A Conceptual Framework for

Assessing the Use of Strategic

Management Accounting in
Small and Medium Enterprises
Studies on how small- and medium-size enterprises
(SMEs) can use strategic management accounting
techniques to meet the challenges imposed by rapidly changing technology and increasing global competition are limited. Tapping into both contingency
theory and upper echelon theory, a new framework
for leaders of SMEs highlights the effect of perceived
environmental uncertainty, advanced manufacturing technology, and CEO characteristics on their
decisions regarding the use of strategic management accounting techniques, which ultimately may
have an impact on firm performance. 2015 Wiley
Periodicals, Inc.
Although studies on the use of management
accounting practices abound, there is a dearth of
research regarding the use of those practices among
small- and medium-size enterprises (SMEs), particularly when it comes to the application of more
advanced practices, such as strategic management
accounting. Analyzing the role that strategic management accounting can play in providing SME
managers with relevant and accurate information
can strengthen SMEs impact on the economic wellbeing of the areas in which they operate. Although
traditional management accounting practices are
primarily concerned with internal and historical
information about production costs, strategic decision-making requires external and future-oriented
information, such as information about customers
and competitors (Chenhall, 2003; Cravens & Guilding, 2001; Guilding, Cravens, & Tayles, 2000).

A B O L FA Z L A M A N O L L A H N E J A D K A L K H O U R A N ,
SITI ZALEHA ABDUL RASID,
SAUDAH SOFIAN,
and B A H A R E H H O S S E I N N E Z H A D N E D A E I

Otley (1980) found that there is no one best management control system for all companies; rather,
an organizations systems should be contingent
on the circumstances it faces. Such a contingencytheory approach can be used to shed light on the
application of strategic management accounting
practices in SMEs. Accounting research based on
contingency theory has shown that various organizational attributes and circumstances, such as size,
environment, and technology, can affect business
leaders choice of the management accounting
techniques they use (Abdel-Kader & Luther, 2008;
Hoque & James, 2000; Luther & Longden, 2001;
OConnor, Chow & Wu, 2004). The contingency
factors that should be considered for SMEs differ
significantly, however (Flacke & Segbers, 2005).
Few studies regarding SMEs have considered such
factors as external environment and technology
(Ahmad, 2012; Collis& Jarvis, 2002; Jnkl, 2007;
ORegan & Sims, 2008).
In its application of upper echelons theory, this
study considers both perceived environmental
uncer
tainty and advanced manufacturing technology. Since the decision-making process in SMEs
is typically highly centralized and chief executive
officers (CEOs) strongly influence determinations
on whether to adopt certain practices (Ahn, Mortara, & Minshall, 2014), executive behavior also
will be taken into consideration. According to upper
echelons theory, executives experiences, values, and
personalities greatly influence their interpretations

2015 Wi l ey Peri odi ca l s , I n c .

Publ i shed onl i ne i n Wi l ey Onl i ne Li brary (wi l eyonl i nel i bra ry. c o m )
Global Business and Organi zati onal Excel l ence DOI : 10. 1002/j oe. 21644 November/Decemb e r 2 0 1 5

45

of the situations they face and, in turn, affect their

choices (Hambrick, 2007), including the choice of
management accounting techniques. To date, few
studies have examined the role that executive behavior and characteristics play in the usage of strategic
management accounting techniques in SMEs (Jorissen, Laveren, Martens, & Reheul, 2002).
According to contingency theory, organizational
performance will improve if there is a suitable fit
between the management accounting and control
system and the context variables. Previous studies have investigated the mediating role of strategic management accounting (Cadez & Guilding,
2008; Santini, 2013). By considering the three contingency factors of perceived environmental uncertainty, advanced manufacturing technology, and
CEO characteristics, this study will shed light on
how they significantly affect strategic management
accounting. Ultimately, the goal is to develop a testable model of the relationship between these factors and the application of strategic management
accounting techniques and, in turn, the mediating
effect of these techniques on performance in SMEs.

