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Structure, formality and the importance of financial and non-financial information in strategy development and implementation

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The strategic management literature indicates that there is high variety in the form and nature of strategic processes within organizations. By contrast, writers on strategic accounting tend focus on the structure and formality of strategic activities and call for a balance of financial and non-financial information to support strategic processes. This study explores the conceptual basis for this perspective and also investigates empirically whether such characterisations hold in practice. The empirical part of the study draws on questionnaire responses by senior corporate accountants and interviews held with a subset of respondents from this group. The results indicate that strategy development and implementation activities tend to be structured and formal, and while greater emphasis is placed on financial information in strategy implementation, in strategy development both financial and non-financial information are used. Differences however prevail across firms as to what is considered to be strategic and the role played by financial and non-financial information varies across companies. A high degree of organization specificity also exists in the uses of strategic accounting information. The study found support for normative ideals within the firms investigated but high organizational particularity also pervades the deployment of strategic accounting information.
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  Management Accounting Research 18 (2007) 3–31 Structure, formality and the importance of financial and non-financial information in strategydevelopment and implementation Alnoor Bhimani a , ∗ , Kim Langfield-Smith b a  London School of Economics and Political Science, London, United Kingdom b  Department of Accounting and Finance, Monash University, Vic. 3800, Australia Abstract The strategic management literature indicates that there is high variety in the form and nature of strategic pro-cesses within organizations. By contrast, writers on strategic accounting tend focus on the structure and formalityof strategic activities and call for a balance of financial and non-financial information to support strategic processes.This study explores the conceptual basis for this perspective and also investigates empirically whether such char-acterisations hold in practice. The empirical part of the study draws on questionnaire responses by senior corporateaccountants and interviews held with a subset of respondents from this group. The results indicate that strategydevelopment and implementation activities tend to be structured and formal, and while greater emphasis is placedon financial information in strategy implementation, in strategy development both financial and non-financial infor-mation are used. Differences however prevail across firms as to what is considered to be strategic and the roleplayed by financial and non-financial information varies across companies. A high degree of organization speci-ficityalsoexistsintheusesofstrategicaccountinginformation.Thestudyfoundsupportfornormativeidealswithinthe firms investigated but high organizational particularity also pervades the deployment of strategic accountinginformation.© 2006 Elsevier Ltd. All rights reserved. Keywords:  Financialinformation;Non-financialinformation;Strategicmanagementaccounting;Strategydevelopment;Strategyimplementation ∗ Corresponding author. Tel.: +44 20 7955 7329; fax: +44 20 7955 7420.  E-mail address:  a.bhimani@lse.ac.uk  (A. Bhimani).1044-5005/$ – see front matter © 2006 Elsevier Ltd. All rights reserved.doi:10.1016/j.mar.2006.06.005  4  A. Bhimani, K. Langfield-Smith / Management Accounting Research 18 (2007) 3–31 1. Introduction While different characterisations of strategy and strategic processes have been proposed by strategyresearchers (Andrews, 1987; Hart, 1992; Hitt and Tyler, 1991; Johnson and Scholes, 1999; Mintzberg,1987; Whittington, 1993), it seems that management accounting researchers have appealed to only a sub-set of this strategic management research knowledge base to explore issues relating to the managementaccounting system and strategy interface. Normative and empirical management accounting research haslargely adopted a rational perspective, often assuming that strategy development and strategy implemen-tation are formal structured processes, relying on a mix of financial and non-financial information tosupport strategic action (Bromwich, 1990; Kaplan and Norton, 2001; McNair et al., 1990; Nyamori et al.,2001; Palmer, 1992; Wilson, 1995). The aim of this paper is to investigate whether strategy developmentand implementation activities used in practice are formal structured processes, and whether financial andnon-financialinformationareofequalimportanceacrossstrategydevelopmentandimplementationactiv-ities. This will be undertaken through a literature review that explores the partial integration of strategicmanagement accounting into empirical management accounting research followed by a questionnaireand interviews with senior corporate accountants of large UK-based companies.Many academic studies concerned with the use and the structuring of financial and non-financialinformation have focused largely on identifying