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A Conceptual Framework for Assessing the Use of Strategic Management Accounting in Small and Medium Enterprises Studies on how small- and medium-size enterprises (SMEs) can use strategic management accounting techniques to meet the challenges imposed by rapidly changing technology and increasing global competition are limited. Tapping into both contingency theory and upper echelon theory, a new framework for leaders of SMEs highlights the effect of perceived environmental uncertainty, advanced manufacturing technology, and CEO characteristics on their decisions regarding the use of strategic management accounting techniques, which ultimately may have an impact on firm performance. © 2015 Wiley Periodicals, Inc. Although studies on the use of management accounting practices abound, there is a dearth of research regarding the use of those practices among small- and medium-size enterprises (SMEs), particularly when it comes to the application of more advanced practices, such as strategic management accounting. Analyzing the role that strategic management accounting can play in providing SME managers with relevant and accurate information can strengthen SMEs’ impact on the economic wellbeing of the areas in which they operate. Although traditional management accounting practices are primarily concerned with internal and historical information about production costs, strategic decision-making requires external and future-oriented information, such as information about customers and competitors (Chenhall, 2003; Cravens & Guilding, 2001; Guilding, Cravens, & Tayles, 2000).

A B O L FA Z L A M A N O L L A H N E J A D K A L K H O U R A N , SITI ZALEHA ABDUL RASID, SAUDAH SOFIAN, and B A H A R E H H O S S E I N N E Z H A D N E D A E I

Otley (1980) found that there is no one best management control system for all companies; rather, an organization’s systems should be contingent on the circumstances it faces. Such a contingencytheory approach can be used to shed light on the application of strategic management accounting practices in SMEs. Accounting research based on contingency theory has shown that various organizational attributes and circumstances, such as size, environment, and technology, can affect business leaders’ choice of the management accounting techniques they use (Abdel-Kader & Luther, 2008; Hoque & James, 2000; Luther & Longden, 2001; O’Connor, Chow & Wu, 2004). The contingency factors that should be considered for SMEs differ significantly, however (Flacke & Segbers, 2005). Few studies regarding SMEs have considered such factors as external environment and technology (Ahmad, 2012; Collis & Jarvis, 2002; Jänkälä, 2007; O’Regan & Sims, 2008). In its application of upper echelons theory, this study considers both perceived environmental uncer tainty and advanced manufacturing technology. Since the decision-making process in SMEs is typically highly centralized and chief executive officers (CEOs) strongly influence determinations on whether to adopt certain practices (Ahn, Mortara, & Minshall, 2014), executive behavior also will be taken into consideration. According to upper echelons theory, executives’ experiences, values, and personalities greatly influence their interpretations

©2015 Wi l ey Peri odi ca l s , I n c . Publ i shed onl i ne i n Wi l ey Onl i ne Li brary (wi l eyonl i nel i bra ry. c o m ) Global Business and Organi zati onal Excel l ence • DOI : 10. 1002/j oe. 21644 • November/Decemb e r 2 0 1 5

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of the situations they face and, in turn, affect their choices (Hambrick, 2007), including the choice of management accounting techniques. To date, few studies have examined the role that executive behavior and characteristics play in the usage of strategic management accounting techniques in SMEs (Jorissen, Laveren, Martens, & Reheul, 2002). According to contingency theory, organizational performance will improve if there is a suitable fit between the management accounting and control system and the context variables. Previous studies have investigated the mediating role of strategic management accounting (Cadez & Guilding, 2008; Santini, 2013). By considering the three contingency factors of perceived environmental uncertainty, advanced manufacturing technology, and CEO characteristics, this study will shed light on how they significantly affect strategic management accounting. Ultimately, the goal is to develop a testable model of the relationship between these factors and the application of strategic management accounting techniques and, in turn, the mediating effect of these techniques on performance in SMEs.

