The Views of Different Writers on What Constitutes Strategic Management Accounting - Term Paper Example

The views of different on what constitutes Strategic Management Accounting Introduction The introduction of strategic management accounting in corporations around the world has been imposed by the increased needs of these firms for accurate and effective evaluations of their financial data that will be valuable for the design and implementation of corporate plans within all firm’s operational sectors. In accordance with Lord (1996, 347) ‘the term ‘strategic management accounting’ has been in the management accounting literature for more than a decade; despite many papers on the subject, there still seems to be a paucity of examples of strategic management accounting actually being used’. Moreover, strategic management accounting is extensively used by firms around the world as it can offer a unique combination of financial measurement and strategic planning. In this context, it is noticed by Lord (1996, 348) that ‘a firm which monitors market share can measure the extent to which it is gaining or losing competitive position; knowledge of a competitor’s costs enables a firm to detect when the competitor is trying to change relative competitive positions, for example, by manipulating prices; knowledge of relative market share and cost structure enables decisions to be evaluated in the light of possible competitor reactions’. In other words, the implementation of strategic management accounting techniques within a particular organization can help the specific firm to enhance its performance through an effective and accurate measurement of its operational activities. The characteristics and the role of strategic management are going to be examined in this paper, in accordance with the theories that have been developed in this area trying to highlight the importance of strategic management accounting for organizations around the world. Literature Review The development of the firm’s performance within the modern commercial markets is a target difficult to be achieved. More specifically, because market conditions tend to change on a constant basis, the evaluation of the firm’s need for a valid and effective managerial plan became extremely difficult. In this context, it has been supported by Chenhall et al. (1998, 243) that ‘the formulation of a clear set of strategic priorities is recognized as an important aspect of effective management’. It is also supported that ‘these strategic priorities may not be sufficient to achieve competitive advantage and ensure high organizational performance and for this reason they should be supported by appropriate and effectively implemented manufacturing processes and information systems, including those providing management accounting information’ (Chenhall et al., 1998, 243). In other words, the creation of strategic management accounting as a fundamental sector of strategic management has been the result of the failure of common managerial techniques to respond to the increased needs of corporations worldwide. On the other hand, in accordance with Lord (1996, 353) Hergert and Morris (1989) ‘asserted that much accounting information is not in a suitable form to be used in analysing the value chain; they pointed out that traditional management accounting systems do not adequately quantify the costs and benefits of joint optimization and coordination between parts of the firm , and between the firm and its suppliers and buyers; currently , firms are organized into divisions or responsibility centres on the basis of products or functions , which may obscure linkages and for this reason firms need to be organized into strategic business units according to critical activities , with the accumulation of accounting data for each activity’. In this context, Nanni et al (1992) supported that ‘cost driver analysis needs to be dynamic continuous improvement may reduce cost drivers to such insignificant levels that they have to be replaced with new cost drivers; in this way performance measurement can be used both as a guide to putting strategy into action and for evaluation of actions taken; it is preferable though that both financial and non-financial measures be used’ (p.17, in Lord, 1996, 352). According to Simmonds (1981), SMA is: ‘the provision and analysis of management accounting data about a business and its competitors for use in developing and monitoring the business strategy, particularly relative levels and trends in real costs and prices, volume, market share, cash flow and the proportion demanded of a firm’s total resources’ (p.26, in Coad, 1996, 392) Figure 1 – Conventional versus strategic management accounting (source: Coad, 1996, 343) It should be noticed that the development of Strategic Management Accounting has led to the increase of the accountant’s obligations towards the firms around the world. In this context, Bromwich et al. (1994) supported that ‘SMA demands new skills and aptitudes of accountants which extend beyond their usual areas, and require cooperation with general management, marketing and production specialists, many of whom may not have a good image of accountants’ (Bromwich et al., 1994, in Coad, 1996, 393). In fact it has been proved that SMA has specific standards which should be followed by all accountants that would be interested in dealing with this particular managerial sector. Specifically for Britain it has been noticed by Coad (1996, 393) that SMA is rarely programmed into the accounting routine of U. K. companies, and therefore requires the energetic commitment of a proactive advocate; too often, the reaction of accountants to being told to consider competitors’ cost structures is that it cannot be done; one of the reasons for this may be that, until quite recently, accountants were not educated in strategy, and may not have played a major role in strategy formation; another reason may be that performance-oriented management accountants, fearing failure, may avoid the challenge of unfamiliar work’. Under the above terms, it is clear that SMA ‘entails the management accountant’s contribution to corporate strategy and that this will involve the provision of financial and other related information of competitors’ costs and cost structures and monitoring the company’s strategies against those of its competitors over a number of periods involving therefore a more explicit external focus for management accountants, but this is not all there is to SMA; a comprehensive approach to SMA would also involve new forms of internal analysis and accounting process/ roles that will help management devise better strategies’ (Management Accounting Research, 1996, 165). Moreover, it should be taken into account that the