Module 1 – Introduction to management accounting

Contents:

• Business environment – Its classification & Features

• General environment - Demographic, socio-cultural, macro-
economic, legal, political, technological, and global - Competitive
environment -
• Strategic Management – Meaning and nature
• Business policy and Strategic Management
• Strategic Management imperative: Vision, Mission, and
Objectives
• Strategic levels in organizations.

Contents
Introduction ...................................................................................................................... 2
Business Environment .................................................................................................... 2
Importance of business environment .......................................................................... 4
Types / Classification of business environment......................................................... 5
General environment ..................................................................................................................... 5
Demographic environment ....................................................................................................... 5
Socio-cultural environment ...................................................................................................... 5
Macro Economic environment.................................................................................................. 6
Legal environment...................................................................................................................... 7
Political environment................................................................................................................. 7
Global environment .................................................................................................................... 7
Competitive environment ......................................................................................................... 8
Internal and external environment ............................................................................................ 9
Internal environment................................................................................................................. 9
External environment................................................................................................................ 9
Strategic Management .................................................................................................. 10
Features / Nature of strategic management........................................................................... 11
Business Policy .............................................................................................................................. 11
 Benefits ....................................................................................................................................... 12
Importance of business policy ................................................................................................ 12
Strategic management imperative ............................................................................. 12
Vision ............................................................................................................................................... 13
Mission ............................................................................................................................................ 13
Objectives ....................................................................................................................................... 14
Value ................................................................................................................................................ 14
Strategic levels in organization .................................................................................. 14
1. Corporate level strategy.......................................................................................................... 15
2. Business level strategy ........................................................................................................... 18
3. Functional level ........................................................................................................................ 19

Introduction
Understanding and designing strategies for an organization requires to study the
nature of business environment. In this light, analysis of business environment is
in dispensable tool for a company.

Business Environment
Business environment is the aggregate of all conditions, events and influences that
surround and affect business.
– Keith Davis
Business environment refers to “the total of all things external / internal to firms
and industries which affect their organization and operation.
– Bayord O. Wheeler
Features of business environment
• Complex:
• Different elements of business environment are closely inter-
related and interdependent.
• It is complex in the sense that it is very difficult to know the exact
influence of a particular factor on the entity.
 • A change in one element affects the other elements. Economic
environment influences the non-economic environment which in turn
affects the economic conditions.
• E.g.: The social pressures against pollution led to the enactment of
anti-pollution laws.
• Dynamic:
• Dynamic means keeps on changing from time to time.
• The volatility prevails in the environment due to constant change
in nature, shape, character and pervasiveness of the varied
influencing factors.
• E.g.: Before COVID-19 pandemic, the small multi-screen theaters
were popular. But now there is a change in trend in the cinema
industry and movies are skipping theatrical releases
• Relativity:
• Business environment is a relative concept. It differs from country
to country and even region to region.
• Capitalist economies like those of USA and UK have a different kind
of environment than communist economies. The nature of economic
system in a country affects the environment of business.
• Uncertainty:
• Business environment is largely uncertain because it is very
difficult to forecast the future environment.
• When the environment is volatile, i.e. changes very fast,
uncertainty increases.
• Far reaching impact:
• Having important and widely applicable effects or implications.
• The business environment has a very great influence not only on
the growth but also on the survival of the organization. If you do
not change as per the changed scenario, the business may come to an
end.
Importance of business environment
• It Helps in Identifying Opportunities and Making First Mover
Advantage:
The environment provides numerous opportunities, and it is necessary to
identify the opportunities to improve the performance of a business.
Early identification gives an opportunity to an enterprise be the first to identify
opportunity instead of losing them to competitors.
Example: ‘Airtel’ identified the need for fast internet and took first-mover
advantage by providing 4G speed to its users followed by Vodafone and Idea.

