STRATEGY AND MANAGERIAL ACCOUNTING

April 14, 2011

STRATEGY AND MANAGERIAL ACCOUNTING
2

Executive Summary

In this presentation the definition of what the purpose and nature of management accounting

methodologies will be formulated. At the forefront of this presentation will be a discussion of

key components that make up the firms “value proposition”. (Atkinson, Kaplan, Matsumura &

Young, p. 9, 2007). A short discussion of the management functions that provide managers high

probabilities of success and how developing long range goals help formulate implementation

strategies that support the firms strategic objectives. Lastly measurement recommendations to

supporting goal setting that push the responsibilities associated for their success down the line to

the lowest level of execution and enhance the commitments of all to meeting the strategy as

defined by upper management. Throughout this discussion strategic purposes of our value

proposition will be discussed and the business strategy implementation cycle will show the link

between the two.

STRATEGY AND MANAGERIAL ACCOUNTING
3

Business Strategy and Managerial Accounting Functions

Purpose of Management Accounting

A common definition of management accounting is “business accounting practice

concerned with the provision of information to management for control and decision-making

purposes. (The New Penguin Business Dictionary, 2003). If by this definition the focus is upon

the decision makers of the organization and providing to them a means of control then I submit

this control is the key focus for management’s functions. Those tasks that involve planning,

organizing, and measuring the business processes they use throughout the organization to bring

about the uniqueness of their strategic objectives for which they are responsible.

Our Value Proposition

In order to execute a business strategy with a high probability of success one must

identify the “key activities … its target customers and delivering what those target customers

want.” (Atkinson, et al., p. 9, 2007). This “value proposition” (Atkinson, et al., 2007) has “four

elements”. (Atkinson, et al., p. 9, 2007). The concept of value proposition has been in the

marketplace since the early 1970s. Some marketers refer to a value proposition as a key selling

point, or a differentiator used to persuade. It can also be referred to as the method you use to

deliver value to your market.

The Price Element

According to Atkinson the first element is price. Determining “the relative price the

customer pays, given the product’s features and competitors’ product features” (Atkinson, et al.,

p. 9, 2007), can be determined using management accounting techniques. Essential components

of the price are the product costs and identifying those “relevant to the short-term product mix

decision”. (Atkinson, et al., 2007). Congruency of value and price must be consistent with our
STRATEGY AND MANAGERIAL ACCOUNTING
4

customers. “Targeted customers are those who place the highest importance, in their buying

decisions, on the attributes of the value proposition offered by the company.” (Kaplan & Norton,

p. 89, 2001).

A successful firm in Southern California in the professional audio visual marketplace has

as their value proposition the motto of Three S, Service, Solutions, and Support. This firm leads

through their marketing activities with the ‘Three S’, it supports this with a highly competitive

market value that is always in congruence with the price for the products and services. The

leadership this firm provides to the global marketplace has contributed to consistent growth rates

over the last 15 years.

How often does Apple run a sale on iPads or MacBooks? If our price and our value

proposition are misaligned, we create confusion — our market isn’t able to truly identify the

benefit they’re deriving from their relationship with us. Key measurements must take place to

keep our value proposition aligned, eliminating confusion, sending a clear message to our

customers – thus providing leadership using our strategic objectives and measurable goals to

guide us.

The Quality Element

Another component of the value proposition, according to Atkinson, is quality. “The

degree of conformance between what the customer is promised and what the customer receives.”

(Atkinson, et al., p. 10, 2007). An example from the electronics firm is providing defect free

products and supporting those products with a four year no questions asked return policy. The

depot repair facility that supports these products also provides complete exchanges with accounts

receivables credits for those exchanges if the product is not the correct fit for their projection and

audio visual applications. The credit to the customer’s account provides for any price differences
STRATEGY AND MANAGERIAL ACCOUNTING
5

it also provides a service to the customer that they can later use to apply to the open balance on

their accounts at year-end. This organizational commitment to quality and service is measured

constantly from component engineering, to receipts of purchase orders utilizing highly defined

quantitative and qualitative measurements during the inspection phase of the components from

suppliers. In the case of these credits it also extends to the customers accounts.

For their suppliers, these measurements continue at 100% of purchase receipts for new

suppliers and eventually scales down to 25% testing of all receipted items with a scorecard

maintained for each supplier that includes elements like, on time delivery, percentage of

component failures, and returns for damaged or unsatisfactory receipts back to the supplier.

