Advances In Management Vol.

11 (3) September (2018)

Case Study:
The Influence of Strategic Management accounting on
Iraqi Service Companies' Performance
Timimi Suhail A.L.
Department of Accounting, College of Administration and Economics, University of Basra, IRAQ
[email protected]

Abstract Increasing local and global competition, globalisation,

Organizations use management accounting technological advancements and increasingly demanding
information in a variety of ways, especially customers, have all contributed to environmental uncertainty
management accounting information, significantly within the services industry and have modified the
characteristics of competition in the wide world,4,34 in
contributes to the effective functioning of management
particular, in the Iraqi marketplace. For example, in the last
process. Furthermore, management accounting two years, three new banks have been established in Iraq.
information contributes to the organization’s However, under such a progressively competitive
performance by providing feedback on the environment, Iraqi services companies need to strive to
implementation of strategic plans and completion of remain competitive and to achieve better performance.
jobs. But the new management accounting system due Therefore, services companies should be able to generate
to its strategic characteristics (i.e. externally and and utilise more strategic information regarding the external
future-oriented) may overcome many of the weaknesses and future events to support and update their business
of conventional management accounting systems; it strategy and accomplish higher levels of organizational
still lacks a solid base of empirical studies. The main performance.31,32,40,44
objective of this study is to determine the effect of
In a more theoretical vein, the fundamental assumption in
Strategic Management Accounting on Iraqi Service contingent-based accounting studies is that superior
Companies' Performance. organizational performance depends on the fit or match
between accounting information systems (AIS) and other
This study uses a quantitative method; the quantitative contingent factors (such as environmental uncertainty,
data are collected by questionnaire. The total selected business strategy, firm size etc.). Accounting information as
sample size for the quantitative approach was 127 output of accounting system, especially management
companies. The research found that the Strategic accounting information, significantly contributes to the
Management Accounting influence on companies’ effective functioning of management process. The essence
performance could be used as subjects of references. of such functioning centres decision-making is planning,
Company management should understand the organizing, directing and controlling. To meet this need,
management accounting system provides management with
importance of accounting information for strategic
information that focuses on decision making.37
decision making.
Organizations use management accounting information in a
Keywords: Management Accounting, Financial variety of ways. Belkaoui7 characterized four usage types,
Performance, Iraqi Service Companies. namely to help management planning, to facilitate
organizational problem solving, to aid the examination of
Introduction control functions and to facilitate operational systems
The services sector plays an important role in the economic management. Other authors have classified these four types
development of any country.45 It has been internationally into two usage streams, namely to evaluate managerial
accepted that the services sector contributes up to 20% of the performance and to assist managers in making decisions.62
global economy and specifically in Iraq, the ratio of the
profits from the services sector amounted to 72% of the Iraqi Furthermore, management accounting information
market in 2008 (Iraq Stock Exchange Report, 2015). The contributes to the organization’s performance by providing
Iraqi services sector has seen many developments that put it feedback on the implementation of strategic plans and
equally with those of the developed countries.51 This sector completion of jobs. Specifically, appropriate MAS can help
is considered as the most important sector that supports the managers be aware of and address organizational
gross domestic product (GDP). Compared with other expectations: customers‟ needs, competitive markets, or
economic sectors, such as manufacturing industry and internal organizational goals.52 In addition, ex-ante
agriculture, it has contributed more than 65% to GDP in information can assist in meeting organizational challenges
2009. Furthermore, more than 79% of the Iraqi labour force resulting from competing market faced by the organization
is working under the services sector while less than 25% of and supports its value-added efforts relative to its
labour force is working under other sectors such as competitors.8
manufacturing industry and agriculture.
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Advances In Management Vol. 11 (3) September (2018)