Theories of Strategic Management Accounting

The term strategic management accounting was
first used by Simmonds (1981), who defined it as
the analysis of management accounting information
related to a business and its competitors in order to
develop business strategy. In another comprehensive study, Bromwich (1990) stated that strategic
management accounting goes beyond gathering
information on businesses and their competitors,
to covering the advantages that products offer to
customers and how these advantages contribute to
building and sustaining competitive advantage.
Although several studies on strategic management
accounting have focused on large-scale enterprises
(Cescon, Costantini, & Rossi, 2013; Cadez & Guilding, 2008), there has been limited attention paid to
the adoption of strategic management accounting

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techniques in SMEs (Ahmad, 2013; Aziz, 2012;

Santini, 2013). Here, the focus will be on applying the perspective set forth by Cadez & Guilding
(2008)that strategic management accounting is a
set of strategically oriented accounting techniques
to SMEs. For the purposes of this study, two theories can be applied: contingency theory and upper
echelon theory.
Contingency Theory

Contingency theory has a long tradition in the

accounting control area of research (Chenhall,
2003; Chenhall & Langfield-Smith, 1998; Gerdin
& Greve, 2004; Otley, 1980). It is based on the
idea that there is no one generally suitable control or management accounting system that is relevant to every organization in all conditions and
circumstances (Fisher, 1995). Fitness, therefore, is
an important issue. The concept of fitness in contingency theory suggests that a suitable fit between
organizational features and contingent factors will
enhance organizational performance (Morton &
Hu, 2008). Drazin & Van de Ven (1985) considered three different approaches to appraising fit:
selection, interaction, and systems. Each of these
approaches meaningfully changes the principle of
contingency theory and the research undertaken.
In keeping with the objective to develop a testable
model for SMEs, the focus here will be on the systems approach.
Based on the conceptual framework of systems
theory (Drazin & Van de Ven, 1985), the systems
approach is the most current form of contingency
theory and takes a holistic and universal approach
to examining interdependencies in corporations
(Selto, Renner, & Young, 1995; Chenhall and Langfield-Smith, 1998). The fundamental premise of this
approach is that in order to understand organizational variables and performance, contingencies and
performance relationships must be studied holistically (Drazin and Van de Ven, 1985). Thus, design
components and multiple contingencies are the
focus, rather than the single variables highlighted in

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the interaction and selection approaches. Chenhall

(2003) adds a new fit to Drazin and Van de Vens
(1985) approaches by referring to a fourth structural relation that comprises intervening variables
or mediating variables. Keeping in line with related
research, in this study this fit will be used for further
model development (Chenhall, 2003; Fisher, 1995;
Gerdin and Greve, 2004; Ittner and Larcker, 2001;
Langfield-Smith, 1997).
It is also important to examine the choice of factors that can affect the adoption of management
accounting practices in the context of SMEs.
Most studies on contingency factors related to
SMEs have considered such factors as external
environment, technology, and firm size (Ahmad,
2013; Collis & Jarvis, 2002; ORegan & Sims,
2008). On the other hand, there is a lack of studies relatedto the characteristics of CEOs who are
responsible for solving problems and making decisions in SMEs (Sorooshian, Norzima, Yusof, &
Rosnah, 2010).
Upper Echelons Theory

The fundamental concept of this theory is well captured by the subheading of Mason and Hambricks
(1984) seminal study of the upper echelons perspective: the organization as a reflection of its top managers. The theory acknowledges that top managers
heavily influence organizational performance by the
choices they make, which in turn are affected by the
managers characteristics. In other words, the main
principle in upper echelons theory has two interrelated parts:

Executives act according to their personalized

interpretations of the strategic circumstances
they face.
These personalized interpretations are a function
of the executives personalities, experiences, and
values.

