Introduction
“Over the last three decades, there has been a tremendous increase in the number of innovative management accounting (MA) techniques developed across a wide range of industries”(Abdel-Kader and Luther, 2008). Abdel-Kader and Luther, 2008, go further to explain that these new techniques have in the end had effects on the whole process of management accounting. Research done indicates that “important characteristics or rather contingencies that have affected the organizational structure include size, environmental uncertainty, production technology, corporate strategy and the market environment”( Otley, 1995; Covaleski et al., 1996; Mitchell, 2002; Abdel-Kader and Luther, 2008). Just recently, Chenhall (2008) discovered that the management accounting innovations were part of strategic management accounting (SMA) (Guilding et al. 2000). This can be attributed to the fact that management accounting connects the strategies of an organization to value while at the same time creating a link across the organization in relation to cost.
As a matter of fact, the last few years have seen a growing interest in strategic management accounting (SMA) despite the considerable discourse on strategic management accounting that has prevailed since the early 1980s (Bromwich, 1990; Guilding et al., 2000; Roslender and Hart, 2003). Nevertheless, very little has been achieved in terms of empirical enquiry designed to further our appreciation of the nature and the context of SMA application (Cadez and Guilding, 2008). The paradox of high SMA interest yet with minimal empirical enquiry is the factor behind the broad motivation for the study reported here in. However, there ought to be further research that is geared towards developing the test hypotheses on factors that relate to SMA adoption (Cadez and Guilding, 2008). This is because of the mare reason that we should be encouraged as we are a little beyond a preliminary stage in the process of developing a robust theory of the context and impact of SMA.
Chenhall (2003) reports that there is a need for more research into service organizations on management accounting system design and contextual variables since these entities become increasingly important within most economies. On the other hand, Potter and Schmidgall (1999) “make the assumption that little innovation has occurred in hospitality management accounting tools and there are many issues that deserve research attention”. However, there is an active interest in financial hospitality management and particularly in management accounting practices of hotels (Pavlatos and Paggios, 2009a; 2000b; Harris and Mongiello, 2006).
An examination of the level of adoption and the benefits derived from traditional and contemporary management accounting practices in the Greek hospitality industry by Pavlatos and Paggios (2009b) led to the following findings. They found out that strategic management accounting tools have a lesser adoption rate from the other management accounting techniques. More so, Anderson and Guilding (2006) explored the nature and potential of competitor-focused accounting practice (CFA) in a large hotel and discovered that the levels of CFA formalized application appeared limited. This was especially when compared with a widely held managerial perception that significant benefits could derive from applying CFA.
Therefore the purpose of this study is to examine the extent to which potential factors affect the use of strategic management accounting techniques. The report focuses on the firm’s characteristics as well as on the characteristics of the organization’s Chief Financial Officer (CFO) to explain the use of SMA in a service context. This first part of the paper provides the the empirical evidence of the application of SMA in hote while the remaining part is organized as follows. A brief review of the literature followed by the development of hypotheses. This is followed by an analysis of the research methodology and thereafter the survey results.
Literature review and development of hypotheses
“The increasing research on strategic management accounting (SMA) is as a result of its increasing importance to managers of information from all boundaries of the firm” (Simmonds 1981 and Bromwich 1990). It was in fact pointed out that the external focus of SMA and further research has been consistent with their premise (Cinquini and Tenucci, 2008). However, despite being introduced into the literature as a potentially exciting development over 20 years ago, there is still little or no agreement about what constitutes strategic management accounting (SMA). According to Roslender and Hart, (2003), while the recent past has seen increased interest in SMA, the area is still under-defined and no universally accepted SMA framework in existence.
To help in the progress, Guilding et al. (2000) provided an original distillation of SMA techniques as well as criteria for viewing a particular accounting technique as “strategic”. They further drew 12 SMA techniques from the literature. Furthermore, Cravens and Guilding (2001) added another three techniques and finally, 16 SMA techniques have been identified by Cadez and Guilding, (2008).
There are an evident number of surveys of SMA practice that have been carried out (Carr et al., 1991; Carr and Tomkins, 1996, 1998; Guilding et al., 2000; Cravens and Guilding, 2001 ;). These surveys have found out that competitor accounting and strategic pricing are the most widely used techniques. However, some also suggest that the term SMA is not widely used in companies, and its meaning is not always clear to managers (Tillmann and Goddard, 2008)
The contingency theory approach to studying SMA practice is one of the techniques that have been used by most researchers (Simons, 1987; Chenhall and Langfield-Smith, 1998; Guilding, 1999; Anderson and Lanen, 1999; Abernethy and Brownell, 1999). Tillmann and Goddard, (2008) report that this research has contributed to our understanding of SMA but does suffer from the usual drawbacks of contingency theory in that variable selection and specification have been eclectic, sample selection not always comprehensive and some conflicting results have been produced. In addition to this, Cadez and Guilding (2008) state that there is little in the way of prior empirical observations upon which contingency theory of SMA can be built.
