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Challenges in advanced management accounting
Challenges in advanced management accounting

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1.2 Comparison of strategic and traditional management accounting

It is not surprising that the focus of SMA mirrors the features identified as important in strategic management; that is, a longer term focus, the environment external to the organisation and a future rather than historical perspective. This emphasis contrasts with the traditional focus of management accounting (see Table 1).

Table 1 The focus of traditional vs strategic management accounting
Traditional management accountingStrategic management accounting
Single entityRelative position
Single periodMultiple periods
Single decisionSequences, patterns
IntrospectiveOutward looking
Manufacturing focusCompetitive focus
Existing activitiesPossibilities
Overlooks linkagesEmbraces linkages
Extract from Wilson and Chua (1993, p. 530) as quoted by Wickramasinghe and Alawattage (2007, p. 245)

Activity 2 Information sources for strategic management accounting

Timing: Spend about 10 minutes on this activity.

Consider what information sources may be useful to evaluate the organisation’s position relative to its competitors in an industry. To begin the exercise it is important to define what is meant by position. It could be market share or it could be in terms of cost structure, size, financial stability, product differentiation, etc. Assume for this activity that the concern is around market share and financial stability because two competitors are rumoured to be considering a merger.


The marketing department may have access to industry associations that produce and disseminate market data. Usually this works on the basis that each member organisation that contributes to the survey is entitled to receive the results. Alternatively it may be necessary to commission market research or undertake it in-house if the organisation has the necessary resources and skills. It is then possible to compare the internal information about product sales with the external data about the market to get a sense of relative position (either in unit sales or sales revenue).

Financial stability may be a concern if the potential combined competitor is likely to use its increased size to gain access to the share market (if it is going to become publicly listed) or to raise debt. In considering its relative financial position, the organisation needs to consider its position, including its cash flows and working capital to support increased price competition or to sell on better terms to distribution networks. It may also need to consider its leverage in absolute and relative terms. If the new competitor reduces cash inflows from sales for a period of time, could it survive and service its debt and other commitments longer than others in the industry? This information may not be very timely, but it should be available through annual and interim reports for competitors. Having connections in the capital markets and financial services sectors may help with early warning of any significant competitor raising capital.

Overall, it is important to understand the focus of the information required and be prepared to cooperate and communicate with others in the organisation who may be in a better position to provide it. Just looking at the information generated internally will not be sufficient.

Research has found that in practice the approach to strategic management accounting is at best partial (Scapens and Jazayeri, 2003). Certainly providing information and analysis in some of the categories listed in Table 1 presents particular challenges. In general terms, the type of information that will be useful in strategy formulation is more broad-based and informal than internal, narrowly defined and historical data. Enterprise resource planning systems facilitate the integration of internal information in an organisation, allowing easier generation of data about customers and suppliers. However, identifying future opportunities requires stepping outside the regular systems of information recording and processing in such systems. Management accountants need to identify what isn’t being done, not just what has happened.

Broadening the basis of the management accounting system also requires abandoning the belief that everything of value can be measured in monetary terms. While Bhimani and Bromwich’s (2010) definition of SMA above emphasises financial information, other authors stress the value of non-financial information such as the industry’s predicted unit sales, market share, etc. (Hoque, 2003). Beyond these concerns, environmental impacts that have no direct cost to the organisation but impose costs on the public or future generations (externalities) are increasingly important to organisations when they are considering strategy. A challenge facing strategic management accounting, and accounting more broadly, is how to represent these almost unquantifiable issues in reports and decisions.

A strategic approach to management accounting also requires collection of data from the external environment. This may in part be a regular process of monitoring competitors’ share prices, accounting reports, newspaper reports and social media on the internet. However, it also requires an element of informal collection of information by individuals in the organisation who are part of larger networks of contacts. Making connections between events in the wider environment to trigger the identification of opportunities cannot be programmed into a system.

The management accounting information and tools that will be most appropriate will depend on the organisational context and purpose. For example, even though broad based, outward looking data may be important in choosing a cost leadership strategy, its implementation requires accurate and timely cost information as part of tight controls and formal systems. This approach fits well with the traditional management accounting techniques of budgeting and variance analysis.

The paradox of strategic management accounting is that, while the need for it is clear, exactly what it is, is not! It is not uncommon, however, for service functions like management accounting to evolve with the changes in organisations, just as the organisations are changing in response to the pressures they face. Not defining SMA too closely allows the flexibility that is needed to apply appropriate tools and change them as needed. The comparison with a strictly traditional approach to management accounting highlights some stark differences in the focus and types of information useful for SMA. However, it is important to distinguish between the role of SMA in supporting the formulation of strategy and its implementation. It may be that many of the traditional management accounting approaches to planning, performance evaluation and control at the operational level will play an important part in turning deliberate and emergent strategy into realised strategy. The research evidence that adoption of SMA is limited is challenging for accountants since strategy formulation is a contested area in which management accountants must contribute effectively alongside other professionals (Activity 1). The next section takes a perspective that may be controversial, that is, that some customers may not be worth having!