SMA Evaluation and Concepts
Strategic management accounting (SMA) is the merging of strategic business goals with accounting information to provide a model which assists management in making decisions aimed at propelling a company's growth (Blank Page 2014). The current paper discusses the SMA Inc. Company. SMA Inc. is a corporation that deals with the design and sale of capital machines and equipment in two major industries that affect sustainability programs, while a third division of the same company is concerned with the financial matters of the other two industries. The two largest industries are agriculture, as well as construction, and forestry. The company has been said to get its largest market from large-scale individual farmers and major governments around the world to supply farm machines under government projects that support farming in underdeveloped countries. The company’s financial division has been described as a component, which monitors sales and leases of various farm machinery. This report evaluates different concepts of strategic management concerning SMA Inc., together with the plans the company is putting in place to improve its performance.
Evaluation of the Concept of Strategic Management Accounting
SMA may benefit the board of directors of SMA Inc. by budgeting, cost allocation methods, and cost-volume-profit (Blank Page 2014). SMA goes to the external environment and comes up with non-financial information on how to improve a company’s operation. The methods include:
- Relative Cost Position
A relative cost position is a detailed analysis that includes the production capacity and cost positions of competing companies that exist in the same market (Chun 2011). The board of directors will have the ability to use this information to create a chart, indicating which companies have the lowest and highest relative cost position in the market. The analysis would also provide the board of governors with the needed information that appertains to the consumers who want the details of the market’s supply of consumer goods and consumer services. The board of directors, as the governing body of the company, can use this information to reduce unit costs and increase the amount of the firm’s output.
- Sustainable Cost Advantage
A sustainable advantage can be defined only as an attribute gained by a company that enables it to perform better than other enterprises in the same market (гудLord 1989). Cost advantage, in this case, is a situation, where a firm uses its resources when a company comes up with a way of ensuring that its products remain the most competitive products in a market. The sustainable cost advantage concept may be beneficial to the board of directors, as the firm would avoid losing its sales by providing substitutes or inferior goods. Substitute or inferior goods are the products that stand in place of a company’s products at lower prices and are of lower quality.
Differentiation refers to an approach under which a firm aims to develop and market unique products for different customer segments (Lord 1989). Differentiation is the way business owners differentiate their companies from other companies in the market through various ways, such as branding and coloring. The method would be advantageous to the board of governors, as the firm will be able to maintain a sustainable cost advantage.
- Management Tools
The management accounting tool, used in this book, includes the total performance scorecard. The total performance scorecard is a systematic process of continuous, gradual, and routine improvement, development, and learning that is focused on a sustainable increase in personal and organizational performance (Manisha 2012). The total performance scorecard is divided into two parts; the part that is concerned with this report is the organizational balanced scorecard. The corporate balanced scorecard is more interested in the way shareholders see the company and the way they see customer satisfaction.
The second management tool to be used is the performance prism, the advantage of this framework over the rest is that it focuses on customers and what the business requires (Mart? n M? guez, Testut & W? Spielmann 2012). The philosophy behind the tool is that organizations, aspiring to be successful, have a clear picture of their primary customers and the needs they have.
The next management tool used is the business process re-engineering tool. Business process reengineering involves redesigning business systems to come up with a new regime, which provides better services (Nandi 2016). The re-engineering process requires rethinking the existing business processes to deliver more value to the customers. The process ends up putting greater emphasis on the needs of clients.
There is a method that SMA Inc. should adopt to reduce costs and improve customer value, the activity-based management (ABM) is a method that identifies and tests activities that a business performs, using activity-based costing and carrying out the value chain analysis to improve strategic and operational decisions in an organization (Paynter 2010). Activity-based costing establishes relationships between activities and overhead costs, so that overhead prices can be allocated more precisely to products as well as services. The method would be a very helpful tool to SMA Inc., especially in situations, such as those that are found in the book. Whereby, farmers are against the plans that are being made by the company, as they claim it is just a move to get their money since farmers do not see the value of the products they are being offered by the company (Paynter 2010). In the development of proper business strategies, multi-business firms need to make the appropriate choices and decisions about the allocation of company resources. When it comes to implementing a strategy, firms need to allocate capital resources appropriately.
