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AF313- Lecture 5.1 Contingency theory.ppt
1. A Contingency Approach to
MCS/MAS Design
Week 5 Lecture 1
Readings: Lecture Notes Provided
Chapman, C.S. (1997)
2. A Contingency Approach to MCS/ MAS Design
Learning Outcomes:
Understand contingency approach to MCS
Identify contingency variables
3. Why study a contingency approach to MCS/MAS
design?
Historically organizational theorists searched for a ‘best’
universal organizational design.
Research subsequently indicated that many successful
organisations had quite different organizational designs
Hence the contingent nature of the ‘best’ organizational
design.
A contingent perspective suggests that the ‘best’
organizational design depends on a number of key
antecedent variables.
4. Why study a contingency approach to MCS/MAS
design?
These contingency factors influence the choice of:
Strategy
Structure, and
MCS/MAS design
Our aim is to design an MCS/MAS that ‘fits’ the
organisation’s:
Antecedent factors
Strategies, and
Structure.
5. Why study a contingency approach to MCS/MAS
design?
Accounting researchers have used Contingency Theory
extensively in their research concerning the best design of
MCS/MAS.
Their focus has primarily been on the impact of two of the
key contingency factors, namely:
External Environmental Uncertainty (usually PEU)
Technology (particularly as it affects organizational structure
and task uncertainty).
Accordingly, these are the two factors upon which we
concentrate in this ‘overview’ of the contingency approach
to MCS/MAS design.
6. Contingency Factors
Five factors influencing organizational design are:
Environmental uncertainty
Often measured subjectively and referred to as Perceived Environmental
Uncertainty (PEU)
Goals and objectives
Organizational Size
Geographic dispersion
Technology
These antecedent factors are shown on the following Figure
7. A contingency framework for MCS design
Environmental
uncertainty
Technology
Goals and
programs
Geographic
dispersion
Organisation
size
Strategies
Structure
MCS/MAS
Design
National and
Organisational
culture
Personality
traits
Organisational
effectiveness
8. The Impact of MCS/MAS design on Organisational
Effectiveness
Contingency theory argues that a good fit between the
MCS/MAS design and the antecedent factors, strategy and
structure will increase organizational effectiveness.
The Figure also shows that national and organizational
cultures, and users’ personality variables may affect the
effectiveness of the MCS/MAS in raising organizational
effectiveness.
A considerable body of management accounting research
concerning the above two claims has been undertaken.
9. Overview of conceptualisation of aforementioned
factors
Following this overview we will be well placed to
consider some of the management accounting
research concerning the ‘best’ design of the MCS/MAS
and its impact on organizational (or managerial)
effectiveness.
In order to understand studies in management
accounting research it is essential that you have some
understanding of how the various factors in the above
contingency theory Figure are conceptualized (i.e.
thought about).
10. External Environmental Uncertainty
Environmental uncertainty relates to the
organisation’s external environment.
Often the organisation’s external environment is
depicted as comprising a number of main sectors.
In assessing the degree of external uncertainty major
emphasis is given to those sectors most influencing
the organisation.
A list of sectors is shown on the following slide.
11. External Environment Sectors
1. Industry sector
2. Raw material s sector
3. Human resources sector
4. Financial resources sector
5. Market sector
6. Technology sector
7. Economic conditions sector
8. Government sector
9. Socio-cultural sector
10. International sector
12. External Environmental Uncertainty
Although general sectors may have an impact on the uncertainty faced by an
organisation, environmental uncertainty is usually assessed by focusing on a
manager’s task environment.
Research has shown that environmental uncertainty can be assessed in terms
of two major underlying dimensions, namely:
Complexity of the environment.
Assessed in terms of the number of elements affecting managers on a day to day
basis.
The rate of change of this environment
Assessed in terms of the degree of stability or instability of the environment.
These two dimensions interact with each other to effect the overall
environmental uncertainty faced by managers.
13. External Environmental Uncertainty
In assessing environmental uncertainty, consideration is given to
the total uncertainty across key sectors.
Because an objective measurement of this uncertainty is too
difficult, we assess PEU by asking managers to give their
subjective opinion of the degree of uncertainty they feel they
face.
This involves managers answering a number of questions on a
PEU assessment survey.
The use of PEU (rather than an objective EU measure) is
defended on the basis that managers make decisions based on
their perception of uncertainty, hence PEU is the more relevant
measure.
14. External Environmental Uncertainty
To simplify our assessment of environmental uncertainty we
often cross the two key underlying dimensions to create 4
quadrants reflecting the relative extent of uncertainty.
The result of this analysis is that we can characterize
environmental uncertainty as reflecting one of 4 degrees of
uncertainty.
This is shown on the following Figure.
Importantly, since uncertainty influences the amount of
information needed for decision making by a manager,
MCS/MAS design is strongly influenced by the extent of PEU.
Greater uncertainty creates a need for more information.
