Strategy & planning management help on: STRATEGIC COST MANAGEMENT

Strategic Management Accounting (SMA)/ Strategic Cost Management Techniques are not useful for modern day organizations.INTRODUCTIONWith the complex structured economy and uncertainty in business outcomes and performances business world is experiencing unprecedented economic changes. To survive these changes successfully organizations need formulation of business strategies to enhance the performance of organization. This can be best done for long-term by adopting the influential and effective SMA techniques which provides the organization with competitive and vital functions be it the health sector or retail or service sector. To remain resilient and competitive the business organizations in every sector should incorporate SMA techniques into practice. SMA techniques to a certain extent do help organizations to adjust their resilience level to an acceptable state (Rahman et al., 2012).SMA has been very well accepted as a generic approach for achieving strategic positioning in numerous organizations (Roslender, 2003). It lays more emphasis on management control, decision making and performance measurement. For example a study done by Cadiz and Guiding (Cadez and Guilding, 2008) suggests that the effect of strategic management accounting on the business performance is quite significant. Since SMA has more focus on strategic orientation, that is why many organizations adopt SMA practices in order to make informed decisions (Cravens and Guilding, 2001) (Roslender and Hart, 2003).

Strategic Management Accounting

The new term ‘Strategic Management Accounting’ emerged in the field of management accounting literature since early 80’s (Simmonds, 1981). Thus Strategic Management Accounting (SMA) has been identified as a generic approach in accounting for achieving strategic positioning (Roslender and Hart, 2003).

SMA is referred to as the analysis and provision of the vital management accounting data regarding the business entity along with its competitors is called strategic Management Accounting (Simmonds, 1981). The literature review suggests that SMA should incorporate performance measurement and strategic product costing along with deep analysis of organizations product markets and competitive market forces and organizational strategic assessment over an extended period of time (Horgnren et al., 2003). Thus the main intent of SMA is to find out the cost of providing customers the product features under the given operating conditions and at the same time seeking continuous improvements (Horgnren et al., 2003).

Strategic Cost Management Techniques

Factors affecting the SMA techniques implementation were studied which confirm that there is increasing level of interest regarding the assessment of the use of SMA techniques in extended manner within the companies and the factors influencing these techniques (Cadez and Guilding, 2008) (Cravens and Guilding, 2001). However there were some issues too which were revealed after the study of these researches and some were significant issues like strategic management accounting techniques were not strategy-driven. While some of the SMA techniques had just the influence on the financial improvement of the performance of organization. It was found that the intensity of using SMA techniques was higher in New Zealand as compared to UK and USA.

Strategic Cost Management Technique from Cadez & Guilding (2008)

Strategic Management Accounting (SMA) or Strategic management Accounting Tools is the term which has been coined by Kenneth Simmonds in 1981. And establishing this term took a very long time (Langfield-Smith, Thorne and Hilton, 2003). It took more than two decades by the time SMA techniques or tools emerged and evolved while the users of the companies gained extensive experience by using these SMA tools and at the same time they learned to which all challenges they need to pay attention to.

Some of the most well established and vital strategic management accounting tools have been described below (Weber and Nevries, 2010). They are as follows:

• Attribute Costing: This technique involves the costing of the advantages the products give to the customers which have been argued as the ultimate cost drivers of the product.
• Benchmarking: This technique is based and mainly focused on finding the best practice for the organization. There are many kinds of benchmarking like benchmarking with external sources to the company or alternatively using the high-performance division being used as the reference within the company.
• Brand Valuation:  In this technique a financial value is being assigned to the equity which is being either associated with the image of the brand or the brand name. However the formalization of brand value accounting can lead to underscoring of the view that the brand –related expenditure should be seen as an investment rather than being an expenditure. This highlights the future and long-term focus of the Brand Valuation technique.
• Competitive position monitoring:  When formulating the strategic management accounting strategy as a part of competitive position reviews all the trends related to market share, unit cost, profits, sales, volume and cash flow should be appraised.
•  Competitor cost assessment: The researchers supporting this technique suggest that if the relative cost position of the key competitor is being assessed it can yield increased appreciation of the strategic decisions-making environment of the organization.
• Competitor performance appraisal: Appropriate and through analysis of the published financial statements of the competitors can help in assessing the strategic performance and the main sources of competitive advantage for the organization.

Selected SMA Technique: Benchmarking

The Benchmarking technique is not a new one (Zairi, 1998), it has always been there, since the very first day we took the decision to learn from others and to learn how to improve our capabilities. The philosophy of benchmarking is simply based on the concept and advice given to Chinese warlords by Sun Tzu (500 B.C.).

Benchmarking mainly arises from the Deming’s Quality Management Theory, which mainly aims at enhancing the quality and checking the sustainability at the same time by following several stages in particular order. Benchmark has also been defined as the standard by which others can be served (Zairi, 1998).’The search for industry best practice that leads to superior performance’ is called benchmarking (Camp, 1989). The main three principles which govern benchmarking method are: continuous improvement, maintaining quality and customer satisfaction.

