CHAPTER 1 - Management accounting and the strategic

management framework

1.1 Introduction

The business environment that organizations face today is increasingly complex, dynamic, and
uncertain. There is no better time for management accountants to optimize their potential in
supporting and contributing to the strategic activities within the organization. The premise
behind the production of this learning resource is to provide an understanding of the standard
strategy models and frameworks and to discuss the management accounting techniques that
complement the strategic management process.
Perhaps the best way to begin an exploration of strategy and management accounting is to
provide an overview of a strategic management framework and review the purpose and
development of management accounting as the discipline adapts to meet the changing needs of
businesses.
The purpose of management accounting is to provide managers with the information they
need to manage the business. Traditional management accounting, however, has been criticized
for not supporting managers in making strategic decisions. The term strategic management
accounting emerged as academics promoted techniques that would provide more support
within the strategic management process. This chapter discusses the criticisms of traditional
management accounting and the emergence of strategic management accounting with reference
to the academic literature.
The chapter then looks at what is meant by strategic management, outlines how the
understanding of the term has changed, and presents a strategic management framework that
forms the structure for the rest of this learning resource. The exploration goes on to discuss
questions such as who sets the strategy, the different levels, planned versus emergent, and the
inside-out or outside-in perspective. There then follows an overview of how management
accounting can support the strategic management process. Chapters 2 – 11 deals with this in
detail. The chapter concludes with a discussion of the concept of strategy as practice to
illustrate the role that management accounting can play throughout all aspects of the strategic
activity within organizations.
The strategic management framework presented here follows a rational approach to the
analysis, formulation, implementation, evaluation, monitoring, and control of strategy. In
practice, the process is much more flexible. Taking a rational approach facilitates a discussion
of management accounting within a strategic context. The danger of taking this approach,
however, is that it may give the impression that the position within the framework in which the
strategy model or accounting technique appears is the only place it can be applied. Many of the

Strategy and Management Accounting – Graham Simons Pitcher 1

models and practices are useful within several areas of the strategic management framework.
It is crucial to appreciate that strategic management is essentially a continuous and iterative
process. The business environment in which many organizations operate today is complex and
dynamic, and the ability to respond and adapt appropriately to changes can mean the difference
between success and failure. Management accounting in support of strategy is about providing
support for all levels of management throughout the entire strategic management process.

1.2 Learning outcomes:

After studying this chapter, you will be able to:

➢ Understand the purpose of management accounting

➢ Understand what is meant by strategic management
➢ Critically evaluate the development of management accounting in response to criticism
of traditional techniques
➢ Critically evaluate management accounting from a strategy as practice perspective
➢ Understand how management accounting can support the strategic management process

1.3 What is management accounting?

Active reading. As you study this section, note the difference between financial and
management accounting, the functions of management accounting, and the criticisms of
traditional accounting. Also, note the changing definition of management accounting as it takes
on a more strategic perspective. Think about why this change happened.

Management accounting has been distinguished from financial accounting by its focus on
providing information for management activities such as planning, decision making, and
control (Kaplan and Atkinson, 1989; Aver and Cadez, 2009). Financial accounting is required
by law, as organizations must ensure that they can accurately record financial transactions, and
report profits and losses to the providers of capital, and the tax authorities. Thus, the provision
of financial information is predominantly to an external audience. Financial accounting must
conform to reporting conventions such as those set out in the International Financial Reporting
Standards (IFRS), the U.S. GAAP (Generally Accepted Accounting Principles), and the U.K.
GAAP (Generally Accepted Accounting Practice). Management accounting, however, is not
governed by any rules, and organizations are free to use whatever tools, techniques, and
practices they think fit for their organization. The audience is internal; hence the format and
the frequency of information are determined by need, not external standards. Essentially
management accounting is there to help managers manage.
Traditionally, the management accounting information was typically internally generated,
financial in nature, and focused on identifying the product cost (Bhimani and Bromwich, 2010;

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Drury, 2012; Ward, 2016). The cost formed the basis for pricing decisions, as well as the
planning and control of operations. The method of valuing products, to some extent, was
influenced by the need to include the value in the financial accounts within the cost of goods
sold, shown in the income statement (also known as the profit and loss account), and the value
of inventory, shown as a current asset, on the balance sheet. There is a requirement to record
inventory within these statements at cost, including materials, labor, and factory overheads,
and in relevant cases, freight, handling, and import duties.
The early definitions of management accounting focused on the cost and production
aspects of a business. Indeed, one of the leading professional bodies in management
accounting, the Chartered Institute of Management Accountants, was initially created in 1919
as the Institute of Cost and Works Accountants. The direct costs of producing products were
predominately materials and labor, known as the prime costs of production. Towards the end
of the nineteenth century, an element of indirect costs, also referred to as production overhead
costs, such as utility, building, and administrative costs, were included in the product costs.
Solomons (1952) noted that the typical method of applying production overheads to product
costs was by adding a percentage of the labor cost, or by creating a company-wide overhead
cost rate per labor hour. As the main costs were labor and materials, traditional forms of
management accounting focused on measures of productivity such as cost per hour, or cost per
kilogram produced, per process, or per worker. These measures of productivity were used as
measures of performance and fed into budgeting, target setting, and the motivation of workers
and managers (Johnson and Kaplan, 1987). Management accounting was, therefore, the
provision of cost and productivity information to assist managers in the activities of operational
planning (via budgeting), decision making, and control.
In the late 1980s, traditional definitions of management accounting received much
criticism for being inappropriate for modern business (Johnson and Kaplan, 1987; Hiromoto,
1988; Bhimani and Bromwich, 1989) in that they focused on cost and operational control. More
recent definitions include an explicit reference to nonfinancial information. For example, Groot
and Selto (2013: 3), refer to management accounting as being, “… concerned with the
generation, communication and use of financial and non-financial information for managerial
decision making and control activities.” Other authors alluded to providing support for broader
strategic management activities (Dixon, 1998). Anthony's (1965) categories of management
activity shown in Figure 1.1, operational, tactical, and strategic, demonstrate the change of
focus required. Management accounting focused on the lower end of the hierarchy, which
ignored the higher end of strategic activity within the organization. As we move up the levels,
the focus of information required by managers changes from internal, quantitative, and short-
term, to include information that is more external, qualitative, and future-oriented.
Towards the 1990s, academics began to suggest that management accounting should
become more externally focused and should take a more proactive role in the strategic
management process (Johnson and Kaplan, 1987; Bromwich, 1990, 1994). It was also
becoming recognized that it is the strategy that drives the information needs. Therefore, the
best approach is to tailor the management accounting systems to each organizations’ specific
requirements. Kaplan (1984: 414) notably commented, “… management accounting can no

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more exist as a separate discipline, developing its own set of procedures and measurement
systems and applying these universally to all firms without regard to the underlying values,
goals, and strategies of particular firms, but it must serve the strategic objectives of the firm.”
A change of focus was needed which met the needs of the managers who were formulating
strategies in a changing business environment.

Figure 1.1 Typical management information requirements at different levels of the

management hierarchy.

Over the year’s management accounting has developed in a variety of ways to meet the
changing requirements of the business (Burns and Scapens, 2000; Weetman, 2006). As the
business environment became more competitive, and the emphasis moved from strategic
planning to strategic management (Whittington, 1996; Hoque et al., 2001; Nixon and Burns,
2012), the call from academics was not only for the need for management accounting
practices to respond to the changing needs of the business but for accountants to become
more involved in the strategic management process (Shank, 1989, 1996; Bhimani and
Keshtvarz, 1999; Mia and Clarke, 1999; Tayles et al., 2002; Pitcher, 2015, 2018; Stein Smith,
2017).
The definitions of management accounting began to recognize this change of emphasis.
For example, The Institute of Management Accountants' (U.S.) description (IMA, 2008)
included the phrases “partnering in management decision making” and “to assist management
in the formulation and implementation of an organization’s strategy.” The inclusion of these
terms indicates that the accountant is no longer seen as just the person with the numbers but is
an active member of the management team involved in the strategic management process.
Brewer (2008: 29) suggests that the “ultimate responsibility of management accounting is

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adding stakeholder value … by providing leadership, by supporting a company’s strategic
management efforts, by creating operational alignment throughout an organization, and by
facilitating continuous learning and improvement.”

