“Strategic Management Accounting” – the need and the challenge!

This post is a summary of part-1 of a longer paper “Strategic Management Accounting and Dynamic Business Models

Get that part-1 paper here

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The Accounting profession has long contributed more than simply financial analysis of business performance – but could do so much more.

The aims of strategic management accounting

Both the Chartered Institute of Management Accounting (CIMA) and the Association of Chartered Certified Accountants (ACCA) see this as a critical capability for accounting professionals. CIMA defines Strategic Management Accounting (SMA) as … ‘the provision and analysis of management accounting data about a business and its competitors, for use in developing and monitoring business strategy’ (I guess it’s an over-sight that there is no mention of actually implementing the strategy!)

However, the CIMA report “Management accounting in support of the strategic management process”  finds there has been little agreement among academics and professionals on the definition of SMA, and on the techniques by which it might be deployed.

ACCA’s extensive online learning resource includes in its Performance Management topic a module on SMA which summarises established strategic planning methods. 

In the German-speaking world and much of former E Europe, the ‘Controlling’ profession has long had a more strategic role than just business reporting and analysis (See the International Group of Controlling [IGC] ). Controllers are often the internal strategy consultants, supporting the CEO and Exec board, with authority to initiate studies and projects they believe to be important (see the IGC’s Controller Competence Model) – which includes a requirement to understand “Basics and methods of the strategic management process”). The guidance of the IGC, like that of the ACCA, is to deploy standard strategy methods (with those same limitations, which will be explained).

BUT … two big problems

1. There’s more to “strategic management” than just the strategic plan.

We need strategies for every function, not just for the business as a whole – strategies for HR, information-systems, marketing & sales, and so on. Those plans must fit with the overall plan but will go into more detail – e.g., staff skills and experience, IS functionality, customer segmentation.

One-off issues also require strategies, from small problems like fixing a service quality problem, to larger-scale challenges such as fighting off a competitive attack. And substantial initiatives need SMA support too, like entering a new market, or making an acquisition.

And organisations often undertake improvement programs, on issues such as data security, health and safety, and energy efficiency. Such programs need to be planned, monitored and adjusted as they progress, in light of emerging data on their impact.

And for all these needs, SMA must continually inform the implementation of the strategy – annual or quarterly reporting supplemented by one-off investigations of specific issues is not adequate. So it must run on a much faster time-clock – quarters or years are quite inadequate! First, things clearly change much faster than these long time-periods – significant changes certainly occur on a monthly or weekly basis, if not daily. And we can and do react faster, adjusting decisions of strategic significance on a monthly, weekly or daily basis in the light of the latest period’s data (“strategic significance” meaning that those decisions affect medium- to long-term performance).

picture of dog leaping to catch frisbee

2. The available strategy methods simply cannot meet those needs.

I checked the guidance offered by some professional bodies for management accountants, e.g. ACCA’s Performance Management module on SMA and the IGC’s Controller Competence Model. Both pick up the standard frameworks and methods from the “strategic management” field – as taught to MBAs and Execs in business schools. (Quite reasonable, of course – what other source might they go to?)

Problem is, none of those strategy frameworks and methods offer anything that can fulfil the needs outlined above. First, those methods contribute only to the overall strategic plan – they say nothing about functional strategies, one-off issues, significant issues or improvement programs.

The methods are almost entirely qualitative – checklists, word-block diagrams and so on. Accountants expect to offer quantified findings and recommendations, not descriptive generalities.

Those methods are mostly static situation-analysis, so offer the same (qualitative) answer whenever they are used. They say nothing at all about how the business and its performance change over time. (In case you are familiar with those methods, you would get very nearly the same result from applying them today to, say IKEA, as you would have got from applying them 40 years ago – whether that’s analysis of its competitive forces, PEST factors, business-model canvas …)

What Strategic Management Accounting needs to offer

1.       SMA must provide, analyse and interpret all factors involved in the organisation’s business model, not just the financials, and it must do so fully – addressing everything strategically relevant about customer development, staffing changes, service quality, production operations, product development, and so on.
2.       That data, analysis and interpretation must be done for those factors in their own terms – financial proxies, such as revenue-growth rates or staff-cost ratios are not adequate. It is customers we win and lose, and people we hire, promote and lose, not dollars or ratios.
3.       SMA must analyse and interpret how those factors interact with each other to drive the changes happening to the organisation’s performance and to its own development.
4.       SMA must analyse and interpret how external factors interact with the organisation to affect its performance.
5.       SMA must do all this quantitatively and continually – it should provide a total understanding, at all times, of the functioning and performance of the entire enterprise.
6.       SMA must provide estimates of mid- to long-term futures – how the organisation will likely develop and perform under a plausible range of scenarios and strategies.

This may look like an impossible set of requirements to meet – but it is not. This is entirely achievable.   

See a possible solution to this demanding challenge in my next post

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