Over the last few decades, academic interest in the

characteristics of top business managers has greatly

G l o b a l B u s i n e s s and Organiz ational Ex cellence

increased, and upper echelons theory has fostered

this uptick in attention (Carpenter, Geletkanycz, &
Sanders, 2004; Nielsen, 2010). Recently, scholars
have started to draw on upper echelons theory to
analyze the association between the characteristics
of top executives and management accounting and
control systems (Hiebl, 2014).
Management accounting and control systems can
be seen as an organizational outcome or as an
aspect of organizational structure (Chenhall, 2003;
Strauss & Zecher, 2013) and, following upper echelons theory can also be expected to be influenced
by top-manager characteristics. Mason and Hambrick (1984) identified administrative complexity
as an important dimension of strategic choices that
is influenced by upper echelons and noted that it
is composed of thoroughness of formal planning
systems, complexity of structures and coordination
devices, budgeting detail and thoroughness, and
complexity of incentive compensation schemes
(p.201). All these elements can be classified as management accounting or control practices (Chenhall
2003; Guenther 2013; Luft & Shields, 2003). In
line with this view, in their research on management
control systems Malmi and Brown (2008) acknowledged that organizational controls are something
that managers can change, as opposed to something
that is imposed on them (p. 294). Consequently, it
can be assumed that top managers and their characteristics have a substantial impact on the design
of management accounting and control systems
(Hiebl, 2014).

Toward a Conceptual Framework

If the ultimate goal of contingency-based management accounting research is to test a comprehensive model that includes multiple accounting
systems, multiple contingent variables, and multiple outcome variables (Fisher, 1995), this study
would appear to constitute a step in the desired
direction (Cadez & Guilding, 2008). The framework of this study examines the association among

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47

three contingency factorsperceived environmental uncertainty, advanced manufacturing technology, and CEO characteristicsand their impact
on strategic management accounting techniques
and performance. Strategic management accounting techniques and their use are at the heart of the
model, and in keeping with previous related contingency-based research (Chenhall & Langfield-Smith,
1998; Cravens & Guilding, 2001; Gerdin, 2005;
Guilding, 1999; Hoque & James, 2000), strategic
management accounting is presented as an endogenous construct in the model. The dependent factor in this model is firm performance. The basic
principle of contingency theory holds that firm performance depends on the suitable fit between the
structure (use of strategic management accounting)
and context (contingency variables). Therefore, the
firms performance indicates whether structure and
context are well matched (Gerdin & Greve, 2004;
Ittner & Larcker, 2001). The suggested framework
is illustrated in Exhibit 1.

Perceived Environmental Uncertainty and

StrategicManagement Accounting

Perceived environmental uncertainty reflects managers inability to correctly forecast their external environment (Tymon, Stout, & Shaw, 1998).
Studies have shown that administrators respond

to perceptions of the external environment rather

than the actual external environment (Magnusson,
1981; Ferris, 1982). In management accounting
research, perceived environmental uncertainty has
been considered a key factor in contingency theories (Chenhall, 2003; Fisher, 1995; Otley & Wilkinson, 1988; Tymon, Stout, & Shaw, 1998).
Several studies empirically support the relationship
between perceived environmental uncertainty and
management accounting practices. For example,
Gordon and Miller (1976) and Khandwalla (1972)
contend that in times of uncertainty, corporations
expect more sophisticated accounting information
systems to offer more nonfinancial and external

Exhibit 1. A Contingency Model of Strategic Management Accounting Usage in SMEs

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information. McManus (2012) also maintains that

managers need information that is future orientated
and goes beyond the financial realm in order to
cope with the complexities of their external environment. This outlook ultimately is manifested in
the organizations strategic management accounting
techniques. For instance, focus on budgets typically
intensifies under conditions of uncertainty. These
factors lead to the following hypothesis:
H1There is a positive relationship between perceived environmental uncertainty and the adoption
of strategic management accounting techniques in
SMEs.
Advanced Manufacturing Technology and Strategic
Management Accounting

Traditional difficulties that business face in investment appraisal, cost allocation, performance evaluation, and overhead apportionment have been
complicated by advances in manufacturing technology. Therefore, business administrators and
accounting professionals have developed several
new accounting practices to deal with them (Hoque
& James, 2000; Bhimani & Bromwich, 1992).
For instance, some firms that have adopted advanced
manufacturing technology have altered their management accounting and control systems in order
to remain competitive while responding to changes
in information needs and operations brought on
by the new technology (Johnson & Kaplan, 1987).
New management accounting and control systems,
such as activity-based costing (ABC), can improve
the relevance and quality of information that management needs to keep the organization running
smoothly. When the business environment changes
and reliance on advanced manufacturing technology intensifies, executives tend to make greater use
of management accounting information in their
daily decision-making (Isa & Foong, 2005). Generally, the fundamental objectives of management
accounting in an advanced manufacturing technology environment are to cost products, value

