No Longer Large Unitary Organisation Accounting Essay

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Contemporary business organizations are no longer large unitary organisation, which assumed in the traditional management control literature. (Chenhall 2003) They become smaller, less diversified, less hierarchical and have more internal mutual interdependencies than the theory admits. (Chenhall & Langfield Smith 1998) Technological change, social change, political change and ethical changes all increase the uncertainty of the business environmental. Other main environmental changes for contemporary organisations include reducing the size of business units, reducing number of people employed, concentrating upon core businesses, long-term alliance, declining in manufacturing and increasing in service-based industries. (Otley 1994) Continuous change requires continuous adaption; contemporary organisations are choosing to make 'continuous improvement' (Otley, 1999). Increasingly, companies are focusing on product or service innovation, cost reduction and customer satisfaction. Cost measuring, allocating and controlling have been impacted by these changes. For example, after the low cost producers of the low-tech mass production product outsources to developing countries due to lower labour cost, the traditional focus on direct labour costs has become obsolete. To compete in turbulent economic climate, contemporary organizations are choosing to adopt modern management accounting systems for strategic planning and operational control.

The purpose of this dissertation is to study the reasons for introducing or changing non-financial performance measures and compare the development of non-financial performance measures in different company sectors. This paper follows qualitative empirical research approach due to the complexity of this subject, which has no definitive answers. I use desk research such as survey review and document reviews. As Otley (1994) said, it is necessary for empirical studies to be undertaken to codify and conceptualize what is already happening in practice. This study not only considers the new MCS, especially non-financial performance measurement features changed or developed in different sectors of contemporary organisations but also find the reasons of these changes.

My dissertation is organized as follows. First, I will introduce the management control and some contextual variables. Next, I briefly introduce the MSC and non-performance measurement through literature review. This is followed by a description of my research propose and methodology. Subsequent sections present the document review findings and conceptualize these empirical findings. Final part is conclusion, contribution and study limitations.

2. Literature review


2.1 Introduction of Management Control

Robert Anthony (1965) distinguished management control from both strategic planning and operational control. He also defines management control as 'the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation's objectives'. But Otley (1994) and Langfield-smith (2003) think this definition is a universal manner caused the focus of study to be fixed almost exclusively on accounting-based organisational controls. Anthony's narrow definition of management control is becoming out-dated and is potentially obstructive to development of the field because organizational size has become smaller which driven by technological change which have replaced labour with capital. (Otley 1994) Traditional management control techniques have been manufacturing-based which is not suitable for current service-based organizations in the developed world. Otley (1994) outlines the main environmental changes that impact on business practices. He believes that the kernel of any control system consists of a predictive model. He lists some changes of the environment in the uncertainty part such as technological change, social change and political change. Therefore, The 'operational control' and 'strategic planning' deliberate neglected by Anthony become more important in contemporary organisations and the artificial boundaries between them may no longer hold. (Otley, 1999) (Langfield-smith 2003) It is necessary to integrate between all of these functions closely. MCS are adopted to assist managers achieve some desired organizational outcomes or organizational goals. (Chenhall, 2003)

2.2 Contextual Variables

Chenhall (2003) set all these contemporary organisations changes as independent variables and MCS as depend variables in contingency-based studies. Furthermore, Chenhall set external environment, technology, organizational structure, size, strategy and national culture as the contextual variables of MCS. Contingency-based research has suggested 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. (Otley 1999) Contingency theory assumes that the design and the application of MCS are influenced by the context in which they are applied (Chenhall, 2007).

2.3 Company strategy

Langfield-Smith (1997) measures the choice of strategy and the design of control system under the established strategy. However, the relationship between strategy and management control systems is complex. Berry et al. (2009) think the reviews by Langfield-Smith (1997) were only focus on formal financial controls and no further comment on social control, clan control and culture and context. Langfield-Smith (1997)'s review is (Berry et al. 2009) Chenhall (2003), Otley (1999), Simons (1995), Langfield-Smith (1997) set strategy as a specific control variables in contingency-based research and conclude that MCS can be implicated in the implementation and monitoring of strategies providing feedback for learning and information to be used interactively to formulate strategy. Langfield-Smith (1997) doesn't the contemporary approached to MCS and strategy that focus on the design of performance measures at all managerial levels to effect balance and consistency with strategy.

Defenders, prospectors, and analysers are three organizational types described and defined by Miles and Snow (1978):

2.4 MSC and Non-financial performance

In order to develop operational control and strategic planning features of MCS, Otley (1987), Fitzgerald and Moon (1996) give and develop the five main sets of issues for performance management framework and represented them as a five questions. These issues are about key objectives, strategies and plans, level of performance to achieve, rewards and information flows. The integration of the five areas to provide a description of the overall management control and performance management systems of an organization is detailed explained in Otley (1999). Otley states that there is no single technique has developed answers to all five of the question posted, although the application of such techniques requires attention to be paid to them all. Budgeting project is only working in horizontal orientation, rarely in an integrated manner. Balanced scorecard approach focus on one or two questions but neglect the others. EVA's scope is narrow because it addresses only on financial performance not non-financial performance. (Otley 1999) Individual empowerment becomes the main idea of the development of flexible manufacturing systems but an organization's capability for adaptation requires a long-term view not a short-term perspective arguably inherent in the use of accounting-based performance measures. (Otley 1994) A combination of a variety of techniques in an overall organizational control system is a more holistic approach that is clearly appropriate to address all of the issues identified by Otley (1999). Furthermore, Otley (1994) believes that the mechanisms for organisational adaptation cannot be left to a few senior managers and should move towards empowerment of lower level employees. The levels of self-control and group accountability will be required.