• It Helps in Tapping Useful Resources:

Business and industry avail the resources (inputs) from the environment and
convert them into usable products (outputs) and provide to society.
The business managers must design the policies that allow the enterprise to get
the resources so that they can convert them into outputs that the consumers
desire.
Example: Technology change led-in manufacturing of LED instead of CRT

• It Helps in Coping With Rapid Changes:

The business environment is changing very rapidly, and the industry is getting
affected by changing market conditions.
Turbulent market environment, less brand loyalty, divisions of markets, changes
in fashions, more demanding customers, and global competition are some
examples of changing the business environment.
Example: Companies adding more features continuously to stand out of
competition.
• It Helps in Improving Performance:
Environmental studies reveal that the success of any enterprise is closely bound
with the changes in the environment.
The enterprises which monitor and adopt suitable business practices not only
improve their performance but become leaders in the industry also.
Example: Indigo airlines - Feedback
Types / Classification of business environment

General environment
It is all about the general factors which affects business. Based on these factors,
the company shall prepare their strategies.
Demographic environment
Demographic environment explains the pattern and changes in the society
It is based on:
✓ Age
✓ Sex
✓ Educational background
✓ Marital status, family size, family life style
✓ Nationality
Demographic environment is useful for marketing decisions, market segmentation
and formulation of marketing strategies. Knowledge of the demographic
environment is very important to a marketer for performance of functions. People
constitute the market and market depends on customers. Demography provides
quantitative as well as qualitative aspects of population.

Socio-cultural environment
The social environment of a nation determines the value system of the society
which in turn affects the marketing of products.
Social factors are:
 ✓ Caste
✓ Customs
✓ Conventions
✓ Cultural heritage
✓ Respect for seniority, etc.
Companies should consider the following while creating strategies:
❖ Changes in people's lifestyles – FASHION, EATERY
❖ Concerns for social problems – RAPIDO, SUSTAINABILITY
❖ Growth of consumerism – BIG BILLION, GREAT INDIAN FEST
Culture influences every aspect of marketing. Marketing decisions are
based on recognition of needs and wants of the customers, which is a function of
customer’s perceptions. These help in understanding of lifestyles and behavior
patterns as they have grown in the society's culture in which the individual has
been groomed. Thus a person's perspective is generated, groomed and conditioned
by culture.
Macro Economic environment
Economic environment is the most significant component of the marketing
environment. It affects the success of a firm. The economic environmental forces
can be studied under two broad categories: (a) General economic conditions (b)
Industrial conditions
General Economic Conditions
❖ Agricultural trends
❖ Industrial output trends
❖ Per capita income trends
❖ Pattern of income distribution
❖ Pattern of savings and expenditures
❖ Price levels
❖ Employment trends
❖ Impact of government policies and
❖ Economic systems
Industrial Conditions
❖ Market growth of the industry
 ❖ Demand patterns of the industry, and
❖ Its stage in product life cycle
Legal environment
Decisions are strongly affected by laws pertaining to competition, price setting,
distribution arrangements, advertising, etc. It is necessary for a manager to
understand the legal environment of the country and the jurisdiction of its
courts. The following laws affecting business in India are important.
✓ Indian Contract Act, 1872
✓ Factories Act, 1948
✓ Minimum Wages Act, 1948
✓ Essential Commodities Act, 1955
✓ Food Products Order
✓ Securities contracts Regulation Act, 1956 (Now replaced by SEBI Act)
✓ The Companies Act, 1956 etc.
Political environment
Political factors play a major role in shaping the environment in which business
organizations operate. Thus, a business organization has to attempt to study and
analyze political environment. Such a study and analysis help in estimating risks
opportunities and threats involved, and then adjusting their decisions and
operations to anticipated changes.
To conclude, the various political factors that should be considered are;
✓ Role of private sector in the economy
✓ Government procedures and changes in government policy
✓ Type of government and stability in government
✓ Role of small-scale industry in the economy
✓ Role of service sector in the economy
Global environment
The global business environment is a complex one. When businesses operate
across national borders to buy, sell, produce or manufacture goods and services in
different countries, they are obligated to consider a number of important variables.
This includes different:
✓ Tax systems and tariffs
✓ Legal requirements
 ✓ Regulatory and compliance frameworks
✓ Social and cultural norms
✓ Political climates
✓ Technologies
✓ Economic and market factors
✓ Shipping and transport processes
Analysis of global environment helps:
❖ Gain a competitive advantage in the global marketplace
❖ Secure new avenues for foreign direct investment
❖ Use evidence to support strong business decision-making
❖ Implement appropriate risk management measures.
Competitive environment
A competitive environment is a system where different businesses compete
with each other by using various marketing channels, promotional strategies,
pricing methods, etc. This system has regulations within it that companies
should follow.
A competitive environment also has a positive effect on customers. Businesses
often offer high-quality goods at an affordable price to win the attention of
consumers. Besides, companies have to bring out their products through
innovations. However, competition can sometimes complicate the existence of a
business.
✓ Many similar businesses are offering similar products or services.
✓ Businesses try to distinguish themselves from their competitors through
price, quality, customer service, etc.
✓ Competition is often intense, and businesses must continually strive to stay
ahead of their competitors.
Analysis tools:
• SWOT
• PESTEL
• Porter’s 5 force model
• Growth-Share matrix
Summary of general business environment
Internal and external environment
Internal environment
It is all the factors which are internal to the company which affects the business
operations. The following includes the internal business environment:
Value System: Value system can be defined as a set of rules and the logical and
consistent values adopted by the firm, as a standard guide, so as to regulate the
conduct in any type of circumstances.
Vision, Mission and Objectives: Vision refers to the overall picture of what the
enterprise wants to attain, whereas mission talks about the organization and its
business, and the reason for its existence. Lastly, objectives refer to the basic
milestones, which are set to be achieved within the specific period of time, with
the available resources.
Management structure and Internal Power Relationship: Management
structure implies the organizational hierarchy, the way in which tasks are
delegated and how they relate, a span of management, relationship amidst various
functional areas, the composition of the board of directors, shareholding pattern
etc.