The characteristics of SMA overcome the failings of Lord46 identified three elements of SMA: collection of
conventional management accounting systems by providing competitor information, utilization of cost decreasing
the appropriate information for today’s contemporary opportunities and matching of accounting emphasis with
business environment to get competitive advantages.58 Thus, strategic position while others referred to SMA in terms of
SMA enhancement to the traditional and internal-oriented accounting for strategic positioning, an idea which is very
approaches of MAS is necessary to meet the special needs of closely linked to Porter's concept of competitive advantage.
contemporary business management, especially on strategy SMA is one of number of different generic approaches that
implementation and execution. While, there is a growing are found within the overall theme of accounting for
interest to introduce SMA as the new management strategic positioning.
accounting system due to its strategic characteristics (i.e.
externally and future-oriented) that may overcome many of Guilding, Cravens and Tayles26 believed that the SMA
the weaknesses of conventional management accounting practices should have at least one of the following
systems, it still lacks a solid base of empirical studies.11 characteristics: an external business environmental
orientation, a marketing orientation, a competitor focus and
In addition, some empirical studies that tested the a long-term orientation for the future. Roslender and Hart58
relationship between SMA and companies‟ performance defined SMA as a generic approach to accounting for
showed mixed results and rendering this relationship still strategic positioning, attempting to integrate insights from
ambiguous.2,11,49,56 Therefore, this study aims to examine the management accounting and marketing management within
relationship between the level of SMA and performance of a strategic management framework. However, there is still
Iraqi services companies. limited consensus about what constitutes SMA.11 This
inconsistency in conceptualizing SMA and what would be
Strategic Management Accounting the contents of the SMA has promoted researchers to
Since Simmonds61 coined the term of SMA in his corner investigate which Management Accounting techniques carry
article at the beginning of 1980s, several authors had strategic orientation and consequently should be shown as
followed him to refine the SMA concept and this show of the SMA technique.
concern on the SMA concept is because of the strong
evidence regarding SMA‟s connection in both management Guilding et al26 assessed the usefulness of “competitor-
accounting and marketing management.26,58 In 1981, focused accounting” (CFA), taking into consideration the
Simmonds61 has created the term SMA as an analysis of three factors (strategic mission, competitive strategy and
management accounting data including information about company size) along with five CFA practices including
the business and its competitors, with the purpose of competitor cost assessment, competitive position
developing and monitoring business strategy. In his work, monitoring, competitor appraisal based on published
Simmonds61 identified SMA by its external emphasis that financial statements, strategic costing and strategic pricing.
focuses on competitor information. The findings showed that all five practices had higher
perceived usefulness scores, in addition to the fact that the
Bromwich8 defined SMA as the provision and analysis of use of CFA was found to be significantly related to
financial information on the company's product markets, competitive strategy, strategic mission and company size.
competitors' costs, cost structures and the monitoring of
strategies of the enterprise and its competitors over a period Guilding et al26 provided an original set of SMA techniques.
of time. According to Bromwich8, SMA extends beyond They also described the criteria for considering particular
simply collecting data about the business and its competitors accounting techniques as “strategic.” It is noted that much of
by seeking to evaluate the organizational competitive the conventional management accounting were based on a
advantage or value added, relative to that of the competitors one-year period and the focus tends to be predominating.
and to evaluate the benefits to the organization over a long- These characteristics do not agree with strategic orientations.
term horizon. The main characteristics of SMA as a strategy imply a long-
term future orientation period and an externally focused
Further definition of SMA was followed by Bromwich and perspective. The authors consequently argued that such
Bhimani.9 They viewed SMA as the provision and analysis characteristics could be a useful tool in determining
of financial information on the organization’s product accounting techniques suitable for SMA. From this
markets, competitors’ cost, cost structures, monitoring of the perspective, the techniques should embody degrees of these
organizational strategies and of their competitors in the two orientations – external business environment (outward-
market over more than one time period. Tomkins and Carr63 looking) and/or long-term (forward-looking). That was how
viewed SMA as lacking a general conceptual framework. Guilding et al26 gathered twelve SMA techniques from the
Similarly, SMA is an emerging management accounting area literature, then Cravens and Guilding12 added another three
with no exact identity and having an uncertain development techniques.
in the future.
The more recent study done by Cadez and Guilding11
emphasized the participation of strategic accountants in
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Advances In Management Vol. 11 (3) September (2018)

