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  • 1. Unlocking the potential of Strategic Management Accounting: some reflections on evidence from the literature Esinath Ndiweni- Cardiff School of Management Abstract This paper explores possible reasons as to why the potential of strategic management accounting (SMA) has not been realised. It is over twenty years ago since the notion of SMA was first mooted. The exploration is based on a critical reflection on the evidence garnered from the literature and documented case studies in the United Kingdom and New Zealand. Findings from two case studies are reviewed. The case studies appeared in the Management Accounting Research Journal of 1990 and 1996 respectively (see Rickwood et al., 1990 and Lord, 1996). The first case study demonstrates how the management accountant used his monopoly position to coerce marketing to get the information he wanted. The paper concludes that through domination of others management accountants colonise information gathered by other disciplines such as marketing for strategic purposes and use it in power relations, in turn stifling the potential of SMA. On the other hand, the second case study indicates that most of the so- called ‘strategic management accounting information’ already existed in organisations. It was collected by operations personnel without the involvement of the management accountant and was openly discussed in multi-functional team meetings. This finding has implications with regards to how and where we locate SMA in organisations. The paper concludes that SMA is an interdisciplinary field and cannot be narrowly construed to be an extension of management accounting. It also argues that emphasis on functionality in organisation design and in business school curriculum has not aided the promotion of interdisciplinary or cross functional studies. Correspondence details: Cardiff School of Management University of Wales Institute, Cardiff Colchester Avenue Campus Cardiff, CF23 9XR Tel:+44 (0)29 2041 7322 Email: endiweni@uwic.ac.uk
  • 2. 1. Introduction The development of strategic management accounting (SMA) can be traced to the early 1980s. The term SMA gained ascendancy against the backdrop of the criticisms of the relevance of management accounting in the new manufacturing environments characterised by computer aided design (CAD); just in time (JIT); and flexible manufacturing systems (FM) (Johnson and Kaplan, 1987). As an emerging field of study SMA is marked by loose boundaries, disparate and disjointed literature (Coad, 1996). In recent years the boundaries of management accounting have been blurring ever since with SMA seen as its extension. Within this new framework several elements have emerged such as strategic cost management (Shank, 1989); value chain costing and analysis (Bromwich, 1990); balanced scorecard Kaplan and Norton, 1996); customer profitability analysis; non- financial indicators or performance measures, quality costing; value analysis, life cycle costing, target costing, all of which are classed as part of SMA. However, evidence of the use of SMA techniques by companies has remained sparse both in the U.K. and U.S. despite the perceived potential benefits claimed in the literature (Guilding et al., 2000). This paper explores possible reasons as to why the project of strategic management accounting has not come to fruition. It also poses questions about the ownership of strategic management accounting techniques. Do they reside in the accountant’s domain or as a practice SMA is everybody’s business? This exploration is done through a critical review of the literature on SMA, organisation analysis and business strategy. The literature on SMA is encapsulated in two case studies, one based in the U.K and the other in N.Z. The next section examines the literature on strategic management accounting highlighting the main themes. The third gives the background to the case studies, one in the U.K. and the other in N.Z while the fourth presents the discussion and conclusion. 2. Strategic management accounting (SMA) In his pioneering work Simmonds (1981) defined strategic management accounting as the provision of management accounting data about a business and its competitors which are of use in the development and monitoring of the strategy of the business. This definition is expanded upon by Bromwich (1989) to include an analysis of a firm’s product markets and competitors’ costs and cost structures. Both configurations reflect an affinity of management accounting with marketing (Roslender and Hart, 2002). Noteworthy is the fact that both definitions reflect the interdisciplinary nature of SMA. Sales and marketing personnel it could be argued are in a better position than management accountants to collect data about competitors from customers. Right from its inception, the term strategic management accounting has remained a misnomer hence some findings in the literature that it is still not appreciated by most accounting practitioners (Guilding et al., 2000). The argument of this paper is that firms need strategic management information which does not necessarily have to be accounting related or gathered by accountants. The literature on SMA can be divided into four categories, namely external focus of management accounting as opposed to internal focus; accounting for competitive advantage; strategic cost management and accounting for continuous improvement. Simmonds (1981, 1982) and Bromwich (1988) emphasise the focus on external matters such as competitor costs and the firm’s markets. They argue that is where competitors challenge the enterprise. As alluded to earlier, external focus is important but requires all employees to be alert and proactive in identifying any data that might impact the firm’s strategies. 2