Human Resource: Human resources are the most important asset of the
organization, as they play a critical role in making or breaking the organization.
The skills, competencies, attitude, dedication, morale and commitment, amounts
to the company’s strengths or weakness.
External environment
It refers to the external factors which affect the business. It is sub-classified into:
 • Micro external
• Macro external
Micro external environment
Competitors: Competitors are the business rivals, which operate in the same
industry, offering the same product and services, and cater to the same audience.
Suppliers: To carry out the production process, the raw material is required
which is provided by the suppliers. The behavior of the supplier has a direct impact
on a company’s business operations.
Customers: Customers are the target audience, i.e. the one who purchases and
consumes the product. The customers are given the most important place in every
business, because, the products are created and promoted for customers only.
Intermediaries: There are a number of individuals or firms that help the
business enterprise in the promotion, selling, distribution and delivery of the
product to the end buyer, which are called as marketing intermediaries. It includes
agents, distributors, dealers, wholesalers, retailers, delivery boys, etc.
Shareholders: Shareholders are the actual owners of the company, as they invest
their money in the company. They get their share in the profits also, in the form
of a dividend. In fact, they have the right to vote at the company’s general meeting.
Macro external environment
It is similar to the general business environment of the company. It includes:
1. Political environment
2. Economic environment
3. Socio-Cultural environment
4. Technological environment
5. Natural environment
6. Legal environment

Strategic Management
“Strategic management is the process of setting goals, procedures, and objectives
in order to make a company or organization more competitive.”
“Strategic management is the process of determining the most efficient allocation
of resources to achieve a business’s short and long-term goals. These resources
could include employees, money, machinery, or technology.”
A strategy is an approach to achieving long-term goals and objectives that most
effectively utilizes resources and aims to create a sustainable competitive
environment.

Features / Nature of strategic management

• Long-term perspective: Strategic management is concerned with
accomplishing long-term goals that are consistent with the mission and
vision of an organization. Making decisions that will affect the
organization’s future for several years or more is a part of the process of
strategic management.
• Unified approach: An organization’s internal strengths and weaknesses,
external opportunities and dangers, and the competitive environment are
all taken into account by a strategic management method, which is an
integrated approach.
• Continuous process: Strategic management requires continuous
monitoring and evaluation. It includes periodic strategy evaluation and
revision in response to developments in the internal and external
environment.
• Holistic perspective: A holistic approach to strategic management
acknowledges that an organization is a complex system of interconnected
sections. It refers to taking into account how several functional areas,
including marketing, finance, and operations, are interdependent and
formulating plans that represent these areas.
• Risk management: To implement strategies, risks, and uncertainties
must be managed strategically. It involves finding possible threats,
determining their probability and impact, and creating backup strategies
that reduce them.