The various types of benchmarking which exist are:Internal Benchmarking

• Competitive Benchmarking
• Functional Benchmarking

Internal Benchmarking is a two-way communication process where the two or more departments of the same organization share opinions or the opinions are being shared between organizations which operate as parts of chain in various countries. Franchising contracts are also considered within the internal benchmarking category. It is highlighted that any part of organization if shows better performance, others will learn from them. The findings and results of internal benchmarking are then used as baseline for extended benchmarking where external organizations can also be included (Karlöf and Östblom, 1994)

External Benchmarking is totally opposite of internal benchmarking. In external benchmarking comparison of work with external organization so that new ideas can be discovered along with new methodologies, products and services is being done. This kind of benchmarking is very effectual as it provides opportunities for learning from the experiences and best practices of the other organizations that are already at leading edge. External benchmarking is again divided into three subcategories:

• Competitive
• Generic
• Relationship

Benchmarking process shows more orientation towards strategic focus as can be seen from the figure below:

Figure 1: Benchmarking methodology (Zairi and Leonard, 1994)

AS per the Mcnair and Leibfried methodology the inputs in the benchmarking process are:

Figure 2: Inputs in benchmarking methodology (Zairi and Leonard, 1994)

Figure 3: Outputs in Benchmarking Methodology (Zairi and Leonard, 1994)

Overview of major processes of benchmark

Selected performance measurements

Identifying potential drivers and external organizationsProcess flow mapping

Validate drivers

Benchmark target companies

Short-term operational improvements

Benchmark QuestionnaireExternal company/ companies

Process analysis performance  assessment and measures

Gap Process improvements/ Reengineering opportunities

New

-Flow/ Policies/ Procedures

Implementation Plans

Outstanding IssuesPlan to close gap

Action to close gap

Recalibrate benchmarks

Additional analysis/ benchmarking to address issues

Concept and Characteristics of Benchmarking

Benchmarking has been emerged as an essential tool which improves the organization’s performance and competitiveness in the market or business (Andersen and Pettersen, 1996) (Kyrö and Finland, 2003). The scope of benchmarking can be seen extending from larger organizations to smaller ones as well as the public sector too (McAdam and Kelly, 2003). Watson (Watson, 1993) also argued that benchmarking is a unique process of adaptation and not just about adoption. It is not just about copying the best others doing, it is beyond the process of copying.

Although there are several definitions of benchmarking but all of them have common characteristics like benchmarking relies on the theme “see what other companies do and try to improve upon that” (Götze, 2004). Thus benchmarking implies the concept of some type of measurement that can be achieved in two forms: internal and external. The main trait of benchmarking which is very attractive to the organizations is that it goes beyond the traditional competitor analysis as it identifies the strengths and weaknesses and then finally includes the clear-cut understanding and knowledge of how the best practices are used (Götze, 2004).

Advantages of Using Benchmarking in Organizations

The literature has much evidence which support the growing popularity and continuous adoption of benchmarking practices in many organizations (Yasin, 2002). This growing popularity of benchmarking can be seen through the surveys in UK and Partnership Sourcing (1997), Cooper and Lybrand (Coopers and Lybrand, 1994) and it is shown in the insight given by Azhar and Omar (Azhar and Omar, 2008) which depicts reports on organisational benchmarking.

By reviewing an extensive literature (Zairi, 1998) following benefits have been found through benchmarking:

• It helps organization in finding their strengths as well as the weaknesses depending on the supply,  market conditions and demand factors.
•  It helps the organization in satisfying the customer’s demands for better  cost, product, quality and service through establishment of new goals and standards.
•  It motivated the staff members to achieve new standards and they get keen enough to know about the latest developments in related area, thus enhancing the motivational levels of their employees.
• By looking at other organizations the company gets to know what levels of performance can be attained and what is the level of improvement which they can attain.
• Helps in documentation of reasons why there exists differences between organizations.
•  Helps the organizations ain increasing their competitive advantage through continuous stimulation of improvement in order to achieve world-class performance and to increase their competitive standards.
• It helps in promoting changes and delivering improvements not just in quality but also efficiency and productivity which brings subsequently competitive advantage an innovation.
• Benchmarking is a time-efficient and cost- effective method of establishing pool of  innovative ideas and form here we can apply and utilise the most practical examples (Kozak, 2004).

Challenges faced by Organizations to Generate Value

Since the competition is always intensifying with time amongst the organizations, they continuously need ways to enhance and improve their financial as well as non-financial performance ((Kaplan and Norton, 2001). With the help of SMA techniques application the organizations would be able to find and identify the major areas of improvement which will in turn support business decisions and help in achieving business breakthroughs in the processes occurring in the organization using cost management strategies (Kaplan and Norton, 2001) (Roslender and Hart, 2003).

 However it is very critical to match the SMA methods with the change strategy for the organization to achieve success ( Mc waters et al 2001).Mostly the organizations are being forced to adapt themselves as per the prevailing business environment and along with that they need to predict future scenarios as strategies  in order to excel in the business( Shank & Gvidrajan ). That is why it becomes imperative to align the strategies using proper management accounting controls or tools  so that the business performance of the organizations can be enhanced and improved at the same time ( (Cadez and Guilding, 2008)( Mcwatter). The strategy which is followed b y many organizations are to apply the ‘best-in-class’  SMA technologies so that the continuous dominance can be ensured in their own market in which they  are participating in order to run their business successfully.

Conclusion

Thus from the above analysis of SMA techniques it is quite evident that benchmarking is  a worldwide accepted  management technique which definitely helps businesses to improve their performance. The finest examples of benchmarking implementation successfully are the Xerox Corporation , Hospitals in Malaysia like Orange Hospital etc. However some organizations have also failed in implementing benchmarking successfully and there are many factors responsible for that like  lack of sponsorship,  teams not understanding they tasks in proper manner,  lack of long-term management commitment,  improper positioning of benchmarking that is keeping it away from larger strategies,  wrong people in team,  focus on performance  targets rather than on the processes, failure to monitor the progress of benchmarking project. But all these factors can be easily overcome through proper planning and strategic implementation.

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