Management Accounting and Strategic Management

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Accountants can support the strategic management process in many ways. It is not just through their involvement in evaluating investment decisions, or the provision of accounting information, but through a constant involvement within the whole process of analysis, formulation, implementation, evaluation, monitoring, and control.  

The diagrams shown in Figures 1 and 2 above, illustrate how the strategy models and accounting techniques can be viewed within the strategic management framework. The models are not fixed and there is no intension, or desire, to put techniques into boxes. Indeed, there is a real danger that viewing the strategic management process as a rational, logical series of steps, injects an element of rigidity into the process and destroys any thought of entrepreneurialism, or gut feel, that is so often required to respond to the dynamic and highly competitive environment that many businesses operate in today. 

Strategy formulation is much more fluid in practice. It is iterative, dynamic, and some would say, a social process, which can often have a political dimension. Several models and techniques can be used within different phases of the process. For example, many of the models and techniques used to assess an organisation’s own resource capabilities, can be used to assess those of the competitors, albeit with the added difficulty of access to accurate information.  

To provide support to the strategic management process the accountant needs to understand how the strategic management process works and the various dynamics that impact on the implementation and effectiveness of a chosen strategy.  Likewise, managers need to be able to understand the potential impact that the various strategic options available could have on the financial performance of the organisation. This implies that the accountant needs to be involved in the early stages. However, part of good strategic management is being able to spot potential issues before they become big problems. Therefore, understanding the future strategic implications of an organisation’s current performance is equally important. Many organisations have gone out of business because they ignored the warning signs emanating from the monitoring of their current performance in relation to competitors, as well as not identifying, or worse, ignoring, the changes in the business environment.  

The diagram of the strategic management process provides a framework for thinking about how, and where in the process, accountants can contribute, using their knowledge and skill set. The Chartered Institute of Management Accountants (2009) highlighted the augmented skill set of the T-shaped accountant which suggested that accountants need more than just the finance and accounting skills. They should also have a combination of skills which on the one side are about business understanding and strategic awareness and on the other, being able to influence people and even provide leadership. It is the strategic awareness and possession of strong interpersonal skills that enables accountants to make a significant contribution to the strategic management process and hence to an organisation’s success.   

A discussion of the strategic management framework is provided in the book Management Accounting in Support of Strategy. For more information about the T-Shaped  accountant see chapter 11 of the book, or the CIMA report referenced below. 

Reference: CIMA, 2009, Improving decision making in organizations – the opportunity to reinvent finance business partners, London: CIMA

An organisation needs to know where it is going in the future and to develop a plan as to how it is going to get there. Therefore, a logical starting point for the strategic management process would be to define a vision and mission, and set the strategic objectives. 

The initial business idea, however, may come from an analysis of the environment, for example, spotting a gap in the market, or from an analysis of internal capabilities, such as, developing a business around a core competence. Wherever the initial idea comes from, the development of the business needs an overall sense of purpose and long term objectives. Stakeholders also need to know what the organisation is about, particularly investors, employees, and customers. 

Vision

The vision sets out the possible and desirable future state of the organisation (Bennis and Nanus, 1985). In essence it is a statement about what the organisation hopes to achieve in the long run, and is often expressed in terms that are intended to provide a source of inspiration and motivation for employees. 

Mission

In contrast to the vision, the mission is more business focused and sets out the rationale behind the business. Campbell, Devine, and Young (1990) suggest that a good mission should include four key elements. A purpose, strategy, behaviour standards, and values. Lynch (2003) adds to this by suggesting that a good mission statement is one that: 

· Communicates the nature of the business

· Considers the customer

· Sets out the values and beliefs

· Encompasses a sustainable competitive advantage

· Is flexible to allow for changes in the environment

· Is realistic and attainable

Defining a mission encourages managers to think holistically about the business and consider the core values that underpin the organisation’s purpose. Collins and Porras (1997, p.48) argue that an organisation needs a core ideology that is expressed either within the vision or mission, or both together. They suggest that an organisation needs, ‘core values and sense of purpose beyond just making money – that guides and inspires people throughout the organisation and remains relatively fixed for long periods of time.‘ The same idea has been put forward by Hamel and Prahalad (1989) who suggested that organisations should express a strategic intent in which the organisation envisions a desired leadership position and establishes the criterion the organisation will use to chart its progress. Even as far back as 1957, Selznick, saw a mission statement as a means of identifying an organisation’s distinctive competence, and providing a framework for resource allocation decisions, and providing a sense of corporate identity. Campbell and Yeung (1991) noted the idea of the vision and mission statements acting as a kind of corporate cultural glue that binds the organisation together, which is particularly useful in the case of a diversified or conglomerate organisation. It was also noted that each business unit could have its own mission statement, relevant to its particular business, but that each business unit’s mission should be consistent with the overall corporate vision and mission – hence, the corporate glue. 

The vision and mission statements serve a communication purpose. They communicate to external stakeholders what the organisation is about, what and how it intends to achieve its purpose, but also acts to communicate the same to employees, as well as providing the inspiration and motivation to help the organisation fulfil the vision, mission and objectives (Verma, 2009). Some research studies have suggested that having a clearly stated vision and mission can positively affect financial performance (Bart, Bontis, and Tagger, 2001), but in contrast others have found no such relationship (Sufi and Lyons, 2003). In a study across six geographic regions Wright (2002) found that 82 per cent of the organisations surveyed had mission statements, but of these, only 40 per cent of managers felt that the statements reflected reality. This raises the issue of how seriously organisations take the development of mission statements or whether they are merely established for the benefit of external stakeholders. Many could be said to be published as a public relations exercise and for the development of a corporate image, as many mission statements contain common key words and phrases with no real attempt to clarify or explain, or operationalise the concepts (Cady, Wheeler, DeWolf, and Brodke, 2011). 

