CHAPTER TWO

Modern Management Control

Systems and Strategic Management
Accounting

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 Introduction

 Management control is a critical function in

organizations.
 Management control failures can lead to large financial
losses, reputation damage, and possibly even
organizational failure.
 Management control is the back end of the management
process.
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 Strategy Vs. MCSs
 Management control focuses on execution, and it involves
addressing the general question:
◦ Are our employees likely to behave appropriately? This question
can be decomposed into several parts:
 First, do our employees understand what we expect of them?
 Second, will they work consistently hard and try to do what is expected of
them – that is, will they pursue the organization’s objectives in line with
the strategy?
 Third, are they capable of doing a good job?

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 Strategy Vs…..
◦ Finally, if the answer to any of these questions is negative, what can be
done to solve the management control problems?

 All organizations who must rely on their employees to

accomplish organizational objectives must deal with these basic
management control issues.
 Addressing management control issues, therefore, involves
reflecting on how to influence, direct, or align employees’
behaviors toward the achievement of organizational objectives
consistent with the adopted strategy.
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 Strategies Vs..…

 Management control systems are tools to implement

strategies.
 Strategies differ between organizations, and controls should
be tailored to the requirements of specific strategies.
 Different strategies require different task priorities;
different key success factors; and different skills,
perspectives, and behaviors.
 Strategies are plans to achieve organization goals.

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 Strategy Vs……

 From a management control perspective, strategies

should be viewed as useful but not absolutely
necessary to the proper design of MCSs.
 When strategies are formulated more clearly, more
control alternatives become feasible, and it becomes
easier to implement each form of management
control effectively.

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 Strategic Management Accounting (SMA)

 SMA is dealing with strategy and management accounting.

 The term ‘Strategic Management Accounting’ was first coined
by Simmonds (1981, p26), who defined it as ‘the provision
and analysis of information about a business and its
competitors for use in developing and monitoring the business
strategy’.
 Thus, it lies at the interface between strategic management and
accounting.

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 SMA…

 Some scholars argue that SMA is a competitor-focused

technique (Bjøornenak and Olson 1999).
 Others view it as related to strategic positioning
(Roslender 1995) and particularly integrating
management accounting and marketing (Roslender and
Hart 2003).

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 SMA….
 The Chartered Institute of Management Accounting (CIMA)
defines management accounting as follows: “management
accounting is the sourcing, analysis, communication and use
of decision-relevant financial and non-financial information to
generate and preserve value for organizations.”
 Strategic management accounting involves the evaluation of
external information regarding competitors in the
marketplace, political/monetary policies affecting the market,
current trends in prices, share and costs.

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 SMA….

 The term 'strategic management accounting' was

introduced in 1981 and was defined as ‘the provision
and analysis of management accounting data about a
business and its competitors, for use in developing and
monitoring business strategy’.
 Since then several attempts have been made to refine
this definition and identify a set of techniques
classified under the banner of strategic management
accounting.
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 Functions of SMA
 Many businesses use some form of management accounting,
whose functions include budgets, cost allocation methods
and cost-volume-profit or break-even analysis.
 Strategic management accounting goes beyond these
functions, focusing on how external factors (such as a
competitor analysis or political/monetary policy review) and
non-financial information can improve a company’s
operations.

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 Evolution of SMA
 Management accounting (factory accounting) in the
1960s was confined to job costing, cost computation,
cost evaluation, standard cost variance analysis, and
inventory control.
 However, the scope of work was gradually extended

to management control and decision making areas in

1970s, such as design and implementation of
management control system, financial information
for decision making, transfer price analysis,
responsibility accounting, and other product and
segment profitability analysis

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 Evolution…
 Management accountants were transformed from a
factory cost accountant to management accountants to
look after business operations by late 1960s and then
have taken more new roles in 1980s and 1990s in the
wake of new business order.
 Management accountants’ role in an organization was
changed from internal focused to dual focuses, both
internally and externally.
 Management accountants’ mindset was changed from
operations focused to strategic focused as well. New
roles increase demand for SMA knowledge.
 This makes strategic management accounting an appeal
topic to all management accountants.
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 A comparison of the traditional and strategic approaches to management accounting

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 Boundaries of SMA
 There are many definitions of SMA.
 The most apprehensible conceptual ideas came from Roslender and
Hart, which is “SMA is about making management accounting more
strategic (p.272).”
 The definitional concept has two implications:
◦ First, SMA is confined within the management accounting framework – the

design of management control system or provision of management

information to management for decision making and planning.

