Strategic Management Accounting, Performance Evaluation, and Pricing in a Competitive Environment

Introduction

• Strategic management accounting integrates financial and non-financial measures.

• Focuses on the balanced scorecard, shareholder value (EVA®), and pricing decisions.

Learning Outcomes

• Understand strategic management accounting and non-financial measures.

• Explain shareholder value and EVA®.

• Discuss pricing decisions.

What is Strategic Management Accounting?

• Supports strategic plans and decisions.

• Addresses limitations of conventional management accounting.

Strategic Planning Steps:

1. Establish mission, vision, and objectives.

2. Undertake a position analysis (SWOT).

3. Identify strategic options.

4. Select strategic options and formulate plans.

5. Review performance.

• Needs:

  • Outward-looking approach.

  • Methods to outperform competitors.

  • Monitoring business strategies.

Facing Outwards

• Understand the business environment, including product markets (size, share, trends).

• Understand competitor threats and customer benefits.

Competitor Analysis

• Aids strategic planning and pricing.

• Methods:

  • Competitor array.

  • Competitor profiling.

Competitor Array

• Ranks business and competitors based on key success factors.

• Identifies strengths and weaknesses.

Competitor Profiling

• Examines competitor aims, strategies, assumptions, and resources.

Competitor's likely actions:

• Analyze 4 key business aspects.

Sources of Information

• Includes annual reports, press, journals, market data, customer discussions, observations, industry reports.

Customer Profitability Analysis (CPA)

• Assesses customer profitability.

• Identifies costs: order handling, delivery, credit, support.

Customer-Related Costs

• Order handling, invoicing, shipment, visits, after-sales.

• Uses activity-based costing.

• CPA statement: sales, cost of goods, admin costs, customer costs.

Competitive Advantage Through Cost Leadership

• Compete on price with lower costs.

• Continuous cost management.

Strategic vs. Tactical Approaches

• Strategic: reconfiguring operations, outsourcing.

• Tactical: improving business processes.

Non-Financial Measures of Performance

• Supplement financial measures.

• Include employee satisfaction, customer loyalty, innovation.

• Act as lead indicators.

Balanced Scorecard

• Integrates financial and non-financial measures across four areas:

  1. Financial.

  2. Customer.

  3. Internal processes.

  4. Learning and growth.

• Key measures: mix of lagging (outcomes) and lead (drivers).

• Cause-and-effect relationship.

Scorecard Problems

• Too many measures, trade-off difficulties, lack of leadership, seen as just measurement.

Measuring Shareholder Value

• Prioritizes shareholder needs.

Shareholder Value Creation Process:

1. Set objectives.

2. Measure returns.

3. Manage to maximize returns.

4. Measure returns over time.

Traditional vs. New Measures

• Traditional (accounting profit) flawed due to short-term focus and ignored risk.

Economic Value Added (EVA®)

• Assesses if returns exceed investor requirements.

• Formula: $EVA = NOPAT - (R * C)$

  • NOPAT = net operating profit after tax, R = required returns, C = capital invested.

• Increase EVA® by raising NOPAT, reducing capital, or lowering required returns.

Adjustments to Conventional Financial Statements:

• Adjustments for R&D, marketing, restructuring costs, and investments.

Just Another Fad?

• New techniques can be costly and disruptive.

Pricing

• Price impacts units sold.

Economic Theory:

• Price and demand, elasticity.

• Maximize profit where Marginal Revenue = Marginal Cost.

Elasticity of Demand

• Sensitivity to price changes.

• Elastic vs. inelastic demand.

Practical Considerations

• Demand and costs are hard to predict, market acceptance varies.

Full Cost (Cost-Plus) Pricing

• Price based on full cost plus margin; market may not accept.

Marginal Cost Pricing

• Sets the minimum price, considers only variable costs, used for spare capacity.

Target Pricing:

• Identify a target selling price.

Pricing Strategies

• Penetration pricing: low price for high