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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.
- 15. Environmental Uncertainty Simple & Stable: Low Uncertainty Complex & Stable: Low-Moderate Uncertainty Simple & Unstable: High-Moderate Uncertainty Complex & Unstable: High Uncertainty Environmental Uncertainty Environ. Change Environmental Complexity Low High Simple Complex
- 16. Environmental Uncertainty Environmental Uncertainty Environ. Change Environ. Complexity Low High Simple Complex Low Uncertainty Low-Moderate Uncertainty High-Moderate Uncertainty High Uncertainty Beer distributors Container Man’frs Food processors Universities Appliance Man’frs Insurance Co’s E-commerce Fashion clothing Music industry Telecommunications Airlines Computer firms
- 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.