Business sustainability is a process that companies use to manage their financial, social, and environmental risks. Business sustainability is divided into three branches: environmental, economic, and social (Sclater 2016). Environmental sustainability involves the schemes by which a company uses its resources to support social and economic development through direct investments. Economic sustainability comprises the use of a firm’s resources to achieve beneficial balance over the long term optimally. Social sustainability also encompasses the use of enterprise resources to support the current and future generations to create healthy and livable communities. SMA Inc. has certainly abided by all of the business sustainability processes. The economic aspect has been achieved by plans of acquiring the analytics company (Paynter 2010). The social approach has been realized by the company, supporting educational programs for science and engineering. Therefore, environmental sustainability has been made by having volunteering programs, which develop communities by redeveloping social commodities, such as schools.
A Report to the Board of Directors
Analysis of the Strategic Position of the Company
According to the book, there was held a board meeting, and the main thing that was under discussion was the future strategy of the enterprise. The board of governors had reached an agreement that the performance of the business for the previous year was satisfactory, even with the difficulties that affected the U.S.’s economy, especially the recession that had taken place that year, but the company had still been able to maintain good performance (Manisha 2012). The only major drawback that the firm had faced was a fall in its share prices by 2%, following a reporting by the U.S. consumer product safety commission that stated that SMA Inc. had agreed to recall about 7,000 units of its compact utility tractors on the risk of serious injuries or harms to the tractor’s operators.
- Strategic Plans
To begin with, SMA Inc. has put various strategies in place that are aimed at improving its performance and also have a competitive advantage over other firms in the market. The opening up of the company to other parts of the world is a strategic plan that has been well planned; the company has already started implementing its strategy by opening up the branches in Brazil and China and is planning to sort for markets in European countries (Reichel & Lazarova 2013). For the company to become successful in the implementation of such schemes, it should maintain its sales, as one of the leaders in the market of the United States and Canada and should also aim at maintaining state of art customer products that are likely to foster commendation to the European countries.
- Corporate Citizenship
The company has also made another strategic plan that involves corporate citizenship. In fact, under the corporate citizenship strategy, the company has come up with various programs, one of which is the volunteering program that ensures each worker of the firm carries out volunteer community activities for at least one week annually (Serdar Asan & Tanya? 2007). The strategy has seen the business give back to the community by remodeling schools and assisting local food banks. The move has seen various communities and the general public develop a positive attitude towards the firm; it is also a way of showing to the public that the company is not only focused on profits but also aims to make substantial societal changes. Under the corporate citizenship strategy, the company supports education programs in the fields of science, engineering, and mathematics. The strategic plan that the corporation has applied is crucial in educating the members of the public because the company requires staff and personnel with knowledge in three fields, hence, the firm may employ these people to bring in new ideas that will enable the business to perform better.
- Relative Cost Position Strategy
The firm could also apply the relative cost position strategy to come up with new ways of satisfying the customers. The relative cost position is simply a chart that shows the way various companies, operating in the same market, are performing against each other, beginning with the one with the best performance to the one with the lowest performance (Smith 2006). In the book, SMA Inc. seems to have the necessary information about its competitors, but the information has not been arranged, in order of performance levels. On the list, SMA Inc. comes second after CP Inc. which has higher revenues and net income profits. In the book, SMA Inc. has analyzed the engagements of other competing firms. The mistake the company made was carrying out the analysis of other businesses that are different in many ways. This resulted in leaving out the inner details of CP Inc. and its strategies that make it earn higher revenues than SMA Inc. Using this approach, SMA Inc. may be able to improve its customer services to suit their requirements, hence fulfilling customer satisfaction.