Theories of Strategic Management Accounting The term strategic management accounting was first used by Simmonds (1981), who defined it as the analysis of management accounting information related to a business and its competitors in order to develop business strategy. In another comprehensive study, Bromwich (1990) stated that strategic management accounting goes beyond gathering information on businesses and their competitors, to covering the advantages that products offer to customers and how these advantages contribute to building and sustaining competitive advantage. Although several studies on strategic management accounting have focused on large-scale enterprises (Cescon, Costantini, & Rossi, 2013; Cadez & Guilding, 2008), there has been limited attention paid to the adoption of strategic management accounting

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techniques in SMEs (Ahmad, 2013; Aziz, 2012; Santini, 2013). Here, the focus will be on applying the perspective set forth by Cadez & Guilding (2008)—that strategic management accounting is a set of strategically oriented accounting techniques— to SMEs. For the purposes of this study, two theories can be applied: contingency theory and upper echelon theory. Contingency Theory

Contingency theory has a long tradition in the accounting control area of research (Chenhall, 2003; Chenhall & Langfield-Smith, 1998; Gerdin & Greve, 2004; Otley, 1980). It is based on the idea that there is no one generally suitable control or management accounting system that is relevant to every organization in all conditions and circumstances (Fisher, 1995). Fitness, therefore, is an important issue. The concept of fitness in contingency theory suggests that a suitable fit between organizational features and contingent factors will enhance organizational performance (Morton & Hu, 2008). Drazin & Van de Ven (1985) considered three different approaches to appraising fit: selection, interaction, and systems. Each of these approaches meaningfully changes the principle of contingency theory and the research undertaken. In keeping with the objective to develop a testable model for SMEs, the focus here will be on the systems approach. Based on the conceptual framework of systems theory (Drazin & Van de Ven, 1985), the systems approach is the most current form of contingency theory and takes a holistic and universal approach to examining interdependencies in corporations (Selto, Renner, & Young, 1995; Chenhall and Langfield-Smith, 1998). The fundamental premise of this approach is that in order to understand organizational variables and performance, contingencies and performance relationships must be studied holistically (Drazin and Van de Ven, 1985). Thus, design components and multiple contingencies are the focus, rather than the single variables highlighted in

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the interaction and selection approaches. Chenhall (2003) adds a new fit to Drazin and Van de Ven’s (1985) approaches by referring to a fourth structural relation that comprises intervening variables or mediating variables. Keeping in line with related research, in this study this fit will be used for further model development (Chenhall, 2003; Fisher, 1995; Gerdin and Greve, 2004; Ittner and Larcker, 2001; Langfield-Smith, 1997). It is also important to examine the choice of factors that can affect the adoption of management accounting practices in the context of SMEs. Most studies on contingency factors related to SMEs have considered such factors as external environment, technology, and firm size (Ahmad, 2013; Collis & Jarvis, 2002; O’Regan & Sims, 2008). On the other hand, there is a lack of studies related to the characteristics of CEOs who are responsible for solving problems and making decisions in SMEs (Sorooshian, Norzima, Yusof, & Rosnah, 2010). Upper Echelons Theory

The fundamental concept of this theory is well captured by the subheading of Mason and Hambrick’s (1984) seminal study of the upper echelons perspective: the organization as a reflection of its top managers. The theory acknowledges that top managers heavily influence organizational performance by the choices they make, which in turn are affected by the managers’ characteristics. In other words, the main principle in upper echelons theory has two interrelated parts: •• ••

Executives act according to their personalized interpretations of the strategic circumstances they face. These personalized interpretations are a function of the executives’ personalities, experiences, and values.

Over the last few decades, academic interest in the characteristics of top business managers has greatly

G l o b a l B u s i n e s s and Organiz ational Ex cellence

increased, and upper echelons theory has fostered this uptick in attention (Carpenter, Geletkanycz, & Sanders, 2004; Nielsen, 2010). Recently, scholars have started to draw on upper echelons theory to analyze the association between the characteristics of top executives and management accounting and control systems (Hiebl, 2014). Management accounting and control systems can be seen as an organizational outcome or as an aspect of organizational structure (Chenhall, 2003; Strauss & Zecher, 2013) and, following upper echelons theory can also be expected to be influenced by top-manager characteristics. Mason and Hambrick (1984) identified administrative complexity as an important dimension of strategic choices that is influenced by upper echelons and noted that it is composed of “thoroughness of formal planning systems, complexity of structures and coordination devices, budgeting detail and thoroughness, and complexity of incentive compensation schemes” (p. 201). All these elements can be classified as management accounting or control practices (Chenhall 2003; Guenther 2013; Luft & Shields, 2003). In line with this view, in their research on management control systems Malmi and Brown (2008) acknowledged that organizational controls are “something that managers can change, as opposed to something that is imposed on them” (p. 294). Consequently, it can be assumed that top managers and their characteristics have a substantial impact on the design of management accounting and control systems (Hiebl, 2014).