cross-functional teams and SMA practice of guided Moreover, Forza and Salvador19 defined performance
management accounting with emphasis on operational measurement systems as an information system that supports
issues. This view is shared by many other authors who agree managers in the performance management process generally
that this shift had led to many new terms such as "strategic accomplishing two main purposes. The first one is related to
accounting." They have also defined new active roles for enabling and structuring communication among all the
accountants such as being key players in analysing broader organizational units (individuals, teams, processes,
business management and in counselling customers. These functions, etc.) involved in the process of target setting. The
roles had not been assigned to them before. second one is that of collecting, processing and delivering
information on the performance of people, activities,
Cadez and Guilding11 further drew sixteen SMA techniques processes, products and business units.
from these works and they classified these techniques into
five broad categories with three categories embodying Ittner, Larcker and Randall38 pointed out three dimensions
themes of management accounting discussed in for performance measurement systems. First, they provide
management accounting literatures. They are (1) costing, (2) information that allows the firm to identify the strategies
planning, control and performance measurement and (3) offering the highest potential for achieving the company's
decision-making. The other two categories were “competitor objectives. Second, they align management processes, such
accounting” and “customer accounting.” as objectives setting and decision making. Third,
performance evaluation was done with reference to the
However, the focus of this study was the related information accomplishment of the chosen strategic target.
on firms‟ customers that was obtained externally. The main
reason behind the selection of this information was because In fact, there have been too many authors who have
customer-focused techniques or customer accounting (which illustrated the term performance measurement systems.17
yield information regarding the customers) are the most However, performance measurement has an important role
widely applied techniques in the services sectors.10 in an organization and it should be chosen according to the
Moreover, the importance of identifying which customers contextual variables, such as strategy, environment
contribute to an organization’s profit had been given a lot uncertainty, technology and so on.
attention of researchers. In addition, there was the idea
which says that not every unit of revenue contributes equally However, while the idea of organizational performance is
to profits; some customers are more profitable than comparatively easy to understand, it is difficult to measure
others.41,59 and evaluate. This difficulty is evidenced by the on-going
debate on whether performance is a one-dimensional
Organizational Performance concept or a multi-dimensional one, whether it should be
Organizational performance has been presented as an measured by qualitative or quantitative data, whether it
essential dependent variable in accounting-based involves objective or subjective data.15,48 In this regard, it is
contingency researches as it gives the means for determining worth here to differentiate between the objective and
the suitable fit between the organizational accounting subjective data method; objective data refers to the data
information systems design and its contextual variables.13,33 which have been given by the organization, while the
Furthermore, most of the related studies look for variables subjective measurements call upon the perception of the
that create variations in organizational performance.48 The respondent.15
general idea of the concepts of organizational performance
is focused on either efficiency or effectiveness, because Information regarding performance is significant in diverse
organizations should be profitable in the long run to ways to the different stakeholders within a business. For
survive.48 example, owners and investors are interested in company
performance to ensure that their investment decisions are the
Nevertheless, by its nature, performance measurement right ones. Managers look at the performance of a company's
systems cover various subjects, thus, encouraging this study subunits as a technique of prioritizing the allocation of
to investigate it from different perspectives such as resources.16
accounting information systems and operations
management. For example, Otley57 looked at performance In a strategic sense, performance measurement is seen as a
measurement systems from a management accounting point significant approach of keeping an organization on its way
of view as system that provides the information thought to in realizing the organization's targets. In addition, it is a
be useful to managers in performing their jobs and to aid monitoring system employed by the owners of an
organizations in developing and maintaining practical organization where ownership and management are
patterns of behaviour. Neely, Gregory and Platts54 defined separated.39 Performance measures have to link with
performance measurement systems as “the set of metrics business strategy to be effective. This view is supported by
used to quantify both the efficiency and effectiveness of number of researchers who noted that performance measures
actions.” need to be based on a business's strategic objectives for

