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Accounting, Organizations and Society 33 (2008) 836–863

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An exploratory investigation of an integrated contingency model of strategic management accounting

Simon Cadez a, Chris Guilding b,*

a Department of Accounting and Auditing, Faculty of Economics, University of Ljubljana, Kardeljeva ploscad 17, 1000 Ljubljana, Slovenia

b Centre for Tourism, Sport and Service Innovation, Griffith University, Gold Coast Campus,

PMB 50 Gold Coast Mail Centre, Queensland 9726, Australia

Abstract

This study examines the effect of strategic choices, market orientation, and company size on two distinct dimensions of strategic management accounting (SMA) and, in turn, the mediating effect of SMA on company performance. A model is advanced and tested using structural equation modelling and data collected from a sample of 193 large Slovenian compa- nies. The validity of the quantitative data findings has been appraised using qualitative data collected in ten exploratory interviews. The study’s findings support contingency theory’s tenet of no universally appropriate SMA system, with factors such as company size and strategy having a significant bearing on the successful application of SMA. � 2008 Elsevier Ltd. All rights reserved.

Introduction

A surge of interest in strategic management accounting (SMA) appears to have been provoked by widely published criticisms of conventional management accounting practice (Ashton, Hop- per, & Scapens, 1991; Bhimani & Bromwich, 1992; Drury, 1992; Johnson & Kaplan, 1987; Kap- lan, 1984). These criticisms triggered a degree of soul-searching with respect to the potential for a

0361-3682/$ - see front matter � 2008 Elsevier Ltd. All rights reserve doi:10.1016/j.aos.2008.01.003

* Corresponding author. Fax: +61 7 5552 8507. E-mail addresses: [email protected] (S. Cadez),

[email protected] (C. Guilding).

more strategic role for management accounting together with normative commentaries concerning the application of an array of relatively novel approaches in the fields of costing, performance management, and strategic investment appraisal. This distinct accounting orientation and associ- ated techniques are often collectively referred to as ‘‘strategic management accounting”.

The term ‘‘strategic management accounting” was first used by Simmonds (1981). Simmonds explored the provision of an accounting perspec- tive on competitor appraisal, which represented a significant departure from accounting’s conven- tional internally focussed orientation. While the

d.

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SMA literature has since grown substantially (Bhi- mani & Langfield-Smith, 2007; Bromwich, 1988, 1990, 1992; Brouthers & Roozen, 1999; Cadez, 2002; Coad, 1996; Cravens & Guilding, 2001; Dixon, 1998; Guilding, Cravens, & Tayles, 2000; Hoque, 2001; Lord, 1996; Moores & Chenhall, 1993; Palmer, 1992; Rickwood, Coates, & Stacey, 1990; Roslender, 1995; Roslender & Hart, 2003; Roslender, Hart, & Ghosh, 1998; Ryan, 1995; Shank & Govindarajan, 1988, 1992, 1993; Sim- monds, 1982; Smith, 1997; Szendi & Shum, 1999; Tayles, Bramley, Adshead, & Farr, 2002; Tomkins & Carr, 1996; Ward, 1992; Wilson, 1991), there is still limited consensus on what is meant by ‘‘strate- gic management accounting”. Despite this atten- tion, it is notable that SMA suffers from a relative dearth of empirically based research. The SMA empirical works conducted by Lord (1996), Szendi and Shum (1999), Guilding et al. (2000), Cravens and Guilding (2001), Roslender and Hart (2003), and Bhimani and Langfield-Smith (2007) stand in relative isolation. The paradox of high SMA interest yet minimal empirical enquiry pro- vided the broad motivation for the study reported herein.

The study has three main objectives. The first is to further refine the SMA notion. This refinement is provided by outlining two distinct, yet comple- mentary, perspectives of SMA. The first perspec- tive involves viewing SMA as comprising a set of strategically oriented (in contrast to accounting’s conventional operational orientation) manage- ment accounting techniques. These techniques have already been commented on in several earlier works (Cravens & Guilding, 2001; Guilding et al., 2000; Roslender & Hart, 2003; Szendi & Shum, 1999). The second perspective considers the poten- tial for greater management accounting engage- ment in the strategic management process. Traditionally, management accounting’s jurisdic- tion has been viewed as confined to the role of pro- viding information designed to assist management decision making and control (Kaplan & Atkinson, 1989). An evolving view holds that management accountants should assume a more active role in the strategic management process (Bhimani & Keshtvarz, 1999; Nyamori, Perera, & Lawrence, 2001; Palmer, 1992; Scott & Tiessen, 1999).

The study’s second objective is to further our appreciation of SMA systems in their organiza- tional context by advancing a contingency-based SMA framework. Contingency theory posits that organizational structures and systems are a func- tion of environmental and firm-specific factors (Anderson & Lanen, 1999; Chenhall, 2003; Ger- din, 2005; Gerdin & Greve, 2004; Haldma & Laats, 2002). In this study, four factors have been noted as potentially carrying significant implica- tions for SMA system design. These are: (1) busi- ness strategy, (2) degree to which adopted strategy is deliberately formulated, (3) market ori- entation, and (4) firm size.

The study’s third objective is to empirically investigate the validity of the proposed SMA con- tingency framework. While it is often claimed that contingency theory has become the dominant par- adigm in management accounting research (Dent, 1990; Fisher, 1995), such a view is questionable. The central proposition of contingency theory asserts that organizational performance depends on the fit between organizational context and structure. This is a specific and complex proposi- tion, because a conditional association of two or more independent variables with a dependant var- iable is hypothesized (Drazin & Van de Ven, 1985). A closer look into many ‘‘contingency studies” reveals, however, that conditional associations are rarely appraised. Most studies would be better described as ‘‘congruency” theory applications (a congruent proposition hypothesizes that a simple unconditional association exists among variables in the model). In this study, following Gerdin and Greve’s (2004) hierarchical taxonomy of forms of fit, a cartesian-contingency-mediation form of fit is tested via a structural equation model based on data collected from 193 large Slovenian companies.

Ittner and Larcker (2001) and Chenhall (2003) advocate that studying the role of novel manage- ment accounting practices within contemporary settings is necessary to ensure that management accounting research is relevant. Motivation for conducting this study in a Slovenian context derives from prior evidence suggesting that suc- cessful transition economies’ economic and politi- cal upheavals are often associated with the

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application of relatively advanced business prac- tices (Anderson & Lanen, 1999; Bogel & Huszty, 1999; O’Connor, Chow & Wu, 2004). It should be acknowledged, however, that these are broadly based claims that are not specific to Slovenia.

Slovenia’s change to a market economy began in 1991. At that time, commercial management expertise was very weak in areas such as market- ing, general management and financial manage- ment (Edwards & Lawrence, 2000). Today, however, Slovenia represents an example of a suc- cessful transition from a socialist to a market econ- omy (Edwards & Lawrence, 2000; Reardon, Miller, Vida, & Kim, 2005) and appears to have well-developed accounting applications (Cadez & Guilding, 2007). Slovenia was granted full mem- bership status to the European Union (EU) and NATO in 2004. In 2007 it was the first of 10 new EU economies to satisfy the criteria for adopting the Euro currency.1 Slovenia can also be viewed as the most economically advanced of the 10 new EU countries, having recently surpassed the per capita GDP of Greece and Portugal. Recognition of Slovenian progress is also apparent from the fact that in 2008 it was the first of the new EU states to take up presidency of the EU. The World Factbook (2006) records that in 2005, 60% of Slovenia’s GDP comprised services, 37% came from manufacturing and 3% came from agricul- ture. Manufactured goods, machinery and trans- port equipment, chemicals (including pharmaceuticals) and food comprise the main exports and total exports represent more than 50% of Slovenia’s total GDP.

The remainder of the paper is organized as fol- lows. In the next section, the SMA concept is fur- ther explored. Following this, the contingency model of SMA is developed, together with a set of testable hypotheses. In subsequent sections, the research method is described, the findings are outlined and the conclusion provides an overview of the most salient issues arising from the study.

1 The 10 new countries admitted to the EU in 2004 were: Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Two further countries were admitted in 2007: Bulgaria and Romania.

What is strategic management accounting?

While the recent past has seen increased interest in SMA, the area is still under defined and no uni- versally accepted SMA framework exists (Coad, 1996; Nyamori et al., 2001; Roslender & Hart, 2003; Tomkins & Carr, 1996). A review of the literature suggests two perspectives on SMA can be taken. Firstly, SMA can be conceived of as comprising a set of strategically oriented account- ing techniques. Secondly, SMA can be viewed as concerned with the involvement of accountants in corporate strategic decision-making processes. These two perspectives are explored now.

Strategic management accounting techniques

Guilding et al. (2000) provided an original dis- tillation of SMA techniques and also criteria for viewing a particular accounting technique as ‘‘stra- tegic”. They noted that in much of conventional management accounting, a one year time frame is assumed and that an inward focus tends to predominate. These characteristics highlight a non-strategic orientation in much conventional management accounting, as strategy implies a long-term future-oriented time frame and an exter- nally focussed perspective (Andrews, 1987; Hunger & Wheelen, 1996; Mintzberg, 1987a; Mintzberg, Quinn, & Voyer, 1995; Porter, 1996). Guilding et al. (2000) consequently advocated that these characteristics might be usefully drawn upon when determining what accounting techniques qualify as SMA. In their view, the techniques should demon- strate degrees of the following orientations: envi- ronmental (outward-looking) and/or long-term (forward-looking).