1.4 The development of strategic management accounting

Active reading. Note the differences between traditional and strategic management accounting
shown in Table 1.1, and the definition of a strategic accounting system given by Brouthers and
Roozen (1999), think about the key differences that distinguish strategic from traditional
management accounting. Ideally, successful organizations would embrace both traditional and
strategic accounting practices. Also, note that the early researchers disagree as to what
constitutes a strategic management accounting technique (shown in Table 1.2).

Simmonds (1981) promoted the development of the concept of strategic management

accounting. He focused his attention on the need for external information and specifically on
data related to competitors and markets. The term strategic management accounting, however,
has not found favor with practitioners (Guilding et al., 2000; Roslender and Hart, 2003;
Jorgensen and Messner, 2010; Nixon et al., 2011; Pitcher, 2015), and an agreed definition has
defied academics. Bromwich (1988), like Simmonds, emphasized gathering and analyzing
information about competitors and benefits to customers over the long term. Govindarajan and
Shank (1992), however, placed the emphasis more on the concept of strategic cost
management, while Ma and Tayles (2009) defined it as being concerned with strategically
orientated information for decision making and control. Hopwood (2007), however, recognized
the continued benefit of traditional accounting practices and proposed they be used to aid the
formulation of strategic plans.
In contrast, Roslender and Hart (2003) adopted a broader viewpoint and suggested merging
management accounting and marketing principles within a strategic framework. Hoque (2001)
also takes a more comprehensive view and argues that strategic management accounting is a
process of identifying, gathering, choosing, and analyzing accounting data for helping the
management team to make strategic decisions and to assess organizational effectiveness.
Brouthers and Roozen (1999: 311-312) talk in terms of a strategic accounting system and
suggest that it should, “… provide information necessary to perform the following strategic
functions: (1) environmental analysis, (2) strategic alternative generation, (3) strategic
alternative selection, (4) planning the strategic implementation, (5) implementing the strategic
plan, and (6) controlling the strategic management process. In order to fulfil these information
functions, a strategic accounting system must contain information that is (1) mostly non-
financial; (2) focused on the future; (3) both internal and external to the firm; and (4) based on
realistic projections of the future, not simple extrapolations of the past.” Whatever the
definition, the need for management accountants to become actively involved within the
strategic management process was compelling.

Strategy and Management Accounting – Graham Simons Pitcher 5

 Table 1.1 summarizes some of the differences between traditional management accounting
and strategic management accounting.

Table 1.1 The difference in orientation of traditional and strategic management accounting

Traditional management accounting Strategic management accounting

Historical Future-oriented
Internal focus External focus – outward-looking
Places equal importance on nonfinancial
Predominantly financial
information
Quantitative – transaction-based Makes use of qualitative measures
Long term outlook and use of scenario
Short term in nature – planning, and control
planning
Uses variance analysis to determine Seeks to understand the reason behind the
corrective action variance to inform future decisions
Supports operational decision making Supports strategic decision making
Un-programmed, uncertain, and ad hoc
Programmed decision making
decisions
Reactive Proactive
Developed to support the competitive
Developed to support manufacturing
position
Focuses on reporting performance of Also reports on consequences and potential
existing activities and explaining the past impact on future performance, as well as
performance alternative strategies
Reporting of actual versus plan – Reviews performance against external
comparison benchmarks

Early research into the development of strategic management accounting (SMA) focused
on the extent to which organizations use SMA techniques. These surveys typically use
questionnaires to collect data. A problem, however, is the fact that it is the academics that
predefine the set of techniques ascribed to SMA. There are, however, variations in the number
of techniques defined. For example, Guilding et al. (2000) identified twelve techniques; Cadez
(2006) identified seventeen techniques; Cinquini and Tenucci (2007) fourteen techniques; and
Cadez and Guilding (2008) sixteen techniques. McLellan (2014), however, took a slightly
different approach and tested the use of forty-two management accounting techniques, some
of which were deemed to be strategic. Table 1.2 provides a brief explanation of the techniques
included within these studies. Some of the techniques have fallen by the wayside in recent
years, often due to the difficulties of implementation. Therefore, this learning resource only

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deals with the accounting techniques deemed to provide the most benefit in the strategic
management process.

Table 1.2 Strategic management accounting techniques

1. Guilding et al. (2000)

2. Cadez (2006)
3. Cinquini and Tenucci (2007)
4. Cadez and Guilding (2008)

Strategic management accounting (SMA) technique Authors

Brief description 1 2 3 4

Activity-based costing An approach to the costing and monitoring of ✓

activities, which involves tracing resources
consumption and costing final outputs.
Resources are assigned to activities and
activities to cost objects based on
consumption estimates. The latter uses cost
drivers to attach activity costs to outputs.

Attribute costing An extension of activity-based costing using ✓ ✓ ✓ ✓

cost-benefit analysis (based on increased
customer utility) to choose the product
attribute enhancements that the company
wants to integrate into a product. This
technique has fallen by the wayside.

Benchmarking The establishment, through data gathering, of ✓ ✓ ✓

targets and comparators, that permits relative
levels of performance (and particularly areas
of underperformance) to be identified. The
adoption of recognized best practices should
improve performance.

Brand value budgeting Brand valuation assigns a financial value to ✓ ✓ ✓

and monitoring the equity created by the name or image of a
brand. It can be represented as the net present
value of the estimated future cash flows
attributable to the brand.

Strategy and Management Accounting – Graham Simons Pitcher 7

Capital budgeting The process of selecting long-term capital ✓
investments.

Competitor cost A technique in which the competitor cost per ✓ ✓ ✓ ✓

assessment unit is ascertained from available information.
It is often, at best, an estimate.

Competitive position Monitoring the market position and ✓ ✓ ✓ ✓

monitoring competitive strategy (market positioning) of
the key competitors.

Competitor financial Looking for strengths and weaknesses in the ✓ ✓ ✓ ✓

appraisal competitors’ financial position.

Customer profitability Customer profitability analysis (CPA) is the ✓ ✓ ✓

analysis analysis of the revenue streams and service
costs associated with specific customers or
customer groups to ascertain their relative
profitability.

Integrated performance The use of a range of performance ✓ ✓ ✓

measurement measurements other than financial. The
balanced scorecard is a typical example,
which includes nonfinancial as well as
financial, internal, and external measures,
quantitative and qualitative. The balanced
scorecard reviews performance from several
different perspectives, for example, customer,
internal business, and learning and growth as
well as financial.

Life cycle costing Life cycle costing is the profiling of costs over ✓ ✓ ✓ ✓
the life of a product, including the
preproduction stage and recycling.

Lifetime customer Estimating the profitability of a customer over ✓ ✓

profitability analysis its lifetime, considering future revenues and
costs, including the cost of acquisition and
retention.

Quality costing The concept of quality costs is a means to ✓ ✓ ✓ ✓

quantify the total cost of quality-related
efforts and deficiencies. It can be broken
down into appraisal costs, prevention costs,
and internal and external failure costs.

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 Strategic cost Strategic cost management is the overall ✓ ✓ ✓ ✓
management recognition of the cost relationships among
the activities in the value chain, and the
process of managing those cost relationships
to a firm’s advantage.
Strategic pricing Strategic pricing considers market segments, ✓ ✓ ✓ ✓
ability to pay, market conditions, competitor
actions, trade margins, and input costs, as well
as other potential factors affecting market
position and demand for the product.

Strategic planning and A system of developing strategic objectives

budgeting and ensuring that budgets developed by
individual units contribute to their
achievement – essentially ensuring alignment
of departmental budgets to strategic
objectives.
Target costing Target costing is an activity that is aimed at ✓ ✓ ✓ ✓
reducing the life cycle costs of new products,
by examining all possibilities for cost
reduction at the research, development, and
production stage. It is not a costing system,
but a profit-planning system—the selling
price and profit requirement are set during the
research stage, thus creating a target cost.
Value chain costing Based on Porter’s value chain analysis, a firm ✓ ✓ ✓ ✓
may create a cost advantage either by
reducing the cost of individual value chain
activities or by reconfiguring the value chain.
Valuation of customers A technique like lifetime customer ✓ ✓ ✓
as assets profitability that attempts to ascertain the net
present value of a customer.

1.5 The uptake of strategic management accounting

Active reading. Note the range of countries covered by recent studies on the use of SMA
techniques and the finding on why the uptake in developing economies might be better than in
developed nations. Think about other functional specialists, apart from management
accountants, that provide information for strategic management in the organization.

