The objective of strategic management is to attain highest goals of the organisation. It main purpose is to use available resources in optimum way (Peppard and Ward, 2016). It is a process which adopt by an organisation in order to utilise all resources properly so that better and effective outcome could be gain. This project is based on TESCO which is one of a largest retail outlet in UK whom want to determine the use of management accounting process in order to support strategic management process of a company. In this project, 2 management accounting tools and techniques will evaluated properly for supporting strategic management process. Along with this, it also stated about use of management accounting approach in order to accomplish all goals and targets properly.
Every organisation has to make various decision at the time of performing business activities. Strategic management play crucial role in gaining competitive advantages and improving performance of company (Brandtner, 2013). One can say that strategic management is basically planning. It can resolve problems which is faced by an organisation and various management accounting and other tools are used in it for tackling complex issue. It does not matter whether a company is big or small, strategic management is useful for everyone. Management accounting is considered as a significant part of strategic management because it focuses on key areas like ''where to invest'' and ''how to reduce cost of business''. Below are some techniques of management accounting which are normally used by big corporations like Tesco:
Net present value (NPV) – This tool show the present value of a future investment. Every company have to make decision regarding investment, this is an important part of strategic management because if they will take wrong decision then even better executions of plan cannot save them (Orsag and McClure, 2013). If a company is getting expected NPV of an investment then they may think about investing money in particular field. This techniques can also be define as present value of cash inflow and outflow. Suppose if Tesco want to make a decision regarding opening new store, they would like to known whether this outlet will become profitable in upcoming time like 7 years or not. NPV can assist them in finding present amount of cash inflow, they can compare it with cash outflow and if this amount is according to their expectation then they should go for investment (Gans and Ryall, 2017). This technique has great importance in strategic decision making (Beullens and Janssens, 2014). The problem of whether Tesco should launch new products in stores is big headache for many manager of this organisation. In past, they have launched various products which fail to impress customer and result in huge amount of loss to the company. This problem can be solved by using NPV technique. It can provide information about cash inflow and outflow, manager can compare these records and easily take decisions regarding launching on new product. They can also analyse opportunities which is available in industry like opening store in developing nations like India. Every retail company want to open their stores in countries like India and China because they known what kind of potential these markets have (Leyman and Vanhoucke, 2017). NPV can assist is identifying right locations where Tesco should invest. It can provide information about which territory can provide more return to company and support then in taking best strategic decision.
Variance analyses – This tolls focuses on finding the different and reason behind difference, between actual and planned expenditure & income. Their are various areas in a company where difference can occur like selling price & fixed overhead spending etc. If an organisation can find main cause of difference between planned and actual behaviour then they can rectify their mistake and improve their problem (Pilleboue and et. al., 2015). Tesco always make budget for various activities. Suppose if they give a budget for sales of 10000 pounds for a particular region but they sale got stuck at 8500 pounds then this difference can be analysed by using variance analyse technique. This tools can be used for finding why the difference of 1500 pounds came. If it is used in proper way then it can tell that variance is coming because one of the store did not perform according to the expectation of managers (Honggowati and et. al., 2017). It can solve problems relating to reducing the wastage and finding areas of improvement in the company. This technique also support in determining whether reason behind attaining more than expected profit. Suppose one of the store of Tesco was expecting a sale of 1000 pounds but they registered revenue of 1200 pounds then variance analyse can determine how this happened (Kaplanski and Levy, 2015). They can concentrate on the factor which play crucial role in increasing revenue in order to grab more opportunities. This is very necessary at the time of making strategic decision like introducing new product in stores.
Every company has some special element like ability to produce goods at low cost. This factor arises the condition of competitive advantage. Getting extra edge on competitor because of some rare factor is the main concept of competitive advantage. It results in more profit and sale to the company and it assist them to successful survive and proceed in business environment (Kaplanski and Levy, 2015). Strategic management and accounting both these concepts are helpful for business in order to grow and develop in an appropriate and effective manner. Thus, strategic management accounting imposes business objectives integration with management accounting concept which assist business for forward looking and gain best and suitable results (Honggowati and et. al., 2017).