Employing these criteria, Guilding et al. (2000) drew 12 SMA techniques from the literature. In a subsequent work, Cravens and Guilding (2001) added another three techniques. Drawing exten- sively on these works, 16 SMA techniques have been identified for analysis in this study. These techniques have been classified into five broad categories. Three of the categories correspond to underlying themes of management accounting acknowledged in many management accounting texts: (1) costing, (2) planning, control and

Table 1 Management accounting techniques exhibiting strategic orientation

SMA technique categories

SMA techniques a

Costing 1. Attribute costing (Bromwich, 1990; Roslender & Hart, 2003) 2. Life-cycle costing (Czyzewski & Hull, 1991; Dunk, 2004; Shields & Young, 1991) 3. Quality costing (Belohlav, 1993; Heagy, 1991) 4. Target costing (Cooper & Slagmulder, 1999; Monden & Hamada, 1991) 5. Value-chain costing (Dekker, 2003; Hergert & Morris, 1989; Shank & Govindarajan, 1992)

Planning, control and performance measurement

1. Benchmarking (Elnathan et al; 1996; Brownlie, 1999) 2. Integrated performance measurement (Chenhall, 2005; Ittner et al., 2003; Kaplan & Norton, 1992; Kaplan & Norton, 1996; Libby, Salterio, & Webb, 2004)

Strategic decision- making

1. Strategic costing (strategic cost management) (Shank, 1996; Shank & Govindarajan, 1988, 1993) 2. Strategic pricing (Rickwood et al., 1990; Simmonds, 1982) 3. Brand valuation (Cravens & Guilding, 1999; Guilding, 1992)

Competitor accounting

1. Competitor cost assessment (Bromwich, 1990; Jones, 1988; Simmonds, 1981; Ward, 1992) 2. Competitive position monitoring (Rangone, 1997; Simmonds, 1986) 3. Competitor performance appraisal (Moon & Bates, 1993)

Customer accounting

1. Customer profitability analysis (Bellis- Jones, 1989; Ward, 1992; Zeithaml, 2000) 2. Lifetime customer profitability analysis (Foster & Gupta, 1994; Jacob, 1994) 3. Valuation of customers as assets (Foster, Gupta, & Sjoblom, 1996; Slater & Narver, 1994; Zeithaml, 2000)

a Brief descriptions of these techniques are provided in the Appendix, while more extensive descriptions of most of these techniques are provided in Guilding et al. (2000) and Guilding and McManus (2002).

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performance measurement, and (3) decision-mak- ing. The remaining two categories have been labelled ‘‘competitor accounting” and ‘‘customer accounting”. The techniques are presented in Table 1.

Accountant’s participation in strategic decision

making processes

Paralleling the development of strategically ori- ented management accounting techniques, several recent commentaries suggest that accountants are assuming a greater role in the strategic manage- ment process (Bhimani & Keshtvarz, 1999; Fern & Tipgos, 1988; Palmer, 1992). Chenhall (2008) feels SMA practices have moved management accounting from an emphasis on operational issues to a more strategic orientation through an integration of customers, processes, HR and finan- cials. Some see the significance of this to be such that a new concept, ‘‘the strategic accountant”, has emerged.

As a reaction to more competitive and uncer- tain market environments, firms have adopted a more pronounced customer oriented posture. This has been manifested by the emergence of more cross-functional team-based structures (Baines & Langfield-Smith, 2003; Chenhall & Langfield- Smith, 2003; Rowe, Birnberg, & Shields, 2008; Scott & Tiessen, 1999). The term ‘horizontal orga- nization’ has evolved to reflect organisations that emphasise the integration of activities across the value chain to support a customer-focused strat- egy, thereby flattening conventional vertical struc- tures (Chenhall, 2008).

Oliver (1991) and Scott & Tiessen (1999) argue that in stark contrast to their more traditional counterparts, strategic accountants are integral to strategic decision-making processes. The more mundane accounting tasks traditionally associated with the profession are being increasingly auto- mated, freeing accountants to become involved in broader spheres of management activity. Strategic accountants can be viewed as proactive in analyzing broader business management issues rather than those narrowly defined by a financial orientation, and also more customer-oriented by providing greater counsel to clients (Chenhall & Langfield-

Smith, 1998a; Coad, 1996; Nyamori et al., 2001). Roslender and Hart (2003) see SMA as intimately associated with marketing management.

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This concept of strategic accounting builds on close relationships with non-accounting personnel, where accountants assume a liaison role across functional boundaries and between levels of man- agement (Coad, 1996; Parker & Kyj, 2006; Rowe et al., 2008). In the literature, several terms have emerged in connection with this liaison role: busi- ness partnership (Oliver, 1991), coordination (Pal- mer, 1992), inter-departmental teams (Scott & Tiessen, 1999), teamwork (Bromwich, 2000), inter- functional cooperation (Roslender & Hart, 2003), team-based structures (Baines & Langfield-Smith, 2003), cross-functional teams (Rowe et al., 2008), and horizontal accounting (Chenhall, 2008). In the past, there appears to have been a tendency for parochial, functionally based, claims to data ownership which have impeded centralised infor- mation gathering. This appears to be becoming less prevalent in contemporary settings (Rowe et al., 2008). Brouthers and Roozen (1999) propose that the process of information management be centralized in the accounting department, since accountants are already trained in data management.

These changes signify a dramatic shift in the underlying accounting paradigm. Strategic man- agement accountants are no longer seen as just information providers, they are seen more as active players in the strategic management process, with power to achieve their own ends (Chenhall, 2003). Roslender et al. (1998) note, however, that if accountants cannot cope with the challenges pre- sented by this evolving role, then another function will move to provide information management ser- vices. Hoque (2001) feels accountants have histor- ically exhibited an adeptness when reacting to new management contexts and sees no reason why the emergence of the strategic accountant should not be consolidated.

Towards a contingency framework of strategic

management accounting

Chenhall (2003) has provided an overview of contingency-based studies of management accounting. These studies have a long tradition dating back to the works of Gordon and Miller

(1976), Waterhouse and Tiessen (1978), Ginzberg (1980), and Otley (1980) and the contingency approach quickly became the dominant paradigm in empirical management accounting research (Dent, 1990; Fisher, 1995).

Chenhall and Langfield-Smith (1998b) and Chenhall (2003) contend that contingency-based management accounting research should employ organizational performance as the dependant var- iable, a view suggesting that many studies that have been described as ‘‘contingency-based” stud- ies (e.g., Bruggeman & Van der Stede, 1993; Carr & Tomkins, 1996; Chenhall & Morris, 1986; Chow, Shields, & Wu, 1999; Fisher, 1996; Gerdin, 2005; Gordon & Narayanan, 1984; Guilding, 1999; Guilding & McManus, 2002; Haldma & Laats, 2002; Libby & Waterhouse, 1996; Moores & Yuen, 2001; O’Connor, Deng, & Luo, 2006; Reid & Smith, 2000; Sharma, 2002), might be better described as applications of a ‘‘congruency paradigm”.

Another issue relating to contingency-based studies concerns the operationalisation of contin- gency fit. Drazin and Van de Ven (1985) see the emergence of three different approaches to appraising fit: selection, interaction and systems. The studies identified in the preceding paragraph fall within the selection approach, signifying they do not examine whether the context-structure rela- tionship affects performance. The interaction approach has also been used relatively widely (e.g., Abernethy & Brownell, 1999; Abernethy & Guthrie, 1994; Chenhall, 1997; Davila, 2000; Govindarajan & Gupta, 1985; Gul & Chia, 1994; Ittner & Larcker, 1997; Mia & Chenhall, 1994), despite the ambiguities that render this approach methodologically problematical (see Gerdin & Greve, 2004; Hartmann & Moers, 1999, 2003). A systems approach, addressing multiple contingen- cies simultaneously, has been much less extensively applied (e.g., Chenhall & Langfield-Smith, 1998b; Selto, Renner, & Young, 1995). Chenhall (2003) provides an extension to Drazin and Van de Ven’s (1985) classification by referring to a fourth struc- tural relationship category that concerns interven- ing variables.

While these issues have no doubt contributed to the fair degree of inconsistent findings emanating

2 This aspect of strategy is especially pertinent in transition economies, such as Slovenia, because it is often argued that management in these countries only became immersed in serious strategic planning following the conversion to a market-based economy (Bogel & Huszty, 1999). This might well signify high variability with respect to the degree that strategy formulation is conducted in a deliberate manner in transition economies.