In line with the above, Cadez and Guilding (2008) “examined the effect of strategic choices, market orientation, and company size on two distinct dimensions of SMA and, in turn mediating the effect of SMA on company performance”. “A model was advanced and tested using structural equation modelling together with data collected from a sample of 193 large Slovenian companies (Cadez and Guilding, 2008). “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” (Cadez and Guilding 2008).
This study examines the impact of those contingencies that have not yet been studied. Such contingent factors include; “Quality of IS information” and “Organizational life cycle stage” on strategic management accounting practices which have not been previously studied. It is for that reason that they have been included in this study. Moreover, this paper focuses on the characteristics of the organization’s Chief Financial Officer (CFO) to explain the scope of use of the SMA which have also not yet been studied.
Chief Financial Officer characteristics (CFO)
Studies that discuss the role of financial managers (CFOs), controllers, and management accountants) in organizations generally argue that financial managers are, to some extent, reluctant to take a proactive role in managing the organization and prefer to see their own role as that of a relatively independent ‘watchdog’ (Naranjo-Gil et. al., 2009; ). Literature proposes that demographic variables provide good proxies for underlying cognitive and affective characteristics that determine the managers’ decision making and are therefore predictive of organizational outcomes (Naranjo-Gil et. al., 2009; Finkelstein and Hambrick, 1996). In addition, Naranjo-Gil and Hartmann (2006, 2007) are fast to indicate that top management team characteristics are related to the design and use of MAS.
According to Young et al., (2001) with regard to age, several studies have examined the relationship between managers’ age and innovativeness and they generally observe a negative relationship (Naranjo-Gil et. al., 2009.). Finkelstein and Hambrick, (1996) report that this is commonly attributed to the negative association between age and dynamic lifestyle as well as age’s declining effect on cognitive capabilities and energy levels (Naranjo-Gil et. al., 2009). As a matter of fact, older managers are less able to evaluate new ideas quickly and to effectively integrate them in decision making. With increase in age, comes a decrease in flexibility, resistance and rigidity to change (Naranjo-Gil et. al., 2009; Wiersema and Bantel, 1992). Concerning MAS, older CFOs will have had more traditional accounting education, and will have spent most of their career in a traditional function in which professional independence and bookkeeping were key performance variables (Naranjo-Gil et. al., 2009; Granlund and Lukka, 1998). On the contrast, Younger CFOs will have entered the profession more recently, and will therefore have a greater chance of being familiar with contemporary MAS environments in the course of their education (Naranjo-Gil et. al., 2009).
Many studies that have found a negative effect of manager age on MCS have also found a negative effect of managers’ tenure in the organization (Naranjo-Gil et. al., 2009; Young et al., 2001). According to Naranjo-Gil et. al., (2009) and Young et al., (2001), managers who have spent a substantial part of their career in organizations are likely to have developed a power basis, social networks and work routines that they do not want to put at risk, even if they believed that innovation and change would be in the interest of the organization. Naranjo-Gil et. al., (2009) literature report concerning educational background, suggests that the educational background of managers affects their decision processes. Moreover, Emsley et al. (2006) found that management accountants’ professional development is associated with the degree to which they initiate accounting innovations. Furthermore, Davila (2005) and Graham & Harvey (2001) reported that the educational level of the CEO is positively related to the use of formal management accounting systems.
Literature review shows that CFOs characteristics may influence the use of innovative management accounting practices and the design of management control systems. In the hospitality industry, Pavlatos (2010) found that there is an association between CFOs characteristics (educational background and age) and the use of innovative management accounting, such as ABC. It is possible that the CFO’s of younger hotels use more strategic management accounting tools than those of older hotels. This is likely to be attributed to the negative association between age and dynamic lifestyle as well as age’s declining effect on cognitive capabilities and energy levels.
In addition, there is likely to be a negative association between the hotels’ CFO tenure and the use of strategic management accounting techniques. More tenured hotels’ CFOs are less likely to see administrative innovation as an answer to challenges posed by the business environment. Furthermore, hotel’s CFOs with a more business-oriented background may be more familiar with the use strategic management accounting practices and more open to changing existing systems than CFOs whose experience contains a dominant operational background for instance in medicine, nursing or pharmacy. Hotels’ CFOs with a business-oriented background are likely to be more receptive to institutional pressures in order to use more strategic management accounting tools.
Based on the above discussion, the following hypotheses will be tested in the research.
- H1a: There is a negative association between the CFO age and the use of strategic management accounting techniques.
- H1b: There is a negative association between the CFO tenure and the use of strategic management accounting techniques.
- H1c: There is a positive association between the CFO relatively business-oriented educational background and the use of strategic management accounting techniques.