These measurements not only get reported direct to the supplier they also are discussed weekly

in component engineering meetings that include management from production, R&D, component

engineering and materials management. Occasionally, the supplier is asked to report on their

own corrective measures to insure their products maintain a continuous improvement process.

For the customer’s account records well trained receivables representatives work directly with

the customer accounting base to rectify open issues monthly. They also work to develop highly

valued credit reputations. Their customers are dealers and having a well thought out credit policy

that enforces and develops good financial habits in their dealers is also considered a value they

teach their customers.

The Element of Functionality and Features

Does our product perform and does it meet the requirements of the application? Are the

products/services we provide or manufacture exceeding our customers’ requirements and are the

features we provide in those products rich in application? In other words are our customers being

given a value that is feature rich providing satisfaction; exceeding their desires?
STRATEGY AND MANAGERIAL ACCOUNTING
6

“Deciding which target group of customers, varieties, and needs the company should

serve is fundamental to developing a strategy. But so is deciding not to serve other

customers or needs and not to offer certain features or services.” (Porter, p. 77, 1996).

The Element of Service

According to Atkinson, the final element of the value proposition is service. This is the

comprehensive element that covers everything else the organization may provide ether in direct

services or implied touch points from the sales personnel, to delivery, to accounting, to shipping

& receiving. That is all the other ways a customer or client may come into contact with the firm.

I would also suggest that along the four elements of the value proposition as suggested by

Atkinson, there are three complimentary ways to deliver value they are:

 Product leadership:  We deliver a unique product or service. The

focus is on innovation: new technologies and better
products/services.
 Operational excellence:  We deliver our product/service at a
lower cost than that of our competitors. Our focus is on better
manufacturing processes, better economies, or other forms of
leverage.
 Customer intimacy:  Our goal is to solve your customers’
problems with a broad portfolio or a customized set of
products/services. Our focus is on delivering a relationship that is
superior to the relationship offered by our competitors.
How does our value proposition affect our pricing with our
customers?

(Adapted from material based on: O’Dell &Grayson, “Knowledge

Transfer: Discover Your Value Proposition,” Strategy and
Leadership, March-April 1999).

Management Functions

In their textbook (Atkinson, Kaplan, Matsumura & Young, 2007) discuss the following

questions. “What will I do?”, “How will I carry out my plan?”, “How am I doing and how does
STRATEGY AND MANAGERIAL ACCOUNTING
7

my performance compare to my plan?” (Atkinson, et al., 2007). These questions underscore the

“planning, organizing, and controlling” (Atkinson, et al., 2007) functions that managers employ

to not only formulate plans but also to follow through, monitor, & measure. Whereby “the needs

of decision makers in the organization drive the scope and focus of management accounting”,

(Atkinson, et al., p. 3) the functions they use are the tools of the trade of management in which

they carry out their plans at meeting those needs.

If the needs of the decision makers are formulated through a well defined strategic plan

then the value proposition can be clearly communicated and acted upon being disseminated from

the top down and throughout the ranks of the organization. Ultimately this value proposition will

enhance the service it provides to its customers and the profitability to the firm. The level of

excellence in which it delivers this will be quantified and the responsibility owned by those who

are the stakeholders in carrying out these plans. One example of planning common to all levels

of management is budgets.

“Budgets are quantitative plans of expected results and can be used as control devices.

They integrate and quantify the objectives of the entire organization, present plans in a

logical manner, and serve to coordinate the activities of all organizational units. (CTUO,

M.U.S.E., 2011).

Once a plan is formulated then the firm must organize. According to Collins, the task of

organization is to “gather information about the area of concern” (Collins, 2011, Chat Phase 1).

From a list of potential alternatives then a choice must be made to enter the acquisition phase of

acting upon these decisions. (Collins, 2011, Chat Phase 1).

Once a choice has been decided upon then delivering upon the solution involves

implementation. (Collins, 2011, Chat Phase 1). This is the boots on the ground, the actions being
STRATEGY AND MANAGERIAL ACCOUNTING
8

undertaken to make the new solution, form the list of alternatives, realistic and then through

supporting the implementation resources and time this solution becomes reality.