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from this body of management accounting work, certain themes and consistencies that provide a basis for further model development can be identi- fied (Chenhall, 2003; Fisher, 1995; Gerdin & Greve, 2004; Ittner & Larcker, 2001; Langfield- Smith, 1997). We have little in the way of prior empirical observations upon which to build a con- tingency theory of SMA, however. This problem is exacerbated by the inconsistent interpretations of what constitutes SMA. For the purpose of this study, it was therefore important that SMA be identified with sufficient clarity to enable it to be viewed as comprising a coherent subset of manage- ment accounting practices. As already noted, Guil- ding et al.’s (2000) view of SMA as comprising techniques that are environmental (outward-look- ing) and/or long-term (forward-looking) has been drawn on in this study. This operationalisation carries a subtle, yet significant, unifying aspect. As noted by Guilding et al., the orientation of most conventional management accounting practices appears to be relatively distinct from SMA’s orien- tations, due to their tendency to exhibit an inward looking, short-term and historically focused nat- ure. This signifies that the SMA practices exam- ined in this study focus on an information set that is fairly distinct from the information set cap- tured by conventional management accounting practices.

Drawing on Fisher’s (1995) view that the ulti- mate goal of contingent accounting research should be to develop and test a comprehensive model that includes multiple elements of account- ing systems and multiple contingent variables, Fig. 1 presents a model concerned with the contin- gency context of SMA. The model includes four contingency factors, the two perspectives of SMA noted above and organizational perfor- mance as a dependent variable.

At the heart of the model are SMA usage (this refers to the usage of SMA techniques) and accountant participation in strategic decision mak- ing processes. Consistent with prior related contin- gency-based studies (e.g., Anderson & Lanen, 1999; Chenhall & Langfield-Smith, 1998b; Cravens & Guilding, 2001; Gerdin, 2005; Guilding, 1999; Guilding & McManus, 2002; Hoque & James, 2000; O’Connor et al., 2006), both these general

level (holistic) dimensions of SMA are modeled as endogenous constructs in the model.

The contingency factors identified as potentially implicated in the design of effective SMA (exoge- nous constructs in the model) derive from conven- tional theories of organizational structure, referred to as the strategy-structure-performance paradigm by Anderson and Lanen (1999). Hambrick (1980) sees strategy as a concept particularly worthy of empirical investigation due to its potential associa- tion with many other organizational facets. In this study the focus is on business level strategy which has been operationalized using Miles and Snow’s (1978) prospector/defender typology, due to its applicability across a range of industrial settings (Smith, Guthrie, & Chen, 1989).

Most early descriptions of strategy imply that it arises from a deliberate stream of decisions (Andrews, 1987; Miles & Snow, 1978), however it appears many organizations’ strategy can be characterised better as emergent rather than prede- termined (Mintzberg, 1987a, 1987b; Mintzberg et al., 1995). Mintzberg (1987b) sees strategy as a craft and stresses the ambiguous and messy nature of strategic decisions. Most empirical management accounting research concerned with strategy pre- sumes deliberate strategy formulation (Langfield- Smith, 1997). Where strategy formulation has less of a predetermined and deliberate orientation, for- mal management accounting systems imposing constraints and discipline may be counter-produc- tive (Ittner & Larcker, 1997). The relatively under- explored nature of this dimension of strategy moti- vated its inclusion in the SMA examination reported herein.

2

The inclusion of market orientation for exami- nation in the study was also partially motivated by a lack of recognition given to the construct by accounting researchers. This is somewhat surpris- ing, given the importance afforded to this variable

Strategy type prospector/defender

Deliberate strategy formulation

Market orientation

Company size

Accountants' participation in

strategic decision making processes

SMA usage

Performance

H1a+

H1b+

H0+

H2d+

H2a+

H2c+

H2b+

H2e+

H3b+

H3a+

H3c+

Fig. 1. Contingency model of strategic management accounting (main effects model).

842 S. Cadez, C. Guilding / Accounting, Organizations and Society 33 (2008) 836–863

by marketing academics. Narver and Slater (1990) view market orientation as central to modern man- agement and strategy. It appears particularly appropriate for inclusion as a contingent factor in this study as it appears to bear a close associa- tion with the distinctive characteristics of SMA (Roslender & Hart, 2003). The inclusion of com- pany size in the model was motivated by its reported contingent significance in several prior accounting studies (Guilding, 1999; Libby & Waterhouse, 1996; Merchant, 1981).

The dependant variable in the model is com- pany performance. The fundamental tenet of con- tingency theory holds that company performance is a product of an appropriate fit between the structure (SMA system) and context (contingency factors). Consequently, it is assumed that both high and low performing companies exist as a result of more or less compatible combinations of context and structure (Gerdin & Greve, 2004; Ittner & Larcker, 2001). Stated alternatively, good fit implies enhanced performance, while poor fit implies diminished performance (Chenhall, 2003).

In this study, following Gerdin and Greve’s (2004) taxonomy of forms of contingency fit, a cartesian-contingency-mediation form is tested. At the top level, the Cartesian and configuration forms represent conflicting paradigms. Advocates of a Cartesian approach argue that fit between context and structure falls within a continuum.

This is contrary to analysts advocating a configura- tion approach which sees only a few states of fit. In the contingency approach, fit is understood as sig- nifying a positive impact on performance due to certain combinations of context and structure. This can be distinguished from the congruent approach which assumes that structure depends on context, without any examination made of whether this relationship affects performance.

Hypotheses relating SMA to performance

SMA usage – performance

The major function of an information system is to support managerial decision-making and control (Abernethy & Bouwens, 2005; Gelinas, Sutton, & Oram, 1998). Gupta (1987) argues that unless an organization’s strategic information- processing capacity adequately meets its needs, the decisions that emerge will be flawed or late, thereby resulting in suboptimal performance. These expectations derive from economic models of decision making which assert that in uncertain conditions, the provision of better information results in improved resource allocation (Baines & Langfield-Smith, 2003; Christensen & Demski, 2003) and an enhanced positive outcome likeli- hood (Christensen & Feltham, 2003). A condi- tional association is thus assumed that better information facilitates more effective managerial

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decisions, which in turn enhance organizational performance (Baines & Langfield-Smith, 2003; Chenhall, 2003). While this relationship might be intuitively appealing, Chenhall (2003) warns against poorly conceived leaps of logic. The exact nature of the relationship is ambiguous (Baines & Langfield-Smith, 2003) as the efficacy of MAS is dependent on organisational contextual factors (Chenhall, 2007) and its compatibility with managers’ mental models (De Haas & Algera, 2002).

The relationship between management accounting usage and performance has been sub- jected to extensive empirical investigation. This accumulated work provides a somewhat equivo- cal picture (Chenhall & Moers, 2007). While most studies provide some support for the view that greater management accounting (broad scope information) usage is positively associated with performance (e.g., Abernethy & Guthrie, 1994; Baines & Langfield-Smith, 2003; Chong & Chong, 1997; Cravens & Guilding, 2001; Gul & Chia, 1994; Hoque & James, 2000; Ittner, Larc- ker, & Randall, 2003; Mahama, 2006; Mia & Chenhall, 1994; Mia & Clarke, 1999; Scott & Tiessen, 1999; Vandenbosch, 1999), in many of these studies the relationship is inconclusive and context dependent. For example, the use of broad scope information has been found to have a more positive effect on performance in prospector than in defender firms (Abernethy & Guthrie, 1994), in the presence of high environmental uncertainty (Agbejule, 2005; Gul & Chia, 1994), and for mar- keting managers relative to production managers (Mia & Chenhall, 1994). Further, team perfor- mance has been observed to be higher when a comprehensive measurement system is combined with greater participation in performance target setting (Scott & Tiessen, 1999). Ittner et al. (2003) report that broad set information usage is positively associated with stock returns, how- ever it is not associated with ROA and sales growth. Abernethy and Bouwens (2005) claim an important intervening role for user satisfaction in the relationship between acceptance of accounting innovations and performance. Some studies have documented no, or even a negative, association between accounting information and

performance. Ittner and Larcker (1997) observed several strategic control practices to be negatively associated with performance. Perrera, Harrison, and Poole (1997) found no association between use of non-financial performance measures and performance. Agbejule (2005) reports that under low levels of perceived environmental uncertainty, sophisticated MAS has a negative effect on performance.

While acknowledging these studies’ mixed out- comes, there appears to be a preponderance of findings pointing to a positive association between accounting information usage and performance. In the context of this study, it is also important to recognise SMA’s quality of providing incremen- tal information not garnered by a conventional accounting system. These factors have motivated the following hypothesis.

H3a: Greater SMA usage is positively associated

with performance.

Strategic decision making participation –

performance

In increasingly competitive and uncertain mar- ket contexts, the creation of inter-departmental teams can improve the speed and quality of an organization’s reaction to environmental develop- ments, thus improving performance (Baines & Langfield-Smith, 2003; Rowe et al., 2008; Scott & Tiessen, 1999). Heterogeneous senior manage- ment teams are better equipped to recognize stra- tegic opportunities, and the representation of a greater breadth of functional perspectives enhances more informed strategy identification (Naranjo-Gil & Hartmann, 2007). Again, a condi- tional association is assumed that increased partic- ipation facilitates more effective managerial decisions, which in turn enhances organizational performance (Wooldridge & Floyd, 1990; De Haas & Kleingeld, 1999). Relative to their more tradi- tional counterparts, strategic accountants can be seen to provide a distinct perspective when acting as an integral part of key organizational deci- sion-making processes (Oliver, 1991; Scott & Ties- sen, 1999). By being customer-oriented, proactive in analyzing business issues, liaising across func- tional boundaries and levels of management

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(Coad, 1996; Parker & Kyj, 2006; Rowe et al., 2008), and by centralizing information manage- ment in modern intelligence centres, the relevance, accuracy and timeliness of information is increased (Brouthers & Roozen, 1999). Further, by nurtur- ing a partner relationship with all the functions in the business they can add value to the deci- sion-making process (Nyamori et al., 2001; Rowe et al., 2008; Wooldridge & Floyd, 1990), thereby facilitating improved performance.

