CPA Strategic Management Accounting (SMA)
Module 1: Introduction to Strategic Management Accounting
Introduction:
• Strategic management accounting creates sustainable value by:
o supporting the formation, selection, implementation and evaluation of
organisational strategy
o synthesising information that captures financial and non-financial
perspectives for internal and external environments to enable effective
resource allocation.
• The essential requirements for successful performance are:
o Generate products/services with value that consumers are willing to pay for
• Subject Map: An organisation decides on a strategic direction, where it believes that
value can be created for shareholders, customers or other stakeholders
Part A: Value
• Value: Combining resources to create a desirable outcome (E.g. Cooking)
The key stakeholders in value creation:
• Shareholder value:
, o Goal: For firms is to generate wealth for its owners in return for the risk
involved in investing in it
• Customer value:
o Goal: To create an output that has customer value
• Stakeholder Value:
o Goal: A by-product of generating value in other areas
Which viewpoint should be taken when determining ‘value’?
• CSR Reporting helps people understand the sustainable effect of a firm’s
activities from a social and environment perspective and not just an economic
one
Part B: The Strategic Management Process:
Strategic Management Accounting – Supporting Managers:
• Strategic management: Focuses on determining the direction and structure of the
organisation and developing plans and objectives for achieving this
• Operational management: The implementation of strategic management which
involves executing the strategy on a daily basis to achieve outcomes in the long run
,Strategic Management:
The 4 stages in the strategic management process:
1. Strategic Analysis:
o Involves analysing the internal and external environment to understand
trends and its resources to adapt to a changing environment (E.g. SWOT)
2. Strategy Planning and Choice:
o Involves developing specific strategies, actions and measures
3. Strategy Implementation:
o Crafting an effective organisational structure, processes and culture
4. Strategy Evaluation:
o Involves measuring performance, providing feedback and undertaking
continuous review for improvement to reach strategic long-term goals
Operational Management:
Strategic Management Accounting and Line Managers:
• Flatter hierarchies in firms has led to greater levels of authority and decision-making
being delegated to lower-level employees which has improved flexibility and
responsiveness in the organisation
• In performance assessment, strategic management accounting can help measure:
o Economy: The extent to which resources of a given quality were acquired at
the lowest cost
o Efficiency: The maximisation of outputs for a given set of inputs
o Effectiveness: The extent to which an organisation achieved its objectives
Part C: The Role of Management Accountants in Strategic Management
,The Role of Management Accountants:
• Management accountants are seen as information providers for business processes,
organisational planning and control, resource management and utilisation and the
creation of value through effective use of financial and non-financial resources
Analyst, Business Adviser and Partner:
• The roles of management accountants can be split to include technical tasks, working
with stakeholders (E.g. Sales and Marketing) and project management (E.g. Running
meetings, supervision)
• Senior accountants require financial skills to be coupled with:
o Detailed knowledge of the specific business/industry
o Ability to manage team members and the accounting function
o Ability to negotiate and communicate with key stakeholders
Contemporary Skills and Techniques:
• A matrix of 4 skills vital for management accountants includes:
1. Intellectual skills
2. Interpersonal and communication skills
3. Personal skills
4. Organisational skills
• 4 ways in which management accountants can support a firm:
1. Creators of value: Developing plans and strategies to set the direction of the firm
2. Enablers of value: Supporting management decision-making and implementation
3. Preservers of value: Protecting value through effective risk management, controls
and compliance
4. Reporters of value: Providing clear and detailed reporting
• Key Strategic management accounting tools:
o Competitor analysis, customer cost and profitability analysis, supplier analysis
and external benchmarking including sustainability perspectives
o Industry and organisation level value analysis
o Strategic costing, life cycle costing and target costing for strategy creation
o Activity Based Costing (ABC) and implementing strategic plans
o Cost driver analysis, value analysis, benchmarking of operational processes
and various forms of budget variance analysis for managing and controlling
the implementation process
o Applying strategic management accounting techniques to the management,
selection, planning and implementation of projects
o Strategic performance measurement systems (E.g. BSC) for managing and
