With reference to academic literature, critically discuss the proposition that there is nothing ‘new’ within the area of strategic management accounting
Traditional management accounting is well known and has historically had an internal focus. Its practices techniques such as budgeting, costing and profitability analysis generally focus on financial information. This essay aims to explore the notion of strategic management accounting, or “SMA”, and whether there is anything “new” within this area. Firstly, the theory of SMA will be explored to understand conceptually where it differs from traditional management accounting and whether it proposes anything “new”. Then SMA will be explored in practice by investigating techniques that are purported to be part of SMA, examining how they apply in practice and whether there is anything “new” within the field.
In order to determine whether there is anything “new” within the area of strategic management accounting it is essential to first explore what SMA is. Exploring SMA will allow us to see how it differs from traditional management accounting and whether the theory of SMA brings something “new”. Traditional management accounting and its focus on internal matters and financial information was seen to have lost relevance (Baines & Langfield-Smith, 2003). This led to the emergence of SMA which was heralded as a new, state of the art, discipline that would fix the shortcomings of traditional management accounting (Shah, et al., 2011). The term SMA was first created by Simmonds (1981) who defined it as “the provision and analysis of management accounting data about a business and its competition for the use in developing and monitoring business strategy”. He stated that it differed from traditional management accounting because rather than focusing internally it placed a much greater emphasis on comparing the business with competitors. This is a clear shift in focus from the traditional management accounting approach and appears to be a promising idea, however further examination of the literature shows several problems with SMA theory. The first problem concerns Simmonds (1981) definition. Whilst the idea of focusing on external factors such as competitors may be a new approach regarding management accounting it is not a novel idea. Johnson and Kaplan (1987) state that Andrew Carnegie was comparing his direct costs to those of competitors in the late 19th century. The second, and more concerning, problem is that despite the field being 30 years old and there being a substantial amount of literate there is no universally agreed upon definition or conceptual framework. A plethora of authors have defined SMA in their own terms, leading to different interpretations of what SMA is. For example Ma and Tyles (2009) define it as “the body of management accounting concerned with strategically oriented information for decision making and control” whilst CIMA (2005) define it as “a form of management accounting in which emphasis is placed on information which relates to factors external to the entity, as well as non-financial and internally generated information”. These definitions are more general, and wider encompassing than Simmonds original definition. This makes it difficult to set the boundaries of what SMA is as it changes depending on which authors is defining it and what their views are. This runs the risk of SMA being viewed as an ambiguous term, a blurring of ideas and an amalgamation of techniques from other fields and disciplines rather than a distinct set of new ideas. This may provide a reason for why several studies have found SMA to have limited familiarity outside of academics. Roslender and Hart (2003) conducted a study of ten companies and found that SMA had limited meaning to managers within the companies. Guilding et al (2000) found in their study that the term SMA was virtually unused in the organization’s that were part of the study. These findings do not necessarily mean that SMA brings nothing “new” but it does highlight that organizations are unfamiliar with the term. Without a clear definition of what it is, definitions that point towards considering external factors that have already been considered by other disciplines such as operations and a lack of familiarity with the term in organization’s it is difficult to conclude that SMA brings anything “new” when only considering the theory. However, (Langfield-Smith, 2008) states it is known that the term “SMA” is not used in practice and instead it is the specific techniques and processes which are recognized.
As it is stated that it is the techniques of SMA that are recognised it is important to explore these techniques and how the theory of SMA is applied to determine whether it brings anything “new”. When delving into the literature on SMA techniques we immediately run into problems. We have already established that there is no universal agreement on what exactly SMA consists of and this lack of standardization extends to SMA techniques. For example, Bjøornenak and Olson (1999) take a narrow view and state that SMA is merely a competition focused technique whilst Guilding et al (2000) offer a wider view and state that SMA embraces all management accounting techniques with a clear strategic focus. There is no universal agreement or standardization in case studies either. For example, Guilding et al (2000) used 12 techniques in a study they conducted in New Zealand, the USA and the UK whilst Cinquini and Tenucci (2007) studied Italian manufacturing firms and used 14 techniques. Cadez and Guilding (2008) went on to use 16 techniques in their survey of 193 large Slovenian companies. This makes it difficult to state a definite list of techniques that fall under SMA. However, for the purposes of this essay we will examine value chain analysis and costing. Shank and Govindarajan (1992) took Porters (1985) value chain analysis and developed a management accounting method was based on its principles. The technique focused on factor external to the firm. It involved seeing the organisation as part of a link in chain, with each link being a value creating activity associated with the creation and development of a product or service. They demonstrated through this technique that the traditional approach of value-added analysis is somewhat narrow as it fails to consider cost savings that can be made through exploiting the linkages with suppliers and customers. This technique is an example of applied SMA, however several factors need to be considered when exploring whether it brings anything “new”. These factors include determining whether the technique is new to SMA and whether it is employed in the fashion that the SMA literature proposes. Lord’s (1996) Cyclemakers case study shines an interesting light on these factors. Her study found that the techniques and attributes that are often accredited to the SMA field may already be found operating in firms without the input of the management accounting function and that organisations may already be exploiting the linkages in the value chain without detailed financial analysis. Dixon (1998) found similar findings in his UK study. Lord (1996) proposes that it is not SMA but that natural outcome of effective operations management that lead to exploitations in the value chain. She further states that if firms focus on the satisfaction of their external and customers, as well as on their relationship with suppliers, they will gain the benefits of value chain analysis without having to conduct the formal process that is promoted by Shank and Govindarajan. These studies highlight that techniques like SMA may be found operating within organisations, but the information is neither collected or used by management accountants, nor quantified in accounting figures, rather it is the front-line operations staff who are conducting the techniques. This brings about several questions about the “newness” and reality of SMA. If the techniques are not performed in the way which SMA literature proposes, nor by management accountants like SMA literature states can the techniques that are performed be considered part of SMA rather than other fields such as operations or management. Other authors also highlight the interesting reality of SMA in practice. Jarvenpaa (1998) conducted a study into how a Finish hi-tech company used SMA in strategy formulation. He found that the more strategic the issue, the less involved the management accounting function became. He further concluded that the SMA tools that are suggested in normative SMA literature were not sufficiently used in practice. Dixon and Smith (1993) acknowledge that some SMA processes might already be undertaken by other departments with a firm. Whilst (Langfield-Smith, 2008) states that some of the techniques considered to be part of SMA are claimed by other disciplines to be their own. Reviewing the evidence, it is difficult to conclude that there is anything “new” within the field of SMA. There is little familiarly with the term SMA within organisations, and techniques purported as part of SMA already exist and are performed by different functions within the firms.
In conclusion, whilst the approach of SMA may be different to that of traditional management accounting it, it is difficult to conclude that there is anything “new” within the field. There is no clear definition or conceptual framework and there is little familiarity with the term outside of academics. Most importantly it appears that the techniques that are claimed to be part of SMA are performed by other functions within the firm, in a different manner and without the input of management accountants and quantified accounting data. The evidence points toward lord’s (1996) statement that “Perhaps the widely touted “strategic management” accounting is but a figment of academic imagination”.
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