The definition of MCS has evolved over the years from one focusing on the provision of more formal, financially quantifiable information to assist managerial decision making to one that embraces a much broader scope of information. This includes external information related to markets, customers, competitors, non-financial information related to production processes, predictive information and a broad array of decision support mechanisms, and informal personal and social controls. More open, externally focused, nonfinancial styles of MCS - Informal controls were introduced to associate with uncertainties in the changing business environment. (Chenhall 2003) In addition, Chenhall and Langfield-Smith (1998) found firms who have product differentiation strategies were associated with, amongst other things, quality systems, team-based structures and employee-based measures and benefit from both new MCS techniques and non-financial information. Those who have low price strategies were found to be associated with manufacturing system innovation, process improvement, and activity-based techniques. (Abdel-Maksoud et al. 2005)

Changes in the competitive environment were associated with strategy, organizational design and technology, all of which were associated with changes in non-financial indicators (Baines and Langfield-Smith, 2003). Ittner & Larcker (1998) demonstrate that firm performance and the degree to which non-financial performance measurement to be used are influenced by these factors. Some types of technologies (detailed discussed in Chenhall 2003) in contemporary organisations would require controls to encourage flexible responses, high level of open communication with in the work force and systems to manage the interdependencies. A reliance on traditional administrative controls, including financial MCS, is unlikely to provide required flexibility and more open, informal controls will be more suitable to manage inter- dependencies. At the same time traditional, formal controls may assist in controlling processes that are well understood. (Chenhall 2003) For example, with the widespread introduction of computer assisted advanced manufacturing technologies in 1990s, many companies have responded to these challenges by implementing innovative managerial practices such as just-in-time (JIT), total quality management (TQM), investing in advanced manufacturing technologies such as CAD/CAM, and emphasising quality, delivery, innovation and flexibility in meeting customer needs (Banker et al., 1993). Fosterand and Horngren (1988) found that flexible manufacturing systems (FMS) were associated with performance measures focused on time, quality, operating efficiency and flexibility. The advanced technologies of JIT and FMS are associated with broadly based MCS such as informal controls and greater use of non- financial performance measures. (Chenhall 2003)

Therefore, traditional performance measures, which focus mainly on financial performance such as ROI, EPS are narrow in focus, historical in nature and in many cases incomplete. (Hoque 2001) Many researchers have expressed this concerns and provide some empirical evidence. (Kaplan & Norton, 1996; Perera et al., 1997; Ittner and Larcker, 1998) Carr et al. (1997) assert that short-term financial indicators are not appropriate measures of performance. Otley (1999) states the use of frameworks and theories drawn primarily from the discipline of economics is another restriction although performance measurement system (PMS) has long been of central interest to both managers and management accounting researchers. He also thinks that other approaches are only concentrate on sectional interest rather than on overall control. Abdel-Maksoud et al (2005) and Otley (1997) also indicated that operational control is best achieved by non-financial measures.

Non-financial performance indicators contained in PMSs refer equally to customer, internal processes and people measurement perspectives. (Dossi and Patelli 2010) Some new non-financial performance measurement has been introduced in contemporary organisations such as customer satisfaction, employee loyalty etc. (Baines & Langfield, 2003) Dossi and Patelli (2010) state that PMSs including non-financial indicators offer a more comprehensive picture of the performance drivers because they measure performance areas beyond the financial results. Thus, including the non-financial indicator into PMS can help contemporary organisations to enhance strategy implementation. Research shows that the importance of non-financial measures is increasing; in a number of countries they are widely being applied (Bhimani, 1994). Other examples of non-financial measures adopted in different countries are based on issues such as inventory turnover, throughput, quality, innovativeness, economic value added, benchmarking, the balanced scorecard and working conditions (Chenhall & Langfield-Smith, 1998). Simons (2000) states that human behaviour is one of the most important factors in design performance measurement and control systems. Same results are identified in Waal (2002) as well. Recent contingency-based research has focused on a variety of aspects of MCS, not only formal controls based on financial aspects, but also informal controls. (Chenhall 2003)

The majority of the current research supports a positive relationship between the inclusion of non-financial information and firm performance. Mia and Clarke (1999) observe an indirect relation between the use of MCS information and business unit performance. Studies of Davila (2000) and Chong and Chong (1997) show that an increase use of non-financial information by firms following customer-focussed (or prospector-type) strategy has a positive impact on performance. Sim and Killough (1998) and Abernethy and Lillis (1995) also argue that firms have improved their performance on the basis of non-financial manufacturing information. Scott and Tiessen (1999) reported that firm performance has improved when they applied comprehensive performance measures [that combine both financial and non-financial information]. Sim and Killough (1998) and Ittner and Larcher (1995) observe a positive interaction among total quality management practices, MCS information and performance. Abdel-Maksoud et al. (2005) who report that a greater portion of shop-floor performance measures in the UK are non-financial. The study finds that most manufacturing companies in the UK measure delivery, timeliness and number of complaints from customers and these measures are considered critically important. (Abdel-Maksoud et al., 2005). Customer satisfaction is also considered very important by most of the manufacturing companies under study indicating their customer-focused orientation.