knowledge required for practicing SMA is really complex as it combines the principles of accounting with those of management. The result is that in many cases even experienced accountant fail to meet the requirements of SMA mostly because their knowledge is limited to the accounting rules. In this context, the adaptation of accountants in a SMA environment can be gradual, based on their participation on the firm’s strategic decision, a rather rare phenomenon in most firms around the world. Govindarajan et al. (1992) refers particularly to the role of SMA in the formulation of firm’s strategy. Towards this direction they support that SMA has many different perspectives and can intervene the following four stages of strategic management process: ‘strategy formulation, strategy communication, strategy implementation and strategic control where the following three ‘themes’ are applied: Value Chain Analysis; Strategic Positioning Analysis; and Cost Driver Analysis which are used to formulate a framework concerned with the relationship between strategy and management accounting; this framework is the ‘Strategic Cost Management’ which is defined as ‘the managerial use of cost information explicitly directed at one or more of the four stages of the strategic management cycle’ (Shank, 1989, p. 50 in Guilding, 2000, 116). On the other hand, Bromwich ‘focuses on the final goods markets defining SMA as the provision and analysis of financial information on the firm’s product markets and competitor’s costs and cost structures and the monitoring of the enterprise’s strategies and those of its competitors in these markets over a number of periods (Bromwich, 1990, p.28 in Guilding, 2000, 117). The particular influences of SMA in corporate performance have been examined by Kasurinen (2002). According to the above researcher SMA can help to the increase of firm’s performance through the provision of valuable information regarding the firm’s overall operational activities. For this reason, Kasurinen (2002, 324) trying ‘to understand how different factors combine and interact to provide ‘real life’ circumstances which either result, or do not result, in accounting change, a strand of studies has analysed the influencing factors in the change process’ refers to the study of Innes et al (1990) which ‘divided the factors associated with change into three categories on the basis of the nature and timing of their influence; motivators were related to change in a general manner while the motivating role of a competitive market, organizational structure and production technology is being presented’ (Kasurinen, 2002, 324). In other words, SMA can lead to significant changes within a particular organizational environment but only under the terms of a continuous and appropriate interaction with the commercial market in general which will indicate the factors on which SMA should intervene. In this context, Kasurinen (2002, 324) found that ‘catalysts could be directly associated with the change; as to this category the following examples are provided: poor financial performance, loss of market share and the launch of a competing product; facilitators (like for example the accounting staff, accounting computing resources and the degree of autonomy from the parent company) are necessary but not sufficient, per se, to result in the change’. The participation of strategic management accounting in the strategic management decision process has been examined thoroughly in order to identify the points where SMA has helped the firm’s strategic planning to be more accurate and effective. In this context, Cinquini et al. (2006, 5) refer to the study of Gupta et al (1984) who ‘adopt a life-cycle approach using the concept of strategic mission (or portfolio strategy). According to life-cycle stage in which the market and product match each other, the company will prefer one mission or another one describing four strategic missions depending on the balance between the objectives of market-share growth and short-run profit maximization: Build strategy aims to increase market share and competitive position, even at the expense of short term earnings and cash flow; Harvest strategy aims at maximising short term earnings and cash flow rather than improving market share; Hold strategy finds itself in the middle between the previous configurations and divest strategy implies the choice to end the activity’. On the other hand, it has been supported by Seal (2001, 489) that ‘management accounting cannot be presented as a purely autopoietic system but rather as a set of designed systems that may develop autopoietic tendencies; in the latter respect, there are similarities between the autopoietic approach and those institutionalist theories of management accounting change that stress the importance of organizational routines and habits, recognizing their persistence in spite of new organizational circumstances; the theory of autopoiesis explicitly explores the dilemma that some forms of organizational design and control (usually analysed as a form of organizational regulation) may actually damage system self-production’. In accordance with the above comments, SMA can have an active role in the firm’s strategic planning procedure but only under the terms that it will be formulated in accordance with the firm’s needs and the conditions of the particular market. Figure 2 – Accounting Change Model (Kasurinen, 2002, 325) Strategic Management Accounting can be also used as an indirect tool towards the control and the evaluation of the decisions made in the firm’s strategic management department. More specifically, in accordance with Marnet (2005, 613) ‘key factors in monitoring senior managements performance include the composition and independence of outside board members, issues of transparency, outside reporting, accounting standards, and shareholder composition while empirical research on corporate governance typically investigates quantifiable relationships between measures of corporate performance and specific remedies to agency problems, including the number and independence of directors on a company board or board committees and the independence of external auditors’. More specifically, the auditing procedure as a necessary element of the strategic management accounting helps the company to identify any potential weaknesses eliminating failures that could be possibly observed by interested investors. The above assumption is justified also by the views of Mercer (2004, 185) who located four issues that potential investors usually examine ‘when assessing the credibility of a management disclosure: (1) situational incentives at the time of the disclosure, (2) managements credibility (i.e., competence and trustworthiness), (3) the