controlling the implementation process and for supporting strategy creation
, Part D: The Key Challenges Facing Management Accountants
Challenges:
1. Using technology effectively while guiding others to effective use Management
Accounting Systems (MAS)
2. Managing resources (E.g. Cash Flow and Supply Chain Management)
3. Promoting innovation (E.g. R&D)
Causes of Change in the Business Environment:
Ethics:
• Choosing the most profitable or cost-effective approach may have significant ethical
implications
• Organisational structure describes how a firm is organised which may have different
departments that work on:
o Specific functions (E.g. Sales, marketing, accounting and customer service)
o Particular product lines (E.g. Mortgages, credit cards and personal loans)
• A traditional functional structure separates the firm into distinct group based on the
functions they perform and they have a manager responsible for them
• These firms use Responsibility Accounting Systems (RAS), which collects revenues
and costs and also measure the performance of these responsibility centres to hold
managers accountable for their performance
,Management Reporting:
Part E: Analytical Techniques Available to Management Accountants
,Value Analysis:
• Value Chain: A sequence of activities to provide outputs to create customer value
• Organisation value chains: A set of ‘chain’ activities specific to the firm that are
interrelated and while individual activities can be improved to provide greater value
• Non-value adding activity: Customers do not compensate the firm for the costs
incurred in carrying it out (E.g. Inventory storage)
• Industry Value Chains: Each role in the industry value chain contributes value to the
industry’s end product
• Creating value can be done by:
o Identifying primary/support activities that don’t add value or destroy value
(E.g. Non-value-adding activities should be minimised/eliminated)
o Using substitute (cheaper) inputs for activities
o Creating new ways to conduct activities (e.g. New processes/technologies)
o Linking the activities within its value chain more effectively than competitors
,SWOT Analysis:
• A SWOT approach involves the analysis of a firm’s internal environment (Strengths
and Weaknesses) and its external environment (Opportunities and Threats)
There are 4 tools that support SWOT analysis:
1. Product Life Cycle analysis (Product portfolio)
2. BCG matrix (Product portfolio)
3. Porter’s 5 Forces model (Industry Analysis)
4. PEST analysis (External environment)
Internal Analysis:
• Resource-based theory: Each firm has a set of distinctive capabilities and reproducible
capabilities and only distinctive capabilities lead to a sustainable competitive
advantage (E.g. Patents) whereas reproducible capabilities can be copied by others
• Categories for internal strategic analysis:
o Assets (E.g. Working capital, plant and equipment and intangible assets)
o Resources (E.g. Unique sources of supply or relationships with suppliers)
o People and Management (E.g. Human capital)
o Systems and Processes (e.g. Support systems like IT systems)
Portfolio theory and product life cycles:
• Product-related risks arise from uncertainties about:
o Demand o Investment requirements
o Sales volumes o Competitor offerings
o Prices o Obsolescence
,BCG Growth/Share Matrix:
• The BCG Matrix identifies 4 types of products (Disregards time element):
1. Question Marks:
§ Requires high investment to maintain/increase market share and cashflow
§ Decision whether the products should continue or be withdrawn
2. Stars:
§ Large cash inflows but requires heavy investment
3. Cash Cows:
§ High cash inflow to support other products and minimal investment
4. Dogs:
§ Low cash inflows and should be removed from portfolio
, External Analysis:
• Opportunities arise from sources including:
o Changes in the national and international regulatory environments
o Emergence of new products, markets, industries and economies
o New technologies (E.g. New distribution channels through digitisation)
o The convergence of technologies (E.g. Cameras, phones etc)
• Steps to analysing an industry:
1. Define the industry:
§ This can be done by looking at the industry’s suppliers, buyers,
competitors, barriers to entry etc
2. Choose a time frame
§ Focus on the industry’s business cycle in the short and long run
3. Quantifiable
§ In assessing buyer power, it is vital to determine how many buyers exist
and the market share of each buyer (E.g. Supermarket monopoly)
Porter’s 5 Forces Model:
1. New entrants: The emergence of a new entrant in an industry may lead to significant
realignment of the competitive positions of existing firms
2. Alternative or substitute products: An alternative product is one that performs a
similar function to that produced by the firm. The presence of alternatives reduces the
demand for a firm’s products and drives down prices
3. Customers: When a firm has powerful customers, its strategic position is weakened
and vice versa.
4. Suppliers: Powerful suppliers have a strong effect on a firm’s competitive advantage
because they can drive up the price of inputs.