- Sustainable Cost Advantage Strategy
A sustainable cost advantage is an attribute that implements the use of a product, in this case, that is provided by a firm in the market, either alongside or as a substitute for the firm’s products (Frakt 2016). The products used to achieve sustainable cost advantage are usually inferior goods or substitute goods of lower quality than the actual product. SME Inc. has already used this strategy. SME Inc. has not seriously considered the importance of this approach. The company applied the strategy when it started selling the compact series seven utility tractors to midsized farms; the company’s tractors have some technological benefits but are not as sophisticated as the larger tractors sold to large-scale farms. The tractors sold on the large farms are ‘high-tech’ tractors, sold in the United States and Canada, which are capable of synchronizing the movements of a grain cart, traveling alongside, as it harvests, and also allow a single driver to control two machines at once (Smith 2006). The sustainability cost strategy has been beneficial to the company, as it has enabled them to sell to customers, who are not able to afford the more sophisticated machines, which allows the company to remain a substantial part of the market. The strategy has been very influential in the firm’s performance, such that after the recall of 7000 units, the company’s share price fell by more than 2%.
- Differentiation Strategy
The firm has applied the differentiation strategy to make its products different from products of other enterprises and even differentiate the products of the same company. SMA Inc. is a business that deals with capital products from two separate sectors; the two sectors are the agriculture and turf, and the construction and forestry industry (Umamaheswari & Divyaa 2015). The products are the same when it comes to the matters of branding, but what makes the products differentiated is breaking down the firm into divisions. Breaking down the company into divisions is said to be differentiation, because, even though the products have the same brand name and belong to the same firm, one group cannot sell the products of another division, and the two are completely differentiated.
- Total Management Scorecard
The firm could also apply the total management scorecard. The total performance scorecard is a strategy to improve the company’s performance. The total performance scorecard focuses on improving the organizational and personal performance of each (Umamaheswari & Divyaa 2015). The method would not only enable the firm to improve its performance, but it would also let the members of staff, starting from the board of directors to the other staff members, come up with ways of improving customer service. The total performance scorecard is divided into two, when it comes to SME Inc., the board of directors should be more concerned about the balanced organizational scorecard. The corporate fair score is more concerned with the thought of how the shareholders see the company and customer satisfaction. Taking, for instance, the situation where the recall of the series seven tractors caused a bad reputation for the firm’s name in that the customers may prefer the tractors from other undertakings in place of tractors from SMA Inc. and the shareholders may also avoid investing in the company because of the fear of making losses (Frakt 2016). The company could employ the technique of target costing to produce a product for the next generation of the series seven tractors. Those tractors will be technologically advanced and will have a price that the farmers will be able to afford. Affordability would encourage shareholders to invest more in the company because it is likely to make more sales than the other firms, hence resulting in higher revenues. The customers would also be satisfied with the technological advancement that the next generation would have taken, hence regaining their trust and they would see the value for money of the tractors.
- Performance Prism Technique
The organization can also adopt the performance prism technique, which focuses on the firm knowing its primary customers and, thus, focuses on analyzing what are the needs of its clients and trying to fulfill them. The firm currently has its largest market in the United States and Canada, where its tractors are used for large-scale production. The farmers in the United States and Canada invest in purchasing farm machines from this company because the firm produces ‘high-tech’ machines. The company has been collecting data from its farm tools over the years (Frakt 2016). The machines have been working in the American and Canadian fields, and the firm is planning to come up with a system, which will be able to communicate with farmers. The systems will enable farmers to achieve maximum productivity, but the problem they are currently facing is a lack of knowledge on how to pick and analyze this data to provide better services in the future and without leaking the farmer’s information. The performance prism would dictate that the firm should try to come up with a way of meeting customer requirements (Serdar Asan & Tanya? 2007). The best alternative would be to liaise with a data analysis company that would do the data and review collection on their behalf and enable them to provide better services to the farmers in the future, based on the collected data.