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Advances In Management Vol. 11 (3) September (2018)

employees to realize and be committed to the ability to explain future performance. These characteristics
accomplishment of those objectives.6 are not matching with contemporary environment such as
competitiveness and high technologically changes.14
However, strong arguments are saying that the main Furthermore, financial performance measures that were
performance measurements would usually include some designed to work in a stable environment become no longer
mixture of indicators across two broad categories: financial useful in current environment.22 Abernethy and Lillis1
indicators and nonfinancial indicators.14,40,42,43 Thus, the claimed that financial performance measures lack
current study has used financial performance measurements integration with the organizational strategy.
to evaluate organizational performance in this study.
Moreover, with exclusive focus on efficiency (e.g. cost
Financial Performance Measurement Systems minimization or profit maximization), it is anticipated that
Accounting literatures have used and they depended mainly financial performance measures would fail to demonstrate
on financial performance measures to assess the other strategic dimensions of customers such as quality,
organizational performance. However, Otley57 pointed out flexibility. Although, all these weaknesses of using the
three major functions of financial performance measures. financial performance measures that have been mentioned,
The first function is that financial measures of performance other authors still believe that the firms should continue to
are the tools of financial management. Second, it is the most use financial performance measures,57 but it must be coupled
important objective measurement for the organizational with nonfinancial indicators that are based on the
performance. Those measures such as return on investment organization strategy, marketing research and external
(ROI) are used to show the accomplishment of an important environments.32
company’s objectives only. The last function of financial
performance measures is that it is considered as a The current study has applied the use such financial
mechanism for motivation and control within the company. performance measures following the related studies.31,36
On this point, it provides financial information to support the Financial performance, therefore, is conceptualized as “the
process in the firm by identifying which specific operations level of company’s financial performance relative to their
are well managed through classification of their inputs and major competitors over the last three years.” Meanwhile, the
outputs in financial language. financial indicators that have been used in this study are
ROI, ROE, sales growth and operating profit.36
However, the concept of organizational performance is in
general centred on either efficiency or effectiveness. Since Review of Literature
organizations must, in the end, be profitable to survive, The existing literature shows that the usage of broad scope
financial efficiency in some form (e.g. gross margins, net MAS information helps managers in reducing high levels of
margins, ROI, relative profitability etc.) is usually used as an job complexity and uncertainty and leads to successful
eventual result when performance is included in research.65 decisions.18 This is because extensive use of broad scope
MAS provides managers with multiple options to manage
According to Chenhall and Langfield-Smith,14 the most their business, resulting in a dramatic improvement in
commonly used financial ratios are the ROE and ROA. ROE managers' understanding of their and organizational
measures profitability from the shareholder’s viewpoint. performance.5,18,25
ROA defined as net income divided by average total assets,
measures company profits per dollar of assets. In addition, Studies in the manufacturing industry found empirical
ROE is a summary measure of company performance. evidence that supports the positive relationship between
According to Sinkey,60 the best measures of a firm's overall managers' use of the conventional management accounting
performance are the profitability ratios, ROE and ROI. information and organizational performance.20 This
empirical evidence present in the manufacturing industry
Notwithstanding the importance of financial performance may not be relevant in the services sectors.52 Also,
measures, it becomes less useful without a link with some conventional management accounting information has
nonfinancial performance indicators. This is because those become under strong criticism by scholars and
financial performance measures are facing critical criticism practitioners22,24 as being internally rather externally
from many academics. Traditional methods of revenue-costs focused, ex-post oriented (related to past events) rather than
matching and short-term profit measures had become ex-ante (related to future events), financially oriented and
unreliable performance measurements due to decreased according to Wilson,67 emphasizes short-term goals.
reliance on direct labour, increased capital intensity and
increased contribution from capital and resources. In Even though conventional management accounting systems
addition, financial performance measures are easily provide important information to decision makers, they
manipulated by managers.32 frequently fail to report relevant, useful and timely
information that creates the components of competitive
In general, financial performance measures are advantage as well as supports business strategy.61
predominately “backward-looking” and lack predictive Increasingly they have been unable to provide useful
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Advances In Management Vol. 11 (3) September (2018)