5. Existing competitors: Understanding a competitor’s strategies has critical
implications for the design of the firm’s value chain activities, such as product design,
quality, pricing and advertising (E.g. Price discounting in airline industry)
Module 1: Introduction to Strategic Management Accounting
Introduction:
• Strategic management accounting creates sustainable value by:
o supporting the formation, selection, implementation and evaluation of
organisational strategy
o synthesising information that captures financial and non-financial
perspectives for internal and external environments to enable effective
resource allocation.
• The essential requirements for successful performance are:
o Generate products/services with value that consumers are willing to pay for
• Subject Map: An organisation decides on a strategic direction, where it believes that
value can be created for shareholders, customers or other stakeholders
Part A: Value
• Value: Combining resources to create a desirable outcome (E.g. Cooking)
The key stakeholders in value creation:
• Shareholder value:
, o Goal: For firms is to generate wealth for its owners in return for the risk
involved in investing in it
• Customer value:
o Goal: To create an output that has customer value
• Stakeholder Value:
o Goal: A by-product of generating value in other areas
Which viewpoint should be taken when determining ‘value’?
• CSR Reporting helps people understand the sustainable effect of a firm’s
activities from a social and environment perspective and not just an economic
one
Part B: The Strategic Management Process:
Strategic Management Accounting – Supporting Managers:
• Strategic management: Focuses on determining the direction and structure of the
organisation and developing plans and objectives for achieving this
• Operational management: The implementation of strategic management which
involves executing the strategy on a daily basis to achieve outcomes in the long run
,Strategic Management:
The 4 stages in the strategic management process:
1. Strategic Analysis:
o Involves analysing the internal and external environment to understand
trends and its resources to adapt to a changing environment (E.g. SWOT)
2. Strategy Planning and Choice:
o Involves developing specific strategies, actions and measures
3. Strategy Implementation:
o Crafting an effective organisational structure, processes and culture
4. Strategy Evaluation:
o Involves measuring performance, providing feedback and undertaking
continuous review for improvement to reach strategic long-term goals
Operational Management:
Strategic Management Accounting and Line Managers:
• Flatter hierarchies in firms has led to greater levels of authority and decision-making
being delegated to lower-level employees which has improved flexibility and
responsiveness in the organisation
• In performance assessment, strategic management accounting can help measure:
o Economy: The extent to which resources of a given quality were acquired at
the lowest cost
o Efficiency: The maximisation of outputs for a given set of inputs
o Effectiveness: The extent to which an organisation achieved its objectives
Part C: The Role of Management Accountants in Strategic Management
,The Role of Management Accountants:
• Management accountants are seen as information providers for business processes,
organisational planning and control, resource management and utilisation and the
creation of value through effective use of financial and non-financial resources
Analyst, Business Adviser and Partner:
• The roles of management accountants can be split to include technical tasks, working
with stakeholders (E.g. Sales and Marketing) and project management (E.g. Running
meetings, supervision)
• Senior accountants require financial skills to be coupled with:
o Detailed knowledge of the specific business/industry
o Ability to manage team members and the accounting function
o Ability to negotiate and communicate with key stakeholders
Contemporary Skills and Techniques:
• A matrix of 4 skills vital for management accountants includes:
1. Intellectual skills
2. Interpersonal and communication skills
3. Personal skills
4. Organisational skills
• 4 ways in which management accountants can support a firm:
1. Creators of value: Developing plans and strategies to set the direction of the firm
2. Enablers of value: Supporting management decision-making and implementation
3. Preservers of value: Protecting value through effective risk management, controls
and compliance
4. Reporters of value: Providing clear and detailed reporting
• Key Strategic management accounting tools:
o Competitor analysis, customer cost and profitability analysis, supplier analysis
and external benchmarking including sustainability perspectives
o Industry and organisation level value analysis
o Strategic costing, life cycle costing and target costing for strategy creation
o Activity Based Costing (ABC) and implementing strategic plans
o Cost driver analysis, value analysis, benchmarking of operational processes
and various forms of budget variance analysis for managing and controlling
the implementation process
o Applying strategic management accounting techniques to the management,
selection, planning and implementation of projects
o Strategic performance measurement systems (E.g. BSC) for managing and