Therefore, only considering financial performance is the main restriction for management accounting to measure the performance of organizations. (Berry A.J et al, 2009) Businesses cannot only rely on the financial performance measurement, which is too narrowly focused. (Hoque 2001) Kaplan and Norton (1996) suggest that multiple performance measures, financial as well as nonfinancial should be used in contemporary organizations. These multiple performance measures reflect both business environment change and goals achievement of the organization. Kaplan and Norton (1996), Simon (1995), Hoque 2001) also suggest that multiple performance measurement is the cornerstone of company's current and future success, not like the financial performance measures which only report what happened in the past, but not tell how to improve the future performance. The balanced scorecard introduced by Kaplan and Norton (1996) is a frequently used format. This is a kind of multiple performance measurement that involves financial performance measures and non-financial performance measures. Key performance indicators have been implemented in this tool.

In summary, Organizations still need systems of management control but it is likely that they will be very different to those found suitable in the past. As a result of contemporary pressures, the environment will become more uncertain, hostile and complex. Chenhall (2003) believes technologies will have varying degrees of complexity; uncertainty and interdependencies that promote control issues. Some tentative suggestions are made as to the type of changes that are needed, but it is also necessary for empirical studies to be undertaken to codify and conceptualize what is already happening in practice. The lag before practice is incorporated into theory has created a major opportunity for researchers in management control. (Otley 1994)

2.5 Types of Non-financial performance measurement

As Kaplan and Norton (1996) says while strategic performance measurement systems tend to balance financial and non-financial measures, the idea is typically that non-financial measures are leading indicators of financial performance. Therefore, I include strategic performance measurements such as Balance Scorecard, Simons lever of control as non-financial performance measurements. In this section, I give brief introductions of some non-financial performance measurement that will appears in my data and analysis sections.

2.5.1. Balance Scorecard

Figure 1. The balanced scorecard: a framework to translate a strategy into operational terms. Source: Kaplan and Norton 1996

The Balanced Scorecard Approach was first introduced by Kaplan and Norton in 1992. Kaplan and Norton define it as an multi-dimensional approach to performance measurement and management that is linked specifically to organizational strategy. (Otley 1999) Bain (2011) concludes that the Balanced Scorecard translates Mission and Vision Statements into a comprehensive set of objectives and performance measures that can be quantified and appraised. Thus four areas of performance measures are included: Financial (e.g. revenues, earnings, return on capital, cash flow), Customer (e.g. market share, customer satisfaction measures, customer loyalty), Internal business process (e.g. productivity rates, quality measures, employee morale, employee knowledge, employee turnover), Innovation and learning (e.g. percent of revenue from new products, employee suggestions, rate of improvement index, employee training time) (Kaplan and Norton 1996) (Bain 2011) It is suggested that up to four measures of performance should be developed in each area. Thus, there is intended to be a close link between the business unit strategy adopted and the performance measures selected and Otley (1999) states that this is the major strength of the Balanced Scored.

Some authors recognized early that the BSC is more than a performance measurement technique and considered it to be a management system (Butler et al., 1997). Just to be sure or in order to contribute to the confusion, some authors prefer to use both at the same time: "formal management technique and formal management system" (Hassan and Tibbits, 2000). Others consider the BSC to be a management philosophy as well as a performance management system (Hanson and Towle, 2000). Further more, it also pays some attention to measuring the achievement of the components of the strategic plan the organization has espoused. Otley (1999) explains that a further area of ambiguity is the way in which the 'balanced' scorecard appears to have become more 'linear' in its approach. In the 1996 book, a linear chain is suggested whereby better trained employees (now in the Innovation and Learning box) will lead to better business processes being designed (one input to such changes, but surely by no means the only one); these in turn will lead to more satisfied customers and then to happier shareholders.

Simon's levers of Control

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Simons (1995) contributed to a broadening of the role of MCS. (Berry et al. 2009) His argument posits in his levers of control framework and focused around balancing four levers of control: interactive (e.g. code of conduct), diagnostic (e.g. budgets), belief (e.g. mission statement) and boundary (e.g. code of conduct) systems. (Simons 1995, Asel and Wu 2009) Langfield-Smith (2006) states that Simons provided a more complex conceptualisation ''to the use of MCS to manage behaviour and effect strategic change'' (Berry et al. 2009)

In earlier studies, Survey research has tended to differences between diagnostic control and interactive control and the frequently use of specific controls (Abernethy and Brownell, 1999) (Bisbe and Otley 2004)

Berry et al (2009) concludes from Collier (2005) that Simons' belief systems did not include complete important informal controls such as group norms, socialisation and culture although he do attempt include them. Another limitation concluded by Berry et al (2009) was that Simons' levers were developed at the senior management level and so may only apply to that level.