levels of external and internal assurance, and (4) characteristics of the disclosure itself’. From a different point of view Dermer (1990) proposed that ‘accounting has three roles in shaping strategy: it may be used as a language of discourse as an authority establishing and maintaining credibility, and as a provider of an historical context for strategy; however if accounting is considered with its economic basis, is unable to deal with the human factors in a firm, such as interest groups, and the overall mood of the organization but stakeholders may use accounting systems to support their own strategy’ (p. 74, in Lord, 1996, 353). In other words, SMA can be used both as a tool for performance measurement and as a ‘vehicle’ for future development combined with the business strategic planning. In order to check the effectiveness of SMA within a specific organization, Henri (2006, 547) used a management control system (PMS) which was going to be implemented in a particular organization in order to support the firm’s strategic decisions. In accordance with the findings of the above research ‘PMS used in an interactive (diagnostic) fashion contribute positively (negatively) to the deployment of capabilities of market orientation, entrepreneurship, innovativeness, and organizational learning while from its balanced use emerges dynamic tension which also contributes positively to capabilities in a context of high environmental uncertainty and organizational culture reflecting flexibility values; globally, dynamic tension contributes to organizational performance and their management may constitute a form of capability’. Towards the above direction, Cinquini et al. (2006, 4) refer to the study of Miles & Snow (1978) who consider that ‘management has to face three types of problem: the entrepreneurial (the strategic management of product and markets), the technological (the production and distribution of products) and the administrative one (the organization to support the entrepreneurial and technical decisions); when these problems are solved in a successful manner, a stable strategic pattern is identified’. On the other hand, Argyris (1994) introduced ‘two processes required to implement a new practice for managing an organization: a) an education and sponsorship process enables change advocates to explore and articulate the merits of the innovation, and gain management support for acting in accordance with the proposed idea, b) the second process, titled internal commitment creation, is required to overcome the barriers resulting from defensive routines, which aim to avoid the experience of embarrassment or threat by bypassing the situations that may trigger these responses; in other words, the commitment creation process aims at motivating individuals to implement the new ideas and to take action based on their implications’ (Argyris et al., 1994 in Kasurinen, 2002, 325). In other words, the implementation of SMA within a particular organization has to be combined with a series of other relevant management plans that will provide to SMA all the appropriate information and support in order to produce the results expected by its implementation. Several researchers have tried to evaluate the effectiveness of strategic management accounting under ‘real conditions’. In this context, Simons (1987) used ‘questionnaires and interviews to test the relationship between accounting control systems and business strategy’ and for this reason he ‘divided the firms studied into prospectors and defenders and found that prospector firms place great importance on forecast data , setting tight budget goals and monitoring outputs , with reduced importance on cost control while large prospectors ‘emphasize frequent reporting and the use of uniform control systems; defenders appear to use their control systems less intensively placing their emphasis on ‘bonus remuneration based on the achievement of budget targets’ (Simons, 1987, 370, in Lord, 1996, 352). The nature and the characteristics of SMA are not very easy to be identified. In accordance with a report published recently (Strategic Management Accounting and the Balanced Scorecard) we could ‘illustrate the basic ideas of SMA by looking at one of the leading retailers in the United Kingdom, Tesco, which has tailored its key performance indicators to the economics of its business. For example, rather than maximise EVA, Tesco has realised that its main fixed assets are its stores. With this type of asset base, the company aims to reduce the cost of building good quality new stores through strategic partnering with construction companies. In order to check its market positioning, the company is constantly monitoring the prices of its merchandise relative to the prices charged by its main competitors’. The above report which refers to the case of a successful UK retailer can be used in order to evaluate the positive effects of SMA in modern corporations. However, it should be noticed that these effects can be achieved only if SMA is implemented successfully and be monitored closely as of its performance. Conclusion The role of strategic management accounting in the development of corporate performance cannot be doubted. Moreover, as the theories presented above showed, SMA can help to the improvement of several organizational sectors in accordance with the targets set by the firm’s strategic management team. Simmonds (1992, 47) noticed that ‘since its first beginnings as factory costing 100 years ago, management accounting has focused on practical skills; it has been about actual measurements and what they indicate for action; management accounting practice, however, can go ashtray; without theory is difficult to decide which of the plethora of techniques and practices that have built up over the years should be utilized’. In other words, strategic management accounting should be based on the appropriate theoretical framework with which it should be considered as closely connected. In fact, there could be no effective and integrate strategic management accounting without the simultaneous application of relevant theory and practice as it has to be evaluated and structured for its particular organization. (words: 2978) References Argyris, C., Kaplan, R. S. (1994). Implementing new knowledge: the case of activity-based costing. Accounting Horizons, 8, 83–105 Bromwich, M., Bhimini, A. (1994) Management Accounting: Pathways to Progress. London, C. I. M. A. Publishing Bromwich, M. (1990) The case for strategic management accounting: the role of accounting information for strategy in competitive markets. Accounting, Organizations and Society, 1(2): 27-46. Chenhall, R., Langfield-Smith, K. (1998). 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