV
analysis misses the richness of real business problems and is
often merely set up to rationalize a prior decision (for example,
the Mavis Machines case).
Strategic analysis may be used to inform investment decisionmaking (see Tomkins model).
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Strategy as Collision: Lean Enterprises and
Business Process Re-engineering
The emerging lean enterprises do not just compete, they collide.
• Lean customers
• New technology
Lean enterprises do not have a chance to create sustainable
competitive advantage but can only seek repeatedly to create
temporary advantages.
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The Balanced Scorecard
Traditionally MA focused mainly on financial performance
measures.
Greater emphasis now being given to incorporating
non-financial measures into the formal reporting system.
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Different Perspectives on the Balanced Scorecard
Could either be seen as a way of monitoring and improving operational
performance (e.g. supplementing standard costing).
And/or as a tool to aid the formulation and implementation of
organizational strategy.
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The Balanced Scorecard
Management translates its strategy into performance
measures that employees understand and accept
Customers
Financial
Performance
measures
Internal
business
processes
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Learning
and growth
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The Balanced Scorecard
How do we look
to the owners?
In which internal
business processes
must we excel?
How can we
continually learn,
grow and improve?
How do we look
to customers?
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Balanced Scorecard
Balanced Scorecard seeks to link performance measures
to an organization’s strategy.
The Balanced Scorecard should be used to clarify,
communicate and manage strategy.
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Exhibit 16.4 From strategy to performance measures: The balanced scorecard
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The Financial Perspective
Typical measures include ROI, RI and EVA.
Besides targets for the above, other objectives include
revenue.
Growth, cost reduction and asset utilization.
Argued by some that by focusing on other perspectives,
financial measures will take care of themselves.
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The Customer Perspective
Typical generic measures include:
1. Market share
2. Customer retention and loyalty
3. Customer acquisition
4. Customer satisfaction
5. Customer profitability.
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The Learning and Growth Perspective
Focuses on the infrastructure that the business must build
to create long-term growth and improvement.
Three principal categories identified:
1. Employee capabilities
2. Information system capabilities
3. Motivation, empowerment and alignment.
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The Internal Business Perspective
Typical innovation measures include:
1. Percentage of sales from new products
2. New product introduction versus competitors
3. Product development break-even time.
Typical operation process measures include:
Cycle time; Quality; Activity and process costs;
Post-sales service processes.
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Internal Business Performance
Delivery cycle time: the amount of time between when
an order is received from a customer to when the
completed order is shipped.
Reduce delivery cycle time to improve competitive
advantage.
Throughput/manufacturing cycle time: the amount of
time required to turn raw materials into completed
products.
Manufacturing cycle efficiency – relates throughput time
to value added time.
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Delivery Performance Measures
Order
Received
Wait Time
Goods
Shipped
Production
Started
Process Time + Inspection Time
+ Move Time + Queue Time
Throughput Time
Delivery Cycle Time
Process time is the only value-added time.
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Delivery Performance Measures
Order
Received
Goods
Shipped
Production
Started
Process Time + Inspection Time
+ Move Time + Queue Time
Wait Time
Throughput Time
Delivery Cycle Time
Manufacturing
Cycle
Efficiency
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=
Value-added time
Manufacturing cycle time
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The Balanced Scorecard and Learning
Learning improves
business processes.
Improved business
processes improve
customer satisfaction.
Improving customer
satisfaction improves
financial results.
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Criticisms of the Balanced Scorecard
The cause-and-effect relationship between non-financial
and financial indicators is questionable: does improved
customer satisfaction always yield good financial
results?
The scorecard does not have an explicit way of
monitoring competitor actions and does not propose a
specific remuneration system.
More?
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Summary
Strategic management accounting has evolved from the collection of
competitor information to attempts to match management accounting
systems with an organization’s strategic position.
Cost and financial data alone cannot capture all the characteristics of
competitive choice.
The balanced scorecard is a relatively new approach to managing
organizations and consists of an integrated system of performance
measures.
The balanced scorecard provides a management accounting system that
supports an organization’s strategy with financial and non-financial
performance indicators.
Different companies will have different balanced scorecards because they
have different strategies.
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