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Since the late 1990s, there has been a surge of studies undertaken to explore the uptake of
strategic management accounting in practice. Many of the research surveys conducted have
focused on uptake in specific sectors or countries. Examples include: Fowzia (2011)
investigated SMA practices in Bangladesh; Cadez (2006) undertook a cross-industry analysis
of SMA techniques in Slovenia; AlMaryani and Sadik (2012) reported on Romanian
companies; Said et al. (2010) on Malaysian Local Government Authorities; Noordin et al.
(2009) Malaysian electrical and electronic sector; Bahaa et al. (2019) hospitals in Malaysia;
Agasisti et al. (2008) on Italian universities; Shah et al. (2011) conducted a study in Australia;
Oboh and Ajibolade (2017) on Nigerian banks; Glushchenko and Yarkova (2016) on the
Russian chemical industry; Alamri (2018) on the Saudi industrial sector; and Jbarah (2017) on
Jordanian industrial companies.
Most studies use questionnaires asking about the usage of techniques determined by the
researchers as being classified as strategic management accounting. Early surveys reported
limited use of the defined SMA techniques. Still, more recent studies indicate that usage of
some techniques, such as strategic planning and budgeting, customer accounting, target
costing, and integrated performance management, is increasing. Nevertheless, Al-Abdel and
McLellan (2013) argue that the specific strategy of an organization needs to be supported by
particular accounting practices, echoing the calls of previous writers that accounting should
support the strategic management process. The need to support a specific strategy means that
different organizations will use different techniques, and the adoption of some techniques may
not be universal.
Some surveys note that respondent organizations perceived that a higher benefit accrued
from more traditional management accounting techniques, for example, Sulaiman et al. (2002)
in Malaysia, Cadez (2006) in Slovenia, and McLellan (2014) in the U.S. The perceived benefit
may be due to the comfort factor of the conventional techniques and the uncertainty
surrounding the value of the more sophisticated advanced techniques. Conversely, more recent
studies suggest that organizations are gaining performance benefits from using strategic
management accounting and can use it to support competitive advantage. For example, the
studies by Noordin et al. (2015) and Bahaa et al. (2019) in Malaysia, Oboh and Ajibolade
(2017) in Nigeria, Alamri (2018) in Saudi, and Jbarah (2017) in Jordan all suggest performance
benefits. Interestingly, Guilding et al. (2000), in an international comparison of SMA practices,
felt that organizations established in the more developed countries were less inclined to move
away from the tried and tested techniques of the conventional accounting systems, whereas,
organizations in developing economies were perhaps more inclined to seek advantage from
newer techniques.
There are also published papers that look at specific uses of SMA concerning particular
activities or take a theoretical perspective. For example, Jorgensen and Messner (2010) and
Nixon et al. (2011) investigated the role of SMA in new product design and development.
Tillmann and Goddard (2008) reviewed SMA as sense-making in a multinational company.
Ma and Tayles (2009) and later, Sunaryanto et al. (2017), explored the development and use
of SMA from the perspective of institutional theory.
An interesting finding from several studies is that the practitioners of management
accounting do not use the term strategic management accounting (Guilding et al., 2000;
Roslender and Hart, 2003; Nixon and Burns, 2012; Pitcher, 2015). Although increasing in

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usage, it is also evident that the uptake of the techniques is not as widespread as early proposers
of SMA had hoped. Despite this, evidence suggests that management accountants are becoming
more directly involved in the strategic management process (Cuganesan et al., 2012; Pitcher,
2015; Glushchenko and Yarkova, 2016; Jbarah, 2017; Oboh and Ajibolade, 2017).
It is worth noting, however, that not all the accounting information is necessarily the
preserve of the management accountants (Dixon and Smith, 1993; Lord, 1996; Anderson,
2006). This observation alludes to the fact that functional managers now have access to a range
of information through integrated management information systems and decision support
systems that include accounting information (Dixon, 1998; Laudon and Laudon, 2006). Couple
this development with the increased importance of nonfinancial information involved in
strategy formulation, implementation, and evaluation (McNair and Mosconi, 1989; Lynch and
Cross, 1992; Kaplan and Norton, 2005) and it is clear that management accountants are part of
a management team involved in the strategic management of an organization. The focus of this
learning resource is the role that the management accountant can play in that process.

1.6 The need for a strategic management process

Active reading. Note how the need for strategic management developed to cope with
changes in the business environment and the all-encompassing definition of the strategic
management process.

In the 1950s and 1960s, management writers were discussing long-range planning. In many
cases, organizations were taking their annual budgets as a start point and extending them for a
period of five to ten years by adding in a growth factor, thus creating a long-range plan. In the
1970s, and particularly in the 1980s, the focus shifted toward strategic planning as markets
became more competitive, and a definitive strategy was needed to develop the business.
Toward the end of the 1980s and into the 1990s, the focus changed again, this time more
broadly encompassing the activity of strategic management, as organizations needed to become
more responsive to changes in what was becoming a more dynamic and complex business
environment. Rather than just producing a strategic plan that would be implemented by the
business units, it was becoming necessary to adopt a proactive approach, not only to strategy
development but to managing the environment. Hence, strategy as a management process.
Despite SMA not becoming the messiah that some had hoped, the sentiment that
management accounting should support the strategic management process is still
overwhelming (Smith, 1997; Brewer, 2008; Blocher, 2009; Pitcher, 2018). Here, however,
arises another difficulty – how to define the strategic management process. Barney et al. (2010)
describe it as formulation, implementation, and evaluation of the strategy. A more
encompassing and generally accepted definition is offered by Nixon and Burns (2012: 229) as
containing the following key activities: “(1) development of a grand strategy, purpose or sense
of direction, (2) formulation of strategic goals and plans to achieve them, (3) implementation
of plans, and (4) monitoring, evaluation, and corrective action.” This description aligns with
the definition of the strategic accounting system outlined by Brouthers and Roozen (1999)

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described in section 1.4 - The development of strategic management accounting. However,
both the Brouthers and Roozen definition of strategic accounting and the Nixon and Burns
definition of the strategic management process, implies that strategic management is a
routinized and formal process.
Although many firms adopt a rational planning process (Chenhall and Langfield-Smith,
1998; Rigby, 2001), there is a recognition that strategic decisions are often complicated, non-
linear and fragmented (Hendry et al., 2010). Therefore, as a necessity, the strategic
management process is iterative, rather than a formalized step by step process undertaken by
senior managers in the organization (McNulty and Pettigrew, 1999). Indeed, many would
describe strategy formulation as being a social and political process (Eden, 1992) in that
strategy involves consensus, and may not always appear rational. The influence of particular
power groups within an organization can also impact on the strategy development. For
simplicity, this learning resource adopts a normative and logical approach to strategy as the
structure for the work. Still, the author recognizes that there is considerable debate in academia
about how and who determines the approach to strategic management in an organization.

1.7 The strategic management framework

Active reading. Note how logically the steps follow each other to produce a rational approach
to strategic management. In practice, the process is more complex and flexible than is described
here, but the logic is still the same.

This section provides an outline of a strategic management framework (Figure 1.2).

Figure 1.2 The strategic management framework

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Academic and practitioner texts discuss various methods, processes, and frameworks for the
development of strategic plans. The framework shown in Figure 1.2 is based on the concept of
a rational approach to strategic planning and forms a structure for the subsequent chapters. The
explanation here is, therefore, deliberately brief as each element is discussed in detail in
Chapters 2 – 11.
The framework incorporates the critical phases of strategic management, highlighted in
Figure 1.3.

Figure 1.3 Critical phases of strategic management

The phases of strategic management encompass the external and internal analysis resulting
in the strategic position (often set out as a SWOT analysis – strengths, weaknesses,
opportunities, and threats); the generation and evaluation of strategic options and strategic
choice; followed by implementation; and finally the review, evaluation, and control of the
current strategy. The dotted lines illustrate the iterative nature of the process and the feedback
loops.

Vision, mission, and objectives

The mission is the rationale behind the business. It sets out the long-term aims and purpose of
the organization as well as indicating the purpose, strategies, behavior standards, and values
(Campbell and Yeung, 1991). Organizations often develop a vision alongside the mission. The
vision is usually broader and shorter than the mission statement and is often intended as a point
of inspiration for employees to drive the business forward. It is common for organizations to
promote their vision, mission, and values that underpin these statements on their websites.
Many organizations now publicize a brief outline of their strategy and their long-term strategic
objectives. These are provided in broad terms as they are for external consumption but would

Strategy and Management Accounting – Graham Simons Pitcher 13

be much more specific when communicated internally to employees. Chapter 2 explores the
link between the vision, mission, objectives, and the management accounting system.

