Literaturereview

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                                      Literature review

       The term “Strategic Management Accounting” (SMA) has been used in management

accounting literature since the 80s (Simmonds, 1981). In the next decades, and still today, a

debate about the composition of SMA has been going on. Scholars generally accept that

SMA is a generic approach to accounting for strategic positioning (Roslender & Hart, 2003).

However, this wide definition does not cover the issue of the so-called “SMA techniques”.

Generally, there have been claims that the “strategic” characteristic encompasses practices

which highlight an external or future focus (Cravens & Guilding, 2001; Guilding et al., 2000;

Roslender & Hart, 2003).

       The schemes of Miles & Snow (1978), Porter (1980, 1985) and Gupta &

Govindarajan (1984) have been the focus of principal attention. Each classification can be

reasonable applied while carrying out empirical research as for the relationship between

strategy and management accounting/control systems, as it is possible to combine companies

with homogeneous features defined by the research. Despite a consistent number, the listed

researches can produce findings, which are not comparable, for the reason of the different

path adopted in operationalizing business strategy. The principal reason, according to

Langfield-Smith (1997: p. 212), is in fact in scope and focus, which differ from those the

typologies are based upon. Trying to integrate the dimensions of strategy Shank &

Govindarajan (1992a) found some consistent agreement regarding Porter’s and Gupta &

Govindarajan’s classifications. They observed that firms, which pursue the strategies of

differentiation and build had to face the same uncertainty in the environment; similar

considerations could be developed for cost leadership and hold mission follower. A few years

later Langfield-Smith (1997), and then Kald et al. (2000), attempted to integrate all the three

mentioned classifications; they proposed some reasonable combinations,           validation of

empirical research among them.
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       Subsequent studies engaged in checking the relationship between strategy, MCS and

performance (see Simons, 1987; Govindarajan & Fisher, 1990; Chenhall & Langfield-Smith,

1998); however, numerous authors speak about the necessity of research in the accounting

design (Dent, 1990; Chapman, 1997; Langfield-Smith, 1997; Chenhall, 2005b; Langfield-

Smith, 2005).

       Recently these approaches have made a great impact on researches, which were

carried out around the factors affecting SMA techniques implementation (Cravens &

Guilding, 2001). It has confirmed the growing interest towards the assessment of the

extension of their use in the companies and the factors, which affect it.

       Contingency empirical research uses different “typologies” or classifications of

strategy. For example, which has been mentioned above, the schemes of Miles & Snow

(1978), Porter (1980, 1985) and Gupta & Govindarajan (1984) have mostly attracted the

attention when they referred to business-unit strategy. In their original version the three

classifications possess unique aspects and represent various business strategy dimensions.

Besides, Langfield-Smith (1997: p.212) emphasizes that each strategy classification has

different characteristics, which are related to focus and scope Now we will briefly present

each calssification and discuss it regarding the concerning strategic element.

       Miles & Snow (1978) believe that management has to face three kinds of problems:

entrepreneurial (products and markets strategic management), technological (products

production and distribution), administrative (organization supporting entrepreneurial and

technical decisions). When these problems are solved in a successful manner, a stable

strategic pattern is identified. In the boundaries of this path three typologies pursuant to their

rate of change in product or market are shown. Mostly prospectors compete through product

innovation, offer a wide product range and are considered the first in product and market

area. Marketing and Research & Development are the main functions in these organizations.
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On the other hand, defenders work in a relatively stable environment and offer a rather

narrow product range. They concentrate on effectiveness, therefore, they prefer production

and engineering functions.

       Analysers combine features of the previous typologies. Gupta & Govindarajan (1984)

adopt a life-cycle approach, which uses the concept of strategic mission (or portfolio

strategy). Pursuant to life-cycle stage in which the market and product fit each other, the

company will prefer one mission or another one. Gupta & Govindarajan refer to four strategic

missions, which depends on the balance between the goals of market-share growth and short-

run profit maximization. As for build strategy, it aims to increase market share and

competitive position, even if it happens at the expense of short term earnings and cash flow.

Harvest strategy pursues a goal of maximising short term earnings and cash flow and does

not focus on improving market share. Hold strategy can be described as something in the

middle between the configurations described above. Divest strategy includes the choice to

end the activity.

       In the accounting literature the “external” orientation of Strategic Management

Accounting is well remarked. One can interpret it in different ways. Firstly we can refer it to

“competitors”. Simmonds (1981) developed a conceptual framework, which underlies the

importance of competitors information (which is related to cost, prices, market share and so

on) in developing and controlling the business strategy. Later, different authors recognized

the value that competitor information has in attaining a competitive advantage (Jones, 1988;

Bromwich, 1990; Ward, 1992; Moon & Bates, 1993). Besides, the term “external” can be

applied to “suppliers and customers”. In a value chain perspective Shank & Govindarajan

(1993b) demonstrated the usefulness of external information that enable the company to

efficient exploit linkages with suppliers as well as customers. Finally, “external” can be

referred to the “market” as well. It means focusing on the product offer satisfying customer
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needs but in the meantime taking care of the product attribute costs (Bromwich, 1990).

Moreover it is possible an interpretation as satisfaction of customers needs by achieving a

desired target profit/cost (Monden & Hamada, 1991; Morgan, 1993; Ewert & Ernst, 1999) or

performance (Narver & Slater, 1990).

       Summing it up, according to the abovementioned criteria, fourteen SMA techniques

have been identified in previous works (Cravens & Guilding, 2001) These SMA techniques

can be enumerated as such:

       Activity Based Costing/Management (ABC/M). The technique consists of definition of

the activities the company performs; they are considered the ultimate causes of indirect costs

(Cooper et al., 1992). ABC strategic focus means the management of the activities through

which it is possible to define actions, which aim at achieving a competitive advantage

(Palmer, 1992; Shank and Govindarajan, 1989).