Accounting is a major concern of business which comprises about analysis, gathering and recording of financial information of business. Hence, business can use historical data or information of a company so that better and effective strategies get plan for making and enhancing profitability of business (Chiarini and Vagnoni, 2015). Thus, there are various types of strategic management accounting techniques are determine which enable business firm to increase profitability as well as gain competitive advantage so that sustainability get encourage properly.
Financial planning tool stated that business have to make appropriate plan for long term and short term consents of business in order to make process more effective (Arrondel, Debbich and Savignac, 2013). Financial planning also includes financial position of a company on the basis of which managers can take such decision which are related with strategic management accounting like investment in long projects or in short term projects. Hence, if managers found that activities are not appropriate in nature which are concern with long term like opening of more and more stores then they have to investment in short projects which might provide best and suitable outcome. This is much helpful technique to accomplish work in an adequate and appropriate manner (Trigeorgis and Reuer, 2017).
Capital budgeting is a process in which, business lead to evaluate all potential expenses and investment which are large in nature and enable business to grow in an appropriate manner (Pondeville, Swaen and De Rongé, 2013). Thus, it is a part of budgetary control in which managers have to evaluate the best option which provide best rate of return. In accounting terms, such projects are feasible in nature whom have better and appropriate return in nature and manage each and every expenses properly. Hence, accounting refer to determine best investment activity which support in providing best return. Managers of a company have to frame their strategies and action plan in such manner through which best return on investment could be gain. TESCO have many big plans in near future which really require critical evaluation of each aspect and compare them with financial records (Gans and Ryall, 2017).
Competitive advantage is a condition or circumstance which puts a company in favourable or superior business position. TESCO have to take this consent in account and use benchmarking and capital budgeting properly so that they can make such strategies which support long term plan for a business in order to accomplish all goals and objectives (Lawton, 2017).
Accountants are considered as important people because they are responsible for using tools of management accounting (Wheelen and Hunger, 2017). They play significant role in at the time of making strategic decisions. But their position in organisation and culture of a company make a huge impact on their working. Their advice can be ignored if board of management do not care about advice of accountants and do not involve them in decision making process (Peppard and Ward, 2016). If credibility of management accountant is high that it means that his/her every advice will be listened and CEO will not argue with accountant and adopt techniques of management accounting which is beneficial for strategic management.
Their are various problems with implementation of NPV. Some manager can argue that this concept runs on the basis of estimation and no one can guarantee 100% accuracy of this tool. Small difference can be ignored but sometime NPV shows positive balance but in reality it come negative (Pasqual, Padilla and Jadotte, 2013). This create big problems for a company who has already made investment by getting positive figure of NPV. This is a major flaw of this technique and it can create huge problems at the time of execution of strategic management plans. This problem can be overcome by focusing on risk free rate of return. Company should considered this point that even in the situation of worst case scenario, their NPV should be positive. If CEO of a company does not trust management accountant then he/she may not allow to spend money on determining risk free rate of return (Trigeorgis and Reuer, 2017). This will make a negative impact on implementation of management accounting tool (Petković, 2015). By gaining trust of board of directors this issues can be solved.
An important part of variance analysis is setting budget, if influence of regional manager is high is an organisation then they may ask for desired changes in allotted budget and set targets. This will create trouble in process of variance analyses because management accountant will try to focus on reason behind various but on the other hand regional managers can give excuses that they already said that they want more budget was attaining set level of sale (Brandtner, 2013). Variance analyse has two main component i.e. expected and budget behaviour. Unsupportive culture in the organisation can arises trouble in execution of this planning tool. This problems can be resolved by brining all the managers and worker of the company on same page. Management accountant should explain them the importance and procedure of variance analyses so they can cooperate with accountant and solve the problems relating to execution (Li, Choi and Cheng, 2014). Variance analyses cover various factor like labour efficiency variance and fixed overhead expenditure variance. By making employees understand about impact on small element on whole variance, successful implementation of this technique can be done.
At the end it can be concluded that there are various tools of management accounting which can be used by an organisation like variance analyses, NPV etc. Strategic management is related to planning for achieving major goals, management accounting tools support a company in making significant decisions which can be related to any area. Organisation policies and relation of management accountants can affect implementation of management accounting tools in organisation, if relationship between CEO and accountants is not good then successful execution of these techniques is not possible.