Environmental analysis
The environmental analysis is the subject of Chapter 3 and provides a means for identifying
external factors that could affect an organization’s ability to achieve its objectives. A strategic
tool known as PESTEL (political, economic, sociocultural, technological, environmental, and
legal) provides a framework for analyzing changes in the general business environment. The
focus of the analysis is on how the changes will impact the industry and hence the organization.
Models such as Porter’s five forces (Porter, 1979) can aid the analysis at an industry level to
identify the forces that will impact on the profitability and attractiveness of the industry, now
and in the future. Understanding the concept of the business ecosystem and the process of
competitor analysis are also key areas in this stage of the process. Strategically the
environmental review helps to identify the opportunities and threats to the organization that is
evident or could emerge from the business environment.

Internal analysis and resource capability audit

The internal analysis and resource capability audit, as the label suggests, analyzes the
organization’s resource capability to achieve its objectives, given that environmental factors
will impact on this ability. Chapter 4 discusses the various models that are useful in a resource
audit. These fit within a simple framework known as the Nine Ms: manpower (human
resources), money, markets, machinery, materials, makeup, methods, management, and
management information. These headings merely point towards broad areas requiring more
detailed analysis to help identify the strengths and weaknesses of the organization.

Strategic position (SWOT) and Gap analysis

Establishing the strategic position pulls together the issues identified during the environmental
analysis and internal appraisal and is the subject of Chapter 5. The environmental review is the
source of opportunities and threats, while the internal assessment is the source of strengths and
weaknesses. However, during the environmental analysis, it is not known whether a change
creates an opportunity or a threat—any changes in the environment need assessing with regard
to the resource capability. If the organization has the resources to deal with the change, it may
present an opportunity. If not, it may be a threat. Hence, the strategic position (SWOT) provides
the framework for bringing together the external and internal analysis.
It is also worth noting that changes in the environment can provide an opportunity for some
organizations while creating a threat for others, depending on the organization’s ability to deal
with the change. There is a connection here to competitor analysis as strengths and weaknesses
in resource capability are relative to competitors and a potential source of competitive
advantage. The completion of the SWOT analysis helps the management to formulate strategies
that build on the strengths, address the weaknesses, grasp the opportunities, and minimize or
avoid the threats, and that is consistent with the mission and objectives.

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 As part of the strategic position, an analysis is undertaken that ascertains the gap between
an organization’s stated objectives and the level of performance that will be achieved based on
the current strategy, given the changes in the environment and its current resource position. If
there is a gap, it requires the formulation and evaluation of strategic options to close the gap.

Strategic options generation

The strategic options generation considers three elements: competitive strategy, the direction
of growth, and the method of growth. Deciding a competitive strategy will be one of the first
decisions an organization makes. The strategy needs continually reassessing as to its
appropriateness, given any identified changes in the environment. Competitive strategy based
on cost leadership and differentiation, as defined by Porter (1985), are discussed in Chapter 6.
Options to generate growth include market penetration, product and market development, and
diversification, as identified by Ansoff (1965) in the product and market growth matrix.
Chapter 7 considers the Ansoff options, together with the methods of achieving organic,
sometimes referred to as internal growth, and inorganic growth options, such as acquisition,
merger, and joint development.

Evaluation and strategic choice

The various strategic options available to organizations need evaluating with respect to the
resource capabilities and the ability to close any gap between the stated objectives and the
forecast performance based on the existing strategy. A framework such as suitability,
acceptability, feasibility, and risk provides a means to evaluate various strategic options, which
would also include a financial evaluation. Suitability asks whether the strategy builds on the
strengths, addresses the weaknesses, grasps the opportunities, and avoids or minimizes the
threats. Acceptability checks to see whether the proposal meets the approval of interested
stakeholders. Feasibility reviews the practical aspects as well as financial evaluation, and risk
assesses whether the proposed strategy is within the risk appetite of the organization. Chapter
8 explores this SAFeR framework in more detail.

Strategic implementation
Once the various strategic options have been evaluated and chosen, the next step is
implementation. The strategy needs crystallizing into operational budgets, targets, plans, and
so on. These then form the mechanisms to communicate the strategy to the various
stakeholders. Changes in strategy could also mean implementing changes to management
information systems, including the management accounting techniques used to support
strategy. Chapter 9 discusses the management accounting support during implementation.

Review, evaluation, and control

Review, evaluation, and control is the area where models such as the balanced scorecard are
useful. The balanced scorecard, and similar frameworks, provides a means to review

Strategy and Management Accounting – Graham Simons Pitcher 15

performance using a range of appropriate performance indicators that include nonfinancial as
well as financial measures. Ultimately the review is considering how well the organization is
meeting its objectives, which establishes the feedback loop to the start of the process. Part of
the reason for any variation from the plan could be a change in the environment or resource
capability, which illustrates the iterative nature of the strategic management process. Chapter
10 discusses performance management, including the balanced scorecard.
Traditional management accounting focuses attention on the review, evaluation, and
control aspects of long-range and strategic planning and evaluation of various strategic options.
The strategic management process is more iterative and dynamic, and management accounting
needs to support the whole strategic management process, especially in the analysis phase, and
in assessing the impact of environmental changes on the business. Indeed, the choice of strategy
and implementation will impact the business environment, particularly the competitive
environment. In cases where innovations and new technologies are involved, if most
organizations in a sector adopt similar strategies over time, it can change the way the industry
operates. For example, the first bank to adopt online banking, or the first retailer to embrace
online shopping changed the way the industry works. Part of strategic choice is about assessing
what this impact might be and proactively influencing the environment for competitive
advantage.

1.8 Who sets the strategy?

Active reading. Note that strategic management affects all levels of employees. It is also
relevant to all types of organizations, including not-for-profit.

There is a debate in the academic literature concerning who sets the strategy and who enacts
strategy. There is a view that middle and lower-level managers determine strategy rather than
being the sole preserve of the senior managers. The strategy as practice school of thought drew
attention to the activities and discourse of strategy formulation and enactment (Whittington,
1996). Proponents of strategy as practice use the term strategizing to promote the idea that
strategy is something that people do, rather than describing a published plan or strategic intent
set by senior managers. It is therefore worth remembering that it is people, rather than
organizations, that formulate and implement a strategy. However, with that in mind, the term
organization is used throughout this learning resource when discussing strategy as the
management accounting techniques considered can be used by people working at different
levels within an organization and may also be of interest to not-for-profit organizations.
Another essential aspect to note is that the process depends on the organization and its
organizational context; that is, it is not necessarily a case of one-size-fits-all. In today’s
business environment, organizations need to be flexible and adaptable, which also extends to
their strategic management process.

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1.9 Levels of strategy

Active reading. Note how the strategy extends to all levels and all functions within an
organization.

There are principally three levels of strategy within an organization. These relate to the notion
of Anthony’s hierarchy, referred to in Figure 1.1, section 1.3 - What is management
accounting? The characteristics of information required at each level will differ; therefore, the
management accounting system needs to be able to satisfy the needs of the users at each level
of corporate, business, and operational strategies.
Corporate strategy is concerned with the overall purpose and scope of the organization. It
is often most associated with a divisionalized organization that has several strategic business
units. The strategy is concerned with how to manage the overall business to create value for
the stakeholders. The objective is to ensure that each business unit contributes to the best of its
ability to the whole organization. In some instances, it is deciding how best to manage a
portfolio of businesses, involving the allocation of investments and resources between business
units. It is concerned with strategies such as growth, stability, and consolidation of its current
position, recovery, reduction, or survival of the corporate whole.
Business strategy is concerned with how a strategic business unit competes in a market. It
is about the management of products and markets dealt with by one strategic business unit.
Under this definition, many small to medium-sized enterprises (SMEs) might only be
concerned with a business strategy.
At the lower end of the spectrum is the operational or functional strategy. To achieve the
business strategy, an organization will need functional strategies, such as a marketing strategy,
production or operations strategy, a human resources strategy, information systems strategy,
and a financial strategy. These strategies, illustrated in Figure 1.4, should support each other in
a way that is consistent with and helps to achieve the business strategy, and in turn, the
corporate strategy.
In a large organization with several business units, these functional strategies may well
extend across the whole corporate organization. In this way, there may be a corporate human
resources strategy that governs the formulation of the HR strategy in each business unit.
It was suggested by Lindblom as long ago as 1959 that what organizations do in practice
is to adopt an incremental approach in which they accept the first outcome that satisfies the
strategic objectives (Lindblom, 1959). Quinn (1978) used the term logical incrementalism,
suggesting that organizations determine a broad direction with the detail emerging later.
Incrementalism in practice suggests that organizations make small changes to their existing
strategy. It is unlikely that managers in small and medium-sized enterprises will have the
resources and time to evaluate every strategic option available to them. Hence, it is logical that
they will make decisions based on a limited evaluation of alternatives.

