CHAPTER 3: THEORETICAL FRAMEWORK AND HYPOTHESES
3.1. Mediating effect of strategic management accounting practices in the relationship
3.1.4. SMA practices impact on corporate performance (H 4 )
The contingency theory of the organizations is used as a basic theoretical framework to explain the relationship between strategic management practices and corporate performance. As illustrated by Anderson and Lanen (1999), the contingency theory states that firms should be designed and managed in connection with its business environment.
The appropriate design of an organizational structure depends on the uncertainty level of business environment and the strategic objectives of that organization. Anderson and Lanen (1999) demonstrate a basic contingency model to explain the organizational structure and the collaboration with management accounting practices, as shown in Figure 3.1. Anderson and Lanen (1999) indicate that, firstly, both endogenous factors (such as strategy, technology and organizational culture) and exogenous environmental variables (such as competition, environmental uncertainty) influence the competitive strategy. Next, the competitive strategy will dictate organizational structure via management accounting practices which are utilized to direct and control an organization to aim desirable corporate performances (Anderson & Lanen, 1999). On the contrary relationship, management accounting practices also support the process of strategy development through strategic management accounting techniques. To sum up, “contingency research in management
accounting provides evidence to support the contingent fit between strategy, organizational design and management accounting systems with corporate performance” (Sanford, 2009).
Figure 3.2. Basic contingency framework
Source: Anderson and Lanen (1999)
3.1.4.2. Hypothesis development (H4)
As can be seen in the basic contingency framework (Figure 3.2), at the heart of the model is management accounting system usage (this refers to the use of SMA practices) in the process of strategic decision making. The fundamental of contingency theory holds that
“fit” is understood as a positive impact on corporate performance owing to certain combinations of management accounting system (i.e. SMA practices) and context (contingency factors). In the basic contingency model, SMA plays a role as medium focusing on performance measurement using strategic rather than tactical indicators because SMA practices bring substantial benefits with regards to identify and support the organization’s strategic intent. This is consistent with the prior contingency-based management accounting studies such as Anderson and Lanen (1999); Hoque and James (2000); Cravens and Guilding (2001); Gerdin (2005); Seaman and Williams (2011).
Furthermore, with respect to information management, the main role of an information system is to support the process of managerial decision-making and control.
Foster and Gupta (1994) argue that if an organization’s strategic information processing does not adequately satisfy its needs, the decisions which are flawed or late will result in suboptimal performance. Therefore, a condition correlation is assumed that better information facilitates more effective managerial decisions, which in turn enhance corporate performance (Chenhall, 2003). As presented in Chapter 2, strategic management
accounting provides much vital information on customers, competitors, cost management, as a result, that information facilitate the development and implementation of business strategies in the strategic planning process. It is not denied that the role of SMA in the strategic planning process is to facilitate the activities in terms of formulating strategy, communicating strategy, developing tactics for implementing strategy, monitoring and controlling performance (Shank & Govindarajan, 1993) as a tool to support the organization’s strategic intent. According to the strategy management theory, when the business strategies are designed and managed more adequately, the organization’s performance will be better.
The relationship between SMA practices and corporate performance is also investigated in many prior studies. For example, Cadez and Guilding (2008) examines the impact of strategic choices, market orientation and firm size on SMA and the mediating effect of SMA on organizational performance. The case study research of Buhovac and Slapnicar (2007) presents that organizations may not achieve high performance unless they use both financial and non-financial information provided by SMA system that is well- aligned with the business strategy. While acknowledging many studies’ outcomes, research has tended to focus on a positive association between SMA practices and corporate performance. In this study, the author also thus recognizes the impact of SMA practices on corporate performance. This relationship is motivated to be re-examined in the fourth hypothesis within Vietnamese context.
Hypothesis 4: SMA practices are positively associated with corporate performance (asset turnover, investment efficiency, return on equity, Tobin q).
As presented in the second chapter, corporate performance is evaluated on three financial dimensions including productivity, profitability and marketable value. All of these dimensions are measured by asset turnover, investment efficiency, return on equity and Tobin q as financial indicators of corporate performance measurement. Productivity can be measured as asset turnover. Higher asset turnover means higher productivity of generating revenue from assets employed. Another indicator to measure the firm’s productivity is investment efficiency. Investment efficiency means undertaking all those projects with positive net present value in order to maximize shareholders’ value (F. Chen et al., 2011). In other words, it means that better strategic management accounting practices may improve investment efficiency by allowing managers to make better investment
decisions through a better identification of optimal projects and more truthful accounting numbers for internal decision makers. In addition, return on equity is one of financial indicators to measure corporate performance on the dimension of profitability from the point of view of the ordinary shareholders. Higher return on equity reveals operating success of an entity for a given period of time. Lastly, although there are many measurements to identify firm value, for example, calculations of free cash flow or residual income and cost of capital, this study uses Tobin q as a proxy to evaluate corporate performance by identifying firm value. It is because Tobin q is easily to measure, reliable and reflects two (book value and market value) company valuation parameters (Lima Crisóstomo, de Souza Freire, & Cortes de Vasconcellos, 2011). The relationship between strategic management accounting practices and return on equity, Tobin q can be explained by the contingency theory. Both return on equity and Tobin q are used to evaluate corporate performance from the point of view of shareholders. Most of shareholders seek to influence over organizations. The organizations can respond to those pressures by the fact that the selected strategies are conditioned by shareholders’ interests and power during the negotiation process. Once the strategy is defined, it shapes strategic management accounting practices. The main reason is that strategic management accounting practices provide useful information for assessing the validity of a particular strategy as well stimulate learning and allowing new strategies to emerge so that managers and shareholders respond to the perceived opportunities and threats (Bell, Hoque, & Arroyo, 2012). The strategic management accounting system is a technical infrastructure in Porter’s value chain to bring the success of an organization. Consequently, the better strategic management accounting practices are, the higher operating success (return on equity) and firm value (Tobin q) may be achieved.