Business Policy
A business policy is a set of guidelines that define the limits within which people
at a subordinate level can make decisions and solve issues.
A good business policy and strategic management give equal opportunities to all
employees to move forward professionally.
Benefits
• It solves business problems
• It ensures equality
• Helps in company’s growth
• Maintains consistency
Importance of business policy

Strategic management imperative

A strategic imperative is a business goal, objective or target that has the
highest priority.
It is of three:
Vision
Vision is the planned result that the organization intends to accomplish or
produce.
In strategic formulation, vision plays a critical role as it provides a guiding
framework for all the actions and decisions made.
A clear and well-defined vision has the capacity to identify and prioritize the
current situation and the overall goal that an organization desires.
A good vision should be:
✓ Positive and future focused
✓ Creates a single purpose
✓ Clear and easy
✓ Challenging and ambitious
✓ Inspiring
✓ Inclusion of all stakeholders
✓ Guides decision and effort
✓ Sustainability

Mission
A mission statement describes the organization’s purpose, guiding principles,
and primary objectives.
• It serves as the framework for establishing strategic objectives and
deciding the overall course of the organization.
• A well-defined mission statement makes strategic decisions that are
consistent with an organization’s purpose and values.
• By clearly defining its mission, an organization can identify and prioritize
its key objectives and goals.
• It assists the organization in developing a clear, coordinated plan that is
based on its specific objective.
 • A mission statement can assist an organization in communicating its
goals and values to its many groups, such as partners, consumers, investors,
and staff.

Objectives
❖ Objective shows the end results of a planned activity. Objectives represent
a commitment at a manager level to achieve specific goals and targets in
a defined span of time. It also tells the quality as well as the quantity of
goals and targets to be achieved, also about the process, the time period,
levels and about the authority who is responsible to carry out that objective.
❖ Narrower aims: To work toward achieving these overall objectives,
organizations also need to create goals, narrower aims that should
provide clear and tangible guidance to employees as they perform
their work on a daily basis.
❖ Alignment: Establishing goals and objectives that align with an
organization’s overall vision and mission.

Value
Values are the guiding principles that define an organization’s culture,
behaviour, and decision-making process. It is essential to match its strategic
goals with those of the organization so that the organization may accomplish its
goals in a manner that is consistent with its values.
It is to be made as:
Defining the organization’s values: This requires determining the values and
beliefs that are essential to the organization and help direct its actions and
decision-making.
Coordinating an organization’s values with its mission: To make sure that
the organization is working towards achieving its goals in accordance with its
principles, it is essential to make sure that the values are in line with the mission
statement.

Strategic levels in organization

There are mainly three levels of strategy in an organization. Some times, it could
be even four.
What is strategy?
Strategy can be defined as the effective path to achieving organizational goals and
objectives in the best possible way.

1. Corporate level strategy

Corporate level strategy is the uppermost level of strategy made by top-level
management which sets the overall direction of the organization. It addresses the
question of what business are we in?
The corporate level strategy attempts to obtain synergy among employees, product
lines, business units, and other components of the organization believing that the
whole is greater than the aggregate of individuals.
The corporate strategy works based on what the organization wants to achieve
overall and sets strategies following the overall goals and objectives. Corporate-
level strategies are set deriving ideas from vision and mission statements.
As the organizational parent, the corporate headquarters works with diverse
products and business units as children. These business units are coordinated at
the corporate level so that the company as a whole succeeds as a family.

Types of corporate strategies

01. Growth Expansion / Strategy
The growth strategy aims to increase sales, assets, profits, or a combination
of the three. It allows businesses to take advantage of the growth curve and
lower the per-unit cost of products sold, resulting in higher profitability. Due
to the increased availability of financial resources, organizational procedures, and
external links, larger organizations tend to endure longer than smaller companies.