Strategy and Management Accounting – Graham Simons Pitcher 17

 .
Figure 1.4 Levels of strategy and functional strategies within an organization

Mintzberg and Waters (1985) identified the concept of emergent strategies illustrated in
Figure 1.5.
Organizations articulate a planned and deliberate strategy that could either be realized or
unrealized. However, even though the intended strategy was not successful, targets such as
sales or profits could still be met. This example indicates that the management team should not
focus solely on the outcome in terms of performance targets but need to understand why
performance targets have been met or missed. For example, in the case of a sales and profits
target being achieved, analyzing the data could reveal a different story. An analysis may show
that the mix of products is different from that of the plan, the category of customers buying
various products differs from that expected, and the primary geographic location of sales is a
surprise. This example is somewhat extreme; however, on further analysis, it appears that the
actual strategy is not the reason for achieving the headline targets. It could be that a potential
market of international sales is emerging to a different customer demographic, and this needs
to be, in Mintzberg’s terms, crafted into the future strategy of the organization.
Emergent strategies can emerge based on a pattern of ad hoc decisions taken in response
to a given situation, perhaps a competitor action or environmental factor, that when looked at
in retrospect, emerges as a potential strategy. They can also develop based on what operational
employees are doing. Perhaps the plan is to spend heavily on marketing a particular type of
product. Sales staff, however, identify that demand for other products is higher and push those
at a local level, meeting sales targets, but not by the mix of sales initially planned. Management
teams have a natural inclination to examine the reasons for not achieving a strategic objective.
It is just as important to analyze the reasons as to why they have been met.

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Figure 1.5 Emergent strategies

1.10 Inside-out and outside-in view of strategy

Active reading. Note the different views between strategy as positioning or strategy based on
core competence, and the source of competitive advantage from the strategic analysis
undertaken of the environment and resource capability as part of the SWOT.

The strategic management framework presented in Figure 1.2, shown in section 1.7, implies
that the start point for strategy formulation is the vision, mission, and objectives. In other
words, if you want to start a business, you begin with establishing the vision, mission, and
objectives, then develop the strategy to achieve them. This may be true in an ideal world, but
often the strategy can be triggered by external or internal factors. The idea for a new business
opportunity may begin with identifying a trend or gap in the market by conducting an
environmental analysis. The strategy can, therefore, stem from the business environment and
the organization’s competitive strategy developed to position certain products in specific
markets. Alternatively, determining an internal strength that provides a competitive advantage
could be the trigger. So, the strategy can exploit an existing distinctive competence held by the
organization.
The schools of thought that relate to developing a strategy for competitive advantage fall
within two broad areas. The strategy as position school of thought suggests that strategy is
about positioning the organization in the market, for example, as a value for money offering or
a high-quality offering (Andrews, 1980; Porter, 1980, 1985; Day, 1994). The resource-based

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or competence-based view suggests that competitive advantage comes from basing the strategy
around the key strengths, resources, distinctive competencies, and strategic capabilities of the
organization (Barney, 1991; Grant, 1991).
The positioning approach suggests that organizations set strategy, taking into account
stakeholders, competitors, market needs, and the business environment. This approach requires
an external focus and attention paid to competitive position, market share, and products. The
organization first identifies the opportunities from the environment and then develops the
appropriate competencies and resources it needs to compete effectively.
The resource-based view suggests that many environments today are too complex and
dynamic to undertake the continuous environmental analysis that would be required, and the
opportunities and threats would be similar for all organizations in the industry. Therefore,
sustaining a competitive advantage is challenging. Barney (1991) suggests that competitive
advantage and any core competence of an organization lies mainly in the application of its
strategic resources that are distinct to the organization, difficult to copy, and non-substitutable.
The resource-based view is, therefore, more about developing a competitive advantage by
focusing on the possession of unique resources and capabilities of the organization. In terms of
the strategic management framework outlined in this chapter, positioning focuses on the
environmental analysis, whereas the resource-based approach focuses on the internal review.
In practice, both can be effective.
These viewpoints cross into functional strategies, and marketers refer to an outside-in and
inside-out approach to developing an organization’s strategy (Day and Moorman, 2010).
Principally the outside-in approach focuses on identifying customer needs and customer
experience and developing a strategy to ensure that the organization satisfies these better than
the competition. The inside-out approach focuses on the inner strengths and capabilities of the
organization. Steve Jobs, for example, did not ask the customer what they wanted when he was
at the helm of Apple but relied on innovative skills and creativity to develop a product that
would have market appeal. Part of the key to Apple’s success is its ability to be creative. So,
taking an internal view of sustaining a competitive advantage appears to work. There is,
however, a danger of an inside-out approach in that focusing on the development of strategic
competencies may mean that the organization takes its eye off the customer needs. The activity
of analyzing the strategic position, however, brings the external and internal analysis together,
allowing consideration of both market position and resource capability in the pursuit of a
competitive edge.

1.11 Supporting the strategic management process

Active reading. Note the range of accounting techniques that can be employed for
management accounting to support all aspects of strategic management. Also, note that many
of the models, accounting techniques, and practices discussed are useful under more than one
heading. Using techniques in different combinations can provide powerful insight into how the
business can be improved.

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Each chapter in this learning resource discusses the strategy models and frameworks and the
management accounting techniques and tools, highlighting how management accounting can
contribute to the strategic management process. This section provides a brief overview of how
management accountants can contribute to the whole process and indicates where in the
learning resource a more detailed treatment of each technique occurs. Although a detailed
discussion may appear within a specific section, it does not preclude its use and benefit to other
areas of the process. For example, many of the techniques discussed under internal analysis are
also relevant to competitor analysis.

Vision, mission, and objectives

The mission and objectives, discussed in chapter 2, need articulating and crystallizing in
quantifiable terms so that they can be measured. The performance measures could be financial
or nonfinancial. Many of the information systems that organizations have at their disposal can
capture nonfinancial as well as financial data. Accountants can incorporate both aspects into
management reports designed to evaluate the success of the current strategy. The reporting
should not, however, focus solely on the explanation of past performance but on the impact of
known events on future performance. For example, suppose an organization in the travel
industry focuses on certain parts of the world where political unrest has affected sales for the
first half of the year. The reporting should not only highlight the reason for the past
performance being worse than expected but report the expected outcome for the full year
considering the known changes in the business environment.
This form of analysis and extrapolation can lead to the early identification of a strategic
gap, discussed in section 5.4, and, more importantly, the size of the potential gap. Scenario
planning, discussed in section 3.15, can also provide insight into possible strategic options, and
the management accountant can contribute their knowledge and skills to the construction and
playing out of various scenarios.

Environmental analysis

The accountant can contribute to an environmental analysis by evaluating the potential

financial impact of changes in the business environment as well as the more obvious
monitoring of information of a financial nature, such as exchange rates, interest rates, and so
on. It will always be the best estimate of the potential impact, often based on incomplete
information. Assessing the impact can, however, help in determining the priorities of which
environmental changes require more immediate attention and which are put on a watch list.
Organizations cannot respond to every change in the environment, and close monitoring
of the resource capability, particularly financial resources, discussed in sections 4.11 and
Appendix B – section B.7, can be an essential part of the early warning system. Competitor
analysis, discussed in section 3.11, is also a necessary aspect of environmental review. The
accountant can contribute to an analysis of the competitors’ financial position as well as
working with other functional colleagues, such as research and development, production,

Strategy and Management Accounting – Graham Simons Pitcher 21

logistics specialists, and marketing teams, to ascertain as accurately as possible the cost
structure of significant competitors.