controlling the implementation process and for supporting strategy creation
, Part D: The Key Challenges Facing Management Accountants
Challenges:
1. Using technology effectively while guiding others to effective use Management
Accounting Systems (MAS)
2. Managing resources (E.g. Cash Flow and Supply Chain Management)
3. Promoting innovation (E.g. R&D)
Causes of Change in the Business Environment:
Ethics:
• Choosing the most profitable or cost-effective approach may have significant ethical
implications
• Organisational structure describes how a firm is organised which may have different
departments that work on:
o Specific functions (E.g. Sales, marketing, accounting and customer service)
o Particular product lines (E.g. Mortgages, credit cards and personal loans)
• A traditional functional structure separates the firm into distinct group based on the
functions they perform and they have a manager responsible for them
• These firms use Responsibility Accounting Systems (RAS), which collects revenues
and costs and also measure the performance of these responsibility centres to hold
managers accountable for their performance
,Management Reporting:
Part E: Analytical Techniques Available to Management Accountants
,Value Analysis:
• Value Chain: A sequence of activities to provide outputs to create customer value
• Organisation value chains: A set of ‘chain’ activities specific to the firm that are
interrelated and while individual activities can be improved to provide greater value
• Non-value adding activity: Customers do not compensate the firm for the costs
incurred in carrying it out (E.g. Inventory storage)
• Industry Value Chains: Each role in the industry value chain contributes value to the
industry’s end product
• Creating value can be done by:
o Identifying primary/support activities that don’t add value or destroy value
(E.g. Non-value-adding activities should be minimised/eliminated)
o Using substitute (cheaper) inputs for activities
o Creating new ways to conduct activities (e.g. New processes/technologies)
o Linking the activities within its value chain more effectively than competitors
,SWOT Analysis:
• A SWOT approach involves the analysis of a firm’s internal environment (Strengths
and Weaknesses) and its external environment (Opportunities and Threats)
There are 4 tools that support SWOT analysis:
1. Product Life Cycle analysis (Product portfolio)
2. BCG matrix (Product portfolio)
3. Porter’s 5 Forces model (Industry Analysis)
4. PEST analysis (External environment)
Internal Analysis:
• Resource-based theory: Each firm has a set of distinctive capabilities and reproducible
capabilities and only distinctive capabilities lead to a sustainable competitive
advantage (E.g. Patents) whereas reproducible capabilities can be copied by others
• Categories for internal strategic analysis:
o Assets (E.g. Working capital, plant and equipment and intangible assets)
o Resources (E.g. Unique sources of supply or relationships with suppliers)
o People and Management (E.g. Human capital)
o Systems and Processes (e.g. Support systems like IT systems)
Portfolio theory and product life cycles:
• Product-related risks arise from uncertainties about:
o Demand o Investment requirements
o Sales volumes o Competitor offerings
o Prices o Obsolescence
,BCG Growth/Share Matrix:
• The BCG Matrix identifies 4 types of products (Disregards time element):
1. Question Marks:
§ Requires high investment to maintain/increase market share and cashflow
§ Decision whether the products should continue or be withdrawn
2. Stars:
§ Large cash inflows but requires heavy investment
3. Cash Cows:
§ High cash inflow to support other products and minimal investment
4. Dogs:
§ Low cash inflows and should be removed from portfolio
, External Analysis:
• Opportunities arise from sources including:
o Changes in the national and international regulatory environments
o Emergence of new products, markets, industries and economies
o New technologies (E.g. New distribution channels through digitisation)
o The convergence of technologies (E.g. Cameras, phones etc)
• Steps to analysing an industry:
1. Define the industry:
§ This can be done by looking at the industry’s suppliers, buyers,
competitors, barriers to entry etc
2. Choose a time frame
§ Focus on the industry’s business cycle in the short and long run
3. Quantifiable
§ In assessing buyer power, it is vital to determine how many buyers exist
and the market share of each buyer (E.g. Supermarket monopoly)
Porter’s 5 Forces Model:
1. New entrants: The emergence of a new entrant in an industry may lead to significant
realignment of the competitive positions of existing firms
2. Alternative or substitute products: An alternative product is one that performs a
similar function to that produced by the firm. The presence of alternatives reduces the
demand for a firm’s products and drives down prices
3. Customers: When a firm has powerful customers, its strategic position is weakened
and vice versa.
4. Suppliers: Powerful suppliers have a strong effect on a firm’s competitive advantage
because they can drive up the price of inputs.
5. Existing competitors: Understanding a competitor’s strategies has critical
implications for the design of the firm’s value chain activities, such as product design,
quality, pricing and advertising (E.g. Price discounting in airline industry)