  • 3. Porter (1980, 1985) suggested that competitive advantage could be obtained through product differentiation. A combination of elements such as low cost, product quality, product attributes may lead to differentiation however these cannot be achieved by accountants alone. Product differentiation requires input from product designers, production engineers, marketing and accountants. Similarly, strategic cost management advocated by Shank and Govindarajan (1992) requires input from across disciplines. Several techniques such as value chain analysis and cost driver analysis have been developed to achieve some of the objectives of SMA; however there is little evidence of their actual use in organisations. Guilding et al., (2000) investigated the incidence and perceived merit of 12 SMA practices in large companies in the U.K., U.S. and N.Z. Their findings indicated that most of the SMA practices appraised were not widely used. When controlling for company size, they found that there was a suggestion that some practices are used relatively more in N.Z. and relatively less in the U.K. and the U.S. Rather, disappointingly there appears to be negligible use of the term `strategic management accounting` particularly in the U.S. and practising accountants had a limited appreciation of what the term means. This finding is disturbing considering that it is more than two decades since SMA was first mooted. This paper explores possible explanations for this state of affairs. The exploration is informed by reflections on the literature and evidence from case studies. 3. Review of case studies The paper adopts a critical approach to the review informed by theoretical concepts of domination, colonisation, and alienation. All these concepts resonate in sociology and politics, however in the review of the following case studies they are used in a narrow sense. Domination is used in the context of professional dominance in organisations. It refers to the dominance of the management accounting function in making strategic decisions which are based on interdisciplinary data. Colonisation, in this paper echoes a similar view to domination but actually refers to data which is hijacked from marketing and used to develop budgets which are later used in power relationships. Again only the management accountant in one of the case studies reviewed below is said to have used his monopoly position to pin down marketing to supply data. Finally, alienation has been used in a narrow sense to reflect the experiences of the marginalised participants in the strategy formulation. According to the authors the first case study demonstrates how management accounting adopted a strategic perspective, while the second case study shows that elements of strategic management accounting already exist in firms and may not be associated with management accountants. 3.1 Case one- Stapylton The case study was conducted by Rickwood et al. (1990) in the U.K. The case concerns a company’s response to action by a major competitor considered to pose a threat to its market position. The information about a potential threat was identified by Stapylton’s marketing function from a customer. Staplyton’s competitive success was achieved while maintaining a premium of about 5% in the selling price. The premium was linked to two features namely –that the particular process adopted in its production resulted in a product which was easier to use and the size of the package. Stapylton used a 400 ml container of distinctive shape and colour while its competitor used 500ml packages. This size difference meant that despite the 5% premium, the unit shelf price per container of the Stapylton product was 16% lower than that of the competitor. A competitor was planning to match Stapylton’s packaging of this product and reveal its lower price per ml. The main objective of management was to reconsider their pricing and advertising policy in order to counter the threat to its market position from the competitor. The interactions between the management accountant and marketing personnel were crucial in the formulation of the new policy regarding this particular product. In the words of Bromwich and Bhimani (1989) Stapylton now needed strategic 3
  • 4. management accounting which sought to estimate their costs relative to their competitor. Sources of data about the external environment Monthly reports prepared by a national market research agency which quantified a number of aspects of consumer activity in this particular product market were received by the management accounting function and distributed to other functions in the organisation. Major emphasis was given to information on market share and the prices paid by customers. The information was supplemented by the companies’ own weekly survey. Data were collected by sales staff making observations at retail outlets and collated with competitors’ and retailers’ advertising material from the media. The price volume information was considered at regular monthly meetings of the management team which comprised sales, marketing, finance, procurement and production executives. There