Since the 80s a new term has been coined in management accounting literature: “Strategic Management Accounting” (SMA) (Simmonds, 1981). Since then, an ongoing debate about what strategic management accounting comprises has been originated. The terms SMA is used by accounting academics and sometimes practitioners in the UK, Australia and New Zealand, while strategic cost management (SCM) is commonly used in the USA literature.
There are various studies in which SMA had been defined due to the lack of agreed definition in defining SMA or SCM. Simmonds defined SMA as “the provision and analysis of management accounting data about business and its competitors, for use in developing and monitoring business strategy” (Simmonds, 1981, p.26). Shank and Govindarajan (1994,p.xiii) describes SCM as “the blending of the financial analysis elements of three themes from the strategic management literature which are, value analysis, strategic positioning analysis and cost driver analysis. In other study conducted by Cooper and Slagmulder, 1988a, they defined that SCM as the application of cost management technique to simultaneously improve the strategic position of a firm and reduce cost. While the simplest definition of all is, SMA is about making management accounting more strategic (Roslender and Hart, 2003, p.272). The rise of activity-based costing (ABC) and activity-based management (ABM) is seen by Shank as supporting the new ideas as it presenting a revolution in thinking and providing a way for accounting to become more strategically relevant. It is still an on going debate between between Shank and Robin Cooper as to whether ABC was the capstone of strategic accounting (Cooper’s view) or whether SCM was the umbrella under which ABC and many other techniques resided (Shank’s view). However, in this paper, ABC will be considered as a part of SMA.
Some commentators define SMA as a process, such as Lord (1996) and Dixon and Smith (1993). Lord (1996) describes SMA as a six stage process which are, collection of competitor information, exploitation of cost reduction opportunities, matching of accounting emphasis with strategic position, collection of competitor information, exploitation of cost reduction opportunities, and the last process is, matching of accounting emphasis with strategic position. While Dixon and Smith (1993) present only four stages which are strategic business unit identification, strategic cost analysis, strategic market analysis, and strategy evaluation. Although there are similarities between this processes with SCM definition as described previously by Shank and Govindarajan (1994,p.xiii), but some would view SMA as broader than SCM.
The objective of this paper is to provide a review of the origins of strategic management accounting and to assess the extent of adoption and success of strategic management accounting. The study conducted by reviewing empirical papers which have directly researched SMA and prior review papers of the adoption and implementation of SMA or SMA techniques. Besides that, the study also assessed the extent of adoption of SMA and the reasons underlying an apparent low adoption rate, role of accountant in adopting and implementation SMA and the success or otherwise of SMA is also discussed. Wider perspective on the origins and development of SMA are then presented. A selective review of literature is also done in order to achieve the paper’s objective and avoid any unneeded information.
3.1 Adoption and implementation of SMA
According to Alexander (1985), the ten most frequently occurring strategy implementation problems include underestimating the time needed for implementation and major problems surfacing that had not been anticipated, in addition uncontrollable factors in the external environment had an adverse impact. Another problem is when management style is not appropriate for the strategy being implemented, they cite the example of the “entrepreneurial risk taker may be an ideal candidate for a strategy involving growth, but may be wholly inappropriate for retrenchment” (Reed and Buckley, 1988, p. 68).Major surveys in the UK and North America regarding the practices of SMA in the late 1980s and up to 1994, resulted to the conclusion that there had been a low level adoption of SMA techniques despite the views that SMA techniques were generally regarded by adopters as useful and the intention to adopt it in the future. This can be supported by the adoption rate of ABC of 10 per cent in few companies and other study surveys that resulted of 32 per cent of companies reported using ABC and a further 28 per cent planned to use the technique. Although the adoption rate and survey still low, but there are number of firm still using ABC as a pilot studies and it is only a matter of time for the wide-scale of adoption.
Besides the perception of moving to ABC can have short time profit, and there will be unfavorable changes to employee’s performance report in response to the new costing information, the analysis of the study perceived it as too early for the propriety of changes taking place. Moreover, in the years following there is evidence of increased adoption of SMA continued to be weak. Others claimed that SMA was still ill-defined and most of the SMA research was at the conceptual level (Tomkins and Carr, 1996)
3.2 Accountant’s role in adopting and implementing SCM
According to the North American perspective. In one of the studies, Robin Cooper expressed doubt in the accountant’s role in adopting and implementing SCM would ever occur due to his opinion that accountant did not have the ability to learn ‘new trick’. This is because Cooper highlighted that SCM activity was developing outside of the view of the accounting profession. However, Shank disagreed with the Cooper’s view for saying that accountants are “intellectually and emotionally un-equipped” for the transformations (Shank, 2007, p.359). Shank pointed out that accountants have the intellects and can be trained to adopt the broad focus needed for the transition to SCM.