The relationship between participation and performance has been the subject of extensive management accounting empirical investigation, however the vast majority of studies have focused on budgetary participation and job performance (e.g., Chong & Johnson, 2007; Clinton & Hun- ton, 2001; Lau & Lim, 2002; Mia, 1989; Nouri & Parker, 1998; Parker & Kyj, 2006; Shields, Deng, & Kato, 2000). Prior works investigating participation in strategic decision-making and organizational performance are few. Wooldridge and Floyd (1990) provide evidence that middle management involvement in strategy is associated with improved performance. Scott & Tiessen (1999) find that inter-departmental involvement has an indirect positive effect on team perfor- mance via the application of more diverse perfor- mance measures. Contrary to these findings, Chenhall and Langfield-Smith (2003) document a case study analysis where team-based initiatives did not appear to enhance performance. As the prior empirical literature concerning a relation- ship between inter-departmental participation and performance is relatively sparse, the follow- ing hypothesis has been primarily informed by what appears to be the conventional normative view.

H3b: Greater accountant participation in strate-

gic decision making is positively associated with

performance.

Strategic decision making participation – SMA

usage

Greater involvement of accountants in strat- egy formulation and implementation will incul- cate accountants with a more profound appreciation of the nature of the information

needs posed by strategic management. In turn, this can be expected to result in accountants instigating accounting innovations (Abernethy & Bouwens, 2005), such as novel SMA tech- niques, that are more market and future focused (Coad, 1996; Nyamori et al., 2001; Otley, 1999). Further, accountants’ involvement in strategic decision making will instill a greater appreciation of the justifiability of expending resources devel- oping SMA systems and also incurring on-going costs associated with running and maintaining the systems (Christensen & Demski, 2003; Chris- tensen & Feltham, 2003). A positive association between participation in strategic decision mak- ing and SMA usage therefore appears likely, as greater participation can be seen as providing both a motive and a pressure for accountants to add value to the strategic decision-making process (Oliver, 1991).

There is some empirical evidence supportive of such an expectation. Abernethy and Bouwens (2005) found that decision-rights’ decentralisation is a factor that contributes to the effective imple- mentation of accounting innovations. Baines and Langfield-Smith (2003) report that greater use of team-based structures results in greater reliance on non-financial management accounting infor- mation. This is also consistent with Gerdin’s (2005) finding that organizations tailor the design of management accounting systems (MAS) to organisationally contingent control factors. On the other hand, Naranjo-Gil and Hartmann (2007) found no relationship between top manage- ment team heterogeneity and broad scope design of MAS in Spanish public hospitals. Further, Chenhall and Langfield-Smith (1998a) suggest a reciprocal relationship signifying accountants’ participation in organizational change is depen- dent on senior management’s support for account- ing innovations. Again, in light of the limited prior empirical findings, the following hypothesis has been motivated primarily by a priori reasoning and what appears to be a consensus view in the normative literature.

H2e: Greater accountant participation in strate-

gic decision making is positively associated with

SMA usage.

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Hypotheses relating contingency factors, SMA

system, and performance

Business strategy

Miles and Snow (1978) identified three preferred organizational strategies (prospectors, analyzers, and defenders), and noted a fourth type (reactor) that they viewed as unsustainable. Miles and Snow see analyzers as adopting a hybrid form of strategy that manifests both defender and prospector attri- butes and considerable evidence suggests that defenders and prospectors define a continuous spectrum with analyzers represented around the mid-point of the continuum (Anderson & Lanen, 1999; Doty, Glick, & Huber, 1993; Shortell & Zajac, 1990; Smith et al., 1989). Prospectors are seen as continually searching for product and mar- ket opportunities and as being the creators of inno- vation in a market. Defenders on the other hand are less dynamic, the key to their success is a focus on efficiency. Since environmental and future ori- entation are prominent factors in both a prospector type strategy and SMA, we expect SMA techniques to be more widely applied in prospector than defen- der organizations. This is consistent with Guil- ding’s (1999) reported positive relationship between the application of a prospector strategy and competitor focused accounting.

H2a: SMA usage is greater in prospector type

companies than in defender type companies.

Adopted business strategy can be expected to influence the degree of accountants’ participation in the strategic decision making process. Prospec- tors are continually searching for opportunities in the environment, while defenders focus on effi- ciency. In the language of Porter (1996), prospec- tors are more concerned with strategic positioning, while defenders are more concerned with operational effectiveness. Since strategy mak- ing requires broad inter-functional discussion (Bromwich, 2000; Nyamori et al., 2001; Palmer, 1992), while operational efficiencies tend to be sought with an intra-departmental philosophy, we expect accountants’ participation in strategic decision making processes to be greater in organi- zation’s applying a prospector-type strategy.

H1a: Accountants’ participation in strategic

decision making is greater in prospector type

companies than in defender type companies.

Deliberate strategy formulation This strategic dimension focuses on the extent

to which a company adopts a deliberate approach in its strategy formulation. Mintzberg (1987a) proposes that strategy is a pattern in a stream of actions, regardless of whether the pattern is intended. This suggests firms can differ with respect to whether they exhibit a deliberate and predetermined strategy formulation orientation or a more emergent strategy formulation orienta- tion where patterns develop in the absence of intentions, or in spite of them. In practice, pure deliberate and pure emergent strategies are uncommon (Mintzberg, 1987b; Mintzberg et al., 1995). A deliberate strategy is a consciously intended course of action implying constant dis- cussion about strategic actions, whereas an emer- gent strategy highlights the ambiguous nature of strategic decisions implying considerable flexibil- ity (Bhimani & Langfield-Smith, 2007; Lang- field-Smith, 1997). The more active management of strategy in those organizations practising a deliberate strategic management philosophy suggests a greater call for strategically oriented information such as that provided by an SMA system. This rationale motivated the following hypothesis:

H2b: SMA usage is greater in companies that

take a deliberate approach to strategy

formulation.

A deliberate strategy, represented as a con- sciously intended course of action, implies fre- quent discussions about strategy where for its effectiveness the involvement of all functional areas, including (strategic) accountants, is required (Bromwich, 2000). It signifies greater intra-organizational debate and deliberation con- cerning what strategy is to be pursued. Hence, we posit that a more deliberate strategy formula- tion orientation results in greater accounting participation in strategic decision making processes.

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H1b: Participation of accountants in strategic

decision making is greater in companies that take

a deliberate approach to strategy formulation.

Fisher (1995) claims that relationships between contingent factors are poorly documented. As a result, he promotes exploration of these relation- ships, although he warns that this can lead to a problem of conflicting contingencies. Following Fisher’s encouragement, it appears reasonable to expect a relationship between the two dimensions of strategy under analysis. As companies applying a prospector strategy have to make strategic deci- sions with respect to what type of product/market innovations should be pursued and also the timing of product/market launches, it appears reasonable to expect prospectors to take a relatively deliberate approach to strategy formulation. In effect, pros- pecting decisions will have to be deliberated (Dav- ila, 2000). This does not appear to be as much the case in defenders as the thrust of their strategy is at an operational, efficiency seeking level (Porter, 1996). Consistent with this reasoning, and sup- ported by evidence from Simons (1987), it is expected that strategic management processes are more structured (deliberate) in prospector than in defender organizations.

H0: Deliberate strategy formulation is more developed in prospector than defender

organizations.

Market orientation

A market orientation philosophy holds that planning and coordination of all company activi- ties is focused on the primary goal of satisfying customer needs (Jaworski & Kohli, 1993; Walker, Boyd, & Larreche, 1998). Market orientation can thus be defined as a business culture that effectively and efficiently creates superior value for customers (Narver & Slater, 1990). Narver and Slater see the concept as comprising three behavioral compo- nents and two decision criteria: customer orienta- tion, competitor orientation, interfunctional coordination, a long-term focus, and a profit objective. As many of these facets are closely aligned to SMA, a positive relationship between market orientation and SMA usage is anticipated.

Further, Guilding and McManus (2002) note a positive association between market orientation and the application of customer accounting.

H2c: SMA usage is greater in market-oriented companies.

Marketing academics and managers have con- tinuously claimed that increased levels of market orientation are consistent with higher levels of market performance (Narver & Slater, 1990; Walker et al., 1998). As there is ample evidence supporting this proposition (Jaworski & Kohli, 1993; Narver & Slater, 1990; Slater & Narver, 1994), the following hypothesis has been developed.