17. Buffering Departments reduce the impact of uncertainty
Inventory warehousing
Human resources
Boundary Spanning Roles Link the organisation to external
elements
Mainly involve the collecting & dissemination of information
Hence reducing uncertainty and speed up responsiveness
Public relations Dept
Competitive intelligence Dept
Management accounting Dept (if ‘on the ball’)
Responses to High Environmental Uncertainty
18. Responses to High Environmental Uncertainty
Differentiation and integration
“Differentiation is the differences in cognitive and emotional
orientations amongst managers in different functional
departments, and the difference in formal structure among
these departments.” Lorsch (1970, p.5).
The greater the uncertainty in EU, the greater the need for
differentiation.
Lawrence & Lorsch (1969, pp.23-29) studied 10 large
organisations and found differences in external linkages, goal
orientation and other factors (see Figures on following two
slides).
19. Responses to High Environmental Uncertainty
CEO
Sales
Manufacturing
R & D
Scientific
journals
Research centres
Professional
Assn’s
Suppliers
Raw materials
Labour
Prod’n equipment
Customers
Advertising
Agencies
Distribution system
Competitors
20. Divisional differences in goal & other orientations
Characteristic R&D
Division
Manufacturi
ng Division
Sales
Division
Goals Innovation
Quality
Production
efficiency
Customer
satisfaction
Time Horizon Long Short Short
Interpersonal
orientation
Mostly task Task Social
Formality of
structure
Low High High
21. Differentiation generates a need for integration
Differentiation creates organizational units often having
quite different cultures, employees, goals, structures and
informational needs.
From a MCS/MAS perspective it seems likely that
differentiation calls for a more sophisticated MAS , capable
of generating a range of reports based on data drawn from a
variety of sources.
Equally important, differentiation drives a need for
integrating mechanisms that ensure these different
organizational units work together in the organisation’s
interests
22. Differentiation generates a need for integration
MCS/MAS can play a valuable integrating role
through techniques relating to, for example:
• Strategic and operational plans
• Budgeting (at unit and organisational levels)
• Transfer pricing
• Maintain consistent application of MAS policies &
procedures
23. Differentiation generates a need for integration
Industry Plastics Foods Containers
Environmental
Uncertainty
High Moderate Low
Divisional
differentiation
High Moderate Low
% managers in
integrating roles
22% 17% 0%
Source: Lorsch & Lawrence (1972, p.45)
24. Mechanistic vs Organic Structures & Mngt Processes
Another response to environmental uncertainty is to vary the
amount of formal organizational structure and the extent of
control imposed on employees.
Bruns & Stalker (1961) studied 20 industrial companies in
England and found that organizational structure was related to
the extent of environmental uncertainty.
When EU was stable organisations organizations had many rules
and standard operating procedures. A clear hierarchy of
authority existed and most decisions were centralize, being
made by top management
Bruns and Stalker characterized such organisations as having a
Mechanistic management structure and processes.
25. Mechanistic vs Organic Structures & Mngt Processes
When EU was high, organisations tended to have fewer rules and
standard operating procedures. Those that were written down were
often ignored. The hierarchy of authority was less clear and decision
making tended to be decentralized.
The extent of management control over employees was diminished.
Under these circumstances employees tended to find their own way
through the system to find out what to do.
Bruns & Stalker referred to such management structures and processes
as Organic.
The reason for these shifts in management structures and processes
enabled organisations facing high uncertainty to be more flexible and
faster in their responses to the (now) less predictable external
environment (see Figure on following slide).
26. Mechanistic vs Organic Structures and
management processes.
Mechanistic Organic
1 Tasks broken down into
specialised parts.
Employees contribute to
departmental common tasks.
2 Tasks are rigidly defined. Tasks are adjusted and redefined
through employee teamwork.
3 Strict hierarchy of control.
Many rules and SOPs.
Less hierarchy of control, less rules.
4 Knowledge and control of tasks
are centralised at the top of the
organisation.
Knowledge and control of tasks are
located anywhere in the
organisation.
5 Communication is vertical
(both up and down).
Communication is primarily
horizontal.
27. Organisational Goals: A Contingency Approach
Contingency approaches to defining organizational effectiveness focus on
various parts of the organisation. The three main approaches are the:
Resource inputs approach
Focuses on the acquisition and maintenance of scare resources
(inputs).
Internal process approach
Focuses on the health of the organisation (employees, organisation
culture, etc) and the efficient transformation of inputs into outputs.
Goal approach
Focuses on product and service outputs and outcomes
See Figure on following slide.
28. Organisational Goals: A Contingency Approach
Inputs Process Outputs
Goal
Achievement
Approach
Internal
Process
Approach
Resource
Based
Approach
29. Organisational Size & Geographic Dispersion
There is a huge organisational theory literature
concerning the effect of size on organisational design.
We do not have time to review this area.
Moreover, little accounting research has investigated
the effects of organizational size on MCS/MAS design.
Accordingly, for our purposes we will accept that larger
organizational size and greater geographical
dispersion generally results in greater
Decentralisation:
30. Organisational Size & Geographic Dispersion
Decentralisation often involves:
Creation of a Divisionalised structure
Location of authority and decision making lower down
the hierarchy
Need for greater control and integration amongst
divisions to retain organizational focus.