Consider an old version of McDonald’s where the vision and mission are merged into one statement. 

‘McDonald’s vision is to be the world’s best quick service restaurant experience. Being the best means providing outstanding quality, service, cleanliness, and value, so that we make every customer in every restaurant smile. To achieve our vision, we are focused on three worldwide strategies, to be the best employer in each community around the world, deliver the operational excellence to each customer in each of our restaurants, and to achieve enduring profitable growth.’ (www.mcdonalds.com, accessed May, 2003)

In terms of the four elements set out by Campbell et al., (1990) this contains the purpose, the strategy, behaviour standards, and values, and fits well with the criteria suggested by Lynch (2003), therefore, it could be said to constitute a good example of a vision/mission statement. 

The current trend is for organisations to focus more on their values than the mission, and also to incorporate reference to strategy. McDonald’s have changed the mission to: 

‘McDonald's brand mission is to be our customers' favorite place and way to eat and drink. Our worldwide operations are aligned around a global strategy called the Plan to Win, which center on an exceptional customer experience – People, Products, Place, Price and Promotion. We are committed to continuously improving our operations and enhancing our customers' experience.’ (www.mcdonalds.com, accessed June, 2018)

They then go on to identify and explain the McDonald’s values which are given as: 

· We place the customer experience at the core of all we do

· We are committed to our people

· We believe in the McDonald’s System

· We operate our business ethically

· We give back to our communities

· We grow our business profitably

· We strive continually to improve

In another example, this time from GSK, the website statement ‘About us’ (June, 2018) clearly, and succinctly, sets out the vision/mission, goals and values and expectations of the organisation. Note the corporate social responsibility elements of transparency, integrity, and accountability. 

‘We are a science-led global healthcare company with a special purpose: to help people do more, feel better, live longer.

Our goal is to be one of the world’s most innovative, best performing and trusted healthcare companies. 

Our strategy is to bring differentiated, high-quality and needed healthcare products to as many people as possible, with our three global businesses, scientific and technical know-how and talented people.

Our values and expectations are at the heart of everything we do and form an important part of our culture. 

Our values are patient focus, transparency, respect, integrity. 

Our expectations are courage, accountability, development, teamwork.’

The link between vision and mission and strategy is never more evident than in the strategy statements that are included on corporate websites. For example, compare the three strategy statements shown below, taken from websites in January 2018. 

GM strategy (https://www.gm.com/investors/corporate-strategy.html)

GM’s purpose begins with a few simple but incredibly powerful words: We are here to earn customers for life. Our purpose shapes how we invest in our brands around the world to inspire passion and loyalty. It drives us to translate breakthrough technologies into vehicles and experiences that people love. It motivates the entire GM team to serve and improve the communities in which we live and work around the world. Over time, it’s how we will build GM into the world’s most valued automotive company. 

Walmart strategy (https://corporate.walmart.com/our-story/our-business)

Every Day Low Price (EDLP) is the cornerstone of our strategy, and our price focus has never been stronger. Today's customer seeks the convenience of one-stop shopping that we offer. From grocery and entertainment to sporting goods and crafts, we provide the deep assortment that our customers appreciate -- whether they're shopping online at Walmart.com, through one of our mobile apps or shopping in a store. 

Royal Dutch Shell strategy 

(https://www.shell.com/investors/shell-and-our-strategy/our-strategy.html)

Our strategy

Shell’s strategy seeks to strengthen our leadership in the oil and gas industry, while positioning the company for growth as the world transitions to a low-carbon energy system. Safety and environmental and social responsibility underpin our business approach.

In February 2016, Shell completed the acquisition of BG Group, adding significantly to our activities in liquefied natural gas (LNG) worldwide and deep-water oil and gas production in Brazil.

Shell’s strategy is now centred on creating a simpler company, one that delivers higher, more predictable returns and growing free cash flow per share. By investing in compelling projects, driving down costs and selling non-core businesses, we will reshape Shell into a more resilient and focused company.

You will notice that each company has a slightly difference focus and could be said to be targeted at different stakeholder groups. 

· GM appears to emphasise the customers for life and communities as important stakeholder groups. There is also a focus on the breakthrough technologies. This is how it hopes to become the most valued company (in its sector) potentially referring to shareholders. 

· Walmart is very much a focus on the strategy of low price, convenience and depth of product range – all of which are aimed at customers. 

· Royal Dutch Shell appears to place more emphasis on maintaining its leadership position in the industry and providing predictable returns for investors. Also generating cash flow which will enable investment in compelling projects.

There is also an implication that the different strategic focus of these three companies will require a different emphasis of management accounting information. Therefore, the vision, mission and strategy of an organisation could be said to determine the style of management accounting system, the management accounting information required, and the accounting techniques that are the most appropriate for the organisation. 

The full article, available to download from link belolw, goes on to look at what the research literature says about the link between strategy and management accounting. 

The article concludes that the vision, mission and strategy, therefore sets the context in which the management accounting system is developed, and if management accounting is going to successfully support the strategic management process from formulation to the achievement of long term objectives, provide information to enable managers to manage, and be alive to the changing needs of the business as it develops, the strategy and management accounting system need to be, and probably will be, in alignment.