H3c: Market orientation is positively associated

with performance.

Company size It is an enduring finding that company size is

positively related to accounting sophistication (Guilding, 1999; Libby & Waterhouse, 1996; Mer- chant, 1981). Company growth poses increased communication and control problems, therefore accounting and control processes become more specialized and sophisticated (Hoque & James, 2000). Further, increased company size results in lower relative costs (i.e. per sale) of information processing (Guilding, 1999; Johnson & Kaplan, 1987). Consistent with this rationale, the following hypothesis has been posited.

H2d: SMA usage is greater in larger companies.

Research method

Sampling procedure

Data were collected using a mailed question- naire survey. An initial sample was drawn from the Slovenian Chamber of Commerce and Trade disclosure of the 500 largest Slovenian companies (in terms of total revenue). This listing includes all industrial sectors except for financial intermedi- aries. To include financial intermediaries in the

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raw sample, two further databases were drawn upon: the Slovenian Banking Association database and the Slovenian Insurance Association database. This resulted in a raw sample of 520 companies. A second size filter was imposed to screen out com- panies with less than 100 employees. The sample was further reduced due to incorrect or incomplete mailing addresses for some cases. The final sample comprised 388 companies.

As part of a strategy to develop an accurate mailing list and secure a high response rate, a phone call was lodged with each company and the name of the most suitable person to complete the survey was identified. These were typically the Chief Accountant, Chief Controller, or Chief Financial Officer. In most cases, the particular manager was spoken to and the purpose of the research explained. The mailed survey package included a covering letter explaining the purpose of the research, a copy of the survey with a glos- sary of terms used and a postage-paid reply enve- lope. The first mailing resulted in 124 usable responses. A reminder letter was posted one month following the initial mail-out. This yielded an addi- tional 69 responses. Thus the overall usable response rate was 49.7%.

The industrial sectors represented in the sam- ple analysed are presented in Table 2. Companies comprising the sample had an average annual sales level of €92.7 million. The smallest com- pany’s annual sales level was €13.5 million and

Table 2 Industry classification of the sampled companies

Industry Number of firms

Percentage of sample

Agriculture 1 0.5 Mining 2 1.0 Manufacturing 108 56.0 Public services and utilities 10 5.2 Construction 9 4.7 Wholesale and retail 30 15.5 Accommodation and food services 6 3.1 Transportation and logistics services 13 6.7 Financial intermediation services 8 4.1 Real estate and other commercial services

6 3.1

Total 193 100.0

the largest company’s annual sales level was €1.2 billion. In terms of employees, the compa- nies analysed had an average number of 747 employees, with the smallest company employing 104 and the largest company employing 8765 staff.

To investigate for possible non-response bias, Kolmogorov–Smirnoff tests of differences in the responses provided by early and late respondents (the first and last 25% of questionnaires returned) were conducted. No significant differences (p < 0.05) in the data provided by these sub-groups were noted for any questions posed. While this suggests little concern for non-response bias, it should be acknowledged that accountants in firms with relatively sophisticated accounting systems may have been more inclined to respond than those in firms with under-developed accounting systems.

In addition to the quantitative data collected, qualitative data has been collected by interviewing senior accountants in ten of the surveyed organiza- tions in order to secure a deeper understanding of the nature of SMA and its context and also to review the validity of the quantitative data find- ings. The companies represented by the intervie- wees ranged in size and were drawn from a wide range of industrial sectors (see Table 3). All inter- views were conducted at the subject companies’ premises, were tape recorded, and had an average duration of around 45 min. All interviews were transcribed and translated into English by a bilin- gual native Slovenian.

Variable measurement

SMA usage The degree of SMA technique usage was

measured using the same approach as Cravens and Guilding (2001) and Guilding and McManus (2002). Following the question ‘‘To what extent does your organization use the following techniques?”, the 16 SMA techniques were listed together with a Likert-type scale ranging from ‘‘1” (not at all), to ‘‘7” (to a great extent). A glossary containing definitions of the SMA tech- niques was provided to aid interpretation (see Appendix).

Table 3 Schedule of companies represented in interviews

Interviewee Nature of company

A A government owned railway operator that has been accumulating losses for many years. The company is subject to powerful trade union influence

B A telecommunications company that is owned by an Austrian based multinational

C A hotel operator that leases about 2% of the Slovenian coastline

D A regional freight delivery company E An electrical equipment manufacturer with

manufacturing facilities on all continents F A manufacturer of electrical home appliances

with international brand recognition G A manufacturer of basic construction materials

with a large mining operation H A large mutual insurance company I Manufacturer of sports equipment with an

internationally recognisable brand name J Employee owned furniture manufacturer

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Accountant participation in strategic decision

making

The measure used draws on Wooldridge and Floyd’s (1990) instrument designed to assess mid- dle management involvement in strategic decision making. Respondents were asked to record their participation with respect to five aspects of strate- gic management: (1) identifying problems and pro- posing objectives, (2) generating options, (3) evaluating options, (4) developing details about options, and (5) taking the necessary actions to put changes into place. The scale anchors ranged from ‘‘1” (not at all involved) to ‘‘7” (fully involved).

Prospector/defender business strategy

The measure developed by Shortell and Zajac (1990) was used. This instrument assesses an orga- nization’s overall strategic orientation on a seven- point scale, anchored at one end by a description of a defender-type organization, and at the other end by a prospector-type organization.

Deliberate strategy formulation orientation

Because this dimension of strategy has not been operationalized in any known previous work, an original measurement instrument had to be devel-

oped. In order to assess an organization’s extent of deliberate strategy formulation orientation, three statements were provided to respondents. Drawing on Mintzberg’s (1987a) terminology, these state- ments were: (1) ‘‘In our company, the strategic decision-makers usually think through everything in advance of strategic action” (2) ‘‘In our com- pany, strategic intentions are seldom realized with little or no deviation”, and (3) ‘‘In our company, strategic action usually develops in the absence of strategic intention”. Next to each statement, a seven-point scale was provided, ranging from ‘‘1” (strongly disagree) to ‘‘7” (strongly agree).

Market orientation

Market orientation was measured using the same instrument applied by Guilding and McM- anus (2002). Using a seven-point scale ranging from ‘‘1” (not at all) to ‘‘7” (to a large extent) respondents were asked to indicate to what extent they agree with the following statements: ‘‘(1) My company has a strong understanding of our cus- tomers, (2) the functions in my company work clo- sely together to create superior value for our customers, (3) management in my organization thinks in terms of serving the needs and wants of well-defined markets chosen for their long-term growth and profit potential for the company, and (4) my company has a strong market orientation”.

Company size

Total revenues were used as the measure of company size. Due to the non-normality of the raw data collected, logarithmic transformation was undertaken prior to the analysis.

Performance Performance was measured using a slightly

modified version of the Hoque and James (2000) instrument. Two additional dimensions have been added to Hoque and James’ five dimensions of performance. The original dimensions comprise: (1) return on investment, (2) margin on sales, (3) capacity utilization, (4) customer satisfaction, and (5) product quality. The two additional dimensions are (6) development of new products, and (7) market share. For each of these seven dimensions, respondents were asked to indicate

3 The SMA techniques and performance dimensions were consolidated into underlying factors to increase the model’s parsimony. As an investigation of the reliability of the reported model, an analysis of a second-order factor model incorporat- ing all of the individual SMA technique adoption measures was conducted. This yielded parameters identical to those in the reported model, however the second-order factor model should be viewed as potentially unstable, as the ratio of observations per estimated parameter is below 3.

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their company’s performance relative to their com- petitors on a scale ranging from ‘‘1” (below aver- age) to ‘‘7” (above average).

Data analysis

In order to test the proposed contingency model, the LISREL structural equation modelling procedure was applied. This statistical technique allows for the simultaneous estimation of multiple and interrelated dependence relationships, has the ability to represent unobservable concepts, and accounts for the measurement error in the estima- tion process (Ferligoj, Omladic, & Coenders, 2003; Hair, Anderson, Tatham, & Black, 1998; O’Con- nor et al., 2006). Smith and Langfield-Smith (2004) advocate that SEM is particularly appropri- ate for modelling relations between environment, strategy, and organizational structure, because theory in this area is relatively established and a considerable body of knowledge exists.

Following the recommended two-step approach (Anderson & Gerbing, 1988; Ferligoj et al., 2003; Hair et al., 1998; Joreskog & Sorbom, 1993; Schu- macker & Lomax, 1996), firstly the measurement model was tested, then the structural model. The measurement model is concerned with the mea- surement properties (validities and reliabilities) of the measurement instruments, while the structural model is concerned with causal relationships among the constructs and their relative explana- tory power (Joreskog & Sorbom, 1993).

In the model specification process, particular attention was given to the potential for multi- dimensionality in two of the constructs: SMA usage and performance. Prior to testing the overall contingency model, on theoretical grounds and also in light of factor analytic observations, the dimensionality of these two constructs was given due consideration (Gerbing & Hamilton, 1996). The comparison of alternative factor structure models (Byrne, 1998; Joreskog & Sorbom, 1993) revealed that best model fit is achieved when SMA usage is specified as a five-factor structure and when performance is specified as a two-factor structure. It is notable that others have viewed performance as a two-dimensional construct comprising financial and non-financial perfor-

mance (Kaplan & Norton, 1992, 1996; Chenhall, 2005).

