All articles for the course Management Accounting Change. Otley, Chenhall, Roberts & Greenwoods, Tsamenyi, Burns & Scapens, Cruz, Gioia, Choo, Tillman, Becker, Van der Steen, Malsch, Spence, Sathe, Lambert
David Otley contingency theory throughout the years
The contingency theory of management accounting suggests that there is no universally applicable
system of management control but that the choice of appropriate control techniques will depend
upon the circumstances surrounding a specific organization.
More recently non-financial performance measures have increased in popularity and are seen as part
of an overall control system, for example the balance score card measuring financial and non-
financial performance. Both strategic and operation control.
Organization have become less hierarchical and many have restructures themselves to focus on their
‘core businesses’, leaving more peripheral activities to be outsourced.
Independent variables
Major independent variables can be grouped into external variables and internal variables. The most
commonly examined external variables include technology, market competition or hostility,
environmental uncertainty and national culture. The major internal variables are organization size,
structure, strategy, compensation systems and information systems.
The understanding of the interrelationship between multiple contingent independent variables may
lead to a better framework of dependent variables determinant analysis.
Dependent variables
The most widely examined dependent variables are performance, performance measures, budgeting
behavior, management control system design and its use, effectiveness, job satisfaction, change in
practices, and product innovation.
Performance, effectiveness and design of systems are the major dependent variables used with
financial performance being the most commonly used outcome variable.
Many of the performance measurement which are highly valued and of significant impact, are non-
financial measurement such as production process measures, defect rates, cycle time and customer
services measures; or qualitative measurement, such as customers’ perception, attitude of
employees towards jobs, and product innovation.
Reliance on accounting performance measures (RAPM)
RAPM focused on the ways in which line managers actually used the accounting (and other)
information supplied to them in the process of holding their subordinates accountable for their
performance.
Simons work on Levers of Control (diagnostic, interactive, beliefs and boundary controls).
Managers who place reliance on motivation appropriate subordinate behavior by setting quantitative
performance targets and emphasizing these above all else, should not be surprised if such targets are
attained by a variety of (often unobserved) behaviors that are often dysfunctional to the
achievement of overall organizational objectives.
Environmental uncertainty and hostility
If an organization or unit is faced by high levels of uncertainty it required flexible and adaptable
systems to manage activities when unexpected events occurs.
Hostility, particularly relates to intense competition. It has been shown to be associate with a greater
reliance on accounting controls (especially budgets) whereas uncertainty is associated with a more
flexible style of control that is open and externally focused.
,Strategy
Strategy has been hypothesized to affect control systems design in a number of straightforward
ways.
- Miles and Snow, four organizational types (defenders, prospectors, analyzers and reactors)
- Porter, thee generic strategies (cost leadership, differentiation and focus)
- Gupta and Govindarajan, life cycle approach (build, hold, harvest and divest)
o harvest (short-term profit and cash flow)
- Klassen, value logic (value chain, value network and value shop)
Culture
Hofstede, four major dimensions on which national cultures could be distinguished: power distance,
individualism, masculinity and uncertainty avoidance.
National culture, even if captured by the measurement instruments used, is an average within which
there is almost certainly a wide range of variation between individuals and groups within a country.
It is likely that organizational culture will also have a significant influence on attitudes and behavior
within an organization.
Organization culture implies a set of social norms, values and beliefs that are shared by the members
of the organization and influence their actions. A strong internal culture can decrease the need for
other control mechanisms, and may thus affect the overall design of an MCS.
Effectiveness
The most commonly used measure of effectiveness, by far, has been financial performance, usually
profit or return on investment.
There are two major problems with using profitability as a criterion variable to determine
contingency fit. Firstly, profitability is affected by a huge range of factors other than MCS design or
use. Secondly, financial performance has been argued to be a contingent variable in its own right.
MCS: Systems or packages?
MCSs within many organizations constitute a package of distinct management control elements that
have been separately designed and implemented without an overall intention or coordination, but
where each element aims to facilitate the attainment of different aspects of organization goals.
, Robert Chenhall findings from contingency based research
The effectiveness of MCS depends on the nature of contemporary settings.
The meaning of MCS
MCS are perceived as passive tools providing information to assist managers
Mechanistic controls rely on formal rules, standardized operating procedures and routines. Organic
systems are more flexible, responsive, involve fewer rules and standardized procedures and tend to
be richer in data.
Outcomes of MCS
Outcomes may be separated into issues related to the use or usefulness of the MCS, behavioral and
organizational outcomes.
Goal formulation process
First, goal formulation or change often involves the influence of new powerful players, either within
or outside the organization who can dramatically change official goals. MCS can act either as a tool to
effect such changes or hinder their acceptance within the organization. Second, changes in the areas
of organizational effectiveness can redirect goals to those areas of effectiveness. Third, it is apparent
that the measurement of goals can have explicit effects on goal formulation, both intended and
unintended. Goals may be selected or evolve as they can be measured readily by the MCS. Fourth, in
addition to influencing types of goals, MCS may affect goal achievement by establishing standards or
benchmarks for performance. Goals that are too hard may cause frustration and withdrawal, while
standard that are too easy may not provide sufficient challenge. Fifth, recently many organization
have recognized the need to satisfy multiple and potentially competing goals. Sixth, aligning
operative goals with official goals is an important aspect of strategic management.
The external environment
Risk is concerned with situations in which probabilities can be attached to particular events
occurring, whereas uncertainty defines situations in which probabilities cannot be attached and even
the elements of the environment may not be predictable.
The more uncertain the external environment the more open and externally focused the MCS.
The more hostile and turbulent the external environment the greater the reliance on formal controls
and an emphasis on traditional budgets.
Where MCS focusses on tight financial controls are used in uncertain external environments they will
be used together with an emphasis on flexible, interpersonal interactions.
More mechanistic, formal MCS tend to provide incomplete information in uncertain conditions and
require rapid reformulation to cope with the unfolding unpredictability.
As organizations become involved in networks involving other entities such as joint ventures and
supplier and customer alliances, the boundaries between what is internal and external become
blurred and consequently the role of MCS will likely change.
Generic concepts of technology
At a general level, technology refers to how the organization’s work processes operate and includes
hardware, materials, people, software and knowledge. Three generic types of technology of
importance to MCS design maybe identified from the organizational literature: complexity, task
uncertainty and interdependence.
Complexity derives from standardization of work, with large-batch and mass production, process and
small-batch unit technologies representing increasing levels of complexity. Task uncertainty refers to
variability in tasks and the analyzability of methods of performing the tasks with high variability and
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