Strategic Management Accounting (eBook)

Dr Wing Sun Li is a teaching faculty at the Hong Kong Baptist University at Zhuhai of China. Prior to his teaching career, he had been practising in diverse industries for many years, of which 18 years were holding senior management (e.g. CFO, Vice President) in local /international firms. Dr Li gained in-depth knowledge in ICT, foods, and management consulting from various levels of practical experiences.Dr Li holds a doctoral degree in management and a CPA in Hong Kong for over thirty years. He had been a Chairman in North Asia Regional Board of CIMA (UK). Dr Li has publications in local journals and international journals, as well as a first author in a strategic managerial accounting reference book (in Chinese).

Acknowledgments 6
Contents 7
About the Author 10
1: Introduction 11
1.1 Introduction 11
1.2 Boundaries of SMA 12
1.2.1 Competitors Focus 13
1.2.2 Strategic Cost Management (SCM) 13
1.2.3 Marketing Focus 14
1.2.4 Strategic Value Focus 14
1.3 Objectives of This Book 15
1.4 Organization of the Book 16
1.4.1 Part I: Fundamental Concepts (Cost and Value) 16
1.4.2 Part II: Managing Customers 16
1.4.3 Part III: Managing Competitors 17
1.4.4 Part IV: Managing Corporate Value 17
1.5 Appreciation for Great Ideas 18
1.6 Concluding Remarks 18
References 19
Part I: Fundamental Concepts: Cost and Value 20
2: Cost Analysis 21
2.1 Introduction 21
2.2 Cost Structure 23
2.3 Contribution Margin Analysis 24
2.3.1 Contribution Margin (CM) Calculators 26
2.3.2 More Illustrations 26
2.3.2.1 Special Price Decision 27
2.3.2.2 Sale Incentive 27
2.3.2.3 Capacity Management 28
2.3.3 Limitations 28
2.4 Strategic Cost Analysis 28
2.5 Activity-Based Costing 33
2.5.1 ABC Overview 34
2.5.1.1 Illustration 34
2.5.2 ABC in Strategic Performance Analysis 35
2.5.2.1 Illustration 35
2.5.3 Limitations 40
2.6 Conclusions 40
References 41
3: Value Concepts 42
3.1 Introduction 42
3.2 Value Chain Analysis 43
3.2.1 An Example on Value Chain Analysis 45
3.3 Vertical Value Chain Analysis 48
3.3.1 An Illustration in the Telecom Industry on Network and Phone Businesses 51
3.3.2 Guides in Vertical Integration Analysis 54
3.3.2.1 An Example on Vertical Integration 54
3.4 Present Value 58
3.4.1 An Illustration of Present Value Concept 60
3.5 Conclusions 60
References 61
Part II: Managing Customers 62
4: Cost to Serve and Customer Selection 63
4.1 Introduction 63
4.2 Cost-to-Serve (CTS) 65
4.3 CTS and Customer Life Cycle 66
4.4 Linking Customer Profit to CTS 69
4.4.1 Customer Profit 69
4.4.2 CTS 69
4.4.3 CP/CTS Ratio 70
4.5 Valuable Customers? 70
4.5.1 Locate Valuable Customers 72
4.6 Customer Selection 73
4.6.1 Business Potential Versus Customer Compatibility 74
4.7 Action Strategies 76
4.8 Sale Performance Monitoring System 77
4.9 Conclusions 78
References 80
5: From Customer Profit to Customer Value 81
5.1 Introduction 81
5.2 An Overview of the Customer Performance Reporting Model 82
5.2.1 Customer Operating Profits, Return on Assets, and Economic Value Added 84
5.3 Free Cash Flows 87
5.4 Customer Value Concept 89
5.4.1 Customer Lifetime Value 90
5.5 Modified CLV Model 92
5.5.1 Examples 94
5.5.2 Customer Retention 96
5.6 Key Driver Performance and Financial Outcomes 100
5.7 Concluding Remarks 101
References 102
Part III: Managing Competitors 103
6: Competitor Analysis and Accounting Model: Competitor Analysis 104
6.1 Introduction 105
6.2 Analytical Framework 106
6.3 Competitive Analysis 107
6.3.1 Competitive Position 108