       Attribute Costing. Using this technique, products are handles as a compilation of

various features; in this respect, Bromwich (1990) supports the possibility of considering

product attributes as cost objects. The attributes are a means of differentiating the products,

and the market share is determined from the contact between product attributes and

consumers’ taste. In this sense we can interpret it as the external (market) orientation of the

technique.

       Benchmarking. The technique lies in identifying the best practices and comparing the

organization's performance to those practices with the aim of improvement. Benchmarking

can be carried out in different ways (Miller et al., 1992; McNair & Leibfried, 1992) but

generally they underline the external strategic orientation toward competitors.

       Competitive Position Monitoring. The principal feature of the technique is the

provision of competitor information. Sales, market share, volume and unit costs are taken into

account (Simmonds, 1981). Basing on the information provided, the firm can estimate its
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own position in relation to principal competitors and, consequently, control or formulate its

strategy.

       Competitor Cost Assessment. Contrary to the previously described technique,

Competitor cost assessment focuses only on competitors cost structures (Simmonds, 1981).

The main critique concerns information sources. Ward (1992) suggests some indirect sources,

e.g. physical observation, common suppliers or customers and ex-employees of competitors.

Public financial statements constitute a relevant source of competitors evaluation. Moon &

Bates (1993) emphasize the strategic insights that it is possible to receive from this type of

analysis. The technique representing an elaboration of common and traditional methods, finds

a strengthness in today’s evolution of IASB that could allow a comparison between

companies of various countries, which is much simpler.

       Customer Accounting. The technique considers customers or group of customers as

unit of accounting analysis (Bellis-Jones, 1989; Guilding & McManus, 2002). Customer

accounting encompasses all the practices directed to appraise profit, sales or costs deriving

from customers or customer segments. Because of its relation to “relational marketing”, this

accounting approach is classified as SMA technique.

       Integrated Performance Measurement. Its principle is consideration of both financial

and non-financial measures (Cross & Lynch, 1989; Nanni et al., 2002). This technique also

includes balanced scorecard and it has been widely demonstrated its role in strategic

management cycle with the help of the four perspectives (Kaplan & Norton, 1996a, 1996b,

2000; Malina & Selto, 2001).

       Life Cycle Costing. This technique calculates the total cost of a product along its life

cycle (from the design to the decline, passing the stages of introduction, growth and maturity)

(Berliner & Brimson, 1988; Shields & Young, 1991;Wilson, 1991). Similarly, Total Cost of
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Ownership has been emphasized as a long term and strategic orientation SMA tool (Ellram &

Siferd, 1998).

         Quality Costing. For competition in the market product quality has become a

preliminary condition. This technique classifes and monitors costs as those, which derive

from quality prevention, appraisal, internal and external failures (Heagy, 1991). Modern

competition also requires safety and environmental costs control. In a strategic perspective,

the technique must support the pursuit of quality (Simpson & Muthler, 1987; Carr & Tyson,

1992).

         Strategic Costing. According to Shank & Govindarajan (1989, 1993a, 1993b) costing

systems are getting into strategic management process step by step. It means that costing

systems must expressly consider strategy and the pursuit of long-term competitive advantage.

The authors stress the marketing and competitive concepts to which the technique refers (

namely product positioning and market penetration).

         Strategic Pricing. Simmonds (1982) comprises into SMA a pricing technique as well.

It includes the use of competitors information, like competitors’ reactions to price changes,

price elasticity, economies of scale and experience, in the pricing process. It is present both

competitors and market orientation.

         Target Costing. According to the technique, the target cost arises from the differences

between the product price, derived from how much the market can sustain, and a set target

profit. Through an accurate product design, the costs must be contained to attain this target

cost (Monden & Hamada, 1991; Morgan, 1993). External market factors frequently intervene

in this SMA technique.

         Value Chain Costing. While developing the value chain model (Porter, 1985), Shank

& Govindarajan (1992b) propose an approach to accounting considering all the activities

performed from the design to the distribution of the product. The strategic implications regard
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the exploiting of the economies and efficiencies, which derive from the external linkages

between the company and both suppliers and customers.

                                           Works Cited

1. Simmonds K., 1981, Strategic Management Accounting, Management Accounting (UK),

April, pp.26-29.

2. Cravens K. S., Guilding C., 2001, An empirical study of the application of Strategic

Management Accounting Techniques, Advances in Management Accounting,10, pp. 95-124.

3. Guilding C., Cravens K. S., Tayles M., 2000, An international comparison of strategic

management accounting practices, Management Accounting Research, 11 (1), pp.113-135.

4. Roslender R., Hart S.J., 2003, In search of strategic management accounting: theoretical

and field study perspectives, Management Accounting Research, 14 (3), pp. 255-279.

5. Miles R. E., Snow C. G., 1978, Organizational strategy, structure, and process, McGraw-

Hill, New York.

6. Porter M., 1980, Competitive Strategy, Free Press, New York.

7. Porter M., 1985, Competitive Advantage, Free Press, New York.

8. Gupta A. K., Govindarajan V., 1984, Business unit strategy, Managerial characteristics,

and Business unit effectiveness at strategy implementation, The Academy of Management

Journal, 27 (1), pp. 25-41.

9. Kald M., Nilsson F., Rapp B., 2000, On strategy and Management Control: The

importance of Classifying the strategy of the Business, British Journal of Management, Vol.

11, pp. 197-212.

10. Langfield-Smith K., 1997, Management Control Systems and Strategy: A Critical

Review, Accounting, Organizations and Society, 22 (2), pp. 207-232.