CHAPTER 3: THEORETICAL FRAMEWORK AND HYPOTHESES
3.2. Associations between intellectual capital components and each group of strategic
Figure 3.3 shows the second research model, indicating whether, and if so how, firms with IC have developed their SMA practices to address the issues that accounting for IC components. It has been argued that the managers in such firms should adopt a more strategic management accounting practices to avoid neglecting the organization’s most valuable IC. Therefore, the research model examines which group of SMA practices (i.e.
strategic cost management, competitor accounting, strategic accounting and customer accounting) are frequently used to manage which components of IC. As Roslender and Fincham (2001) observe, there is very little empirical academic literature on how SMA handles intellectual capital. Based on the discussion above, this study offers the second research model with the following hypotheses.
Figure 3.3. The second research model
Source: Developed by the author
Strategic management accounting practices
Strategic cost management
Competitor accounting
Strategic accounting
Customer accounting
Human Capital
Structural Capital
Relational Capital
Note:
H6a (Research objective 4) H6b (Research objective 4) H6c (Research objective 4)
3.2.1. Underlying theoretical framework
It has been debated in literature that a resource-based strategy is not enough sufficient to sustain a competitive advantage in the turbulent environment (Nazari, 2010). It is because many firms maintain a large number of valuable assets but still fail to manage these assets to obtain dynamic capabilities. According to the dynamic capability theory, this theory emphasizes the dynamic fit between resources and the environment (Itami &
Roehl, 1987). Teece, Pisano, and Shuen (1997) define dynamic capabilities as “the ability to integrate, build, and reconfigure internal and external competencies to address rapidly- changing environment”. The observable outcome of dynamic capabilities is the transformation of existing resources into functional competencies that better match with the environment (Eisenhardt & Martin, 2000). The question is raised whether or not strategic management accounting is one of dynamic capabilities. According to the discussion in Part 3.1.4.1, the contingency theory confirms a fit between strategic management accounting systems with dynamic and uncertain environment (Sanford, 2009). Increased dynamism means that traditional management accounting’s models of
“how things work” will become out of date much quicker (CIMA, 2014a). Therefore, it is suggested that strategic management accounting as a firm’s dynamic capability will be able to manage more quickly to a firm’s initiatives that may constitute a firm’s intellectual capital. To summarize, since strategic management accounting is dynamic capability for strategy positioning and intellectual capital is the concrete to develop strategy, strategic management accounting has its appropriate function to manage intellectual capital.
On the other hand, according to theory of shortermism, many organizations have found that sole reliance on financial measurements will result in short-term outcomes sacrificing long-term objectives if those measures are linked to the compensation system (Kaplan & Norton, 2001). An increasing number of works suggest that non-financial performance measures are better leading indicators of long-term performance and therefore, should be used to direct managers on the long-term perspectives of their decisions (Horngren, Datar, Foster, Rajan, & Ittner, 2012a). Investing intellectual capital are often the decisions with the long-term goals. Hence, strategic management accounting system focusing on non-financial indicators are more appropriate to manage IC because those indicators can provide better targets and predictors for the firm’s long-term profitability goals. As well as monitoring target achievement, indicators can also be shown
as trends, to determine whether performance is improving or deteriorating over longer time periods than is usually disclosed in financial reports. Examples of non-financial performance measurement include performance on research and development, production cycle time, (structural capital), employees’ skills (human capital) and customer relations (relational capital), all of which are vital intellectual capital contributing a company’s long- term performance. Thereby, many of literature suggest that balanced scorecards may be the technique to develop and sustain intellectual capital (Andriessen, 2004; Kaplan, 1984;
Mouritsen et al., 2002; Roos, 1998).
3.2.2. Hypotheses development (H6)
As discussed in Part 3.1.2, a firm with higher intellectual capital, means that it has better concrete and infrastructure, will give a prompt impulse to develop strategic management accounting system despite traditional management accounting. In other words, Part 3.1.2 examines if a firm with higher intellectual capital may be expected to develop the practices of strategic management accounting. At another aspect, strategic management accounting is the skeleton and the glue of an organization because it consists of tools and architecture for retaining, packaging and moving intellectual capital along the value chain (Cleary, 2015). Strategic management accounting would therefore appear to have potentially role to play in intellectual capital management. Its focus is on making better management of each component of intellectual capital that is already available and accessible with the organization, with the aim of enhancing subsequent corporate performance (Edwards, Collier, & Shaw, 2005). As evidence of this, Tayles et al. (2002) link intellectual capital with SMA by arguing that SMA provides a “vital fulcrum” in leveraging IC to achieve competitive advantage. For example, strategic cost management offers means of examing the value chain, cost drivers that underpin business activities and strategic positioning analysis (Shank & Govindarajan, 1993); thereby, strategic cost management facilitates the analysis of how each IC consumed to create a firm’s sustainable development by the use of cost data to identify each of intellectual capital in relation to organization’s performance. Firms may analyses and compare the linkage between value chain performed in terms of the extent that leveraged or proprietary intellectual capital elements utilized as means of understanding competitive effectiveness. For example, by increasing customer value for specific customer segment (e.g. differentiation and focusing are used to strengthen the strategic position) and, at the same time, decreasing costs, the
organization might reach a state where it is providing greater value at the same or less cost than its competitors, thus creating better relational capital. For another example, while balanced scorecards approach enhances its understanding of how employees’ skills are creating more added value to customers, the corporate will concentratedly train such skills to aim higher human capital at the lower cost. One of SMA techniques related to strategic accounting is capital budgeting. In term of whether the level of IC within firms influences capital approaches, Tayles et al. (2007) find that firms with higher level of IC attach greater importance to capital budgeting approach because capital budgeting is used to evaluate the long-term projects that are related to IC investments on a long-term basis rather than in the short term.
Based on the discussion above, this study has placed emphasis thus on contemporary management accounting, which have a strategic orientation, with a particular focus on the four groups of SMA techniques, those are strategic cost management, competitor accounting, strategic accounting and customer accounting. It is unclear that how each group of SMA techniques may manage each of the different IC components. While the literature places considerable attention on the valuation, measurement and reporting intellectual capital for external reporting purposes, little attention has so far been given to the implication of strategic management accounting practices for IC management. Hence, this study does an exploratory research to identify a number of SMA techniques expected to manage IC components, leading to the following hypotheses. This is in the line with the attempts of the author to contribute to a theoretical framework of strategic management accounting.
Hypothesis 6a: Which categories of SMA techniques (strategic cost management, competitor accounting, strategic accounting and customer accounting) are strongly
associated with human capital.
Hypothesis 6b: Which categories of SMA techniques (strategic cost management, competitor accounting, strategic accounting and customer accounting) are strongly
associated with structural capital.
Hypothesis 6c: Which categories of SMA techniques (strategic cost management, competitor accounting, strategic accounting and customer accounting) are strongly
associated with relational capital.