Quality of IS information
Quality of IS information refers to the reliability, relevance, accuracy, precision and completeness of IS information (Dunk, 2004; Nicolaou et al., 1995; Teng et al., 1995; Wang and Strong, 1996). According to Typanski (1999) and Dunk (2004), information is central to many organizational processes and crucial for effective decision making while at the same time being increasingly important for competitive success. According to Dunk (2004) a frequently held view is that the value relevance of information is based in part on the contribution it makes to decision processes relating to the products organizations deliver. Mores and Yuen (2001) reported that as decision making in firms becomes more sophisticated, organizations will become more reliant on information. He goes further to explain that information systems represent organizational applications that are increasingly IT-based. Therefore the quality of IS information is considered here in this context. Although information systems are an aid to organizational control and decision making, firms indicate that they need to shift their attention from systems to the nature of the information being generated (Dunk, 2004). Literature suggests that firms rely on their IS to facilitate the provision of high quality information necessary for organizational functioning (Naveh and Halevy, 2000). Such developments therefore put a greater focus on quality of IS information (Dunk, 2004).
According to Raghunathan, (1999) quality of IS information is expected to contribute to the extent to which strategic management accounting is used by firms. Higher information quality has been cited as a factor underpinning improved productivity and performance across organizations (Dunk 2004). The fact that information quality is a necessary basis for facilitating improved decision processes greater quality of IS information should facilitate strategic management accounting taking place (Dunk, 2004; Naveh and Halevy, 2000). Nicolaou et al. (1995) and Dunk (2004) argued that improvements in information quality increase the usefulness of decision systems and the use of management accountings techniques for instance in product life cycle cost analysis. Consequently, the attributes comprising quality of IS information should contribute significantly to that purpose (Dunk, 2004).
In the hospitality industry, Pavlatos and Paggios (2009a) found that there is an association between cost system design and the use of cost data. The survey revealed that cost system design is associated with the need for information that its users have. They report that more detailed, accurate and frequent cost data are more useful in decision-making. The quality of IS information is likely to play a positive role in affecting the extent to which strategic management accounting tools are used in hotels. In addition, improved IS information quality including; accuracy, relevance, precision, reliability and completeness are likely to help hotels’ managers to use more contemporary management accounting techniques, such as strategic management accounting techniques.
Therefore, the following hypothesis is tested:
H2: There is a positive association between the quality of IS information and the use of strategic management accounting techniques.
Organizational life cycle stage
According to Miller and Friesen, (1984) a firm’s life cycle stage is a contingency to which organizational responses have to be matched. This implies that the use of management accounting systems differs across the stages of organizational life cycle as different systems are needed in different stages (Kallunki and Silvola, 2008). Additional research by Miller and Friesen (1984) show that firms in the maturity phase put significantly more emphasis on formal cost controls than firms in the growth stage. On the contrary, Auzair and Langfield-Smith (2005) used a self-categorization measure based on the firm’s own assessment of its life cycle stage and reported that organizational life cycle, among other contingent variables, has a significant effect on the design of a firm’s management accounting systems. Furthermore, Kallunki and Silvola (2008) found out that the organizational life cycle stage affects the use of innovative management accounting techniques, such as ABC.
Miller and Friesen, (1983; 1984) noted that the life cycle literature implies that there are few reasons why the use of advanced management accounting systems and techniques is greater among firms in the maturity phase than among firms in the growth phase (Kallunki and Silvola, 2008). First of all, as a result of a more complex, more challenging and more competitive business environment, the administrative task of mature firms is more complex than that of growth firms (Kallunki and Silvola, 2008). This creates a need for a more sophisticated decision-making approach utilizing innovative management accounting techniques (Kallunki and Silvola, 2008). Secondly, maturity firms experience increased diversification in their products and markets. They go further to state that “increased diversification in products and markets together with increased competition cause firms in the maturity phase to put more emphasis on controlling and understanding factors driving their costs as opposed to firms in a growth phase” (Kallunki and Silvola, 2008). “Thirdly, the life cycle literature suggests that the organizational size of the firms is greater in the maturity phase than it is in the growth phase” (Kallunki and Silvola, 2008).
Further findings by Chenhall and Langfield-Smith (1998) indicated that greater organizational size leads to greater complexity of tasks, which requires more division of labour. As a result, it becomes more difficult to ensure that organizational subunits are acting towards the achievement of a common purpose (Kallunki and Silvola, 2008). According to Chenhall and Langfield-Smith, (1998) more sophisticated integrative mechanisms such as information systems are then developed to coordinate the activities of subunits. “Management accounting innovations are examples of such information systems”(Kallunki and Silvola, 2008). In addition, firms in the maturity stage as result of greater organizational size have greater resources to experiment with administrative innovations such as innovative management accounting tools (Kallunki and Silvola, 2008). Kallunki and Silvola, (2008) report that greater organizational size and greater resources is expected to lead to more widespread use of strategic management accounting techniques among firms in the maturity stage as opposed to firms in the growth stage.
The above literature therefore indicates that there is a correlation between the organizational life cycle stage of hotels and the use of strategic management accounting techniques. The mature or older hotels may have a more analysis of the competitor positions within the industry. This is because they use more cost data based on strategic and marketing information to develop and identify superior strategies so that may produce a sustainable competitive advantage. This is in order to analyse to a great extent of strategic factors in the pricing decision process in comparison with growth hotels.
In this case, the following hypothesis is tested:
H3: The use of strategic management accounting techniques is greater among firms in maturity phase than among firms in a growth phase.