6.3.2 Market Power 108
6.3.3 Competitive Scope 109
6.3.4 Market Capacity 109
6.4 Competitor Identification 110
6.5 Interfirm Market Rivalry 116
6.6 Proxy Measures 118
6.6.1 Market Commonality Index (MCI) 119
6.6.2 Resource Significance Index (RSI) 120
6.6.3 Market Power Index (MPI) 123
6.7 Guide to Use Proxy Measures in Interfirm Competitive Analysis 125
6.8 Conclusions 126
Appendices 126
Appendix A 126
Appendix B 127
References 128
7: Competitor Analysis and Accounting Model: Accounting Model 129
7.1 Introduction 129
7.2 Assessment of Competitive Position 130
7.2.1 Accounting for Competitive Position 131
7.2.2 Competitive Position Analysis 133
7.2.3 Efficiency, Capability, and Financial Lever Analysis 136
7.3 Predictive Model 139
7.4 Conclusions 144
References 145
8: Competitive Analysis: Game Theory 146
8.1 Introduction 147
8.2 The Basics of Game Theory 147
8.2.1 Example 148
8.3 Case Revisited: Electrical Bike 152
8.4 Market Power and Pricing Decision 154
8.5 Conclusions 158
References 159
Part IV: Managing Corporate Value 160
9: Strategic Value Analysis: Value Search 161
9.1 Introduction 161
9.2 Short-cut Financial Statement Approach 162
9.3 Strategic Value Analysis 162
9.3.1 Identification Phase 165
9.3.1.1 Value Chain Analysis 165
9.3.1.2 Strategic and Value Drivers 165
9.3.2 Strategic Formulation Phase 169
9.3.2.1 Key Strategies 169
9.3.2.2 Strategic Plans 170
9.4 Concluding Remarks 172
References 172
10: Strategic Value Analysis: Business Valuation 173
10.1 Introduction 173
10.2 Corporate Blue Print (Financial) 174
10.3 Case Revisited: Abbraccio Caffe (ABC) 175
10.3.1 Strategic Assumptions 177
10.3.2 Financial Assumptions 178
10.3.3 Corporate Expansion Plan (in No. of Shop Opening) 179
10.4 Free Cash Flows 181
10.4.1 Operating Cash Profit 182
10.4.2 Incremental Working Capital 182
10.4.3 Incremental Fixed Capital Investment 183
10.5 Discount Rate 185
10.5.1 Approaches 186
10.5.2 Heuristics Method 187
10.5.2.1 Dividend Valuation Method 187
10.5.2.2 Capital Asset Pricing Model (CAPM) 187
10.5.2.3 Weighted Cost of Capital (WACC) 188
10.6 Business Valuation (Using DCF) 189
10.6.1 Discount Cash Flow (DCF) 190
10.6.2 Valuing by DCF 191
10.6.3 What Is Discount Rate? 191
10.7 Concluding Remarks 193
References 194
11: Creating Value Through Strategic Alliances 195
11.1 Introduction 196
11.2 Value Formation in Strategic Alliance 196
11.2.1 Relation-Specific Assets 197
11.2.2 Interfirm Knowledge Sharing 197
11.2.3 Complementary Resources Endowments 198
11.2.4 Effective Governance Mechanism 199
11.2.5 Interactions 200
11.3 Payoff Structure (Private vs. Common Benefits) 201
11.3.1 Types of Alliance Under PCB Ratios 204
11.3.2 Example: Kosmos Laboratory 206
11.4 Strategic Symmetry (Interfirm Fit) 209
11.5 Risk and Payoff Value 211
11.5.1 Risk Mitigation Measure 213
11.5.2 Risk-Adjusted Discount Rate 214
11.5.3 Example: Kosmos Laboratory (Continue) 215
11.5.3.1 Competitive-Cooperative Mode of Partnership 215
11.5.3.2 Adjusted Payoff Values for Kosmos, A Co. and B Co. 216
11.6 Conclusion 216
Appendix: Composite Measure of Strategic Symmetry Index 217
References 218
12: Cases and Solutions 219
12.1 Case 12.1: ART Food Ltd. 219
12.1.1 Sales and Operations 220
12.1.2 Current Problems 227
12.2 Case 12.2: BAX Containers Ltd. 227
12.3 Case 12.3: Scenario: Dealership Contract 229
12.4 Case 12.4: Superstores 229
12.5 Case 12.5: Ah Kin Electric Bike 239
12.6 Case 12.6: Tender Bid 247
12.7 Case 12.7: Abbraccio Caffè 253
12.8 Case 12.8: Telnet Ltd. 257