Books and Journals
Arrondel, L., Debbich, M. and Savignac, F., 2013. Financial literacy and financial planning in France. Numeracy. 6(2). p.8.
Beullens, P. and Janssens, G.K., 2014. Adapting inventory models for handling various payment structures using net present value equivalence analysis. International Journal of Production Economics. 157. pp.190-200.
Brandau, M. and et. al., 2013. Institutional drivers of conformity–Evidence for management accounting from Brazil and Germany. International Business Review. 22(2). pp.466-479.
Brandtner, M., 2013. Conditional Value-at-Risk, spectral risk measures and (non-) diversification in portfolio selection problems–A comparison with mean–variance analysis. Journal of Banking & Finance. 37(12). pp.5526-5537.
Bryce, H. J., 2017. Financial and strategic management for nonprofit organizations. Walter de Gruyter GmbH & Co KG.
Busch, T. and Shrivastava, P., 2017. The global carbon crisis: Emerging carbon constraints and strategic management options. Routledge.
Chiarini, A. and Vagnoni, E., 2015. World-class manufacturing by Fiat. Comparison with Toyota production system from a strategic management, management accounting, operations management and performance measurement dimension. International Journal of Production Research. 53(2). pp.590-606.
Coccia, M., 2017. Sources of technological innovation: Radical and incremental innovation problem-driven to support competitive advantage of firms. Technology Analysis & Strategic Management. 29(9). pp.1048-1061.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management. 32(7). pp.414-428.
Gans, J. and Ryall, M. D., 2017. Value capture theory: A strategic management review. Strategic Management Journal. 38(1). pp.17-41.
Harrison, J. S. and et. al., 2017. Publication bias in strategic management research. Journal of Management. 43(2). pp.400-425.
Hill, C. W. and Jones, G. R., 2013. Strategic management theory. South-Western/Cengage Learning.
Hill, C. W., Jones, G. R. and Schilling, M. A., 2014. Strategic management: theory: an integrated approach. Cengage Learning.
Honggowati, S. and et. al., 2017. Corporate governance and strategic management accounting disclosure. Indonesian Journal of Sustainability Accounting and Management. 1(1). pp.23-30.
Johnson, G., 2017. Exploring strategy: text and cases. Pearson.
Kaplanski, G. and Levy, H., 2015. Value-at-risk capital requirement regulation, risk taking and asset allocation: a mean–variance analysis. The European Journal of Finance. 21(3). pp.215-241.
Lawton, T. C. ed., 2017. Strategic management in aviation: critical essays. Routledge.
Leyman, P. and Vanhoucke, M., 2017. Capital-and resource-constrained project scheduling with net present value optimization. European Journal of Operational Research. 256(3). pp.757-776.
Li, J., Choi, T.M. and Cheng, T.E., 2014. Mean variance analysis of fast fashion supply chains with returns policy. IEEE Transactions on Systems, Man, and Cybernetics: Systems. 44(4). pp.422-434.
Orsag, S. and McClure, K.G., 2013. Modified net present value as a useful tool for synergy valuation in business combinations. UTMS Journal of Economics. 4(2). p.71.
Pasqual, J., Padilla, E. and Jadotte, E., 2013. Equivalence of different profitability criteria with the net present value. International Journal of Production Economics. 142(1). pp.205-210.
Peppard, J. and Ward, J., 2016. The strategic management of information systems: Building a digital strategy. John Wiley & Sons.
Petković, D., 2015. Adaptive neuro-fuzzy optimization of the net present value and internal rate of return of a wind farm project under wake effect.
Pilleboue, A. and et. al., 2015. Variance analysis for Monte Carlo integration. ACM Transactions on Graphics (TOG). 34(4). p.124.
Pondeville, S., Swaen, V. and De Rongé, Y., 2013. Environmental management control systems: The role of contextual and strategic factors. Management accounting research. 24(4). pp.317-332.
Trigeorgis, L. and Reuer, J. J., 2017. Real options theory in strategic management. Strategic Management Journal. 38(1). pp.42-63.
Wheelen, T .L. and Hunger, J. D., 2017. Strategic management and business policy. Pearson.
Top 11 Techniques used in Management Accounting. 2017. [Online]. Available through :<http://www.accountingnotes.net/management-accounting/techniques/top-11-techniques-used-in-management-accounting/5862>.
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