Just in Time (JIT)

'Just-in-Time' is a management model that aims to improve manufacturing efficiency. (Chenhall 2003) It is most suitable for high-volume, repetitive manufacturing. The common perception of Just-in-Time is that its main objective is the elimination of stocks. However, a more complete list of its objectives are involved zero defects, zero waste, zero inventory, zero lead times; smooth continuous flow processes and flexible manufacturing. The first four of these lend themselves to measurement by performance indicators. (Proctor 2012)

Proctor (2012) states that Just-in-time is active in the following four areas of manufacturing: product design; process design; human/organisation elements; manufacturing planning and control.

Product design uses value engineering to increase the product's value to the customer without increasing costs. Process design aims to make use of flexible manufacturing cells. The human element is a holistic approach encouraging the use of all the employees' skills. This implies continuous training in new skills, including problem solving, and a flexible, multi-skilled labour force. Manufacturing planning and control aims at continuous, rapid-flow, small-batch manufacturing but strictly within the confines of a 'pull' system.

Total Quality Management (TQM)

Total Quality Management (TQM) is a systematic approach to quality improvement that marries product and service specifications to customer performance. (Bain 2011) The aim of TQM is to continually improve the quality of the product with zero defects, which means meet the requirements of the customer perfectly (Proctor 2012). This creates a virtuous cycle of continuous improvement that boosts production, customer satisfaction and profits. (Choi and Orlando 1997) However, the operation of a TQM system has an associated cost. Firms cannot spend money on improving quality as much as they want. Therefore, understanding the various cost elements is important. (Proctor 2012)

Benchmarking

Benchmarking is all about performance measurement and review. Its fundamental aim is the achievement of competitive advantage by learning from the experience of others. (Camp 1989) The process involves several different organisations comparing certain aspects of their performance with each other. It can also be used for independent parts of one company. (Proctor 2012)

The CIMAs' Official Terminology defines benchmarking as:

"The establishment, through data gathering, of target and comparators, that permits relative levels of performance (and particularly areas of underperformance) to be identified. Adoption of identified best practices should improve performance." (CIMA 2005)

The analysis of the information would be along the following lines:

• What things are we doing well?

• Which activities do we need to improve?

• What should we be doing that we are not doing now?

Benchmarking has proved to be a popular and effective performance management technique. (Bain 2011)

Six Sigma

Six Sigma started life in a manufacturing company (Motorola in 1985) but has since also been successfully adapted for service businesses. It can be used on its own or together with other performance management techniques such as Lean Production. (Proctor 2012) Six Sigma is a phenomenon that is gaining wide acceptance in industry, but lacks a theoretical underpinning and a basis for research other than "best practice" studies. (Linderman et al 2002) Six Sigma focuses on process improvement by reducing the variability of the outcomes. (Proctor 2012) A Six Sigma approach can be used to improve many different processes, even some not directly connected with quality. (Pande et al 2000) The six-sigma approach to quality ensures that a maximum of 3.4 parts per million are defective in each step of the process (Kumar and Gupta, 1993).

3. Research aim and purpose


As the changing of business environment discuss above, more and more company transfer from manufacturing company to service or other type of companies in recently years. It is necessary to conduct researches for organizations from different sectors. Otley (1999) concludes 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 by the contingency theory of management accounting.

Furthermore, non-financial performance measurement is new in MSC and adopted very quickly in many organizations in recent 20 years. Traditional financial performance measures have been concluded only to evaluate firm's past performance because its backward-looking nature. In contrast, non-financial performance measures are leading indicators of future performance in recent literatures. (Ittner and Larcker 1998) Therefore, my research questions are how does non-financial performance measurement developed and what are the main contextual variables for non-financial performance measurement develop in each sector of contemporary organisations in recent 20 years. My research attempts to distinguish the new non-financial performance measures use in contemporary organizations to the financial performance measures they used before and find the reasons of change. My literature review intersects of contextual variables and performance measurement. Environment uncertainty, size, structure, strategy etc., are all the factors for organisations to change their MCS.

As a qualitative research method, I conclude different non-financial performance by review literatures, different organisations' case studies and survey researches made by other researchers. I will take a more inductive approach to identify some key issues that are similar in different organisations sectors. Different non-performance measurement will be analysed and to identify features of their application. Finding the same features of non-financial performance measures in different sectors and identify the most important non-financial performance indicators in all companies.

In my research, I will carry out a comprehensive review of which above contextual variables affect organisation most in each sector of organisation and how non-financial measures are developed to meet the need of introducing informal controls in previous research papers.