dimensions of performance measurement (CIMA, 1993;Chenhall, 1997; Coates et al., 1996; Govindarajan and Gupta, 1984, 1985; Ittner and Larcker, 1995,1997; Ittner et al., 1997; Perera et al., 1997). A number of studies have specifically considered the extentto which non-financial measures are strategically linked and how they connect to performance targets(Banker et al., 1993, 2004; Ittner and Larcker, 1998) and others have focussed on how measures that are strategy linked versus those that are common across business units affect performance evaluation(Banker et al., 2004; Lipe and Salterio, 2000). The intent of the present investigation departs from these prior studies by focusing on the associations between information type (financial and non-financial) andstrategy development and implementation. Such research is scant. Yet, it raises important issues. Thesuggestion has been made that a strategic dialogue can be relevant to the formulation of strategy andstrategic control (Boyd, 1991; Norreklit, 2001; Picken and Dess, 1997). Evidence exists that information in different forms can influence strategy development and implementation activities, just as it can aidin the evaluation of strategic action (Kershaw, 2001; Lorange and Scott Morton, 1974; Lorange et al.,1986). The role of financial and non-financial information in particular can extend to both interactive anddiagnostic processes (Simons, 1995, p. 200). Some investigations are strongly indicative of information type having a bearing not only on strategy implementation and control activities but also on strategydevelopment (Chenhall and Langfield-Smith, 1998; Coates et al., 1992; Euske et al., 1993; Ittner et al.,2003; Vaivio, 1999; de Haas and Kleingold, 1999; Preble, 1992). Assessing the appropriate informationmix to monitor the achievement of strategic intent is a relevant line of inquiry, but it is also importantto understand the associations between information type and the development and implementation of strategy.The motivation for the study derives from the schism between normative claims about the potentialof strategic analysis and descriptive narratives of organizational strategic processes. Normative modelstend to presume strategy development and implementation as rational technical endeavours entailing theformulation of structured and formal statements of intent and the application of predefined instrumentalcontrols.Thisviewischaracteristicofmanypractitioner-orientedwritingsandhasculminatedinabodyof prescriptive literature which considers strategic management decision-making as amenable to sequential   A. Bhimani, K. Langfield-Smith / Management Accounting Research 18 (2007) 3–31  5 and linear structuring, whereby choice making between alternatives and control processes can be aidedthrough properly constructed accounting information. In contrast, some accounting scholars have calledfor caution to be exercised in the search for ways in which relationships can be forged between strategyand accounting in attempts to make accounting more strategically oriented.The managerial bias adhered to within much of the prescriptive management accounting research inthis area rests on the assumption that organizations are purposeful rational systems that are internallyconsistent. However, this has been met with scepticism by some scholars who see strategic managementconcerns as highly complex and relatively unstructured (Archer and Otley, 1991; Coad, 1996). The interplay between strategic pursuits and accounting information production and use is viewed as beinginfluenced by a diversity of contextual, organizational, political and environmental factors (Dent, 1991;Ezzamel et al., 1997; Mouritsen, 1999; Puolam¨aki, 2004). Conscious strategising is seen to enhanceinteractions between different functional managers leading to more rather than less diffusiveness instrategyformation(Andrews,1987;Hickson,1987;J¨onssonandGr¨onlund,1988).Notionsofthepartiallyconscious, multi-level and poly-rational nature of strategy formation based on empirical descriptivestudies have generally been antithetical to ideals espoused within prescriptive strategy related accountingwritings. Warnings have been sounded against the normative view that suggests strategic managementdecision processes and choice are sequential and rational in nature, and relatively unproblematic andlinearly structured (Coad, 1996; Hoque and Alam, 1999; Langfield-Smith, 1997; Lord, 1996).Empirical investigations of strategic processes point to diffuse and inchoate relationships betweenaccounting and strategy (Roslender and Hart, 2003). They emphasisetherelevanceof considering certain contextualelementsoforganizationalprocessesandthecontingenciesatplaywhichshapestrategicorga-nizational action and accounting practices (J¨onsson and Gr¨onlund, 1988). The proactive and sequentiallogic assumed of prescriptive strategic orientations to management accounting is viewed by these writersas being simplistic and inadequate given the dynamic flux constituting organizational life. Dent (1990)considers descriptive writings on strategy from the longer established strategic management literature asusefully extending our appreciation of strategic decision-making beyond the partiality of the mechanis-tic imagery of strategic activities portrayed in the prescriptive strategic accounting literature. He warnsthat “we should be cautious and selective in our use of strategic