Because the primary goal was to estimate rela- tionships between constructs while increasing the estimation model parsimony, a partial aggregation approach (Bagozzi & Edwards, 1998) was taken to represent multi-dimensional constructs.3 This means that each dimension was represented in the model with a variable that was calculated as an average of the retained original indicators. For example, for the costing dimension of the SMA usage construct, one composite item was cal- culated as the mean of five original items.

Findings

Structural equation model

A priori reasoning suggested that SMA usage is a five-dimensional construct (see Table 1) and per- formance is a two-dimensional construct. Based on the premise that exploratory factor analysis can contribute to a useful heuristic strategy for model specification prior to cross-validation with confirmatory factor analysis (Gerbing & Hamil- ton, 1996), both exploratory and confirmatory fac- tor analyses (first and second-order) were conducted. The results confirmed that best model fit results when SMA usage is specified as compris- ing five factors and performance is specified as two factors. Consistent with Table 1, the five dimen- sions of SMA usage have been labelled: (1) cost- ing, (2) planning, control, and performance measurement, (3) strategic-decision making, (4) competitor accounting, and (5) customer account- ing. The two dimensions of performance have been labelled: (1) financial performance, and (2) non- financial performance.

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Using the partial aggregation approach for the two multi-dimensional constructs, the total num- ber of indicators entering the measurement model is 21. The number of indicators per construct is: SMA usage: 5 (i.e., the 16 techniques were col- lapsed into 5 SMA dimensions by calculating com- posite items); accountant’s participation in strategic decision making: 5; business strategy: 1; strategy deliberation: 3; market orientation: 4; company size: 1; and performance: 2 (seven ques- tionnaire items were collapsed into two main dimensions). Constructs measured with only 1 indicator are problematic, because it is impossible to empirically estimate their reliability. For these constructs, one can either assume there is no mea- surement error, or a reliability value for a single measure must be specified (Anderson & Gerbing, 1988; Hair et al., 1998; Schumacker & Lomax, 1996). Total revenues as an indicator of company size is an objective measure obtained from a cred- ible source, thus minimal measurement error can be assumed. The measure of business strategy is, however, not objective and it is unreasonable to assume no error variance (Joreskog & Sorbom, 1993). Because of this, in light of arguments that an arbitrary value of 0.8 is a better assumption than an equally arbitrary value of 1 (Joreskog & Sorbom, 1993; Schumacker & Lomax, 1996), it has been assumed that the reliability of business strategy is 0.8.

To estimate the measurement model, the maxi- mum likelihood estimation method was used. Input data was provided in the form of a vari- ance-covariance matrix, supplemented with the asymptotic covariance matrix (Schumacker &

Table 4 Correlation coefficients among constructs in the measurement model

Str-PD Str-DE

Business strategy (Str-PD) 1 Strategy deliberation (Str-DE) 0.39** 1 Market orientation (Mo) 0.58** 0.61**

Company size (Size) 0.17* 0.05 Participation (Part) 0.29** 0.28**

SMA usage (SMAu) 0.63** 0.53**

Performance (Perf) 0.72** 0.41**

* Coefficient is statistically significant at p < 0.05 level (two-tail). ** Coefficient is statistically significant at p < 0.01 level (two-tail).

Lomax, 1996). An initial estimate revealed a prob- lem requiring a respecification of the model. The problem was a very high correlation (0.9) between two of the participation in strategic decision mak- ing items (evaluating options and developing details about options) and this was resolved by dropping the latter from the model. The respecified model fitted the data quite well with all major indices (NFI = 0.938, NNFI = 0.970, CFI = 0.976; SRMR = 0.054, RMSEA = 0.042) falling within acceptable levels (Hair et al., 1998; Lance & Van- denberg, 2002; Schumacker & Lomax, 1996) and with standardized residuals symmetrically clus- tered around the zero point (Byrne, 1998; Joreskog & Sorbom, 1993). All of the factor loadings exceeded 0.5 and were statistically significant at p < 0.01 level. Taking these factors into account, it was determined that the measurement model holds and the analysis progressed to testing the structural model.

Prior to reporting the structural model testing results, the correlation levels between constructs in the measurement model are presented in Table 4. Of the 21 relationships reported on in this table, 18 are positively statistically significant (p < 0.05). Given the confirmatory nature of the study, of greatest interest is the 11 hypothesized relationships (these correlations are highlighted in bold in Table 4). All 11 correlations are statis- tically significant and consistent with what was hypothesized. A very high correlation is evident between the application of a prospector strategy and performance. This relationship was not hypothesized in the theoretical model. The finding is surprising as it contradicts Miles and Snow’s

Mo Size Part SMAu Perf

1 0.12 1 0.33** �0.07 1 0.62

** 0.20

* 0.51

** 1 0.83

** 0.17* 0.29** 0.59** 1

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(1978) premise that both the prospector and defender archetypes are ideal organizational strategies.

The results of the structural model are pre- sented in Fig. 2. In this figure, only ‘‘structural” parameters (regression coefficients and R2 values) are presented. These findings signify support for 9 of the 11 hypothesized relationships. Accoun- tants’ participation in strategic decision making is positively associated with prospector strategy and deliberate strategy (however these contingent factors only explain 13% of the participation vari- ance). SMA usage is positively associated with three of the four contingent factors (prospector strategy, deliberate strategy, and company size), and also accountants’ participation in strategy (explaining 62% of the variation in SMA usage). With respect to the relationship between SMA and performance, SMA usage exhibits a statisti- cally significant positive relationship, while strate- gic decision making participation is not significantly related to performance. Performance is also directly influenced by the contingent factor market orientation. In combination, the variables appraised explain 71% of the variation of performance.

*: Coefficent is statistically significant at p < 0.05 lev **: Coefficient is statistically significant at p < 0.05 l

Goodness of fit criteria: 2 = 221,96; d.f. = 156; sig 0.965; CFI = 0.971; SRMR = 0.060; RMSEA = 0.0

Strategy type prospector/defender

Deliberate strategy formulation

Market orientation

Company size

Ac part

strate makin

SM

0.21**

0.22**

0.38**

0.13**

0.36**

0.17

0.19*

χ

Fig. 2. Structural model parameter es

The hypothesised relationships that have not been supported by the model also appear worthy of comment. The structural model indicates that SMA usage is not associated with market orienta- tion, although in the measurement model there is a relatively strong correlation between the two con- structs. This can be explained by the very strong direct relationship between market orientation and performance which undermines the indirect effect via SMA usage. It is also interesting that strategic decision making participation does not directly influence performance, however an indi- rect effect exists between participation and perfor- mance via SMA usage.

From a holistic perspective, the model is domi- nated by a very strong direct effect of market orientation on performance. This dominant rela- tionship may have contributed to the mediating (intervening) effect of SMA system being some- what lower than anticipated. Despite this, a signif- icant mediating effect of SMA system on performance is evident. SMA usage is positively affected by the adoption of a prospector strategy and a deliberate approach to strategy formulation (both directly and indirectly via participation), and company size, while SMA usage, in turn, positively

el (one-tail). evel (two-tail).

.level = 0.001; NFI = 0.932; NNFI = 47; GFI = 0.885.

countants' icipation in gic decision g processes

A usage

Performance

0.31**

-0.04

0.19**

0.73**

R2=0.71

R2=0.13

R2=0.62

timates (standardized solution).

852 S. Cadez, C. Guilding / Accounting, Organizations and Society 33 (2008) 836–863

affects performance. The results therefore largely support the central proposition of contingency theory asserting that organizational performance depends on fit between organizational context and structure. The relatively large proportion of explained variance for SMA usage and perfor- mance also indicates that the identified contingent factors are indeed relevant to the model, although participation in strategic decision making is appar- ently affected by factors not captured in this study.

As is evident from the discussion provided above, structural modelling necessitates the exer- cise of a degree of subjectivity. The correlation analysis conducted (Table 4) revealed an unhypo- thesised highly positive relationship between per- formance and the prospector strategic archetype, despite Miles and Snow’s view that prospectors as well as defenders represent ideal strategic types (see also Smith et al., 1989). Following this obser- vation, and in spite of the position taken by Miles and Snow, an investigation of the robustness of the model depicted in Fig. 2 was conducted by incorporating a direct path between ‘‘strategy type” and ‘‘performance”. This revised model revealed a significant association between ‘‘strat- egy type” and ‘‘performance” (coefficient 0.34, p < 0.01). The probability level of all other statisti- cal relationships recorded in Fig. 2 were unaltered with the exception that the path linking market orientation and SMA usage became marginally significant (p < 0.05: two tail) and the path linking SMA usage and performance became marginally insignificant. While these two paths have moved in opposite ways across the threshold of signifi- cance, the absolute size of the coefficient change for both is relatively minor. This investigation therefore suggests a reasonable degree of robust- ness for the model depicted in Fig. 2.