◦ Second, the orientation of the information extends to strategic

decision, planning, and control.
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 Boundaries….

 SMA can be further broken down into four focus

areas, which are:
(a) Competitors focus,
(b) Strategic cost management focus,

(c) Marketing focus, and

(d) Strategic value focus.

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 a. Competitors Focus
 Competitor analysis approach emphasizes the comparisons of
the firm with its rivals (competitors).
 Information is collected to facilitate investigation in competitors’
accounts, cost structure, price, market share, sale volume, and
relative competitive position.
 Information can be sourced from public domain, such as
financial reports, business press, market database, or from
informal channels such as suppliers, sale team, or even market
intelligence agency.

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 b. Strategic Cost Management (SCM)
 SCM was particularly advocated from the US scholars (e.g.,
Shank, Govindarajan) who looked at strategic management
accounting from the strategic cost perspective the use of
management cost accounting in making strategic decisions.
 SCM sees the cost structure of a firm as the result of its strategic
choice from the specific strategic positioning the firm was
anchored, and where the firm has the competitive advantages.
 Management information should be designed and used to
facilitate these strategic purposes

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 b. SCM…
 Three central themes were recommended by Shank and
Govindarajan.
◦ First, SCM should assist strategic positioning analysis – the best

strategic choice in the market position based on both

market and internal conditions.

◦ Second, value chain analysis is employed to find out from vertical
industry value chains (from suppliers to ultimate end users) the
best combination of linkages which would deliver optimal
benefits to the firm from its competitive advantage in the market.

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 b. SCM…
 Finally SCM emphasizes that a firm’s design and use of
information pivot on its choice of generic strategy.
 Firms in cost leadership strategy would put more weight
on cost control, standard cost assessment, and tight
budgetary control, whereas firms in product
differentiation strategy would regard external marketing
cost analysis as utmost importance.

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 c. Marketing Focus
 Marketing focus approach emphasizes “the marriage
of accounting and marketing.”
 The leaders of this marketing focus approach include
Gupta, Roslender, and Bromwich who stress the
5

infusion of knowledge of these two disciplines to

promote SMA.

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 d. Strategic Value Focus
 Strategic value focus approach underscores the importance of
long-term value of a firm which comes from a careful
charting of the business objectives and implementation of
strategies to meet optimal shareholders’ value.
 Economic value analysis (EVA) and value-based management
(VBM) are the representatives of this discipline in which
Stewart’s advocates on strategic value were acclaimed from
6

academic, professional, and business supporters.

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 d. Strategic Value…
 VBM framework emphasizes the creation of corporate value from
business objectives through identification, measurement, management of
business value drivers, monitoring strategies and action plans, and linking
strategic performance evaluation system to incentive and reward system of
the firm.
 VBM is an organization-based strategic management vehicle which
makes management accountants (or business controllers) in an absolute
advantageous position to navigate the corporate change.
 Nevertheless, it also asks management accountants to possess the required
calibers and confidence in managing change.

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 SMA Techniques
The balanced scorecard (BSC) – linked with strategy

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 Other Tools of SMA

 Activity Based Management

 Attribute Costing

 Competitor Analysis

 Brand Valuation

 Target Costing

 Strategic Costing
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 MCSs Vs. SMA

 The role of a management accountant consists of

ensuring that operations are aligned with
organizational strategy and can be put in numbers
that can be managed and followed (Kaplan & Norton,
2008).

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 MCS vs. SMA..

 The concept of strategic management accounting is

related to the provisions and use of accounting
information by people in the organization such as the
management and the managers, for the purpose of
making business decisions that would allow them to
have competitive advantage and able to effectively
control the firms activity.

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 MCSs vs. SMA….
 Strategic management accounting is considered both
financial and non-financial in nature and it is often used for
the purpose such as making of decisions, execution of
decisions and controlling of decisions to ensure it does not
go beyond the boundary of such decision.
 Specifically, the accounting unit or department is
responsible to provide management accounting information
that is necessary and required by the management.

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 • End of chapter 2

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