A note on competitor accounting in strategic management accounting

A note on competitor accounting in strategic management accounting

 

Highlight 4 main ideas of competitor accounting in the context of advanced management accounting study.

Competitor accounting: four main ideas

1.    An outward-looking branch of strategic management accounting
Competitor accounting uses accounting and market information about rivals—not only internal cost data—to support strategy. Its purpose is to understand competitors’ current economics, judge a firm’s relative position, and anticipate likely competitive moves.

2.    Competitor cost assessment
Managers estimate a competitor’s unit costs, cost structure, capacity economics, and possible cost advantages. This helps assess whether a rival can profitably cut prices, sustain a low-cost strategy, or match a new product offer. Information may be inferred from public disclosures, suppliers, customers, direct observation, and industry data.

3.    Competitive position monitoring
The firm tracks its position against rivals over time using indicators such as market share, sales volume, prices, unit costs, return on sales, cash flow, capacity use, and resource availability. The key point is comparison: a performance number becomes strategically meaningful when viewed relative to competitors.

4.    Competitor performance appraisal
This involves analysing competitors’ published financial statements, trends, and ratios to evaluate their financial strength and the apparent success of their strategy. For example, a rising operating margin alongside stable sales may suggest improved efficiency, whereas high debt and weakening cash flow may constrain a competitor’s ability to fund expansion.

A useful way to remember the topic is: costs, position, performance, and prediction—with prediction being the strategic purpose that links the other three.

 

Suggest 3 specific examples that competitor accounting could affect contemporary management accounting practices.

Three practical effects

1.    More informed strategic pricing
A retailer can combine its own cost-volume-profit analysis with estimates of rivals’ costs and prices. If a competitor has lower distribution costs, management may avoid an unsustainable price war and instead use value-based pricing, bundles, or service differentiation. Competitor-oriented analysis is specifically relevant to pricing because it incorporates competitors’ price reactions, costs, market share, and customer price sensitivity.

2.    Market-led target costing for new products
When designing a new product, management can begin with the market price likely to be accepted in light of competing offers, deduct the required profit margin, and derive an allowable—or target—cost. This shifts costing from “calculate cost, then add a mark-up” toward “design the product so it can achieve a competitive price and target profit.”

3.    External benchmarking in performance management
A company can add competitor measures—such as relative market share, unit cost, delivery speed, defect rate, or return on sales—to dashboards and balanced scorecards. Rather than asking only, “Did our margin improve?”, managers ask, “Did it improve faster than key competitors’?” Benchmarking can reveal underperformance and identify practices worth adapting.

Simple example: a coffee chain

Imagine Harbour Brew, a Hong Kong coffee chain, is deciding whether to introduce a premium iced coffee.

Traditional management accounting might focus mainly on internal figures:

·        Estimated selling price: HK$42

·        Variable cost per drink: HK$16

·        Contribution per drink: HK$26

That suggests the product looks profitable.

Strategic management accounting adds external and competitor information. Management discovers that key competitors charge HK$38–40, offer loyalty rewards, and can probably withstand price cuts because they buy coffee beans at lower cost. SMA deliberately combines internal accounting data with information about competitors and the wider market when developing and monitoring strategy.

So Harbour Brew changes its decision: rather than launch at HK$42 and risk weak demand, it sets a competitive price of HK$39, redesigns the drink to reduce cost from HK$16 to HK$14, and offers loyalty-app points rather than a blanket discount. The management accountant then monitors not only contribution per drink, but also competitor prices, sales volumes, customer retention, and market share.

The central insight is that a product can appear profitable internally but still be strategically weak when competitor behaviour and customer alternatives are ignored.

 ** references:  a collection of management accounting notes; a useful generative AI tool.