Interviews

The interviews comprised two phases. During the first phase, interviewees were asked to express their opinions on what factors might affect SMA adop- tion in Slovenian companies and also which indus- tries are likely to have a higher incidence of SMA adoption. In phase two, the interviewees were pre- sented with the structural equation model findings

and asked to comment on the validity of the findings with respect to factors affecting SMA usage.

The most widely noted organizational factor affecting SMA adoption was corporate or business strategy (cited by eight of the ten interviewees). The second most widely cited factor was the inten- sity of competition (referred to by five intervie- wees), suggesting greater SMA usage may be associated with heightened competition. Manage- ment accounting capability was referred to by five interviewees (three of whom referred to the capa- bility of accountants and two of whom referred to information system capabilities). It was notable that only one of the interviewees referred to com- pany size as a factor affecting SMA adoption. The comments provided by interviewees G, A, and F were especially insightful:

‘‘I think that the most important factor is corporate strategy. Our company has tradi- tionally been a producer of basic construc- tion materials (e.g., cement) with relatively low value added. Eventually, some time ago we decided to change our strategic focus by moving up the value chain to offer construc- tion products with greater value added (e.g., concrete). This strategy proved to be a suc- cess. . . During this process, we have used some techniques that you also list here. . . But the techniques we find more valuable today are different than the techniques we found valuable in the past. . .”. ‘‘Strategy is an important factor affecting the use of these techniques. However things are not so straightforward in a company such as ours where the profit motive is not preva- lent. These techniques are about improving efficiency. Yet in our company, due to great power of trade unions, rationalizations, espe- cially if they result in redundancy, are often unwelcome. In our company, the spirit of socialism is still present. . .”. ‘‘We need to provide information that the management requires. An important factor affecting their requirements is strategy. Based on these requirements, we adopt appropriate methods in order to provide the information in a format most apt for the users”.

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All of the interviewees expressed the view that the applicability of SMA is industry specific. Despite this, limited consensus was apparent with respect to what particular industrial sector charac- teristics are conducive to SMA application. Amongst the industry factors noted as conducive to SMA application were: high degrees of compe- tition, manufacturing, high degrees of regulation and resource scarcity.

The face validity of the statistically significant association between the four contingent factors and SMA adoption noted in Fig. 2 was then com- mented on by the interviewees. With respect to the positive association between prospector strategy and greater SMA usage, the interviewees agreed unanimously that this association carries high intuitive appeal. Some felt that prospectors’ quest for new business opportunities predisposed them towards innovating in all areas of business, includ- ing the adoption of novel accounting techniques. Some also saw the application of externally ori- ented SMA techniques as providing important decision making information for the successful application of an externally focused prospector strategy. For example, Interviewee C commented:

‘‘A prospector company is always a step ahead in a quest for new market opportuni- ties and this business culture is adaptable to all areas of making business. Employees in prospector type firms in general have a wider horizon and are more prone to accept inno- vative approaches, including novel account- ing techniques”.

Fig. 2’s documented positive association between deliberate strategy and greater SMA usage was also seen to represent a highly rational observation by all of the interviewees. They saw accounting techniques with a strategic orientation as provid- ing important support to strategy formulation in firms applying formalised approaches to strategy determination and implementation. For instance, Interviewee I commented:

‘‘Deliberate strategy is about planning. In our company profitability is a key objective. In order to achieve planned profitability, knowledge about the market is essential.

We need to know as much as possible about our competitors and our customers in order to plan effectively”.

The interviewees also exhibited strong support for the positive association between company size and greater SMA usage (with the exception of intervie- wee J who saw no particular reason for any relationship between size and SMA usage). Several claimed that increased company size signifies increased complexity and a greater call for sophis- ticated accounting procedures to manage the complexity. Some also commented that increased company size is associated with greater resources (human, financial, and technical), while others noted that the cost of information processing per unit of output declines as company size increases.

The interviewees’ perspectives on whether mar- ket orientation carries an implication for SMA usage were somewhat mixed. Five interviewees expressed surprise at the failure to identify a posi- tive relationship between the two variables. For example, Interviewee E commented:

‘‘I am surprised by this finding. Even if the company is completely market orientated, i.e., it would do everything to satisfy the cus- tomer, it still needs information about how far it can go. If I do everything for my cus- tomer for free then I haven’t done anything for myself”.

The other five interviewees did not see a strong rationale for a positive relationship between mar- ket orientation and SMA usage. The following commentaries were provided by interviewees C, G, and J:

‘‘If the customer is fully satisfied, he is also prepared to pay a high price. In this case, there is no need for detailed analyses”. ‘‘The SMA techniques do not represent tools that search for new customers. Sales is much like prostitution. We need to deliver what- ever our customers want and our customers mainly want low price. So that’s what we deliver”. ‘‘In the past socialist times, all companies including ours were production oriented.

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First we manufactured, then we worried about selling what we have manufactured. It is only recently that we have started emphasizing market orientation. Now we first turn to customer needs and then we adjust our offerings accordingly in order to secure profitability. This is a sign of company maturity”.

As a final interview step, interviewees were asked to rank the relative importance of a list of six con- tingent factors (drawn from the literature) that may influence SMA usage. This list comprised: company size, environmental uncertainty, inten- sity of competition, organizational culture, stage of the product life cycle, and strategy. In a manner strongly aligning with what has already been re- ported in this section, strategy ranked most highly (four interviewees ranked it as 1 and four ranked it as 2), followed closely by intensity of competition (four interviewees ranked it as 1 and one ranked it as 2).

Conclusion

This study provides several contributions. Firstly, it provides a conceptual representation of strategic management accounting’s context that extends prior SMA commentaries. Secondly, it draws on quantitative and qualitative empirical data to examine contingency theory based hypoth- eses concerning SMA. The findings provide sup- port for contingency theory’s central proposition that organizational performance depends on the fit between organizational context and structure.

More than a decade has passed since Tomkins and Carr (1996) noted that no generally accepted SMA framework exists. This view may no longer be quite so tenable. In this study two distinct dimensions of SMA have been noted. The first draws on prior studies (Cravens & Guilding, 2001; Guilding et al., 2000; Roslender & Hart, 2003) by viewing SMA as a set of strategically ori- ented management accounting techniques. The second SMA perspective represents a relatively novel slant on the accountant’s role in strategy. It draws on recent commentaries suggesting that

strategic management accountants are no longer just information providers, rather they can partic- ipate as an integral influence in the strategic deci- sion-making team (Bhimani & Keshtvarz, 1999; Nyamori et al., 2001; Palmer, 1992; Scott & Ties- sen, 1999).

This study’s focus on the organizational context of SMA can be seen as consistent with calls to maintain research relevancy through the examina- tion of novel management practices within con- temporary settings (Chenhall, 2003; Ittner & Larcker, 2001). By drawing on the premises of contingency theory, four factors were identified as potentially exhibiting a contingency relationship with SMA. These are (1) business strategy, (2) deliberate strategy formulation orientation, (3) market orientation and (4) firm size.

The findings emanating from the structural model provide support for most of the hypothes- ised relationships. Accountants’ strategic decision making participation is positively associated with the application of a prospector strategy and also deliberate strategy formulation. SMA usage is pos- itively associated with adopting a prospector strat- egy, deliberate strategy formulation, company size, and accountants’ strategic decision making partic- ipation. SMA usage, in turn, also positively affects performance. Given that in a structural equation model fit is depicted as a statistically significant indirect effect (Gerdin & Greve, 2004), these results provide support for the contingency theory pre- mise. In addition, the relatively large proportion of explained variance for SMA usage and perfor- mance indicates that the identified contingent fac- tors are pertinent to the SMA organizational framework.

The qualitative interview data findings lend considerable validity to the conclusions drawn from the quantitative analysis and also yielded some additional insights. With respect to the iden- tification of significant contingency factors, there was nigh on unanimous interviewee concurrence that strategy is the most important factor affecting SMA usage. In addition, another potentially important factor was uncovered, namely the inten- sity of competition (a factor that was not incorpo- rated in the quantitatively examined model). While the interviewees saw considerable face validity in

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the statistically significant findings emanating from the study’s survey phase, equivocality is evi- dent with respect to the hypothesized relationship between market orientation and SMA usage. While no quantitative support was found for this hypothesis, the mixed reactions of the interviewees suggest it might be premature to abandon market orientation from any subsequent research into fac- tors relating to SMA adoption.

Considered holistically, the findings provide support for the application of contingency theory in accounting system design. They signify that the application of SMA systems are not necessarily related to superior performance, but that superior performance is a product of an appropriate match between contingent factors and SMA application. There is, however, universal support provided for the view that higher performance is found in large Slovenian companies with a high market orienta- tion. This supports the claim by Slater and Narver (1994, p. 54), that ‘‘being market oriented can never be a negative”.

As contingent management accounting research is often criticized for the piecemental way in which it is conducted (Chenhall & Langfield-Smith, 1998b; Fisher, 1995), this study clearly contributes to our limited appreciation of the way in which strategic and marketing choices and SMA prac- tices combine to enhance performance. If the ulti- mate goal of contingency-based management accounting research is to test a comprehensive model that includes multiple accounting systems, multiple contingent variables, and multiple out- come variables (Fisher, 1995), this study would appear to constitute a step in the desired direction.