To be measured and reported upon the realistic picture of the solution must provide for

practical quantitative reporting and metrics. Metrics should be contrasted and compared to the

original planning goals. Personnel who have ownership should also be provided the resources so

that objective measurement can be made. Personnel who learn management accounting

techniques can be used to provide the necessary testing, reporting and eventual advisements for

making needed changes.

Goals and Measurements

In this presentation I have taken the liberty to identify four areas that involve strategic

goals and how we may measure our progress in each of these areas. The progress toward

reaching these goals and the measurements involved provide to us a means of putting our boots

on the ground to progress toward adding value through our strategic planning. Whereas

“procedures typically provide a system of steps that should be followed in a particular order to

accomplish a task” (CTUO, M.U.S.E, 2011), measuring those steps consistently allows the

necessary feedback to either make adjustments in these plans or motivating our personnel

differently to insure our plans take us in the correct direction to fulfilling these goals.

To insure that our goals are met, it would be helpful and highly recommended to ask for

commitments from our lower level employees with the appropriate oversight to commit to the

responsibilities we are providing to them.

Three common ingredients that hinder success and almost guarantee failures are “lack of

commitment”, not providing for “the necessary time” to review and revise, and third overlying

“reliance on the past information”. (CTUO, M.U.S.E., 2011). Managers and their personnel must
STRATEGY AND MANAGERIAL ACCOUNTING
9

commit to these new responsibilities, provide the adequate time to meet to revise their progress,

and embrace these new measurements.

To summarize this section on measurement, financial accounting tells upper management

that something may be wrong. However, management accounting tells them what and how,

problem definition and reasons for the problem. In other words “managerial accounting tells the

story of what is going on now, how it got there, what people did, how people did it, and where

improvement is needed.” (CTUO, M.U.S.E., 2011).

The Firm’s Strategic Goals and Decision Making

Financial Perspective
Goals Measures
Grow into global
markets Ratio of domestic to international sales
Increase existing market share Company versus industry growth
Identify new revenue streams Gross profit from new products
Customer Perspective
Goals Measures
Increase customer retention Customer database
Benchmark against competing
Become lowest cost supplier suppliers
Increase customer satisfaction Customer survey
Internal Business
Perspective
Goals Measures
Maintain lowest cost base in inventory Inventory turns
Improve production efficiency Product returns with quality issues
Integrate acquisitions Revenues per sales dollar
Learning and Growth Perspective
Goals Measures
Link strategy to incentives Net income per dollar of variable pay
Foster innovative
culture Number of new products
Develop critical competencies Competency matrix - percent failed

(CTUO, M.U.S.E., 2011)

STRATEGY AND MANAGERIAL ACCOUNTING
10

Conclusion

The firm’s strategic objectives may involve a broader range of statements however, these

suggested goals “describes expected outcomes at the individual or departmental level.” (CTUO,

M.U.S.E., 2011). The measures suggested provide the adequate tools to those department level

managers to report on their own progress as they take on the responsibility of moving us in our

strategic direction.

“The nature of management accounting systems is to link the daily activities of managers

to the strategic objectives of an organization.” (Ansari, Bell, Klammer & Lawrence, p. 8, 1999).
STRATEGY AND MANAGERIAL ACCOUNTING
11

References

Ansari, S., Bell, J., Klammer, T. and Lawrence, C. (1997), Strategy and management

accounting. Houghton Mifflin Company.

Atkinson, A.A., Kaplan, R. S., Matsumura, E. M., & Young S. M., (2007). Management

accounting, fifth edition. Upper Saddle River New Jersey: Pearson Prentice Hall.

Collins, S. (2011, April 6). Chat posting Retrieved April 10, 2011, from CTUO, Virtual Campus,

ACC350-1102A-01: Management Accounting. Phase 1 Theory. Chat Archive:

https://campus.cutonline.edu

CTU Online, (2011). Management accounting - planning. Virtual Campus, ACC350-1102A-01. M.U.S.E:

https://campus.ctuonline.edu

Kaplan, R.S., Norton, D.P. (2001). The strategy-focused organization. Harvard Business School

Press.

Management Accounting. (2003). In The New Penguin Business Dictionary. Retrieved from

http://www.credoreference.com/entry/penguinbus/management_accounting

O’Dell, C., Grayson, J. “Knowledge Transfer: Discover Your Value Proposition,” Strategy and

Leadership (March-April 1999).

Porter, M. (1996). “What is Strategy”. Harvard Business Review. November – December 1996,

p. 77.