information to address a current competitive environment. management accounting information usage influences
Conventional management accounting systems are not effectiveness in decision making and organizational
sufficient to maintain services companies‟ long-term performance.5,11,20,35,55 For example, Cadez and Guilding11
competitiveness.24,52 However, MAS must add an external hypothesized the direct relationship between SMA usage
focus such as customers' perceptions of value in addition to and organizational performance and they gave the rational
the traditional inward emphasis of the accounting analysis, link for this relationship. They have argued that the major
planning and control. purpose of an accounting information system is to provide
information to help the mangers on the implementation of
The situation with conventional management accounting plans, completion of their job, support the mangers in the
promoted management accounting researchers to introduce decision-making process and enhance the organizational
strategic management accounting (SMA), to overcome the performance.
inability of conventional management accounting to provide
the long-term orientation, external and ex-ante Chong and Chong20 have hypothesized the direct
information.11,26 relationship between the usage of MAS information and
organizational performance; they assumed that MAS
Despite many authors showing intense interest in SMA information would aid the managers in their decision-
overcoming the weaknesses in conventional management making process and enhance the organizational
accounting systems,11,26 there remain many neglected issues performance. Then, Henri investigated the direct association
in the SMA literature. There are few empirical studies on between the usage of management control system and
SMA that demonstrated its efficacy.11,21 Several studies have organizational performance. In his study, Henri35 implicitly
measured SMA techniques by using one signal item assumed that the usage of management accounting
(question) in the questionnaire for each technique10,11,28,49 information for decision making has a positive effect on
and such methods tend to increase the possibility of bias.50 organizational performance. In addition, Jais30 also assumed
a direct link between the usage of management accounting
Furthermore, the majority of previous studies did not give information and performance. According to Baines and
sufficient attention to nonfinancial indicators, but focused on Langfield-Smith5 management accounting information
financial performance or overall performance, a practice helps managers reach informed decisions and enhance
widely criticised due to its internal and historical focus, organizational performance.
which is more likely to be manipulated by managers.32 Those
financial measurements are considered as not to give a clear A negative relationship was found between several strategic
picture of an organization’s performance, unless it is coupled control practices (such as market research, benchmarking
with nonfinancial indicators.14 In addition, a few empirical and strategic audits) and performance. Chong and Chong20
studies that examined the relationship between SMA and found MAS played a role in the relationship between
organizational performance provided mixed and inconsistent strategy choices and performance. The study showed that the
results.11,49,56 broad scope of MAS information positively affects the
performance. Gul Glen and Huang29 have investigated the
Relationship between SMA and Organizational relationship between MAS and organizational performance
Performance and their finding showed that there is positive relationship
The direct relationship between information use and between MAS and organizational performance.
organizational performance has been assumed in many areas
such as in the field of management information systems64 Methodology
and in marketing.23,53 However, this assumption has mostly The sample size is 127 service companies listed from Iraq
been confirmed in the management accounting systems Stock Exchange used as the sampling frame for the current
literature as well.3,5,11,20,33,55 These studies have study. This study uses a quantitative method; the variables
hypothesized a direct relationship between management are measured based on the questionnaire. SPSS (Statistical
accounting information and performance. Even in the study Package of Social Science) version 20.0 will be used in the
conducted by Henri,35 who deliberately assumed an indirect analysis of the data. The data collection was processed
relationship between use of management accounting through different statistical techniques such as (Descriptive
information and performance, the empirical data did actually Statistics, Correlations Analysis and Multiple Regressions).
provide support for a direct relationship.
Descriptive Statistics: Table 1 shows that financial
The common assumption regarding the direct relationship performance was high in organizational performance (mean
between management accounting information usage and = 4.56, SD = 1.55). On the other hand, the table revealed that
organizational performance has been supported by most of the mean SMA is mean = 4.26, SD = 1.46).
the studies that have been examined. The assumption on the
direct relationship between information use and Correlation Analysis: Correlation analyses (table 2) were
performance, especially, the positive influence of applied to determine the degree to which the variables are
information use on the performance is that the extent of related. It determines how well the estimated equation
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Advances In Management Vol. 11 (3) September (2018)

actually describes the relationship. The correlation between In this study the hypothesis that was set before the analysis,
SMA and F-P is shown in table 4. The report showed that showed acceptance for the variables proposed in this study;
SMA has positive relationship with F-P with values (.310). the hypothesis was supported.