4. Research methodology


This dissertation follows qualitative empirical research approach due to the complexity of this subject, which has no definitive answers. The principal style of research adopted was a multi-site study in the qualitative method. Multiple cases, surveys and literatures are chosen for cross-sit comparison. Qualitative research intends to create a thorough understanding regarding the chosen subject and the problems studied in the thesis through collecting data and examining the collection of data. (Holme and Solvang, 1997; Johansson 2011) Johansson (2011) states that it is suitable to use qualitative method for outsource, describe and understand a specific research area. Therefore, qualitative method will be used in my dissertation.

The theoretical perspective of my study is to emphasis how contingent factors such as technology and environment affect the non-financial performance change. (Abdel-Maksoud et al. 2005) In order to do the cross-sit comparison, a document review is used to collect data. Due to the time limitation and the difficulty to enter into a company to do a case study or question survey, all of my data is secondary data. They are from recent literatures, organisation case studies that talk about non-financial performance changes in each organisation, sectors and recent survey research about management accounting techniques change in contemporary organisations. Case studies are widely used in organizational studies. Case study research consists of a detailed investigation, which provides further understanding and explanation of a particular problem or topic within an area of research. (Hartley 2004) In this study, I will use three surveys about the management accounting change made by three different organizations: Ernst & Young, Bain & Company and CIMA. All these survey gives the comprehensive view of management accounting situation in the whole world. Five cases about manufacturing companies and six cases about banks. Then all the rest data is the result from other scholars' researches. I will categorise all organisations in case studies and survey researches into two different sectors: manufacturing sector and non-manufacturing sector. Then I will count and sort all the factors that make the organisations change their performance measurement. After that, I will count and sort all the features of non-financial performance measures in different sectors. Furthermore, I will take a more inductive approach that draws upon all company case studies and surveys in this study to identify some key issues that are similar in different organisations sectors. Finally I will conclude the similar reasons for non-financial performance change or develop in both manufacturing and non-manufacturing sectors. For each conclusion I get, I will use several organisation case studies or survey researches from different researchers to demonstrate it because it is difficult to draw general conclusions through single empirical studies, but repeated studies within the same area of research may lead to a general conclusion of a theory (Yin 2006).

5. Data and Analysis

5.1 Survey Review:

5.1.1 E&Y Survey

E&Y (2003) states that a lot of management accounting techniques and tools has emerged and adopted by corporations to response increased competition and uncertainty of business conditions. These changes have put significant pressure on corporate management to make informed business decisions and maximize their company's financial performance.

E&Y (2003) made this survey in order to answer questions such as have there been fundamental changes in the role of management accounting and what role have new technologies played in the diffusion of common management accounting methodologies?

During January and February of 2003, nearly 2,000 out of 23034 survey responses from IMA members poured in. The response rate is 9%.

In Figure 5.1.1a, we find that traditional management accounting tools are still widely used in 2003. Companies have been slow to implement new tools. As figure shows, 76% reported using quantitative techniques and traditional costing techniques (e.g., full absorption costing), followed closely by operational budgeting techniques (75%) and overhead allocations that are mostly based on direct labour (70%). (E&Y 2003) More modern, non-traditional tools and techniques are still striving for adoption with much lower usage rates. Only Benchmarking is over 50%. Balanced Scorecard is just over 40%. However, Figure 5.1.1b shows that more and more managers consider accepting some new management accounting tools. Performance evaluation tools such as Benchmarking and Balanced Scorecard were both around 50%. We can find in Figure 5.1.1c that both Balanced Scorecard and Benchmarking have a low reject rate. Figure 5.1.1d is the separate chart of performance evaluation tools. It is much clearer to get the conclusion as above.

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Figure 5.1.1a Source : E&Y 2003

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Figure 5.1.1b Source: E&Y 2003

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Figure 5.1.1c Source: E&Y 2003

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Figure 5.1.1d Source E&Y 2003

It is easy for us to find that multiple performance measures has been adopt in many firms. The high consider rate in next few years (see 5.1.1b) and low rejected rates of non-financial performance measures can prove this as well.

5.1.2 CIMA 2009 Survey

The CIMA management accounting survey asked about current and intended usage of more than 100 management accounting and related tools, and was completed by 439 respondents in July 2009. (CIMA 2009)

CIMA describes, "A large proportion (61%) of the respondents is based in the UK. almost all respondents are CIMA members who have been specifically invited to complete the survey, with a very small number of other respondents. The regional composition of respondents to the survey therefore reflects global CIMA membership, which is 75% UK based". CIMA also gives the responses by sector. Survey's respondents who work in the service sector are weight 50%. They are made up of 10% from financial services, 8% from professional services and 32% from other services. Responses who are employed in the manufacturing sector are almost one third of the total respondents. CIMA (2009) noted that the sector labelled 'other' comprises 'public and education' and all 'other' responses (from industry sectors such as retail and trade; IT and telecommunications; hospitality etc.). Furthermore, CIMA states that most survey's respondents are employed in small and medium organisations. Respondents from organisations, which have over 250 employees, are about 35%.