Toward a Conceptual Framework If the ultimate goal of contingency-based management accounting research is to test a comprehensive model that includes multiple accounting systems, multiple contingent variables, and multiple outcome variables (Fisher, 1995), this study would appear to constitute a step in the desired direction (Cadez & Guilding, 2008). The framework of this study examines the association among

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three contingency factors—perceived environmental uncertainty, advanced manufacturing technology, and CEO characteristics—and their impact on strategic management accounting techniques and performance. Strategic management accounting techniques and their use are at the heart of the model, and in keeping with previous related contingency-based research (Chenhall & Langfield-Smith, 1998; Cravens & Guilding, 2001; Gerdin, 2005; Guilding, 1999; Hoque & James, 2000), strategic management accounting is presented as an endogenous construct in the model. The dependent factor in this model is firm performance. The basic principle of contingency theory holds that firm performance depends on the suitable fit between the structure (use of strategic management accounting) and context (contingency variables). Therefore, the firm’s performance indicates whether structure and context are well matched (Gerdin & Greve, 2004; Ittner & Larcker, 2001). The suggested framework is illustrated in Exhibit 1.

Perceived Environmental Uncertainty and Strategic Management Accounting

Perceived environmental uncertainty reflects managers’ inability to correctly forecast their external environment (Tymon, Stout, & Shaw, 1998). Studies have shown that administrators respond to perceptions of the external environment rather than the actual external environment (Magnusson, 1981; Ferris, 1982). In management accounting research, perceived environmental uncertainty has been considered a key factor in contingency theories (Chenhall, 2003; Fisher, 1995; Otley & Wilkinson, 1988; Tymon, Stout, & Shaw, 1998). Several studies empirically support the relationship between perceived environmental uncertainty and management accounting practices. For example, Gordon and Miller (1976) and Khandwalla (1972) contend that in times of uncertainty, corporations expect more sophisticated accounting information systems to offer more nonfinancial and external

Exhibit 1. A Contingency Model of Strategic Management Accounting Usage in SMEs

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information. McManus (2012) also maintains that managers need information that is future orientated and goes beyond the financial realm in order to cope with the complexities of their external environment. This outlook ultimately is manifested in the organization’s strategic management accounting techniques. For instance, focus on budgets typically intensifies under conditions of uncertainty. These factors lead to the following hypothesis: H1—There is a positive relationship between perceived environmental uncertainty and the adoption of strategic management accounting techniques in SMEs. Advanced Manufacturing Technology and Strategic Management Accounting

Traditional difficulties that business face in investment appraisal, cost allocation, performance evaluation, and overhead apportionment have been complicated by advances in manufacturing technology. Therefore, business administrators and accounting professionals have developed several new accounting practices to deal with them (Hoque & James, 2000; Bhimani & Bromwich, 1992). For instance, some firms that have adopted advanced manufacturing technology have altered their management accounting and control systems in order to remain competitive while responding to changes in information needs and operations brought on by the new technology (Johnson & Kaplan, 1987). New management accounting and control systems, such as activity-based costing (ABC), can improve the relevance and quality of information that management needs to keep the organization running smoothly. When the business environment changes and reliance on advanced manufacturing technology intensifies, executives tend to make greater use of management accounting information in their daily decision-making (Isa & Foong, 2005). Generally, the fundamental objectives of management accounting in an advanced manufacturing technology environment are to cost products, value