Internal analysis, resource capability audit and strategic position

Contributions to the internal analysis and strategic position (SWOT), discussed in section 5.3,
include the identification of financial strengths and weaknesses and the determination of any
profits gap. More importantly, indicating how big the gap could become if no action is taken
based on the balance of elements within the SWOT, for example, the incidence of significant
weaknesses and threats. Other areas where the accountant can provide substantial input include
analysis of supplier performance (section 4.10) and customer profitability analysis (section
4.7), the profitability of the product life cycle (section 4.4), and the mix and balance of product
portfolios (section 4.5). Accountants can also contribute to benchmarking exercises to identify
improvements to the effectiveness of business operations and processes (section 10.9), and
assistance in the analysis of the value creation system (section 4.9).

Options generation, evaluation, and strategic choice

The accountant can contribute to the financial and strategic evaluation of strategic options,
discussed in sections 8.3, 8.4, and 8.5. For example, by evaluating the long-term viability of
competitive strategies, such as cost leadership (section 6.3.1), and by monitoring the current
profit margins and forecasting future profit margins. In markets where the price is the main
focus of competition, watching the profit margin is an essential activity. Enhancing and
maintaining a cost advantage via strategic cost management and activity-based management
(section 6.6) is a crucial area where the accountant can provide specific expertise. The
development of lean manufacturing and lean accounting (section 6.7) has emerged to support
cost-efficient and responsive manufacturing strategies. Accountants are also able to contribute
to the maintenance of a differentiation strategy (section 6.3.2) by undertaking competitor
analysis (section 3.11) and using the value creation system (section 4.9) to identify areas where
value can be added to the product or service.
Analyzing the relative profitability of different market segments can help to identify
possibilities for organizations to pursue a focus strategy (section 6.3.3), which could be either
a cost-focus or differentiation-focus. Assisting in the evaluation of product development
(section 7.4.4) via techniques such as target costing (section 7.8), life cycle costing (section
7.9), quality costing (section 6.8), and pricing strategies (section 6.4) provides opportunities
for accountants to contribute to strategy development. Similarly, assisting in market
development strategies (sections 7.4.5 and 7.5) by evaluating the potential profitability of
entering new markets or exploiting new marketing channels can provide the management team
with valuable information on which to base strategic decisions.
A more obvious area where the accountant can contribute to the choice of strategic option
is in the financial evaluation via investment appraisal techniques, such as net present value
(section 8.5) and real options (section 8.6). The investment appraisal techniques and financial
analysis are also useful during the evaluation of the various methods for implementing the

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chosen strategy, such as evaluating potential mergers and acquisitions, and the possibilities for
joint development (section 7.10). All options involve the assessment of risk and developing
appropriate risk management strategies (section 8.7) has become more significant since the
financial crisis of 2008 and 2009.

Strategic implementation

Crystallizing strategic plans into operational budgets, discussed in section 9.3, is part of the
implementation process, but also ensuring that the information systems can provide the
information required to monitor and evaluate new strategies. All too often, organizations fall
victim to the reliance on legacy systems that are not capable of providing the necessary
information to manage the business as it grows and develops. It is also essential for the
accountant to support management by employing appropriate accounting techniques. For
example, the techniques to aid sustaining a cost leadership strategy are different from those
that will support one of differentiation. It is equally important to ensure that the use of
appropriate reporting formats (section 9.6) helps the organization understand the underlying
causes of good or bad performance and thus take appropriate action.
The preparation of budgets viewed as a traditional accounting practice has received some
criticism in recent years, and a movement known as beyond budgeting (section 9.4) is growing
in popularity. Beyond budgeting encompasses a system of setting stretch targets that strives
towards continuous improvement. Implementing such a system involves changing the way the
organization operates and often a change of culture. Indeed, adopting new strategic models,
such as the concept of the business ecosystem (section 3.13), or accounting techniques, such
as lean accounting (section 6.7), involves educating managers in understanding the insight that
the analysis and evaluation provides. Management accountants can assist in facilitating change
(section 9.5) not just for changes in accounting systems, or adopting new accounting
techniques, but for a change in strategy that may result in a shift of focus to the management
information required.

Review, evaluation, and control

Implementation feeds into the review, evaluation, and control of the current strategy that closes
the loop to the mission and objectives. The accountant of twenty years ago would have focused
mainly on reporting on actual performance versus plan. Today’s accountant, however, would
be involved in reporting on the effectiveness and continued viability into the future of the
current strategy using integrated performance measurement and highlighting any potential
emergent strategies and the need for a strategic response to any potential profits gap.
The concept of multidimensional performance management (section 10.3) and reporting
on critical success factors (section 10.3.2) are important here, as is reporting on divisional or
business unit performance (section 10.6). To ensure the reported performance of divisions and
business units accurately reflects the value-added and motivates employees, the accountant can
set appropriate transfer prices of goods and services provided between divisions (section 10.8).
Economic value added (section 10.7) seeks to provide a performance management system that

Strategy and Management Accounting – Graham Simons Pitcher 23

aids the management of an organization to enhance shareholder value and can also be used to
evaluate divisional performance by understanding where value is added or lost. Techniques
such as benchmarking (section 10.9) aid performance enhancement and the accountant can
assist in both the process of benchmarking and the subsequent monitoring of any improvements
implemented.
Performance management can be an emotive topic, particularly at an individual level, and
understanding the behavioral aspect of performance management (section 10.10) is key to
establishing the right measures to encourage the desired behavior.
An aspect of strategy and organizational performance that is highly relevant in today’s
business environment is the issue of sustainability, discussed in Chapter 11. It is becoming
popular for organizations to publish corporate social responsibility reports that report on the
implementation of environmental, social, and governance practices to demonstrate their
commitment to sustainability. Management accounting has much to offer here, as many of the
techniques discussed in this learning resource lend themselves to the inclusion of sustainability
as a consideration.

Frameworks, models, and techniques

The diagram shown in Figure 1.6 provides a summary of how the strategy models and
accounting techniques can be viewed within the strategic management framework. The models
are not fixed, and there is no intension, or desire, to constrain techniques within specific boxes.
Several models and techniques are useful within different phases of the process. For example,
many of the models and techniques used to assess an organization’s resource capabilities can
be used to determine the capabilities of the competitors, albeit with the added difficulty of
access to accurate information.
Other examples include stakeholder analysis (section 8.4), which is relevant to the
objective-setting process, as well as the evaluation of strategic options that are acceptable to
the stakeholders, and performance management to monitor the achievement of objectives.
Benchmarking can be used to support competitive strategies but is also part of performance
management. It is important, therefore, that the reader does not assume that the technique is
restricted to the box in which it is depicted. Indeed, it will be noted in the discussion of the
techniques that they are very seldom used in isolation but provide a toolbox of complementary
tools that can support the strategic management process.

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Figure 1.6 Strategy models and accounting techniques in the strategic management framework
To provide support to the strategic management process, the accountant needs to
understand how the process works and the various dynamics that impact on the implementation
and effectiveness of a chosen strategy. Likewise, managers need to be able to understand the

Strategy and Management Accounting – Graham Simons Pitcher 25

potential impact that the different strategic options available could have on the financial
performance of the organization. Part of proper strategic management, however, is spotting
potential issues before they become big problems. Many organizations have gone out of
business because they ignored the warning signs emanating from the monitoring of their current
performance relative to competitors, as well as not identifying, or worse, ignoring the changes
in the business environment.

1.12 The role of accounting data and information within strategy

Active reading. Accountants are often referred to as bean counters, that is, just dealing with
the numbers. Note, however, how this can be used positively within the strategic management
process.

While there is debate regarding the management level at which the organization’s strategy is
formulated (Balogun and Johnson, 2007; Hendry et al., 2010), there is evidence that middle
managers and accountants become involved in the work of strategy formulation,
implementation and evaluation (Dutton et al., 2001; Chenhall, 2003; Ahrens and Chapman,
2007). Not least, accounting information is inherent in the strategic management process.
Boland (1993) suggests that accountants write reports based on an interpretative reading of an
organizational situation, inevitably based on the accounting data, which are read by managers
and others. In this way - via analysis, manipulation, and interpretation - accounting data could
be used to inform, persuade, and impress others (Langley, 2007). Indeed Robson (1992) argues
that it is the properties of numbers that make them influential in that they have mobility,
stability, and combinability.
The skills of accountants enable them to use these properties to support strategic decision
making (Oliver, 1991; Coad, 1996). Formal analysis has also been shown to enhance
legitimacy with numbers taking on the roles of controlling, legitimatizing, and sense-making
(Denis et al., 2006; Whittle and Mueller, 2010). Accounting data or numbers have been used
to rationalize decisions after the event (Burchell et al., 1980), but conversely, as suggested by
Simons (1992), can be seen to trigger organizational learning by stimulating new, and often
unanticipated, strategies to emerge. There is little doubt that accounting data is used in the
strategic management process. Management accountants can use this information in
collaboration with others to make sense of organizational situations (Tillmann and Goddard,
2008).
Management accounting, however, is more than just numbers. If accountants do not
understand and participate in the strategic management process, how can they provide
appropriate information to managers? The Chartered Institute of Management Accountants
(2009) highlighted the augmented skill set of the T-shaped accountant (Figure 1.7), which
suggested that accountants need more than just the finance and accounting skills. They should
also have a combination of skills which, on the one side, are about business understanding and
strategic awareness and on the other, being able to influence people and even provide
leadership.