Table 5.1.2a shows the tools that respondents intend to adopt within next two years. It can give an indication of how the management accounting technique is developing in the short-term (figures in brackets are the number of respondents intending to introduce that tool):

The tools most likely to be introduced soon

1. Balanced scorecard (50) - the tool most likely to be adopted soon, and already very popular.

2. Customer profitability analysis (36).

3. Rolling forecasts (34) - already very heavily used, and apparently to become even more popular.

4. Activity based management (ABM) (31).

5. Environmental management accounting (29).

6. Product/service profitability analysis (28).

7. Activity based costing (ABC) (25) - although evidence from other studies suggests many users do not achieve full implementation.

8. Post completion audits (25).

9. Business process re-engineering (BPR) (24).

10. CIMA strategic scorecard (22).

Table 5.1.1a Source: CIMA 2009

We can easily conclude from Figure 5.1.2b that the larger the organisations, the more performance management tools they use. CIMA (2009) states that on average organisations use just under two out of eight performance management tools. Large organisations use on average twice as many performance measurement tools as small or medium ones.

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Figure 5.1.2b Source: CIMA 2009

Figure 5.1.2b also shows the balanced scorecard is the most popular performance management tools in all organisations. Almost 60% of very large organisations use BSC. CIMA (2009) states that other surveys confirm similar results for the balanced scorecard, for example it is used by 60% of fortune 1000 (i.e. very large) companies. The trend of using BSC is still increasing. The popularity of BSC is a sign of the popular use of multiple financial performance measurement because BSC consider both financial and non-financial perspective. Figure 5.1.2c shows it is the most likely tool to be introduced by current non-users of all sizes. There is no sign of abating of BSC in short term. This is similar to the result of a study conducted by Ax and Bjørnenak (2005) who finds that Balanced Scorecard has already implemented in 27% of major companies in Sweden. The further research was conducted and found that the share rise to 61% if include the companies that want to have the Balanced Scorecards within two yeas. Ax and Bjørnenak conclude the Balanced Scorecard in Sweden is not only a tool for cultivating a pure shareholder perspective, but also has definitive stakeholder characteristics. (Ax and Bjørnenak, 2005)

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Figure 5.1.2c Source: CIMA 2009

After comparing with other management accounting techniques, CIMA (2009) concludes that performance management tools are the ones that most respondents intend to introduce in the next two years; they are approximately three times as likely to be cited as other categories of tool. This was observable across all industry sectors, and all regions. Of particular interest to respondents are balanced scorecard, ABM, BPR and total performance scorecard. The popularity of the some performance management tools that are involved non-financial performance features can get a similar conclusion as 5.1.2b.

It is interesting to find that no very large organizations, which almost use all management accounting techniques, are going to introduce Performance prism and Six-sigma within two years in Figure 5.1.2c. The proportion of current of users of Six-sigma was 14% (CIMA 2009). The less popular of Six-sigma is highly probable caused by very large companies enter into non-manufacturing sectors in recent years (detailed described in Section 2). Six-sigma is more suitable and widely used in manufactory companies (see figure 5.1.2d); there are only one-third manufactory companies in this survey. Furthermore, the complex use of six-sigma that describe by Proctor (2012), may become another reason for very large organizations to reject it.

Figure 5.1.2d shows that most performance management tools were similarly popular across all sectors except ABM and Six-sigma. ABM is not popular in manufacturing sector, but Six sigma is popular in manufacturing sector most. The total proportion of using performance management tools in service sector is lower than other two sectors.

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Figure 5.1.2d Source: CIMA 2009

5.1.3 Bain Survey

Darrell Rigby, a partner with Bain & Company and leader of Bain's Global Retail and Global Innovation practices, has conducted Bain's Management Tools & Trends survey since 1993. In Figure 5.1.3a, executives expressed high degree of agreement to concern about non-financial indicators such as culture, innovation, customer and employees.

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Figure 5.1.3a Source: Bain 2011

In Figure 5.1.3b, the three tools that the largest number of executives say they will start using in 2011 are open innovation, scenario and contingency planning and price optimization. Although we have consistently found that that the current usage of these tools are low, the fact that these tools currently have the largest predicted increases, more than 30%. Customer relationship management, Strategic planning and Benchmarking all have over 80% usage in predict in 2011.

Open innovation allows companies to expand the sources of breakthrough products; scenario and contingency planning helps executives test the "what ifs" to prepare for the future better and minimize risks; price optimization addresses another future concern-rising commodity prices. As prices increase, executives are unsure about how much of the cost they realistically can pass on to customers, especially in uncertain economic times. Price optimization models, used correctly, will help them identify the optimal price point.(Bain 2011)

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Figure 5.1.3b Source: Bain 2011

Customer Relationship Management (CRM) is a process companies use to understand their customer groups and respond quickly and instantly. CRM technology allows firms to collect and manage large amounts of customer data in order to increase customer satisfaction and loyalty. CRM data also provide companies with important new insights into customers' needs and behaviours, allowing them to tailor products to targeted customer segments. Therefore, the satisfaction of CRM is about 4 out of 5 and the usage increased rapidly from 20% to 80% since it first introduced in 2000. (See figure 5.1.3c) It demonstrates that customer satisfaction and loyalty is become more and more important in performance indicator.