inventory, measure performance, and make investment decisions (Jeans & Morrow, 1989). Numerous studies have examined the influence of advanced manufacturing technology on the design of management accounting systems. For example, Otley, Broadbent, and Berry (1995) found a positive relationship between automation in manufacturing and budget formality. On the other hand, Isa and Foong (2005) argued that advanced manufacturing technology leads to new costing techniques, such as ABC, and a greater emphasis on nonfinancial performance measurement indicators. Abdel-Maksoud, Dugdale, and Luther (2005) found that advanced management accounting practices exist in firms that have made significant investments in total quality management (TQM), just-in-time (JIT) initiatives, and advanced manufacturing technology. Their findings were strengthened by Al-Omiri and Drury (2007), who found that highly sophisticated cost systems are positively related to lean production techniques and the degree of JIT implementation. According to Abdel-Kader and Luther (2008), the level of management accounting sophistication is influenced by the organization’s use of TQM, JIT, and advanced manufacturing technology systems. Thus: H2—There is a positive relationship between advanced manufacturing technology and the extent to which strategic management accounting techniques are adopted in SMEs. CEO Characteristics and Strategic Management Accounting

Executive characteristics have always been an important contingency factor. Previous research on management accounting systems design has concentrated on such administrative features as founder/non-founder status, expertise, entrepreneurial intensity, type and degree of education, and experience (Beal & Yasai-Ardekani, 2000; Gibson & Cassar, 2002; Jorissen et al., 2002; and Jorissen, Laveren, Martens, & Reheul, 2008). The influence

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of a CEO’s characteristics has been shown to take on particular significance in SMEs (Flacke & Segbers, 2005; Jorissen et al., 2002, 2008) because the CEO of an SME is frequently in a position to exert extensive personal control (Flacke & Segbers, 2005). Studies have also shown that proficient CEOs play a significant role in meeting the challenges that SMEs face (Sorooshian et al., 2010). A high level of CEO education and experience translates into an enhanced ability to make strategic decisions and process information, innovation, and flexibility to openness (Xiaowei & Zhang, 2010). According to upper echelons theory, CEOs are typically unable to fully appreciate all the contextual aspects within which their firms operate. Their limited awareness makes it more likely that they will perceive a business situation based on their own characteristics and/or past experience, and then interpret it in their own way (Mason & Hambrick, 1984). Consequently, top managers and their characteristics are likely to have a substantial influence on the design of management accounting and control systems (Hiebl, 2014), and highly educated and experienced CEOs are more likely to adopt strategic management accounting techniques. Therefore, the following hypotheses are suggested: H3—There is a positive relationship between a CEO’s education and the extent of adoption of strategic management accounting techniques in SMEs.

Fewer studies have investigated the relationships between the use of strategic management accounting techniques and organizational performance. Chenhall and Langfield-Smith (1998) found significant relationships between those techniques and business performance. Cadez and Guilding (2008), on the other hand, found a weak bond between the adoption of strategic management accounting practices and performance, while S¸ ener and Dirlik (2012) found a medium-level relationship between them. Despite these mixed results, a majority of studies indicate a positive association between the use of strategic management accounting and organizational performance. Therefore, H5—There is a positive relationship between the extent of adoption of strategic management accounting techniques and firm performance. The Mediating Effect of Strategic Management Accounting

Strategic Management Accounting Usage and Firm Performance

Although most researchers lend some support to the idea that greater use of management accounting is positively linked to the performance of an enterprise, in many cases, their findings are inconclusive and context dependent (Cadez & Guilding, 2008). This means that an organization’s control system and its components can mediate the relationship between context variables and performance.

The main role of an information system is to support administrative decision-making (Abernethy & Bouwens, 2005). Better information leads to more effective administrative decisions, which in turn improve performance (Baines & Langfield-Smith, 2003).

Many have noted this mediating effect in terms of an organization’s control system and its components (Cadez & Guilding, 2008; Chenhall, 2003; Chenhall & Langfield-Smith, 1998; Gul, 1991;

H4—There is a positive relationship between a CEO’s prior work experience and the extent of adoption of strategic management accounting techniques in SMEs.

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The relationship between the adoption of management accounting practices and performance has been the subject of broad empirical research. Most studies support the view that the adoption of management accounting practices that offer information that is broad in scope is positively related to performance (Baines & Langfield-Smith, 2003; Cravens & Guilding, 2001; Hoque & James, 2000; Mahama, 2006).


