Defining Strategy and Scenario Planning

What are the most important elements of strategic management accounting and scenario planning? The examiner for enterprise strategy (E3) explains. How would we define ‘enterprise ‘and ‘strategy’? In this context, take enterprise as the business unit. As for strategy: ‘Strategy is the direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a changing environment to meet the needs of markets and to fulfil stakeholder expectations.’ Johnson and Scholes There are three important elements in this definition: environment, markets and stakeholder, all of which allude to an important aspect of strategy - its external orientation; that is the organisation looking beyond its internal boundaries to its relationships with the outside world. Traditionally management accounting is described as having three dimensions: allocate costs between costs of goods sold and inventories for internal and external profit reporting provide relevant information to help managers make better decisions provide information for planning, control performance measurement and continuous improvement (Drury) This traditional classification mentions the outside world only once - ‘external profit reporting’. So, we can infer that originally, management accounting’s orientation was internal. Arguably, at this point, there was a mismatch between strategy, with its strong external orientation and management accounting, with its strong internal orientation. However, in 1981, Professor Ken Simmonds defined a new concept, strategic management accounting: ‘A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information.’ This

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If the strategic management accountant can provide relevant information about these areas it should enable managers to make better decisions. One important variable that should receive continuous scrutiny is market share which is affected by pricing decisions and policies. cost leadership. value is added to the products or services provided by an entity’. for example. as an example. The management accountant has always reported on sales revenues: the strategic management accountant would report on market share. managers have to make many decisions about markets. the strategic management accountant will necessarily want to analyse competitors’ value . CIMA defines this as ‘the sequence of business activities by which. the strategic management accountant would be just as interested in analysing competitors’ costs as his/her own. Provide relevant information to help managers make better decisions Johnson and Scholes included ‘markets’ in their definition of strategy.important innovation emphasised the externalaspect and provided a link between strategy and management accounting. in the area of pricing. The value chain identifies the margin. the difference between the cost and the price: a role for management accountancy. Therefore. control performance measurement and continuous improvement Porter’s value chain is another important concept. Provide information for planning. the contribution of strategic management accounting can be seen as: Allocate costs between costs of goods sold and inventories for internal and external profit reporting It is important not only to know and understand our own costs. relative market share and trends in market size and growth. Using one of Porter’s generic competitive strategies. If the traditional description of management accounting is reconsidered. an organisation attempting this strategy without a detailed knowledge of the organisation’s costs (from management accounting) and the cost structure of the industry (from strategic management accounting) would be foolhardy. knowledge of our competitors’ costs is useful and will inform our strategic choices. If the organisation is using the value chain to evaluate its performance and to provide a basis for continuous improvement. in the perspective of the end user.

2009. There are no easy solutions. E3. More Energy. Shell continues to use this approach as the following extracts from its website reveals: 'Shell energy scenarios to 2050 RDS provide an overview for their scenario planning: The Energy Challenge. The Learning System also makes reference to the use of scenario planning by Royal Dutch Shell (RDS) a major international oil company. It helps to operationalise strategy and its future and external orientations are invaluable. Three hard truths:     . Schoemaker also described a four step approach for using scenarios: develop scenarios to examine the external environment and identify key trends and uncertainties. Less Carbon.’ The CIMA Learning System makes extensive reference to the work of Schoemaker and the ten step approach for the construction of scenarios.chains.. The Johnson and Scholes’ definition of strategy mentions ‘a changing environment’ and the concept of environment reappears in their definition of scenario planning: which ‘ . Strategic management accounting has given management accountants a new and important role which should contribute to the better formation and monitoring of strategies.. pages 118-122. conduct industry analysis and strategic formulation against each scenario to develop strategies that enable the organisation to fit with each scenario identify the core capabilities of the business and strengthen these to withstand or benefit from each of the scenarios adopt the appropriate strategic option as the future unfolds and the key uncertainties resolve themselves.builds plausible views of different possible futures for an organisation based on groupings of key environmental influences and drivers of change about which there is a high level of uncertainty. Enterprise Strategy. CIMA Learning System.

Our latest energy scenarios look at the world in the next half century linking the uncertainties we hold about the future to the decisions we must make today. We’re working towards that world. the difficult decisions are taken sooner rather than later.’ . supplies will struggle to keep up. stresses on our environment are increasing. Our scenarios are not mechanical forecasts. They recognise that people hold beliefs and make choices that can lead down different paths.1. first focusing on increasing energy supply and then facing the consequences later. humanitarian and economic outcomes seen in ‘Blueprints’ make it a better.’ The above summary is Shell’s own: there is a link on the website to a more extensive document. CIMA has also recognised the relevance of scenario planning and it is included it in the indicative syllabus content for syllabus section C: ‘Evaluation of strategic position and strategic options. They reveal different possible futures that are plausible and challenging. surging energy demand 2. more sustainable world than ‘Scramble’. leading to revolutionary changes and a better balance of economic and environmental needs. 3. RDS has developed two scenarios: Scramble A more reactive approach.’ Shell also explains that it ‘uses scenarios to explore the future. Blueprints In this scenario. At Shell we believe the environmental. The use of scenario planning by RDS demonstrates its relevance now and in the future.

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