Figure 5.1.3c Source: Bain 2011

Total Quality Management (TQM) is a systematic approach to quality improvement that marries product and service specifications to customer performance. (Bain 2011) However, we can found in figure 5.1.3d that the usage of TQM is decreasing since 1993 when is the fist time of the survey although the satisfaction is high (4 out of 5 and keep stable).

Figure 5.1.3d Source: Bain 2011

Lean Six Sigma

Originally developed to improve manufacturing efficiency and quality, Lean Six Sigma is now being widely adopted by financial institutions, retailers, hospitals and other corners of the services industry. (Bain 2011) However, Bain (2011) states that Lean Six Sigma often fails to deliver expected results. Bain's management survey of 183 companies found that 80 percent are not achieving their expected value from Lean Six Sigma efforts, and 74 percent have failed to achieve their savings targets.

Benchmarking

Benchmarking improves performance by identifying and applying best demonstrated practices to operations and sales. Managers compare the performance of their products or processes externally with those of competitors and best-in-class companies and internally with other operations within their own firms that perform similar activities. (Bain 2011) Benchmarking is one of the most popular tools used by executives. It has a high percentage of usage, which is around 80% and high level of satisfaction, 4 out of 5. (See figure 5.1.3e)

Figure 5.1.3e Source: Bain 2011

Balanced Scorecard

A Balanced Scorecard defines what management means by "performance" and measures whether management is achieving desired results. (Bain 2011) After first introduced in 1996, the usage of BSC increases from 40% to 70%. Although its usage decreases to 50% in 2010, it seems to be caused by financial crisis 2008. The overall satisfaction of BSc is high at almost 4 out of 5. (See figure 5.1.3f)

Figure 5.1.3f Source: Bain 2011

Business Process Reengineering

Business Process Reengineering involves the radical redesign of core business processes to achieve dramatic improvements in productivity, cycle times and quality. (Bain 2011) The usage of BPR is very high at more than 60% in early 1990s, but it keeps decreasing in later years to lower than 40%. Although its usage went up in mid 2000s, it dropped down again recently. The overall satisfaction of BPR is always lower than 4 out of 5. (See Figure 5.1.3g)

Figure 5.1.3g Source: Bain 2011

From figure 5.1.3c to Figure 5.1.3g, it is interesting to find that the usage of these non-financial performance managements increased after introduced in recently 20 years. However, all these usage decreased since 2008. Financial crisis 2008 is probably the major reason for the decrease. This result is similar to the view that "economic constraints" is one of the most important roles in conduct non-financial performance measurement practices, which I will discuss in following part in detail.

5.2 Document Review:

5.2.1 Manufacturing Sector

Borealis is a European producer of plastics. When it used a traditional, time-consuming budgeting process, the budget was quickly out of date in a competitive environment characterized by continually changing input and output prices and dynamic market conditions. This case describes the process that led Borealis to replace its budgets with four targeted management tools: rolling financial forecasts, Balanced Scorecard, activity based costing, and investment management. It discusses the process of implementing the new measurement and control systems. Borealis adopted the Balanced Scorecard to communicate strategic objectives and measures to employees and track performance against key performance indicator related to business. The BSC reports listed the corporate Key Performance Indicators and the performance of the six divisions of each KPI. Results were color-coded; green meant that the target had been meet, red that performance fell short of target. The company introduced a small incentive plan that could pay not to exceed half a month's salary based on twelve KPIS from the BSC. Through BSC, many more employees understood how their daily work contributed to company objectives and how they were doing.

Dell Computers is one of the most famous manufacturing companies who leveraged JIT successfully. Dell uses the direct business model where by it sells its computers directly to customers that can reducing inventory and make the distribution more efficient. (Broyles et al, 2005) In addition, Dell employs a JIT inventory system that they leverage their suppliers to achieve JIT goal. (Waytt 2001) Dell's strategic focus to reduce inventory and the use of JIT make them keep only 5 days of inventory on hand, much better than other computer companies who have 20 to 30 days of inventory. (Broyles et al, 2005). Consequently Dell is able to provide short lead time to their customer and significantly reduce inventory holding costs that results in cost savings, superior customer satisfaction and limited waste when the hardware get update.

Xerox Corporation, an American multinational document management corporation is a case study in Proctor (2012). Xerox Corporation realized that negative customers feedback were caused by its long sales order processing times. Then, managers in Xerox Corporation try to learn from a mail-order catalogue company, L.L Bean, who were successful in fast and reliable service to customers and has three times faster order processing time than Xerox. After learning from Bean, Xerox adopt some practices that suit to their business such as ensure that the most frequently purchased items are also the most easily accessible ones and develop a computer programme that organize incoming orders efficiently, then their performance increased as a result. (Proctor 2012)

MK Electric is an electric wiring products company. Proctor (2012) describes that there were only 30% of their sale were delivered to customer within 10 days before they apply JIT process. Consequently, customers who were not satisfied with their service were looking at alternative sources of supply. After an investigation, managers concluded the problems that it produced too many products, the sales department failed to liaise and coordinate with production control and traditional absorption costing systems is inefficient. Then, MK Electric introduced optimized production technology, a computer software system that was based on JIT principles. As a result, 80% of the sales order were delivered to customer within 10 days, which increase from 30%. Furthermore, the value of inventory held reduced by one-third. (Proctor 2012)