Given the still nascent nature of SMA, it is to be expected that further conceptions of what it consti- tutes may be forthcoming. In fact the challenge of distilling a tight operationalisation of the term ‘strategic management accounting’ is likely to be an enduring facet of research associated with the term. This is because not only is there limited con- sensus in the literature with respect to the meaning of the word ‘strategy’, there is also limited consen- sus with respect to what management techniques constitute management accounting (Bromwich, 1988). Despite this, there does appear to be broad consensus that strategy concerns an organizational

posture that is long term, forward looking and externally focused.

It is notable that the SMA practices examined in this study all represent relatively recently conceived accounting techniques. None of them feature in nor- mative management accounting discourse under- taken prior to the 1980s. It appears as no coincidence that the burgeoning interest in these rel- atively strategically oriented accounting techniques occurred around the time that the term ‘strategic management accounting’ was first coined by Sim- monds (1981). The somewhat contemporaneous nature of these developments signify that the tech- niques are likely to be viewed in many organizations as relatively marginal, suggesting that accountants are likely to exercise a high degree of discretion when determining whether they be adopted. This marginality is believed to have been a facilitating factor in this study, as degree of adoption of the techniques represents a useful barometer, with scope for variability, in measuring a firm’s relative propensity to adopt strategically oriented manage- ment accounting practices. Despite this, it should be acknowledged that some conventional manage- ment accounting practices may be interpreted as having strategically oriented qualities, and in fur- ther research that conceives of SMA in a manner similar to that adopted in this study, consideration could be given to their inclusion in the strategic management accounting rubric.

The study can be considered noteworthy in terms of methodology employed. Following the call by Ittner and Larcker (2001) to deploy multi- ple data sources or research models to develop a consistent body of evidence, this study has applied two distinct approaches to data collection: the acquisition of quantitative data by way of a survey and qualitative data collected by way of interviews. The deployment of intervening models based on structural equation modelling in contingency- based research has not been extensively applied (e.g., Baines & Langfield-Smith, 2003; Chenhall, 2005; Chong & Chong, 1997; Scott & Tiessen, 1999; Shields et al., 2000), however, when this approach is coupled to the collection of qualitative data, the novelty of the methodology applied in this study becomes particularly apparent. It should be noted, however, that the application of the

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interview method in a way that calls for intervie- wees to pass comment on the face validity of prior survey findings is likely to be compromised by the halo effect. While careful consideration needs to be given to this shortcoming, the conduct of ‘‘post survey” interviews in this study has proven to be a useful approach that has yielded greater insight into the phenomenon under examination.

The study can also be seen as constituting an overdue enquiry into the validity of viewing ‘‘stra- tegic management accounting” as a coherent empirical construct. By placing strategic manage- ment accounting techniques in a contingency model and conducting an empirically based exam- ination of the model, an advancement has been made in our appreciation of the extent to which strategic management accounting constitutes a construct that is sufficiently robust to enable empirical analysis. Despite the considerable dis- course on strategic management accounting occur- ring since the early 1980s (e.g., Bromwich, 1990; Guilding et al., 2000; Roslender & Hart, 2003) very little has been achieved in terms of empirical enquiry designed to further our appreciation of the nature and context of SMA application. The extent to which the hypotheses formulated in this study have received empirical support provides affirmation that SMA can be investigated as a cohesive construct in a meaningful way.

In interpreting the study’s findings, its limita- tions should be borne in mind. Firstly, while the proposed model is relatively complex in terms of the number of contingency factors under consider- ation, it is nevertheless incomplete as there are doubtlessly other significant contingency factors that have not been captured in the model tested. Some factors that have been examined in relation to firm-level management accounting practices include intensity of competition, environmental uncertainty, technology, structure, and organiza- tional culture (Anderson & Lanen, 1999; Chenhall, 2003). These factors would appear to be prime candidates for inclusion in any study designed to extend the findings reported here, particularly ‘‘competition intensity”, given commentaries pro- vided by this study’s interviewees. Secondly, a shortcoming of the study stems from the use of a single item measure of business strategy. The use

of single item measures precludes any investigation of construct reliability. Given the confirmatory orientation of the study, it is also noteworthy that two expected relationships were not confirmed. This might be due to conflicting contingencies (Gerdin, 2005), and also the attempt to explain strategic management accounting in the context of strategy and marketing, even though strategy is itself often characterized by an ambiguous and contradictory nature (Mintzberg, 1987a, 1987b).

In addition to these study specific limitations, there are other issues associated with contin- gency-based research in general. One particular issue revolves around the endogeneity problem arising when a researcher seeks to appraise whether a particular management accounting practice or action is associated with performance (Chenhall, 2003; Chenhall & Moers, 2007; Ittner & Larcker, 2001). The model specified in this study assumes that disequilibrium conditions exist, signi- fying an assumption that the optimal level of SMA adoption will vary across organizations. Further, while many different forms of fit have been used in the past, very few researchers acknowledge the problems of relating them to one another (Gerdin & Greve, 2004). For example, Drazin and Van de Ven (1985) and Selto et al. (1995) contend that the selection, interaction, and systems approaches provide complementary information and in their studies deploy all three approaches on the same data set. Countering this view, Gerdin and Greve (2004) argue that the approaches are paradigmati- cally different. At the top level of the hierarchical structure that they propose, they see the Cartesian (reductionist) and configuration (holistic) approaches as constituting two conflicting para- digms and feel it inappropriate to relate results emanating from Cartesian modelling to results yielded by configuration modelling. As a result, some researchers claim that their findings are con- flicting, when this is not necessarily the case, while others inappropriately claim that their observa- tions are supported by previous studies.

These factors need to be born in mind when attempting to build on the findings reported herein. This is an important consideration, for while this study is believed to constitute one of the most exten- sive SMA contingency models formulated to date, it

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is doubtlessly incomplete. Further research that develops and tests hypotheses concerning factors relating to SMA adoption is to be encouraged as we are little beyond a preliminary stage in the pro- cess of developing a robust theory of the context and impact of SMA. Following the rationale pre- sented by Ittner and Larcker (2001) and Chenhall (2003), further attempts to advance this theory would likely benefit from operationalising perfor- mance in terms of espoused strategy.

Acknowledgement

The authors would like to acknowledge the helpful comments provided by two anonymous referees.

Appendix. Glossary of terms, provided to

respondents

Attribute costing

The costing of specific product attributes that appeal to customers. Attributes that may be costed include: operating performance variables; reliability, warranty arrangements; the degree of finish and trim; assurance of supply; and after sales service.

Benchmarking

The comparison of internal processes to an ideal standard.

Brand valuation

The financial valuation of a brand through the assessment of brand strength factors such as: leader- ship, stability, market, internationality, trend, sup- port, and protection combined with historical brand profits.

Competitor cost assessment

The provision of regularly scheduled updated estimates of a competitor’s unit cost.

Competitive position monitoring

The analysis of competitor positions within the industry by assessing and monitoring trends in competitor sales, market share, volume, unit costs, and return on sales. This information can provide a basis for the assessment of a competitor’s market strategy.

Competitor performance appraisal

The numerical analysis of a competitor’s published statements as a part of an assessment of a competitor’s key sources of competitive advantage.

Customer profitability analysis

This involves calculating profit earned from a specific customer. The profit calculation is based on costs and sales that can be traced to a particular customer. This technique is sometimes referred to as ‘‘customer account profitability”.

Integrated performance measurement

A measurement system which focuses typically on acquiring performance knowledge based on customer requirements and may encompass non- financial measures. This measure involves depart- ments monitoring those factors which are critical to securing customer satisfaction.

Life cycle costing

The appraisal of costs based on the length of stages of a product or service’s life. These stages may include design, introduction, growth, matu- rity, decline and eventually abandonment.

Lifetime customer profitability analysis

This involves extending the time horizon for customer profitability analysis to include future years. The practice focuses on all anticipated future revenue streams and costs involved in ser- vicing a particular customer.

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Quality costing

Quality costs are those costs associated with the creation, identification, repair and preven- tion of defects. These can be classified into three categories: prevention, appraisal, and internal and external failure costs. Cost of qual- ity reports are produced for the purpose of directing management attention to prioritize quality problems.

Strategic costing (strategic cost management)

The use of cost data based on strategic and marketing information to develop and identify superior strategies that will produce a sustainable competitive advantage.

Strategic pricing

The analysis of strategic factors in the pricing decision process. These factors may include: com- petitor price reaction, elasticity, market growth, economies of scale, and experience.

Target costing

A method used during product and process design that involves estimating a cost calculated by subtracting a desired profit margin from an esti- mated (or market-based) price to arrive at a desired production, engineering, or marketing cost. The product is then designed to meet that cost.

Valuation of customers as assets

The technique refers to the calculation of the value of customers to the company. For example, this could be undertaken by computing the present value of all future profit streams attributable to a particular customer.

Value chain costing

An activity-based approach where costs are allocated to activities required to design, procure, produce, market, distribute, and service a product or service.

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