Okay, you should know what management accounting is so let's instead jump right into what the hell this book means by 'strategic decisions'.
Okay so let's imagine on one hand you have all your baking supplies, flour, sugar, eggs, whipped cream, etc. etc., as well as a working oven and whatever trays you need. We'll call that point A. Now on the other hand, you have a bunch of screaming demon children and you desperately want them to shut up. Let's call that point B. Strategy then is how you get from point A to point B.
Now one strategy could be to just feed the kids raw ingredients, however you question the healthiness of feeding children raw eggs or the sanity of giving children cups of sugar. And no, no you can not use just the oven to solve the problem of having children. However, you do remember your mom's recipe for chocolate cake, and you do remember it making you feel better and brightening your mood back when you were a little demon child. So, you bust out your baking skills and craft the perfect chocolate cake, et voila, the demon children shut up and are eagerly chowing down on cake. The process that you plan on taking to get from your start point to your end point is your strategy, and through let's say, accounting for all of your starting resources, skills, and knowledge, it's one of the ways managers can help firms make strategic decisions.
While this is enough to answer the learning objective, the book does go into more detail about strategic decisions companies tend to make. Specifically, there are two main strategies: Cost Leadership, and Product Differentiation.
Cost Leadership starts with a good quality standard of a product and beating the competition for that quality of a product with a lower price point. Imagine three drug dealers standing side by side on the same street corner, and you have a problem. I mean you recognize that all of their products are generally of the same quality. However, drug dealer number 3 is selling his ketamine for only half the price of the other two. He will most likely win your patronage, having used a strategy of Cost Leadership to beat his rivals.
Product Differentiation on the other hand utilizes clever marketing and/or truly unique products to stand out amongst the crowd. The best real life example of this is Apple, which has somehow managed to hypnotize and brainwash its consumers into a strange brand-loyal state that causes all of these people to only be able to buy Apple products. Because of this odd brand loyalty, Apple and other companies that successfully utilize Product Differentiation are able to charge more for their products.
Management Accountants can help provide a lot of critical and numerical analysis on deciding what strategy to execute and how. The two examples given are the company's cost, productivity, or efficiency advantage relative to competitors, and the premium prices a company can charge over its costs from distinctive product or service features. This emphasis of strategic issues can also be called Strategic Cost Management.
The chapter ends on a bullet point point list of important questions to ask in formulating a strategy. They are:
- Who are our most important customers, and what critical capability do we have to be competitive and deliver value or our customers?
- This is the point a to point b example, analyzing what you have and the people you want to make happy (or shut up) and executing on the most effective strategy you have based on these constraints.
- What is the bargaining power of our customers?
- Demon children will eat anything sweet.
- What is the bargaining power of our suppliers?
- There are a lot of bakeries and baking supplies in town, so baking goods are actually rather cheap around here as everyone is climbing over each other.
- What substitute products exist in the marketplace, and how do they differ from our product in terms of features, price, cost, and quality?
- As mentioned there are a lot of bakeries around town. Their professional cakes are probably way better than mine, but they're also way pricier.
- Will adequate cash be available to fund the strategy, or will additional funds need to be raised?
- Luckily I already had the ingredients lying around, so I will not need cash for the cake. I will need funds for the ketamine addiction though.
Anyway to wrap this up, how do management accountants support strategic decisions?
Primarily, management accountants keep inventory of the resources and assets on hand that you can use to achieve your goals and determine your strategic decisions. After deciding if you want to go with Cost Leadership or Product Differentiation, the accountant can walk you through the numbers behind your strategic decision from costs to premium prices. They should also be able to help you answer problems like bargaining power of both customers and suppliers, any substitutes and competition, as well as whether you have the capital to even begin your venture.
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