G l o b a l B u s i n e s s and Organiz ational Ex cellence

inventory, measure performance, and make investment decisions (Jeans & Morrow, 1989).
Numerous studies have examined the influence of
advanced manufacturing technology on the design
of management accounting systems. For example,
Otley, Broadbent, and Berry (1995) found a positive
relationship between automation in manufacturing
and budget formality. On the other hand, Isa and
Foong (2005) argued that advanced manufacturing
technology leads to new costing techniques, such as
ABC, and a greater emphasis on nonfinancial performance measurement indicators.
Abdel-Maksoud, Dugdale, and Luther (2005) found
that advanced management accounting practices exist
in firms that have made significant investments in
total quality management (TQM), just-in-time (JIT)
initiatives, and advanced manufacturing technology.
Their findings were strengthened by Al-Omiri and
Drury (2007), who found that highly sophisticated
cost systems are positively related to lean production techniques and the degree of JIT implementation. According to Abdel-Kader and Luther (2008),
the level of management accounting sophistication is
influenced by the organizations use of TQM, JIT, and
advanced manufacturing technology systems. Thus:
H2There is a positive relationship between
advanced manufacturing technology and the extent
to which strategic management accounting techniques are adopted in SMEs.
CEO Characteristics and Strategic Management
Accounting

Executive characteristics have always been an

important contingency factor. Previous research
on management accounting systems design has
concentrated on such administrative features as
founder/non-founder status, expertise, entrepreneurial intensity, type and degree of education, and
experience (Beal & Yasai-Ardekani, 2000; Gibson
& Cassar, 2002; Jorissen et al., 2002; and Jorissen,
Laveren, Martens, & Reheul, 2008). The influence

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49

of a CEOs characteristics has been shown to take

on particular significance in SMEs (Flacke & Segbers, 2005; Jorissen et al., 2002, 2008) because
the CEO of an SME is frequently in a position to
exert extensive personal control (Flacke & Segbers, 2005). Studies have also shown that proficient
CEOs play a significant role in meeting the challenges that SMEs face (Sorooshian et al., 2010).
A high level of CEO education and experience
translates into an enhanced ability to make strategic
decisions and process information, innovation, and
flexibility to openness (Xiaowei & Zhang, 2010).
According to upper echelons theory, CEOs are typically unable to fully appreciate all the contextual
aspects within which their firms operate. Their limited awareness makes it more likely that they will
perceive a business situation based on their own
characteristics and/or past experience, and then
interpret it in their own way (Mason & Hambrick,
1984). Consequently, top managers and their characteristics are likely to have a substantial influence
on the design of management accounting and control systems (Hiebl, 2014), and highly educated and
experienced CEOs are more likely to adopt strategic management accounting techniques. Therefore,
the following hypotheses are suggested:
H3There is a positive relationship between a
CEOs education and the extent of adoption of strategic management accounting techniques in SMEs.

Fewer studies have investigated the relationships

between the use of strategic management accounting techniques and organizational performance.
Chenhall and Langfield-Smith (1998) found significant relationships between those techniques and
business performance. Cadez and Guilding (2008),
on the other hand, found a weak bond between
the adoption of strategic management accounting
practices and performance, while Sener and Dirlik
(2012) found a medium-level relationship between
them. Despite these mixed results, a majority of
studies indicate a positive association between the
use of strategic management accounting and organizational performance. Therefore,
H5There is a positive relationship between
the extent of adoption of strategic management
accounting techniques and firm performance.
The Mediating Effect of Strategic Management
Accounting

Strategic Management Accounting Usage and

FirmPerformance

Although most researchers lend some support to

the idea that greater use of management accounting
is positively linked to the performance of an enterprise, in many cases, their findings are inconclusive
and context dependent (Cadez & Guilding, 2008).
This means that an organizations control system
and its components can mediate the relationship
between context variables and performance.

The main role of an information system is to support

administrative decision-making (Abernethy & Bouwens, 2005). Better information leads to more effective administrative decisions, which in turn improve
performance (Baines & Langfield-Smith, 2003).

Many have noted this mediating effect in terms of

an organizations control system and its components (Cadez & Guilding, 2008; Chenhall, 2003;
Chenhall & Langfield-Smith, 1998; Gul, 1991;

H4There is a positive relationship between a

CEOs prior work experience and the extent of
adoption of strategic management accounting techniques in SMEs.

