STRATEGIC COST MANAGEMENT

Table of Contents

INTRODUCTION.. 3

Strategic Management Accounting. 4

Strategic Cost Management Techniques. 5

Strategic Cost Management Technique from Cadez & Guilding (2008) 6

• Attribute Costing. 6
• Benchmarking: 6
• Brand Valuation: 6
• Competitive position monitoring. 6
• Competitor cost assessment: 6
• Competitor performance appraisal: 7

Selected SMA Technique: Benchmarking. 7

Concept and Characteristics of Benchmarking. 11

Advantages of Using Benchmarking in Organizations. 12

Challenges faced by Organizations to Generate Value. 14

Conclusion. 15

Bibliography. 17

Strategic Management Accounting/ Strategic Cost Management Techniques are not useful for modern day organizations.

INTRODUCTION

 With 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).

Different SMA tools or techniques are being used by different organizations for different purposes , but the ones which are able to provide very sound managerial control are the ones which are being preferred by  businesses especially when the business is more focussed towards  strategic nature ( (Kaplan and Norton, 2001). In such cases when business is strategic in nature advanced SMA tools like balanced scorecard (NSC), benchmarking, total quality management (TQM) and activity-based costing and management (ABC/M) are the mainly used strategic approaches for achievement of strategic management control in the organizations.

 This clearly indicates how the more advanced, management accounting techniques or technologies are being developed into organizations strategic purposes. Among the vital strategic purposes of organizations which are included cover corporate positioning in the market, improved and enhanced business processes, and competitive pricing decisions and many others (Rahman et al., 2012).

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). Another definition about strategic management accounting given by CIMA (CIMA, 2002) says that SMA is a form of management accounting in which more emphasis is laid on information which is related to external factors related to the firm along with nonfinancial information as well as the internally generated information.

Thus SMA can be seen as the attempt to integrate the insights from management accounting and marketing management  within a framework of strategic management (Roslender and Hart, 2003).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 management Accounting is very specific and to such an extent that it connotes the integration of internal as well as external financial as well as non-financial information’s of organizations. SMA mainly covers the cost management approaches like:

• Life-cycle costing
• Target costing
•  Quality Costing
•  Activity-based  management
•  Balance scorecard
•  Value chain analysis

This is the reason why SMA is being applied in organizations which are highly specific enterprise-wide (Horgnren et al., 2005).

One of the latest management accounting techniques which is based upon the activity-based costing and balance scorecard developed by the researchers and practitioners within the specific organizations is claimed to be the Strategic Management Accounting.

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.

 It has been found that SMA techniques can be applied to almost all the organizations which seek favourable positions in their own markets; however there is concern regarding the implementation of SMA techniques in service industry. That is mainly due to intangible nature of service industry. It has been found that the allegations of service organizations adopting  minimal and  simple management accounting techniques is found to be baseless as  it has been found that they progress and prosper too at very encouraging pace (Azhar and Rahman, 2009).

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 and all of them have been identified by the two leading experts in the field of SMA tools that is Cadez, S. And Guildings, C. (Weber and Nevries, 2010).

• 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.
• Customer Profitability Analysis:  This is the most common and widely discussed accounting technique because it is highly customer focussed. It is mainly related to creating a link between customer-specific sales and cost with individual and specific customer accounts.
• Integrated performance measurement systems: This technique is very helpful in providing financial and non-financial performance measures which can easily cut across the varied range of organizational perspectives. When these are combining” these measures provide a method of translating strategy into coherent set of performance measures”. This technique is very closely related to Balanced Scorecard which is mainly popularised by writings of R. Kaplan and D. Norton (Kaplan and Norton, 2001).

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.

 However another definition which has been contributed by The American  Productivity and  Quality Centre ( 1999) is that process in which continuous comparison and  measurement of any organization is done against the business leaders. The various types of benchmarking which exist are:

• Internal Benchmarking
•  Competitive Benchmarking
•  Functional Benchmarking

Although the process of benchmarking is almost the same for  every category however the main difference which exists is that what is to be benchmarked and  with whom it will be benchmarked.

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

Competitive benchmarking is very sensitive benchmarking method and here the comparison is directly done with the immediate competitors. Banks and building societies mainly utilise this kind of benchmarking. This type of benchmarking is found to be more rationale for larger organizations than smaller ones. For example the market share of Xerox started to decline due to new competitors, so it decided to benchmark its performance with its competitors. Thus it improved its financial condition, increased the satisfaction level of the customers and  stabilized its share in the market.

Functional benchmarking is related to  comparative research and it tries to achieve world-class  excellence through comparison of best practices of not just their competitors but also  against the top-class businesses in the same field  and doing same activities or the ones which have same problems but are  in different industry. For example British  Rail network South East  utilised the functional benchmarking to enhance their standards of cleanliness in trains . For this the survey was done which indicated that cleanliness was the most sensitive dimension for the customers. For this venture they used British Airways as the benchmarking partner because in this organization a team of 11 members clean the 250 seater jet in just 9 minutes.

Similar case of functional benchmarking has been seen  in manufacturing industry too where River , a car manufacturing company selected Honda another top-class car manufacturer for benchmarking , but it also benchmarked itself against IBM and  British Airways which belong to different sectors. However it has been found that generic or functional benchmarking takes longer time to complete and sometimes the research results need a lot of modifications so that they can become standards for the organization to be followed.

