Subject: E2

Section: A1

Learning Outcome: a

Resource type: Article

Author: examiner of enterprise strategy

Title: Defining strategy and scenario planning

Description : What are the most important elements of strategic management accounting and
scenario planning? The examiner for enterprise strategy (E3) explains.

Article content

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 important innovation
emphasised the externalaspect and provided a link between strategy and management accounting.

If the traditional description of management accounting is reconsidered, 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, knowledge of our competitors’ costs is
useful and will inform our strategic choices. Using one of Porter’s generic competitive strategies, cost
leadership, as an example, 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. Therefore, 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; managers have to make many
decisions about markets, for example, in the area of pricing. One important variable that should
receive continuous scrutiny is market share which is affected by pricing decisions and policies. The
management accountant has always reported on sales revenues: the strategic management
accountant would report on market share, relative market share and trends in market size and growth.
If the strategic management accountant can provide relevant information about these areas it should
enable managers to make better decisions.

Provide information for planning, control performance measurement and continuous

improvement
Porter’s value chain is another important concept. CIMA defines this as ‘the sequence of business
activities by which, in the perspective of the end user, value is added to the products or services
provided by an entity’. The value chain identifies the margin, the difference between the cost and the
price: a role for management accountancy. If the organisation is using the value chain to evaluate its
performance and to provide a basis for continuous improvement, the strategic management
accountant will necessarily want to analyse competitors’ value chains.

Strategic management accounting has given management accountants a new and important role
which should contribute to the better formation and monitoring of strategies. It helps to operationalise
strategy and its future and external orientations are invaluable.

The Johnson and Scholes’ definition of strategy mentions ‘a changing environment’ and the concept
of environment reappears in their definition of scenario planning: which ‘ ...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.’

The CIMA Learning System makes extensive reference to the work of Schoemaker and the ten step
approach for the construction of scenarios. Schoemaker also described a four step approach for using
scenarios:

develop scenarios to examine the external environment and identify key trends and uncertainties.
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.

CIMA Learning System, E3, Enterprise Strategy, 2009, pages 118-122.

The Learning System also makes reference to the use of scenario planning by Royal Dutch Shell
(RDS) a major international oil company. 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. More Energy, Less Carbon. There are no easy solutions.

Three hard truths:

1. surging energy demand

2. supplies will struggle to keep up.
3. stresses on our environment are increasing.
RDS has developed two scenarios:

Scramble
A more reactive approach, first focusing on increasing energy supply and then facing the
consequences later.

Blueprints
In this scenario, the difficult decisions are taken sooner rather than later, leading to revolutionary
changes and a better balance of economic and environmental needs.

At Shell we believe the environmental, humanitarian and economic outcomes seen in ‘Blueprints’
make it a better, more sustainable world than ‘Scramble’. We’re working towards that world.’

Shell also explains that it ‘uses scenarios to explore the future. Our scenarios are not mechanical
forecasts. They recognise that people hold beliefs and make choices that can lead down different
paths. They reveal different possible futures that are plausible and challenging. 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.’

The above summary is Shell’s own: there is a link on the website to a more extensive document. The
use of scenario planning by RDS demonstrates its relevance now and in the future.

CIMA has also recognised the relevance of scenario planning and it is included it in the indicative
syllabus content for E3 2015 syllabus section B: ‘Evaluating strategic position and strategic options.’