- Explain how accounting affects strategy development
Accounting affects strategy development in a variety of ways. The tax piece can be a huge factor. Take a look at this short video about Marriott Corporation and how accounting affects their strategy from a tax standpoint:
A strategy is a game plan to help a business be successful. It doesn’t just happen by luck or chance, but by planning for success! Companies need to know how to attract the right customers who choose them over a competitor. It isn’t always about price! Think about Walmart trying to get into the upscale clothing market. Would it work? Probably not. It is not in their strategic plan. Their market is to provide products at a low cost, not a high cost.
But then, look at Trek Bicycles. Their goal was to make high quality bikes in the United States. When someone buys a Trek, it isn’t because it is the cheapest bike they could buy, it is because it is a quality U.S. made product. Their strategy is different from the strategy of Walmart. From an accounting standpoint, it isn’t about making the cheapest product. For example, a decision at Trek would not be whether a component that is currently made in their manufacturing facility should be shifted overseas to save money. The decision may be, should they contract with another U.S. based company to make the component, or keep it in house?
Business strategy development may revolve around several different components:
- Customer intimacy. A company such as Trek sets a goal to gain customers because they can customize a bicycle to best meet the customer’s needs. Cost is not a factor.
- Operational excellence. A company such as Walmart gains customers by saying they can provide products and services faster and cheaper than the competition. Price is a factor.
- Product leadership. A company such as Apple who sets a goal to gain customers based on their ability to provide a higher quality product than the competition. Cost is not a factor.
From a managerial accounting standpoint, it is important to understand the strategy of a company. It isn’t always to sell more product or provide more services at a cheaper price. Quality and customization may play a huge role in many strategic plans. Is it better to sell 1000 bicycles for $1000 each that will last the customer for years, or to sell 50,000 bicycles at $50 each that need to be replaced by the customer every two years? The answer to this question will depend on the strategic plan of the company.