- Re-engineering Technique
Finally, the firm could use the re-engineering technique. This method involves a rethinking of current business systems. The technology is pegged towards providing better customer services. For SMA Inc. the firm should rethink its current processes and come up with a process that provides better customer services to increase the farmers’ productivity on the farms (Reichel & Lazarova 2013). For instance, the firm should join forces with a data analytics company that could provide expertise to develop products that would analyze the trends from the meta-data collected and turn the data collected into useful information for the farmers. The new products would control the information provided by existing technologies. The products would go further into improving other sectors that the firm deals with, such as the forestry industry; it could be used to improve forest management, thus being a product that would benefit both company divisions. The move would see the company gaining more customers, thus making more sales due to the high level of technology.
The Potential Acquisition of Data Analytics Limited
- Recommendation for the Pursuit of the Prospect
The acquisition of the data analytics company would be a good business prospect for SMA Inc... SMA Inc. has been dealing with large-scale farms in the United States and Canada and has been able to gain meta-data from the farms (Sclater 2016) The company, which makes significant sales due to its ‘high-tech’ machines, would like to make another step towards achieving higher prospects regarding technology to enable its customers to make maximum production. The process of analyzing the data has proved to be a difficult task for the firm, hence the firm needed to find a data analysis company that would do the data analysis for it. SMA Inc. is willing to own the data analytics company, based in the UK, to analyze its data to improve its customer services. Data analytics is a recognized analytics firm with a big number of clients. The acquisition of the data analytics company would be a very prospective business venture for the SMA Inc. Company. The data analytics company has its customers who will continue to provide the revenues for it, even after its acquisition, and also the company’s directors had developed it by gaining two small analytics companies (Sclater 2016). The data analytics company was willing to be backed by another company due to its onboard loan capital, and its willingness to gain investments to develop its products into world-class products. The development of global-class products would also do well with the SMA Inc. Company. From the meeting that was carried out by the board of directors of SMA Inc., an assessment of the performance of the data analytics company over 5 years showed that the committee believes that they could increase the sales from the existing level by 10% in each of the next five years’ compounds (ChungKiHan 2011). The sharing of resources between both companies would also lead to a 15% decrease in R&D expenditures (“Top 20 by 5 Year Compound Annual Dividend Growth Rate (CAGR)” 2007). SAG expenses could also be reduced by 10%. The marketing director and operations director of SMA Inc. believe that after the reduction of the costs that would take place in the first year of ownership, the levels of R&D and SAG would, however, remain the same in between the second and the fifth year.
- Compound Annual Growth Rate
CAGR = (ending value/beginning value) ^ (1/#of years)-1
Beginning value = $1,489
Taking increase in sales to be 10% annually, then: year1 = 1,489 ? 110% = 1,637.90
Year2 = 1,637.90 ? 110% = 1,801.69
Year3 = 1,801.69 ? 110% = 1,981.86
Year4 = 1,981.86 ? 110% = 2,180.05
Year5 = 2,180.05 ? 110% = 2,398.06
CAGR = (2,398.06/1,801.69) ^ (1/5)-1
= 0.06 ? 100
The benefits over five years would be:
? (€2,663.00 ? $1.50)/€1
=$3,994.5 in millions
However, there is a discount cost that is brought about due to the existence of a cost of the capital figure of 10%. The cost of capital figure brings about a discount or simply reduces the revenues that would have initially been realized.
? 90% of 3,994.5
= $3,595.05 in millions
Recommendations for Other Strategic Issues that Should Be Taken into Account Appertaining to the Acquisition
SMA Inc. should consider whether to pay in shares or cash. Each of the two options has an advantage and a disadvantage. From the acquirer’s point of view, payment by cash has more disadvantages than advantages (Livne, Simpson & Talmor 2011). Making payment, using shares, enables the acquiring firm to avoid the need to pay out the money, thus preserving the company’s resources, which could be used to fund other transactions. In the situation between SMA and the data analytics company, it is clear that SMA has a higher P/E rating than the data analytics company. The bootstrapping effect, which would occur in the short run, when an increase in earnings per share occurs on a share for share exchange when a company trading at a higher price to earnings ratio acquires a company trading at a lower price to earnings ratio making SMA Inc. increase its earnings per share (Sclater 2016). The bootstrapping effect does not add shareholder value, but it attracts the data analysis company to get into the acquisition deal.