theory to inform accounting research”(Dent, 1990, p. 21). But the argument has also been made that interrelationships between functionalist and interpretive perspectives on accounting generally need to be more deeply understood so as not touphold a polarised perspective in guiding one’s research enterprise (Ahrens and Chapman, 2005).In the context of the above noted normative-descriptive schism, the present investigation finds moti-vation in exploring the possible existence of a similar dichotomy between what is advocated in theprescriptive strategic accounting literature and what is prioritised in practice. If conceptions of strategyprocesses condition calls for strategy-based accounting information, then the basis for this literature andtheissueofwhethersuchinformationconformstocorporateperceptionsofstrategicprocessesinpracticeis worthy of investigation.In this light, the paper seeks to make two distinct but interdependent contributions. First, it exploresthe partial integration into strategy-focused accounting writings of models drawn from the strategicmanagement literature. The paper develops arguments about what is surmised within advocated strategicaccounting ideals as to formality and structure of strategic processes and the importance of financialand non-financial information for strategic processes. As a separate but connected objective, this studyassesses the extent of structure and formality characterising organizational strategy development andimplementationactivitiesaccordingtolargeUK-basedcompanies,drawingonresponsestoquestionnaires  6  A. Bhimani, K. Langfield-Smith / Management Accounting Research 18 (2007) 3–31 and interviews held with senior accounting managers. This second part of the study also explores thedesirability for balance in the use of financial and non-financial information in strategy development andimplementation in these firms.The paper is structured as follows. In the next section, the strategic management literature is discussedprior to considering assumptions made within strategic management accounting writings about strategydevelopment and implementation. In the subsequent part of the paper, the methodology for the empiricalportionofthestudyisoutlined.Section5discussesthequestionnaireandinterviewresults.Theconcluding section of the paper considers the study’s broader implications and points to further potentially usefulresearch which may be carried out in the area. 2. The strategic management literature To assess the perspective adopted in the accounting literature concerning the role of information infirms’ strategic activities, it is essential to consider the distinction between prescriptive and descriptivenotions of strategy as found in the strategic management literature.The prescriptive strategy literature considers strategy as a formalised statement of intent or plan whichidentifiesobjectivesandintendedactions.Organizationsareassumedtoengageinstrategicchoicemakingin an economically rational manner within the constraints of limited information, cognitive biases andcausal ambiguity (Amit and Schoemaker, 1993; Barney, 1992; Ginsberg, 1994; Peteraf, 1993; Phelanand Lewin, 2000; Reed and De Fillippi, 1990). Strategy is seen as consciously identified, proactive andformulated prior to decisions and actions.This prescriptive view of strategy finds early expression in the writings of  Ansoff (1965), Penrose (1959) and Steiner (1969) and has continued to be developed and refined in the works of more recent strategytheorists.Porter(1980,1985),forexample,viewsstrategyasthepositioningofthefirmwithinits competitiveenvironment,andprioritisesbuildingsustainablecompetitiveadvantageasawayofshieldingtheenterpriseagainstcompetitiveforces.Hedevelopsseveraltoolsforanalysinganddeterminingafirm’sposition in competitive markets including the diamond of industry attractiveness, generic strategies andvaluechainanalysis(Porter,1996).Porterarguesthatfirmsshouldbuildsustainablecompetitiveadvantage by consciously choosing a specific strategic position, developing unique activities and determining howthey fit within a “chain” of value-adding activities (Porter, 1996, 2001). He delineates these strategic positions using a generic typological framework.Porter’s framework has been extended by Grant (1996), for example, who links Porter’s concepts of industry forces and competitive advantage to different facets of firms. Others describe how a firm’scompetitive advantage is based on its non-marketable strategic resources, assets and capabilities (Cooland Dierickx, 1994). Rather than focusing on the competitive product markets, imperfections in marketshave also been viewed as leading to sustainable competitive advantage where a firm’s strategy focuses ondeveloping dynamic capabilities to ensure future competitiveness (Barney, 1986; Peteraf, 1993; Peteraf and Salancik, 1978; Prahalad and Hamel, 1990). Strategic thinking underpins rational economic propen-sities concerning resource distribution decisions and organizational conduct and outcomes (Oliver, 1997;Sabherwal and King, 1992; Teece and Pisano, 1994).Prescriptive conceptions of strategy presuppose the deployment of formal management informationsystems. The achievement of objectives requires the analysis of data which feeds into decision-makingprocesses. If strategic decision-making is a structured and planned endeavour, it will draw on informa-

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