 Relationship benchmarking is another type of external benchmarking , where the organization is benchmarked against the other organization with which the benchmarked had  some kind of relationship in advance of the benchmarking agreement. It is also called collaborative benchmarking.

Numerous benchmarking models have been proposed by the researchers although the main benchmarking theory has been derived from the Deming’s Four stages which are : Plan,  do, check and act. However after reviewing  all the major models following major steps have been outlined under the main category like: planning, data collection, analysis, action and review.

 As per   C.J. McNair and  K.H. Leibfried  the benchmarking process lays focus on strategic or operational issues and they proposed that benchmarking  process shows more orientation towards strategic focus as can be seen from the figure below:

Concept and Characteristics of Benchmarking

 The term ‘benchmarking’ has found to be evolving from the surveyor’s benchmark which is considered to be the reference  in the topographical surveys and the tidal observations (Andersen and Pettersen, 1996).

 It has 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. Then a comparative study is done between the internal and external practices and a statement of significant differences is being prepared so that the gap can be identified and then measures acne b taken to fill this gap. Moreover the best part is that benchmarking can be applied to all the facets of business,  including the products,  structures, methods ,services, and  processes . 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

Organizations operating in an industrial environment developed the SMA technique of Benchmarking (Spendolini, 1992). Today many organizations have realised the value of benchmarking and they are applying this technique to improve their performance, functions, systems and processes. Despite the popularity and recognition of benchmarking it has become a routine and as such an integral part of the organizational culture (Spendolini, 1992) and at the same time for sustaining strategies in many organizations (Huq, Abbo and Huq, 2008).

 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.

 It is also seen that the European  organizations which are adopting business excellence models like  British Quality Foundation (British Quality Foundation, 1997) or European  Foundation for Quality Management (European Foundation for Quality Management, 1993) as their core frameworks in order to achieve performance management are finding it difficult enough to conduct their businesses smoothly without benchmarking. This clearly shows the phenomenal impact of benchmarking on the organizations. This again reconfirms that SMA techniques are very much useful for modern day organizations if they are implemented properly.  The presence and deep impact of benchmarking can be seen all across the globe and in each and every business organization or industries (Hinton and Holloway, 2000). Even the service industry of Malaysia is seen to get enough benefits from benchmarking implementation  (Azhar and Rahman, 2009) (Yasin, 2002). All these scenarios confirm that benchmarking has been evolving at a very rapid pace. Moreover benchmarking also encompasses the private as well as public sector in some or the other managerial respects.

 For quite some time the  concept of benchmarking has been found in familiar form in the  public services in the UK in the form of independent reports on the best practices which are being produced by The Audit Commission and the  National Audit Office. They have also claimed that benchmarking has been used as an effective and relatively common tool for performance enhancement in the UK.

However it has been found that there are many factors which influence the successful adoption of benchmarking in the form of tool for continuous improvement in many organizations. There are several factors like organizational sector, company size and subsidiary which have been identified and which either encourage or prevent the adoption of benchmarking in the organization. But till date it has been acknowledged that benchmarking is an effectual and competitive tool for any organization to implement change management (Azhar and Omar, 2008). The reason for benchmarking being so effective is that it helps the organizational management in identifying the practices or drivers which are underlying the best performances.

 Since benchmarking is one of the prevailing SMA approaches as mentioned by Cravens and Guilding (Cravens and Guilding, 2001) for making assessments about organizational performance as well as providing the platform for the organization which try to excel and innovate their operational strategies This kinds of practices are found to be helpful in identifying many organizational issues as well as practices.

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.

 The organizations need to continuously and consistently apply the SMA techniques so as to strategically position themselves in business ( (Roslender and Hart, 2003). Therefore the intent of SMA is to determine the  cost in the given operational conditions which continuously seek improvement  as claimed by Roslender and Hart (2003). This clearly indicates that when any organization combines the  management accounting with management decision-making processes, there is seen to be dramatic improvement in the  service as well as product delivery, along with those market strategies and processes internal as well as external are realised, this all finally leads towards wealth as well as value creation for the organization.

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 .

On the other hand it is seen that the main intent of benchmarking as seen in many successful organizations is to  learn as well as improve. In the benchmarking process it is seen that learning comes through  implementation of positive changes which are based upon the  identified causes of performance gaps. Thus benchmarking acts as an important analytical tool for modern day organizations which provides straight impetus for converting new insights into actions in the organizations.

 Thus by  utilising a smart combination of proactive cost governance,  tactical cost reductions and  strategic cost initiatives  we can create a high  performance efficiency organizations. Strategic cost management survey done by Accenture suggests that the banks which implemented strategic cost management depicted:  reduction in overall expenses, execution of three or more waves of cost cutting, were able to target staff-related expenses, finally used the strategic cost management initiatives or techniques for  reducing their operational  expenses (ACheiving sustainable growth thorugh strategic csot management, 2010). Thus the current  strategic management accounting practices in organizations all across the globe are taking new shapes according to the market competitiveness and  they are applying varied kids of SMA techniques which not juts accumulates strategic but also financial information’s for the organizations helping them in decision-making .

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