50

The relationship between the adoption of management accounting practices and performance
has been the subject of broad empirical research.
Most studies support the view that the adoption of
management accounting practices that offer information that is broad in scope is positively related
to performance (Baines & Langfield-Smith, 2003;
Cravens & Guilding, 2001; Hoque & James, 2000;
Mahama, 2006).

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and Mahama, 2006), but few studies to date have

investigated the mediating effect of strategic management accounting practices on the relationship
between contingency variables and organizational
performance. For example, Cadez and Guilding
(2008) investigated the effect of strategic choices,
market orientation, and company size on two distinct dimensions of strategic management accounting and, in turn, the mediating effect of strategic
management accounting on company performance
in large Slovenian companies. In another study,
Santini (2013) found that SMEs that operate in a
highly complex environment make more extensive
use of strategic management accounting tools to
improve financial performance. Thus, it is expected
that a good fit between contingency variables and
advanced management accounting principles should
improve performance. In line with this rationale,
H6Perceived environmental uncertainly has a
positive indirect effect on firm performance through
the mediating effect of strategic management
accounting in SMEs.
H7Advanced manufacturing technology has a
positive indirect effect on firm performance through
the mediating effect of strategic management
accounting in SMEs.
H8The CEOs education has a positive indirect
effect on firm performance through the mediating
effect of strategic management accounting in SMEs.
H9The CEOs prior work experience has a positive indirect effect on firm performance through the
mediating effect of strategic management accounting in SMEs.

A Call for Additional Research

The proposed framework suggests that in order
to improve performance, leaders of SMEs should
devote particular attention to their use of strategic
management accounting, taking care to adopt the

G l o b a l B u s i n e s s and Organiz ational Ex cellence

unique practices best tailored to their special circumstances. Along with the hypotheses presented above,
the framework highlights three factors that have a
significant effect on the use of advanced management
accounting principles in SMEs: perceived environmental uncertainty, advanced manufacturing technology, and CEO characteristics. The conceptual
framework taps both contingency theory and upper
echelon theory to explain the relationships between
CEO characteristics and adoption of strategic management accounting. Looking ahead, empirical testing is needed to determine whether the hypothesized
relationships hold up in practice and to what extent
any associations might be most meaningful.
With its focus on strategic management accounting,
this study contributes to broadening the literature
on improving organizational effectiveness. Subsequent research would do well to expand this line
of inquiry to include such contingency factors as
organizational culture and structure and additional
CEO characteristics, including executive turnover,
in assessing the adoption of strategic management
accounting practices in SMEs.
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Abolfazl Amanollah Nejad Kalkhouran, MBA, is a PhD candidate in the Department of Accounting and Finance, Faculty
of Management, at Universiti Teknologi Malaysia in Johor
Bahru. His research interests are in management accounting,
performance measurement, and risk management. He can
be reached at ankabolfazl3@live.utm.my or abolfazlaman@
gmail.com.
Siti Zaleha Abdul Rasid, PhD, MBA, is an associate professor in management accounting at Universiti Teknologi
Malaysias International Business School in Kuala Lumpur
and an associate member of the Malaysian Institute of
Accountants. Dr. Rasids research interests are in management accounting, risk management, and corporate governance. She can be reached at szaleha@ibs.utm.my or
sitizaleha.utm@gmail.com.
Saudah Sofian, PhD, MBA, is an associate professor in management accounting at the Department of Accounting and
Finance, Faculty of Management, at Universiti Teknologi
Malaysia in Johor Bahru. Dr. Sofian has more than 25 years
of experience in the academic field, and her research interests
include management accounting, intellectual capital, performance management, and corporate social responsibility. She
can be reached at saudah@utm.my.
Bahareh Hossein Nezhad Nedaei, MBA, is a PhD candidate in the Department of Accounting and Finance, Faculty
of Management, at Universiti Teknologi Malaysia in Johor
Bahru. Her research interests are in enterprise risk management, management control systems, and management
accounting. She can be reached at bahar6484@gmail.com or
hnnbahareh2@live.utm.my.

DOI : 10. 1002/j oe

Gl obal Busi ness and Organi zati onal Exce l l e n c e