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and Mahama, 2006), but few studies to date have investigated the mediating effect of strategic management accounting practices on the relationship between contingency variables and organizational performance. For example, Cadez and Guilding (2008) investigated the effect of strategic choices, market orientation, and company size on two distinct dimensions of strategic management accounting and, in turn, the mediating effect of strategic management accounting on company performance in large Slovenian companies. In another study, Santini (2013) found that SMEs that operate in a highly complex environment make more extensive use of strategic management accounting tools to improve financial performance. Thus, it is expected that a good fit between contingency variables and advanced management accounting principles should improve performance. In line with this rationale, H6—Perceived environmental uncertainly has a positive indirect effect on firm performance through the mediating effect of strategic management accounting in SMEs. H7—Advanced manufacturing technology has a positive indirect effect on firm performance through the mediating effect of strategic management accounting in SMEs. H8—The CEO’s education has a positive indirect effect on firm performance through the mediating effect of strategic management accounting in SMEs. H9—The CEO’s prior work experience has a positive indirect effect on firm performance through the mediating effect of strategic management accounting in SMEs.

A Call for Additional Research The proposed framework suggests that in order to improve performance, leaders of SMEs should devote particular attention to their use of strategic management accounting, taking care to adopt the


unique practices best tailored to their special circumstances. Along with the hypotheses presented above, the framework highlights three factors that have a significant effect on the use of advanced management accounting principles in SMEs: perceived environmental uncertainty, advanced manufacturing technology, and CEO characteristics. The conceptual framework taps both contingency theory and upper echelon theory to explain the relationships between CEO characteristics and adoption of strategic management accounting. Looking ahead, empirical testing is needed to determine whether the hypothesized relationships hold up in practice and to what extent any associations might be most meaningful. With its focus on strategic management accounting, this study contributes to broadening the literature on improving organizational effectiveness. Subsequent research would do well to expand this line of inquiry to include such contingency factors as organizational culture and structure and additional CEO characteristics, including executive turnover, in assessing the adoption of strategic management accounting practices in SMEs. References Abdel-Kader, M. & Luther, R. (2008). The impact of firm characteristics on management accounting practices: A UKbased empirical analyses. The British Accounting Review, 40(1), 2–27. Abdel-Maksoud, A., Dugdale, D. & Luther, R. (2005). Non– financial performance measurement in manufacturing companies. The British Accounting Review, 37(3), 261–297. Abernethy, M. and Bouwens, J. (2005). Determinants of accounting innovation implementation. Abacus, 41(3), 217–240. Ahmad, K. (2012). Factors explaining the extent of use of management accounting practices in Malaysian medium firms. Paper presented at the ASEAN Entrepreneurship Conference 2012 (AEC), 5-6 November 2012, Kuala Lumpur, Retrieved from http://eprints.uthm.edu.my/3350/ Ahmad, K. (2013). The adoption of management accounting practices in Malaysian small and medium-sized enterprises. Asian Social Science, 10(2), 236–249.

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Abolfazl Amanollah Nejad Kalkhouran, MBA, is a PhD candidate in the Department of Accounting and Finance, Faculty of Management, at Universiti Teknologi Malaysia in Johor Bahru. His research interests are in management accounting, performance measurement, and risk management. He can be reached at [email protected] or abolfazlaman@ gmail.com. Siti Zaleha Abdul Rasid, PhD, MBA, is an associate professor in management accounting at Universiti Teknologi Malaysia’s International Business School in Kuala Lumpur and an associate member of the Malaysian Institute of Accountants. Dr. Rasid’s research interests are in management accounting, risk management, and corporate governance. She can be reached at [email protected] or [email protected]. Saudah Sofian, PhD, MBA, is an associate professor in management accounting at the Department of Accounting and Finance, Faculty of Management, at Universiti Teknologi Malaysia in Johor Bahru. Dr. Sofian has more than 25 years of experience in the academic field, and her research interests include management accounting, intellectual capital, performance management, and corporate social responsibility. She can be reached at [email protected]. Bahareh Hossein Nezhad Nedaei, MBA, is a PhD candidate in the Department of Accounting and Finance, Faculty of Management, at Universiti Teknologi Malaysia in Johor Bahru. Her research interests are in enterprise risk management, management control systems, and management accounting. She can be reached at [email protected] or [email protected].

DOI : 10. 1002/j oe