Other study conducted by Simmond, claimed that SMA was “spreading rapidly in practice” and that “management accountant are spending a significant proportion of their time and effort in collecting and estimating cost, volume, and price data on competition and calculating the relative strategic position of a firm and its competitors as a basis for forming business strategy” (Simmonds, 1981, p. 26). However, there is another disagreement in later year regarding simmond’s claim when several writer maintained that such practices have not been adopted widely (Guilding et al., 2000; Lord, 1994, 1996; Shank, 2007).
Bromwich (1990) provided persuasive arguments in favor of SMA, which draws on economic theories compared to previous study that relied on common sense to justify the case for SMA. In his study, he stated the need to release “management accounting from factory floor” to assist and meet global challenges in product markets, and allow management accountant to focus on the firm’s value added relative to competitors. Firm’s value added in this perspective can be such as the competitive advantage gain compared from other firms, quality services or product that can be provided to the customers and etc. Management accountant then should be contributing their ideas and ability to achieve this matter by working out with management and production team to be able costing various products that will offer the consumer cheapest price in a profitable way and compete with the other firm to be a price leader.
3.3 Strategic management accounting techniques
Balanced scorecard consists of an integrated set of performance measures that are derived from the company’s strategy and that support the company’s strategy throughout the organization. It is a very influential model, the balanced score-card may be used by firms to develop, implement and control strategy through a balanced use of financial and non-financial indicators. Roslender and Hart (2002) state that the BSC “puts strategy and vision, not control, at the centre” (Kaplan and Norton, 1992, p. 79) to allow organizations to compete more effectively. Under the balanced scorecard approach, top management translates its strategy into performance measures that employees can understand and can do something about.
However, implementing balance scorecard in the firms is not an easy task. There are also various form and ways to implement it. Bhimani and Langfield-Smith (2007) found high variety in the form and nature of strategic management accounting processes used within organizations, which was in contrast to the prescriptions of the SMA literature, which focused on the structure and formality of strategic activities and a need for a balance of financial and non-financial information to support strategic processes. One of the advantages of the balanced scorecard is that it continually tests the theories underlying management’s strategy. If a strategy is not working, it should become evident when the objectives did not achieve. Without this feedback, management may drift on indefinitely with an ineffective strategy based on faulty assumptions.
Besides balance scorecard, activity based costing (ABC) also considered as another SMA tool. Bromwich and Bhimani’s (1994) saw ABC as having the potential to overcome some of the problems of conventional management accounting techniques, through providing a better understanding of how overheads vary in relation to a range of cost drivers, and viewed statistical studies as supporting the notion that non-volume related activities may drive costs. However, some commentators reject the idea that activity-based costing is a part of SMA, as the focus of ABC is on the accuracy of cost allocation, not strategic support. Opposing the statement, Shank describes ABC as presenting a revolution in thinking and providing a way for accounting to become more strategically relevant. This is supported by, many academics and practitioners saw ABC as providing a solution to the problems of irrelevancy
3.4 Obstacles to SMA
There are various obstacles to SMA, some of it may be that traditionally management accountants have a performance rather than a learning orientation. Thus, rather than look for new data (outside the organization and traditional accounting systems) and fearing failure, management accountants stick to the familiar. To accountants, the familiar usually means financial data. The lack of widespread adoption also makes it difficult to determine the success or otherwise of SMA implementation. Moreover, the term SMA itself is not well understood by researcher or in practice, and in some cases the term is not even recognized. Some may perceive it as a burden because a company will change its strategy unintentionally, whereby a successive adaptations to SMA require the firm to follow the changing markets, competitive position, technology and any other factor that involved.
To conclude, as competition has become tougher and strategic positions seem harder to sustain, the management should emphasis on its financial and non financial information to be sustainable and competitive with the others. In order to achieve this, firms and its management accountant should have knowledge and management accounting system that supports an organization’s strategy with a variety of financial and nonfinancial performance indicators. Although the implementation of SMA is still not widely practices and adopted. Otley (2001) claims that SMA has had a major impact on the thinking of practicing management accountants and managers. This is not just due to the influence of the books and papers written by key SMA advocates, such as Shank, Bromwich, Cooper and Kaplan, but also due to the influence of activities of professional accounting bodies (particularly CIMA, in the UK, or CPA Australia) who have sponsored research reports and included SMA as part of professional training and professional development programs. Furthermore, the importance of SMA can be seen as early as in the universities whereby many aspects of SMA are taught not only as part of the management accounting curriculum but it also can be found in subjects in the marketing and management as well as in IT areas. As an overall conclusion, future research might be needed in order to encourage the implementation of SMA for a greater benefit to the firms.