Another strategy that can be applied in the acquisition is the use of the ‘what can go wrong?’ strategy. This approach involves managers and board of directors of gaining companies to ask themselves various questions about issues that are likely to go wrong with the acquisition (Zwarts 1995). The procurement process is usually likely to go wrong in situations, whereby the targets are larger than the acquirers are. In the case of SMA and data analytics, SMA is greater than data analytics, hence SMA does not have to worry about failures but about strategies that are aimed at improving the acquisitions’ chances of success.
Customer Profitability Analysis
- Analysis of the Customer Segment for the Agriculture and Turf Division
The agriculture and turf industry for SMA Inc. has got its market from the farms, mainly in the United States and Canada. In recent years, with global warming and soil erosion, many people are moving away from the rural areas to settle in urban areas (ChungKiHan 2011). It has been estimated that more than 50% of the world’s population is living in urban areas. It can be said that the reduced sales volume of farm machinery is due to the losses that were made in 2013 due to the bumper harvests that took place after farmers purchased farm machinery and the market prices went down due to a surplus of products in the market, making the farmers realize losses. The realization of losses has resulted in farmers rethinking their investments in farm machinery.
- Observations About the Accuracy of the Analysis
Based on the analysis from the finance director, it can be observed that customers with large-scale firms tend to purchase ‘high-tech’ farm machinery more than both small-scale and middle-scale farmers. The largest sales volume that the business makes is made to the large-scale farmers. The cost allocation that has been done was appropriate (Zwarts 1995). The distribution of costs that has been decided upon is aimed at ensuring the firm does not make losses, should it invest equally in all of the three sectors then the middle and small-scale industry fail to make sales.
- Appropriateness of the Customer Segment Analysis
The customer segment analysis that has been taken by the company is appropriate in that the study goes into finding out what sector of the business market makes the largest purchases from the firm. The analysis has enabled the company to make decisions on where to allocate its resources.
- Evaluation of the Balanced Scorecard
The balanced scorecard strategy has been used in various organizations around the world to align business activities, improve internal and external communication, and monitor the organization’s performance against strategic goals. The balanced scorecard has multiple perspectives, such as learning and growth perspectives. The learning and growth perspective entails an understanding of the continuous changes in technology; thus, resulting in the need for an ongoing learning mode for the employees of the firm (CP 2015). The business process perspective deals with internal business processes that allow managers to know how their business is running. The perspective also enables businessmen to conform to customers’ requirements. Another perspective is the client’s perspective; customer satisfaction is a crucial aspect of the business; when customers are not satisfied, they will eventually find other suppliers and firms that can meet their requirements (CP 2015). Firms have chosen to adopt the performance scorecard strategy to enable them to retain customers, and through the client’s perspective, they can maintain their volumes of sales and even attract more customers, thus the reason why SMA should adopt the balanced scorecard tool. Finally, the balanced scorecard tool also has a financial perspective strategy. Before the creation of the balanced scorecard technique, time and data funding were always crucial, when it came to business. Kaplan and Norton, the creators of the balanced scorecard tool, have recognized the importance of financial data and did not disregard it in their tool. The two improved the aspect of finance by defining the concept of an organization’s success and describing how to create growth in the shareholder value (CP 2015). SMA has been able to apply the perspective to finding ways in which they can increase revenues and reduce losses. The methods that SMA has employed regarding the financial outlook include a substitution of their products and cost allocation.
How the Accounting Team Can Contribute to the Achievement of SMA Inc.
The accountants of SMA Inc. can carry out the audit on how the company spent its money on making machinery that was suited for different markets and the returns that hose markets made, such as determining the amount of money spent on making and advertising products for large-scale markets and the returns made. Such audits would enable the company to make proper resource allocation at the prospect level that would enable the business’ growth. The company’s accountants are also important in keeping records of the company’s performance over the years to allow them to maintain track of the good and low-performing years.