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 It is applying their technical knowledge and strategic awareness, together with the
development of strong interpersonal skills that enable accountants to make a significant
contribution to the strategic management process and hence to an organization’s success.

Figure 1.7 The T-shaped accountant (source: CIMA, 2009)

1.13 Strategy as practice and management accounting

Active reading. Note the viewpoint taken by supporters of the strategy as practice perspective
and how the skills and day to day activities of management accountants can feed into the
strategic management process.

More recently, in terms of academic development of the subject, there is a significant body of
literature building around the concept of strategy as practice. Adopting a strategy as practice
perspective provides some insight into how management accounting and the management
accountant, can support the strategic management process.
The strategy as practice perspective takes the view that strategy is something that the
various actors within an organization “do” rather than something an organization “has”
(Whittington, 1996). Jarzabkowski et al. (2007: 7-8) note that strategy has been defined as “a
situated, socially accomplished activity, while strategizing comprises those actions,
interactions and negotiations of multiple actors and the situation practices that they draw upon
in accomplishing that activity.” The use of the verb strategize, takes up the point that verbs
grasp the dynamic nature of the strategic management process (Whittington et al., 2006).

Strategy and Management Accounting – Graham Simons Pitcher 27

 Strategizing is broken down by Jarzabkowski (2005) into procedural strategizing and
interactive strategizing. Procedural strategizing focuses on diagnostic control – the monitoring
of strategic outcomes and taking corrective action, an activity that the traditional management
accounting practices would support. Interactive strategizing focuses on the activities of
communicating, persuading, negotiating, influencing, and sense-making in strategic
management. The skill set of the T-shaped accountant described in section 1.12 - The role of
accounting data and information within strategy, would be particularly useful in interactive
strategizing.
The aspect of sense-making activities has been reported by Tillmann and Goddard (2008:
80) in respect of management accounting practices in a multinational company when they
identified that “accountants consciously and unconsciously undertake ‘sense-making’ activities
through the strategies of structuring and harmonizing; bridging and contextualizing; and
compromising and balancing.” Accountants are good at organizing data and providing structure
to data such as reporting by cost centers, thus making it more manageable and less complicated
for the users of the information. Harmonizing activities, such as using accounting policies and
rules, allows comparisons of data on a meaningful basis. Concerning comparisons, bridging
activities take place by comparing data from one period to another, and spatial comparison
provides an analysis of information across sectors, competitors, and within the organization
across business units. Contextualizing occurs when comparing data for a specific purpose, such
as benchmarking exercises. Compromising and balancing is used when there is a lack of
accurate information, and it is necessary to use the best possible alternative or best estimate.
The accountants can use their professional experience and know-how to provide information
that is relevant to inform the decision-making process.
Cuganesan et al. (2012: 257) identified that “management accounting created shared
understanding by objectifying, mobilizing and connecting strategic concerns across strategic
practices and practitioners.” In other words, management accountants are good at bringing
together information from different sources, both financial and nonfinancial, to aid decision
making in all disciplines. It is often the case that in small to medium-sized enterprises (SMEs),
the accounting department is responsible for pulling together the management information
from various functional departments and issuing a monthly reporting pack to senior managers.
Accountants also help identify and develop strategic priorities. Indeed, the development
of strategic management accounting practices to support the strategic management process
demonstrates a reciprocal relationship between strategic management and management
accounting practices. These activities would fall with the mediating and shaping role described
by Cuganesan et al. (2012). This role reinforces the need for management accounting to
support the strategic management process and for accountants to work closely with functional
managers of all disciplines and strategic business units to formulate, evaluate, and implement
the strategy.
It is suggested that strategizing practices include strategic planning, resource allocation,
decision making, and strategic change – all activities that accounting information can support,
and all practices that occur within the strategic management process. So, where do accountants
have the most impact? Dixon (1998: 273) suggested that the “identification, formulation and
implementation of strategy by management is carried out using the techniques and language of
the management accountant.” He goes on to suggest that the “strategic decision-making process

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can influence the procedures of management accounting and the design of management control
systems in order to aid the control of strategy.” These observations imply that the focus is on
the monitoring of strategy for control purposes, whereas Dixon was postulating that the
accountant can be involved in all aspects of the strategic management process. Skærbæk and
Tryggestad (2010) noted that accounting devices had a role in the formulation of strategy and
helping to shape the various strategic options. Aver and Cadez (2009) found that, apart from
the monitoring and control activity, the most likely areas for involvement was in the evaluation
of strategic options and developing details about the strategic options activities. This learning
resource is written on the basis that management accounting can contribute throughout the
entire process of strategic management.
Whittington et al. (2006) highlight that the strategizing process encompasses the hands-
on, practical skills of the strategists. Pye (1995) had earlier provided evidence that the
strategist’s skills (the practices and use of artifacts) can mean the difference between success
and failure of a strategy. While this learning resource argues that accountants possess a skill
set that can make a significant contribution to the activities of strategizing, Ahrens and
Chapman (2007) noted that the skills required take time to develop, and can only really be
learned on the job, emphasizing the practical nature of strategizing. The mind-set of the
accountant, and indeed the culture within an organization, can also influence the contribution
made to strategizing, as accountants that believe they have something significant to contribute
will be more likely to adopt a strategic approach to the management accounting activity, and
hold a desire to become involved in the strategic management process (Hutaibat et al., 2011;
Pitcher, 2018; Hutaibat, 2019). It has also been found by Kalkhouran et al. (2017) and Pitcher
(2015) that the degree to which the chief executive officer is supportive of the accounting
function being involved in the strategic management process can have a positive influence on
the use of strategic management accounting.

1.14 The 3 Ps of strategy as practice

Active reading. Note the difference between practice and praxis. Praxis can mean ‘practice’
as distinct from theory, that is, the application of knowledge or skill in a practical way, but with
habitual use, it becomes the standard custom and practice, and part of the culture, both of the
organization and the profession. Note how the training of accountants and the use of accounting
techniques feed into the praxis of strategy.

As Whittington (1996) states, strategy as practice is concerned with the doing of strategy.
Strategy as practice focuses on the praxis, practices, and practitioners of strategy – what
Whittington refers to as the 3Ps (Whittington, 2006a). Practice is defined by Reckwitz (2002:
249) as “routinized types of behaviour which consists of several elements inter-connected to
one [an]other: forms of bodily activities, forms of mental activities, ‘things’ and their use, a
background knowledge in the form of understanding, know-how, states of emotion and
motivational knowledge.” In a strategizing context, Whittington (1996: 732) suggests that
practice is concerned with “… all the meeting, the talking, the form-filling and the number-