was recognition that volume and, in particular market share, showed sensitivity to the relative product price represented by the size of the premium. Stapylton management identified three areas of data need: • information was required to establish the effects on Stapylton’s cost of any resulting changes in volume or efficiency through modifying production methods or facilities; • it was necessary to assess the potential competitive reaction by the competitor in response to a policy change by Stapylton; • Information was needed in quantified form to assess the effects of price and advertising policies on Stapylton (Rickwood et al., 1990:41). It is clear from the above three areas that information required was not the preserve of management accounting. Modifying plant facilities requires input from engineers and product designers. The second set of information could effectively be collected by sales and marketing while accounting would perform the last step to assess the effects of price and advertising policies using sensitivity analysis. What is interesting from this case is how the role played by management accounting is cast. Some excerpts are included to underscore the argument of this paper. The objective was to give specific consideration to a re-pricing policy and or an extended advertising policy. The management accountant had this to say: ` My problem, as the accountant, was to pin down the marketing man to having to quantify the various options. Accounting played the right part and made them quantify. I would ask ‘if you want £1m for advertising what will you give me in increased sales volume? What would be the effect of a price cut of 2%, 4%, or zero? These questions I made them answer so it was capable of quantification, but it was up to me to work them out.’ According to the authors, the management accountant made it clear to marketing that the information obtained would be incorporated into the budget. The accountants used their monopoly position since only they had access to the relevant data and they selected the policy for cost determination which resulted in the valuation of alternative possible outcomes. The authors acknowledge that the information was not freely available but had to be obtained from those who possessed it or were able to formulate it possibly without their willing co-operation. It is this general acceptance of bullying tactics used by accountants on other disciplines to get information, that this paper argues stifles the potential to develop strategic management accounting. The authors further state that the accountant put marketing in a dilemma to force them to provide realistic data. In this case study the contribution of production and design engineers is downplayed and not recorded. 4
  • 5. 3.2 Case two- Cyclemakers Group (NZ) Ltd Cyclemakers was established, with a stated policy of flexibility in order to satisfy customer needs in direct competition with two dominant manufacturers. Six years after it was formed the Government deregulated the industry, opening it up for competition. Cyclemakers differentiated its product on the basis of high quality, flexibility and satisfying consumer demand. At the time of repositioning there was no-one in the firm with accounting training. When a management accountant was finally engaged, he changed from a manual to a computerised system and maintained the status quo. Lord (1996) argues that despite the lack of change in the management accounting system, many elements ascribed to SMA were evident in the firm without the involvement of management accountants. Examples of such elements were, the collection of competitor information; exploitation of cost reduction opportunities; and matching of accounting emphasis with strategy. Data collection Sales representatives regularly reported competitor information such as sales volumes and prices to the managing director. Competitor costs were estimated from Cyclemakers’ knowledge of its own costs and observation of components on its competitor’s products. Market share was estimated from knowledge of number of cycles sold by dealers and customs records of imports. Cyclemakers used the competitor information to differentiate its own products and used its sales representatives to inform retailers about the unique attributes of their own products. What is important to note in this case is that information was not collected or recorded by management accounting (Lord, 1996:357). Cyclemakers entered into strategic alliances to help reduce costs of its components. It negotiated terms with employees to stabilise labour costs. It also bought a computer program to simplify the design of custom frames. Non-value added labour was reduced by the introduction of computer-aided design. When an opportunity arose to set up a new factory, Cyclemakers restructured it to reduce handling time and speed up throughput time. One of its main competitive advantages was product quality. The quality manager introduced a total quality management (TQM) system whereby workers were empowered to detect errors as soon as possible. A reward and punishment system was instituted to motivate workers to find errors. Cyclemakers used target pricing, replacing expensive components with cheaper ones to reduce prices. Again these cost saving measures were not being spearheaded by management accountants. From this case study it is apparent that collecting information for strategic purposes must involve everyone in the organisation not just accountants. 