CHAPTER 3: THEORETICAL FRAMEWORK AND HYPOTHESES
3.1. Mediating effect of strategic management accounting practices in the relationship
3.1.2. Intellectual capital impacts on SMA practices (H 2 )
In the current competitive context, many organizations have realized that the only source of sustainable competitive advantage they can leverage is the effective use of their existing intellectual capital as well as the fast acquisition and utilization of new intellectual capital (Davenport & Prusak, 1998). Teece (2000, p. 37) argues that:
“the competitive advantage of companies in today’s economy stems not from market position, but from difficult to replicate intellectual capital and the manner in which they are deployed.”
Companies are increasingly looking for ways to become learning organizations, aware of the fact that successful companies will be those that value intellectual capital and have a strategy for systematically managing it better (Carlucci, Marr, & Schiuma, 2004).
According to Wiig (1994), intellectual capital also affects and advances knowledge management through strategic management accounting techniques as well as improves traditional management accounting system. Intellectual capital by themselves neither create value nor generate growth, so they need to be combines with other management factors (Lev & Daum, 2004). They need efficient support and enhancement systems – otherwise, they are also the input determinants which impulse the changes of management systems. For example, investment in e.g. training only generates financial values when it is combined with other factors, such as improved business processes and the availability of the appropriate information systems. Otherwise, with intellectual capital, the company has a bundle of resources such as human, infrastructure, knowledge to enhance or to change the current management systems e.g. management accounting system, information
management system and so on. Thereby, the important contributions to the understanding of the impact of intellectual capital on strategic management accounting practices have arisen from the major body of literature: competence-based theory.
The competence-based view considers the company’s capacity to recognize, create, strengthen and increase its “core competencies” (Carlucci et al., 2004) as the source of a sound competitive advantage. A competence is a bundle of skills and technologies or the sum of learning capability (Mouritsen, Bukh, Larsen, & Johansen, 2002). As Hamel and Prahalad (2013, p. 78) write:
“The company is perceived as a portfolio of competencies and its competitiveness is based on the creation and development of competencies and on the realisation of a strategy able to create a link between aims, resources and competencies.”
Competencies are expressed and conceptualized in the processes which a company implements for the development of its organization. Therefore, a firm’s strategic management accounting practices are also recognized as one of a firm’s competency. In order to allow competences to continuously develop, it is necessary that organizations have the necessary input resources to develop their competencies over time. On the perspective of competence-based competition, it is interpreted that an organization needs a combination of all “knowledge assets” and “knowledge processes” that allow this organization to carry out its business processes (Carlucci et al., 2004). This interpretation recognizes knowledge assets (i.e. intellectual capital) and knowledge processes (e.g.
strategic management accounting practices) as fundamental elements of organizational resources and competencies. This allows us to proclaim that the resource of intellectual capital is at the basis of developing organizational competencies, for instance, strategic management accounting practices. For firms with greater IC, for instance, quality personnel may serve to span the boundaries between a firm and its external network. They can overcome the knowledge flow barriers through properly conveying and transforming external information into knowledge understandable to aim better strategic business planning that are one of SMA practices (S.-C. Chang, Chen, & Lai, 2008). While relations bring better external information and quality personnel provide a platform for transferring external knowledge for internal utilization, these will be fundamentals of well-developed SMA practices and SMA practices are simultaneously essential to ensure the effective usage of external knowledge. With the aid of well-designed, reporting-oriented strategic
management accounting, the learnt knowledge is properly accumulated, stored, integrated, and diffused across the organizational sub-units (S.-C. Chang et al., 2008).
3.1.2.2. Hypotheses development (H2)
The strategic positioning literature shows that the design of management accounting system differs based on firm-level strategy (e.g. differentiation strategy or cost leadership strategy). In addition, both differentiation-based and low-cost-based firms may use human capital as the strategic resource that drives their corporate-level strategy. More precisely, human capital is a driving force influencing the opted firm-level strategy which thereby impacts on the design of management accounting. Widener (2004) illustrates the relationship between management accounting system, firm-level strategy and the strategy of human capital in Table 3.1.