Regression Analysis: In order to test hypotheses that The Impact of SMA and Financial Performance
postulated positive relationship between independent SMA is one of the most important factors that impacts on the
variables (SMA) and dependent variable (financial organization performance.5,11 The current study evaluated
performance), there was one step of hierarchical regression the level of financial performance of Iraqi services
equation that was carried out. In step one, the independent companies. The current study contributes to the literature by
(predictor) variables were introduced to test their marginal offering detailed evidence of the level of financial
effect on the dependent variable. performance of these companies. The level of performance
of services companies in Iraq was shown by using
A report on table 3 with R square value of .130 for SMA, the descriptive statistics. The results of the current study drew
R square value is explaining 13.% from independent conclusions regarding the financial performance of Iraqi
variables on dependent variable (Financial Performance).
services companies that had contributed to the existing
Table 4 was found that SMA has positive relationship with research. Financial performance measured by monetary
the financial performance, (-.189). The result showed that metrics (such as return on equity, return on investment and
the internal review has a significant impact on financial operating profit) was rated higher than other performance
performance where it was at P<0.01, β=0.191. It shows that dimensions and indicated that Iraqi services companies
the larger is information of SMA, the higher is performance. ranked financial performance rated as above average. This
Therefore, this hypothesis has been supported. This result result is entirely expected as the main objective of business
gives support for the assertion that the SMA characteristics is to maximise profit.
lead to the creation of performance on financial.
Nevertheless, a closer look at the characteristics of Iraqi
Table 1 services companies showed that about 40% of the companies
Descriptive statistics of variables had been in operation for more than 3 years well established
and stable in Iraq. Such well-established companies
Variables Mean Std Deviation normally have relatively higher financial performance.
SMA 4.26 1.46
F-P 4.56 1.55 This result was justified by the World Competitiveness
Note: All the variables were measured using a 7-point Likert Yearbook, 2009 which showed that Iraqi companies have
scale with (1 = not at all, 7 = to a greater extent) had stable financial performance for last few years.
However, there are increasing criticisms that the financial
Table 2 performance measurement system of relying solely on
Correlations Analysis performance measurements are focused on internal and
SMA F-P historical aspects rather than having external focus and being
SMA 1 future-oriented. In addition, previous studies have pointed
out that the role of short-term financial performance
F-P .310 1 measurement systems has been undermined by rapid
**. Correlation is significant at the 0.01 level (2-tailed).*. changes in technology and competitive business
Correlation is significant at the 0.05 level (2-tailed). environment14,32 and organizational performance should also
be evaluated on nonfinancial performance measurements
Table 3
which are considered as leading indicators to future financial
R Square of SMA
performance.
Model SMA
R Square .130 In the current study, market performance indicators. Iraqi
Sig F Change .000 services companies ranked market performance highest,
after financial performance, with mean value of 4.56, which
Table 4 indicates market performance was rated above average. In
Regression Result: Relationship between SMA and addition, the qualitative results ranked the market
Financial Performance performance in the second rank after financial performance.

Financial Performance However, the relatively low market performance level

Standardized Coefficients among Iraqi services companies could be a result of the
Independent Variable Beta dynamic actions that have been taking place in the Jordanian
SMA .191 market, making the process of estimating a firm’s market
performance difficult, costly and time consuming. These
findings from the present study are in line with that of some
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Advances In Management Vol. 11 (3) September (2018)

previous studies28,56 and contrasted with other works on performance on financial. This is significant for at least three
accounting technique usage, such as that of Lord, Shanahan parties i.e. companies’ managers and the relevant
and Nolan47 who found that customer accounting technique authorities’ bodies, to strategize on containing the existence
usage was below the midpoint on a 7-point Likert scale and of the financial performance in firms by accordingly
that of Cadez10 who found that two out of three customer controlling the selected characteristics, hence help services
accounting techniques measured below the midpoint on a 7- company management understand the importance of
point Likert scale. The reasons behind their findings may be accounting information for strategic decision making.
explained by their research design which used one single
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