4. Discussion Drawing from insights gleaned from the first case study the paper argues that tactics used by management accountants to elicit information from other functions may in fact be hindering the development of strategic management accounting. Rickwood et al.,(1990) state that the management accountant at Stapylton occupied a monopoly position when compared with marketing. He obtained most of the data for inputting into strategy from sales and marketing; however he retained control over the data. With reference to the budget, he withheld some of the information from marketing to demonstrate his power. In an ideal situation, the marketing budget should have been drafted by the marketing function; however in this organisation how the budget was formulated was the prerogative of the accountant. The management accountant emphasised the need for marketing to quantify, so that he could make his estimates. However, it is obvious that not all important information can be quantified; moreover sales forecasts are mere estimates and not accurate predictions. In their commentary the authors state that using the data as the basis for both budget setting and for providing resources provided disincentives to distort information in either direction (see p. 44). Marketing had to trade off additional funding against higher performance. This 5
  • 6. statement alludes to a lack of trust and bad faith on the part of management accountants. The contention of this paper is that accountants seem not to see any fault with the way they interact with other discipline groups. By taking positions which create information asymmetry, one automatically revokes resistance from the other party, hence the argument of this paper that this might result in alienation or disassociation by those whose contribution appears to be marginalised. Another key argument of this paper is that SMA is an interdisciplinary field bringing together knowledge from engineers, marketing, quality assurance and the general workforce. By virtue of its nature SMA falls in the domain of organisational and business strategy. The development of business strategy involves an interdisciplinary team of managers. Therefore interactions in such teams should acknowledge the contributions of others to the process of strategy. Consequently, by classifying all the diverse knowledge under strategic management accounting accountants risk alienating other potential contributors to this data who are not accountants. By so doing accountants create resistance, foment professional rivalry and undermine collective responsibility. The second case material amply demonstrated that operations management performed most of the functions that are identified in the literature as being part of SMA, albeit without the involvement of management accountants. Ndiweni (2002) also showed that engineers in an automotive plant carried out accounting activities from investment appraisal, product costing, and measuring the benefits of TQM without any input from accountants. It would appear that the extent of the involvement of accountants depends on the culture and subcultures of the organisation. Stapylton exhibited a culture where financial accounting measures played a major role, for example rewards were based on revenue net of expenses. In contrast, at Cyclemakers key concerns lay with the quality of products, flexibility and customer satisfaction. Where there is meaningful team work, all members of the management team contribute to organisational strategy, without coercion from accountants. 5. Concluding remarks If the spirit of SMA is embraced it can make accounting more accessible to other functional groups (Roslender, 1995). It is acknowledged in the literature that SMA is an interdisciplinary approach however, it is opportune for the accountants to colonise this development in furtherance of their own professional status. Why SMA has not come to fruition, it may be argued that it may be yet another example of a failed jurisdictional claim by management accountants. It is advantageous for the accountants to regard this new development as their own because it raises the status of the management accountant to that of senior management where strategic issues are discussed. It is painfully clear even to the accountants that the current body of knowledge that constitutes SMA is beyond their domain- encompassing, production engineering, design, total quality management, marketing and sales and everyday processes of managing modern organisations. By deliberately labelling such an interdisciplinary field as SMA, there is a danger of further alienating those who are non- accountants and reinforce their resistance to domination. The insights from case two show that everybody in that organisation was involved in the gathering of information that helped to achieve the strategy of that organisation. In the light of the breadth and diversity of the sources that might give a firm a competitive advantage, substituting strategic management information would be a more befitting term. The lack of progress in this endeavour requires that academics deconstruct the meaning of SMA and open up the boundaries of management accounting so that its role of interfacing across disciplines is emphasised. In addition, researchers should look to other fields of study in order to gain a wider understanding of the SMA problem. If we cast aside issues of semantics and focus on how organisations are designed we find that 6