Table 3.1. Integration of firm-level strategy and reliance on human capital Differentiation-based firms Low-cost-based firms Lower reliance on
human capital
Traditional management accounting system
Traditional management accounting system Higher reliance on
human capital
Non-traditional management accounting system
Non-traditional management accounting system
Source: Widener (2004)
As can be seen from the Widener (2004)’s study, a firm with a lower reliance on human capital (i.e. the strategy of human capital is centered in key employees) will design management accounting system that will depend more on traditional, aggregate financial result controls. On the other hand, a firm with a higher reliance on human capital (i.e.
strategic human capital is diffused throughout the organization) will rely more on non- traditional, non-financial result controls as well as leverage the staff’s contributions on strategic decision making. Firms which rely more on human capital are likely to consider non-financial measures such as employee loyalty, staff turnover, skill development index to be leading indicators which provides information to make strategic decisions. Another example, high human capital firms will place more reliance on all the employees’
participation on budgeting that prefers more frequent forecasting and separate targeted
setting, as a result, these firms change conventional budgeting over the approach of rolling budgeting of SMA practices. This leads to the following hypothesis:
Hypothesis 2a: Human capital is positively associated with the practices of strategic management accounting.
In terms of competence-based theory, strategic management accounting “as the provision of information assisting to managers in their strategic decision making” (Cleary, 2015) is most appropriately situated within the realm of structural capital. Structural capital including a firm’s overall process, organizational structure design, information system structure and even corporate culture. Corporate culture, one element of structural capital, may also play the key role of changing and developing a firm’s accounting system (Hsu &
Fang, 2009). For example, a firm with role culture tends to be impersonal and rely on formalized rules and procedures to guide decision-making in a standardized, bureaucratic way (CIMA, 2014b). Hence, decisions tend to be controlled at the centre, this means that traditional management accounting practices such as imposed budgeting, responsibility accounting, financial result controls are deployed. By contrast, task culture is typified by teamwork, flexibility and commitment to achieving objectives, rather than an emphasis on a formal hierarchy of authority (CIMA, 2014b). This means that a firm with task culture is more likely to employ non-financial measures, participative budgeting which encourage creativity and job satisfaction (CIMA, 2014b). According to Cleary (2015), firms chasing with customer-focused and market-driven orientation want to develop efficient organizational routines and processes (including strategic management accounting) that are created by the input resources, i.e. intellectual capital, to cater for the informational demands. For instance, focusing structural capital on establishing a customer databank will improve SMA practices in terms of customers accounting to reduce the cost of decision making due to resistance of insufficient information. Based on the discussion above, this study offers the hypothesis as follows:
Hypothesis 2b: Structural capital is positively associated with the practices of strategic management accounting.
The organization members with more relationships and networks may exhibit better information acquisition and resource allocation (Hsu & Fang, 2009). Tsai (2001) recognizes that employees with better communication skills and more connections with externals have more opportunities to access different resources. This connectedness may
enhance the practices of strategic management accounting to some degrees. Better connections provide greater possibilities that business partners will share information, professional technology with each other. Accordingly, relational capital may increase a firm’s capability of external information development. Relational capital brings a stronger external focus – especially regarding the behavior of competitors, customers and suppliers.
This information will be vital to allow the business to understand the market it is operating in, which is a fundamental input of strategic management accounting usage. Firms therefore understand and satisfy stakeholder needs to achieve innovation and economics success. Strategic management accountants use raw information sourced by external relationships to produce data which will help the business in some number ways, including effective strategic planning, business performance control, better decision-making.
Therefore, this study proposes the following hypothesis:
Hypothesis 2c: Relational capital is positively associated with the practices of strategic management accounting.