Benefits
• Market Saturation
• Economies of Scale
• Diversification
• Competitive Advantage
• Access to Talent and Innovation

02. Stability Strategy

The stability strategy is a strategy that tries to keep an organization’s existing
activities going without making any significant changes in direction.
Maintaining existing products, markets, and operations is a priority. A stability
strategy can be beneficial in the short term, but it can be harmful if used for an
extended period of time.

Benefits:
• Market Stability: To maintain their current market position
• Consolidating Gains: For ensuring they can sustain their current success
rather than pushing for rapid expansion.
• Risk Mitigation: To reduce exposure to external risks.
• Resource Allocation: Optimizing their existing operations.
 • Preserving Brand Equity: Through focusing on maintaining current
customer loyalty and market presence.

03. Retrenchment Strategy

Retrenchment is a defensive nature of strategy. A retrenchment strategy is a
business approach that tries to diminish a company’s size or diversity.
It also entails cutting costs in order to maintain financial stability. It is used to
limit the diversity of the company’s operations or to reduce the overall scale of
the company’s operations. A retrenchment plan entails exiting specific markets or
discontinuing specific products or services.

Benefits:
Cost Reduction: Minimize expenses to improve profitability.
• Financial Distress: Address financial difficulties and instability.
• Reorganization: Streamline operations and enhance efficiency.
• Market Shrinkage: Adapt to declining market demand.
• Strategic Focus: Concentrate on core strengths and competencies.

04. Combined Strategy

When an organization operates in a variety of environments, separate strategic
business units and products follow a combination strategy. In other words, a firm
is said to be implementing a combination strategy if it uses stability, expansion,
and retrenchment strategies in its many strategic business units at the same
time. It is primarily used to solve a variety of environmental issues.

Benefits:
• Risk Diversification: Spread exposure to minimize vulnerability.
• Optimal Resource Allocation: Balance capital, human, and time resources.
• Adaptation to Market Dynamics: Flexible response to changing conditions.
• Enhanced Competitive Position: Maintain advantage in diverse areas.
• Synergy and Innovation: Foster creativity through diverse strategies.
2. Business level strategy
Business strategy is the most common level of strategy. Business level strategy is the
which is designed to use the best use of organizational competencies to gain a
long-term competitive advantage over competitors.

Business strategy deals with the question of how do we compete? It aims to how to
best successfully compete with competitors so that competitive advantage will be
gained.

SBU: A strategic business unit is a division of an organization that has a separate

district external market for goods and services from the other strategic business units.

SBU

Cost leadership Differentiation Focus / Niche

strategy Strategy strategy

What is an SBU?
An SBU level strategy allows an organization to allocate resources and teams that
manage products as independent entities. They focus on the long-term
objectives of each product. By dividing an organization into SBUs, each unit
can focus on specific markets, products, or services.
Cost leadership strategy
The cost leadership/cost reduction strategy is a step in producing goods or services
with attributes that customers find acceptable at a lower cost than competitors.
This strategy typically involves selling standardized goods or services to the
industry’s cost-conscious clients. Cost leaders focus on lowering their costs in
comparison to their rivals.
Differentiation Strategy
The differentiation strategy is an endeavor to produce goods or services that
buyers perceive as unique (at a reasonable cost). Differentiators, unlike cost
leaders, target clients for whom value is created in a way that sets the firm’s
offerings apart from the competition. As a result, product innovation is crucial to
a differentiation strategy’s success.
Focus / Niche Strategy
The focus/niche strategy entails producing goods or services that cater to the needs
of a specific competitive segment. Firms use their core capabilities to fulfill the
demands of a certain industry segment, a different segment of a product line, a
different geographic market, or a specific customer group when they use a focus
strategy.

3. Functional level
The functional level strategy also called operational level strategy is developed to
run effectively the day-to-day activities of the organization. Most operational
strategies are no longer than one year.
The functional level strategies aim to deal with the question of how do we support
the business-level strategy?
At the functional level, resources, work pressure, information, and manpower are
integrated to bring effectiveness to the business and corporate-level strategies.
Functional strategies are for short time usually less than one year.
These strategies are related to capability, efficiency, customer service, product
quality, and marketing.
Summary of strategic levels in organization