  • 7. since Taylorism, functionality is still the prevailing organisation design (Galpin et al., 2007). It could be argued such structures impede focus on inter-disciplinary / cross- functional teams. In several studies of U.S. organisations it was found that cross- functional organisations appear to have several performance advantages over functional organisations (Dimancescu, 1992; Nadler and Tushman, 1997; Ashkenas et al, 2002; Gaplin et al., 2007). In other words, SMA is ahead of its time, because it appears that organisational structures are not ready to embrace interdisciplinary or cross-functional activities. Business school curriculum has not assisted in this matter either. In the U.S. only a few MBA programmes had cross-functional modules (Gaplin et.al., 2007). A similar comment might hold true in the U.K. business schools. What is revealing in the U.S. study is that while some business schools had embraced interdisciplinary studies, corporate training has remained functional. The training of future management accountants should develop team working and communications skills so that accountants command respect when interacting with their contemporaries. There should be cooperation amongst team players and none of the members should be privy to information that others do not have. Experiences from Japanese companies show that there is no strategic management accounting but there is strategic use of accounting information/ information. Hiromoto (1988) stated that accounting information is used to influence management behaviour rather than to measure or control performance. The designation of a management accountant as a “controller” is also problematic in the sense that many a time accountants fail to transcend beyond control and marshal everyone towards achieving organisational strategy. It could still be a long way before we understand how strategy is developed, formulated and implemented and let alone enhanced by strategic management accounting techniques. If strategy is organic or processual, it therefore follows that strategic management accounting techniques should also be in a flux and not fixed. For example, accounting for continuous improvement is never ending and hence difficult to quantify results of such processes. Firms in the twenty first century need integrated strategic management information systems, not just management accounting. Finally, we might not unlock the potential of SMA unless organisational designs and management release themselves from the constraints of division of labour and functionalism. References Ashkenas, R., Ulrich, D., Jick, T., Kerr, S., 2002. The Boundaryless Organisation: Breaking the Chains of Organisational Structure, Jossey-Bass, San Francisco, CA Bromwich, M., 1988. Managerial Accounting Definition and Scope- from a Managerial View, Management Accounting (CIMA) 66 (8), 26-27. Bromwich, M., 1990.The Case for Strategic Management Accounting: the Role of Accounting Information for Strategy in Competitive Markets. Accounting, Organisations and Society 15 (1), 27-46 Coad, A., 1996. Smart work and hard work: explicating a learning orientation in strategic management accounting. Management Accounting Research 7 (4), 387- 408. Dimancescu, D., 1992. The Seamless Enterprise: Making Cross-functional Management Work, Oliver Wight Publications, Inc., Essex Junction, VT Galpin, T.,Hilpirt, R. and Evans, B. 2007. The connected enterprise: beyond division of labour. Journal of Business Strategy 28 (2), 38-47. Guilding, C., Cravens, K.S. & Tayles, M., 2000. An International Comparison of Strategic Management Accounting Practices. Management Accounting Research 11 (1),113- 135. Hiromoto, T., 1988. Another Hidden Edge of Japanese Management Accounting. Harvard Business Review 66 (4), 22-26. Johnson, H. T. & Kaplan, R.S., 1987.Relevance Lost: The Rise and Fall of Management 7
  • 8. Accounting, Boston Mass, Harvard Business Press. Kaplan, R.S. & Norton, D.P., 1996. Using the Balanced Scorecard as a Strategic Management System, Harvard Business Review Jan/Feb, 75-85. Lord, B.R. 1996. Strategic Management Accounting: the Emperor’s New Clothes? Management Accounting Research 7 (3), 347-366 Nadler, D. & Tushman, M., 1997. Competing by Design: The Power of Organizational Architecture, Oxford University Press, New York, NY Ndiweni, E. 2002. The production and reproduction of management accounting and quality practices: an analysis using structuration theory. Unpublished Thesis, University of Essex Ndiweni, E. & Choo K.L. 2007. The Road to Critical Strategic Management Accounting: an Empirical Investigation, Business Research Yearbook, Global Perspectives XIV (2), 947-953 Porter, M. E., 1980. Competitive Strategy: Techniques for Analysing Industries and Competitors, New York, The Free Press Porter, M.E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance, New York, The Free Press Rickwood, C.P., Coates, J.B. & Stacey, R.J. 1990. Stapylton: Strategic Management Accounting to gain Competitive Advantage, Management Accounting Research 1 (1), 37-49 Roslender, R. 1995. Accounting for Strategic Positioning; Responding to the Crisis in Management accounting, British Journal of Management 6 (1), 45-57 Roslender, R. & Hart S.J., 2002. Integrating management accounting and marketing in the pursuit of competitive advantage: the case for strategic management accounting, Critical Perspectives on Accounting 13 (2), 255-277 8