Strategy and Management Accounting – Graham Simons Pitcher 29

crunching by which strategy actually gets formulated and implemented.” In this respect, the
preparation, interpretation, and the putting to use of management accounting information could
constitute practice, particularly in the sense that many individuals within an organization
perform strategy work (Grant, 2003), much of which is mundane, everyday activities, involved
in implementing the strategy.
Accountants would fall neatly within the definition of practitioners - those people who do
the work of strategy (Whittington, 1996; Jarzabkowski, 2005), and the activities and practices
of accountants fall neatly within the terminology of strategy as practice. The budgets,
spreadsheets, and numerous reports produced by accountants constitute artifacts – the stuff of
strategy, as defined by Jarzabkowski et al. (2013). These artifacts become imbued with
knowledge and invested with meaning as they are developed and continually changed and
updated, the various components often being used by multiple individuals for different
purposes. The business plans and forecasts of future outcomes in which accountants are often
heavily involved would constitute strategy texts, as defined by Fenton and Langley (2011). The
accounting techniques and their output from activities such as gathering, analyzing,
interpreting, and reporting could be viewed as knowledge artifacts, as defined by Jarzabkowski
and Wilson (2006).
Professional accountants undertake a rigorous qualification process as part of their
training. This training enables them to bring a specific kind of expertise and thinking to the
strategizing process. As Schatzki (2005: 480) suggests, “different combinations of a practice’s
organizing elements are incorporated into different participant’s minds due to differences in
participants' training, experience, intelligence, powers of observation and status.” Therefore,
management accounting practices and their use by management accountants with their training,
defined in part by professional accountancy bodies, forms part of the practices of the profession
that impact on the organization. These practices adopted by the practitioner accountants impact
on the collective experiences and thus become part of the praxis, (the process of using a theory
or something that you have learned practically) or standard routine practices (Whittington,
2006b).
Fauré and Rouleau (2011) undertook case study research investigating the interactions
between accountants and managers in preparing budgets. They noted how the participants'
practical knowledge of strategy helps to shape the numbers and interpretation when using
numbers as part of justifying local projects, both internally within the organization and to
external partners. They highlight the use of numerical analysis in the justification of strategic
decisions and the way different viewpoints, experiences, practical knowledge, interactions, and
discourse between managers with different functional responsibilities, other than accountants,
can be brought to bear on the decision-making process. This example illustrates that
accountants, working closely with other managers, can contribute to the process of strategizing.
Management accountants regularly produce information to reaffirm that the strategy is
working or to indicate a need for action. Techniques such as budgetary control become part of
the culture of the organization. Indeed, one of the criticisms of management accounting is that
information is produced on a routine basis only because it always has been. The traditional
techniques and practices have been passed through generations of managers, even if they are
no longer appropriate for the current business model (Johnson, 1992). That said, the idea of

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management accounting forming part of the praxis associated with strategizing is relevant in
that the contribution of management accounting, as Whittington (2002: 2) says, the practice
becomes “…[part of the] routines and formulae of the formal strategy process, laid down in the
corporate culture and systems of how the enterprise formulates, implements, and evaluates
strategy.”
As practices become embedded within the culture of an organization, they can be passed
on and acquired tacitly by newcomers (Martin, 2002). The techniques of management
accounting have, therefore, in terms used by Bourdieu (1990) - a principal author about
practice, become part of the habitus. Habitus is embodied within individuals (Hurtado, 2008)
but at the same time becomes part of the collective experience of individuals with similar
socialization or within the same class (Whittington, 2006b); in other words, part of the culture
of an organization or profession. This observation implies that the theories and practical
management accounting support provided to managers over a period become part of the culture
of the organization. This phenomenon may add some support to why organizations are reluctant
to adopt new strategic management accounting techniques.
We could be seeing the beginnings of an isomorphic element. Just as firms in the same
industry display similar strategic responses over time (Spender, 1989), the training and
recognized practices of accountants passed on via their training and the attainment of a
professional qualification can help to develop the body of accepted practices as a form of
normative isomorphism associated with professionalization (DiMaggio and Powell, 1983).
That is, as the professional syllabi include more of the new techniques described as strategic,
they are more likely to be adopted by newly qualified accountants taking up employment in
different organizations. Once organizations report the use of newer techniques and the
performance benefits, more organizations in the sectors will follow suit, and their use becomes
part of the standard practice.
The strategy as practice framework of praxis, practitioners, and practice is, therefore, of
value to understanding how management accounting can support the strategic management
process. Remembering that the term strategizing refers to a hands-on, practical activity of
enacting the strategy helps to provide insight into how the practice of management accounting
can contribute to that process. As Nixon and Burns (2012: 235) suggest the “effectiveness of a
combination of management accounting techniques, or SMA systems, depends very much on
how it is used and on the extent to which it is a part of the organizational process that manages
the formal, semi-formal and informal information and communication systems.”

1.15 Summary

Definition of management accounting

Management accounting is about providing information to enable managers to manage. As

managers make decisions at all levels in the organization, that is, operational, tactical, and
strategic management accounting should support all levels. The term strategic management
accounting was introduced to encapsulate techniques that were useful for supporting strategic

Strategy and Management Accounting – Graham Simons Pitcher 31

decisions. Still, as yet, that is no agreed definition of strategic management accounting, nor has
the term become part of the terminology of practicing accountants. There is, however, an
agreement that management accounting should support the strategic management process and
that there should be a more external and future orientation to the information provided.

Strategic management

The term strategic management recognizes the complex and dynamic nature of the business
environment. Strategy is not just the setting of a long-term plan but the continuous process of
managing the organization through turbulent and uncertain events. Strategic management is an
iterative and social process that involves all levels of management. Organizations can develop
a strategy by reference to external factors such as positioning the organization in the market to
meet particular customer demands, or by exploiting a distinctive competence from within the
organization, or indeed both.
A key aspect is the recognition and crafting of emergent strategies. Not all emergent
strategies, however, are right, and part of the success of organizations is understanding the
business and the environment in which it operates to ascertain which strategies are worth
pursuing and which need to stop. Understanding the market is also crucial to being able to
assess which changes in the environment represent potential opportunities or threats and
formulating and implementing an appropriate strategic response.

The strategic management process and management accounting

The strategic management process consists of key phases of analysis, generation, and
evaluation of options, implementation and review, evaluation, and control. Management
accounting can support each stage via a range of techniques. The umbrella term of strategic
management accounting covers many of the techniques discussed in this learning resource, but
this does not mean that the everyday activities of traditional accounting do not support strategy.
Many strategic decisions, such as new product development, or entering new markets, rely on
sustaining a sufficient margin, or an acceptable breakeven point, on ensuring that the venture
is viable. Neither the calculation of profit margin nor breakeven point would be considered a
strategic management accounting technique.

Strategy as practice

Strategy as practice is concerned with the day to day enactment of strategy. It is what managers
do, rather than what they plan to do. The term strategizing encompasses the activities of doing
strategy. The three Ps of praxis, practices, and practitioners used by promoters of the strategy
as practice perspective can be used to describe the day to day support provided by the skill set
of practicing qualified professional accountants. The skill set is kept up to date via continual
professional development and learning on the job through the interaction with other functional
specialists. Management accounting can and should support all levels of management
throughout the entire strategic management process.

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1.16 Review questions

(1) What is the purpose of management accounting?

(2) What do you understand by the term strategic management?
(3) Outline a rational approach to the strategic management process.
(4) What do you understand by the term strategic management accounting?
(5) Why has the concept of SMA been developed?
(6) What are the main criticisms of traditional management accounting practices?
(7) Briefly outline the inside-out and outside-in views of strategy development.
(8) What do you understand by the concept of emergent strategies?
(9) Critically evaluate the contribution that management accountants can make to the
strategic management process from a strategy as practice perspective.
(10) Briefly discuss the skill set required by management accountants in today’s business
environment that would enable them to contribute to the strategic management process.

1.17 Case study activity 1 – HW Inc. Approach to Strategy

This activity refers to the case of HW Inc., described in Appendix A of this learning resource.

Read sections A1 to A8 to familiarize yourself with the case. Then focusing more on
sections A5 – A8, determine whether you think that HW Inc. has adopted a rational approach
to strategic management? Do you believe that HW Inc. is taking an outside-in or an inside-out
approach? Is there any evidence of emergent strategies? Give reasons for your assessment
citing evidence from the case study information.
[Note: There is no one right answer to these questions as there is often a degree of
subjectivity in how the information is interpreted. It is important, therefore, that you adopt the
practice of justifying your views with supporting evidence.]

1.18 References
Agasisti, T., Arnaboldi, M. and Azzone, G. (2008) ‘Strategic management accounting in
universities: The Italian experience’, Higher Education, 55(1): 1–15.
Ahrens, T. and Chapman, C. S. (2007) ‘Management accounting as practice’, Accounting,
Organizations and Society, 32(1–2): 1–27.
Al-Abdel, S. and McLellan, J. (2013) ‘Strategy and Management Accounting Practices
Alignment and Its Effect on Organizational Performance.’, Journal of Accounting,
Business & Management, 20(1): 1–27.
Alamri, A. M. (2018) ‘Strategic Management Accounting and the Dimensions of Competitive
Advantage: Testing the Associations in Saudi Industrial Sector’, International Journal of
Academic Research in Accounting, 8(2): 48–64.
AlMaryani, M. A. H. and Sadik, H. H. (2012) ‘Strategic Management Accounting Techniques
in Romanian Companies: Some Survey Evidence’, Procedia Economics and Finance, 3:

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