defining strategy and scenario planning

7/29/2019 Defining Strategy and Scenario Planning

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Defining Strategy and Scenario Planning

What are the most important elements of strategic management accounting

and scenario planning? The examiner for enterprise strategy (E3) explains.

How would we define enterprise and strategy? In this context, take enterprise as

the business unit. As for strategy:

Strategy is the direction and scope of an organisation over the long term, which

achieves advantage for the organisation through its configuration of resources

within a changing environment to meet the needs ofmarkets and to

fulfil stakeholderexpectations.

Johnson and Scholes

There are three important elements in this definition: environment, markets and

stakeholder, all of which allude to an important aspect of strategy - its external

orientation; that is the organisation looking beyond its internal boundaries to its

relationships with the outside world.

Traditionally management accounting is described as having three dimensions:

allocate costs between costs of goods sold and inventories for internal and externalprofit reporting

provide relevant information to help managers make better decisions provide information for planning, control performance measurement and

continuous improvement

(Drury)

This traditional classification mentions the outside world only once - external

profit reporting. So, we can infer that originally, management accountings

orientation was internal.

Arguably, at this point, there was a mismatch between strategy, with its strongexternal orientation and management accounting, with its strong internal

orientation. However, in 1981, Professor Ken Simmonds defined a new concept,

strategic management accounting: A form of management accounting in which

emphasis is placed on information which relates to factors external to the firm, as

well as non-financial information and internally generated information. This


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important innovation emphasised the externalaspect and provided a link between

strategy and management accounting.

If the traditional description of management accounting is reconsidered, the

contribution of strategic management accounting can be seen as:Allocate costs between costs of goods sold and inventories for internal and

external profit reporting

It is important not only to know and understand our own costs, knowledge of our

competitors costs is useful and will inform our strategic choices. Using one of

Porters generic competitive strategies, cost leadership, as an example, an

organisation attempting this strategy without a detailed knowledge of the

organisations costs (from management accounting) and the cost structure of the

industry (from strategic management accounting) would be foolhardy. Therefore,the strategic management accountant would be just as interested in analysing

competitors costs as his/her own.

Provide relevant information to help managers make better decisions

Johnson and Scholes included markets in their definition of strategy; managers

have to make many decisions about markets, for example, in the area of pricing.

One important variable that should receive continuous scrutiny is market share

which is affected by pricing decisions and policies. The management accountant

has always reported on sales revenues: the strategic management accountant would

report on market share, relative market share and trends in market size and growth.

If the strategic management accountant can provide relevant information about

these areas it should enable managers to make better decisions.

Provide information for planning, control performance measurement and

continuous improvement

Porters value chain is another important concept. CIMA defines this as the

sequence of business activities by which, in the perspective of the end user, value

is added to the products or services provided by an entity. The value chain

identifies the margin, the difference between the cost and the price: a role for

management accountancy. If the organisation is using the value chain to evaluate

its performance and to provide a basis for continuous improvement, the strategic

management accountant will necessarily want to analyse competitors value


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chains.

Strategic management accounting has given management accountants a new and

important role which should contribute to the better formation and monitoring of

strategies. It helps to operationalise strategy and its future and external orientationsare invaluable.

The Johnson and Scholes definition of strategy mentions a

changing environment and the concept of environment reappears in their

definition of scenarioplanning: which ...builds plausible views of different

possible futures for an organisation based on groupings of key environmental

influences and drivers of change about which there is a high level of uncertainty.

The CIMA Learning System makes extensive reference to the work of Schoemaker

and the ten step approach for the construction of scenarios. Schoemaker also

described a four step approach for using scenarios:

develop scenarios to examine the external environment and identify key trends anduncertainties.

conduct industry analysis and strategic formulation against each scenario todevelop strategies that enable the organisation to fit with each scenario

identify the core capabilities of the business and strengthen these to withstand orbenefit from each of the scenarios

adopt the appropriate strategic option as the future unfolds and the keyuncertainties resolve themselves.

CIMA Learning System, E3, Enterprise Strategy, 2009, pages 118-122.

The Learning System also makes reference to the use of scenario planning by

Royal Dutch Shell (RDS) a major international oil company. Shell continues to use

this approach as the following extracts from its website reveals:

'Shell energy scenarios to 2050

RDS provide an overview for their scenario planning:

The Energy Challenge. More Energy, Less Carbon. There are no easy solutions.

Three hard truths:


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1. surging energy demand2. supplies will struggle to keep up.3. stresses on our environment are increasing.

RDS has developed two scenarios:

Scramble

A more reactive approach, first focusing on increasing energy supply and then

facing the consequences later.

Blueprints

In this scenario, the difficult decisions are taken sooner rather than later, leading to

revolutionary changes and a better balance of economic and environmental needs.

At Shell we believe the environmental, humanitarian and economic outcomes seen

in Blueprints make it a better, more sustainable world than Scramble. Were

working towards that world.

Shell also explains that it uses scenarios to explore the future. Our scenarios are

not mechanical forecasts. They recognise that people hold beliefs and make

choices that can lead down different paths. They reveal different possible futures

that are plausible and challenging. Our latest energy scenarios look at the world in

the next half century linking the uncertainties we hold about the future to the

decisions we must make today.

The above summary is Shells own: there is a link on the website to a more

extensive document. The use of scenario planning by RDS demonstrates its

relevance now and in the future.

CIMA has also recognised the relevance of scenario planning and it is included it

in the indicative syllabus content for syllabus section C: Evaluation of strategic

position and strategic options.

defining strategy and scenario planning

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