Knowles (2004) looks a case study, which is a successful application of the six sigma within a sweets manufacturing organization. The first exercise, which is removal of air bubbles problem, eliminated the cost of broken sweets and 80% of the sweets that were rejected by the grader. This exercise saves £ 100,000 annually. The second exercise, adjustment of wrapping machines to accept larger sweet variation, eliminated the other 20% of the grader rejects. £165,000 annually is saved by this exercised. The third exercise, common cause variability reduction, resolves the issues regarding measurement of finished product and the associated wasted sweets in the cooler that are generated when mistakes are made. This exercise saves about £195,000 from waste, £45,000 from maintenance and £50,000 from labour costs. The application was successful, and total savings of £290,000 per annum is demonstrated for an investment of approximately £13,000. (Knowles 2004)

All the five cases above is describe some different non-financial performance measures using in different contemporary organizations that help these organizations to improve their business performance. Fullerton (2009) studies the relationships among lean manufacturing practices, use of non-financial performance measures, and firm profitability. Results of the study confirm that both the lean production and non-financial performance measures has a significant direct effect on profitability. In addition, Sim and Killough (1998) find that complementarities between TQM or JIT and performance goals or measures can raise the business performance. In addition, Chenall (1997) also proved that the using of performance measures as part of managerial evaluation can improve the association between TQM and business performance. . Similar results are documented by Abdel-Maksoud et al. (2005) who report that high levels performance measures are found to be correlated with a high environmental competition, and with the adoption of JIT or TQM.

More importantly, the evidence in Fullerton (2009) suggests that the use of non-financial performance measures support the use of lean strategies as well. This view is similar to the Kaplan and Norton (1996)'s.

Chenhall and Langfield-Smith (1998) found firms with differentiation strategies would focus on quality system, team based structures and employee-based measures. However, firms with low price strategies would be focus on manufacturing system innovation, process improvement. The following examples of six-sigma explain this view further.

Six-sigma programs are widely adopted by many industries as a way to cut costs, improve cycle time, reduce defects and increase customer satisfaction. It is used in some very well-know multinational organizations, such as The Ford Motor Company, General Electric, Boeing and American Express. (Proctor 2012) Dow Chemical's successful implementation of six sigma helped it save $1.5b in just 3 years since 1999. This six-sigma programme Dow's to reach most expectations of strategy goals and financial performance. (Motwani 2004) The bank of America reported $2.0 billion over the same period.

After Allied Sinal uses six-sigma, it applies its quality concept, which offered by six-sigma in a different way. Six-sigma helps them define areas their customers consider critical to quality and make Allied reduce cost, short cycle time and increase speed to market. (Industry Week, 1998).

Raytheon Corporation is using six sigma as a means to reduce defects, and instil continuous improvement philosophies throughout the organization. Raytheon's six-sigma success is attributed to eliminating non-value added work, reducing defects, simplifying processes, reducing variation, and looking for reusable solutions. This enables them to respond more quickly to customer's needs, which results in improved customer satisfaction, competitive advantage, profits, and growth (Raytheon, 1999).

The Figure 5.2.1a is more examples of the relationship between using six-sigma and strategies.

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Figure 5.2.1a Source: Motwani 2004

Seppo (2005) shows that strategic performance measurement systems can be used both diagnostically and interactively, but such systems have implications for beliefs control and boundary control as well. (see Figure 5.2.1b)

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Figure 5.2.1b Source: Seppo 2005

Seppo (2005) uses the case of FinABB, a subsidiary of ABB Finland to support this view. The performance measurement system is 3K Scorecard. FinABB adopt the 3K Scorecard from the beginning of 1999 , which is to deploy a new performance measurement system as a means to communicate customer focus and enhance strategic control. Customer Focus had been a major objective at ABB throughout the 1990s. Managerial bonus systems at FinABB were gradually changed to take into account non-financial measures and the implementation of particular actions, in addition to traditional financial performance measures. Figure 5.2.1c is the details of how 3K scorecard link to the four levers of controlling strategy.

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Figure 5.2.1c Source: Seppo 2005

Malina and Selto (2004) conduct a research to describe a large US manufacturing company's designing and using a performance measurement model including multiple performance measurement. The results show the evidence that firms who operate in complex, risky and high competition environments are more likely rely heavily on qualitative controls as well as on non-financial performance measures. (Malina and Selto 2004)

Similarly, Hoque and Mia (2001) examine the use of multiple performance measures in manufacturing organisations. They collected data from 120 New Zealand-based manufacturing companies using a mailed questionnaire survey and received 71 responses, yielding a response rate of 59.2%. They conclude that organizations pay more attention on the use of multiple performance measures if the firms operating in high-level competition environment. This result is consistent to other research on the effect of competition on performance measurement. (Cobb et al., 1995; Hussain and Hoque, 2002; Lynch & Cross, 1991) Hoque and Mia (2001) also give the evidence that multidimensional performance measures may vary between both computer-aided manufactories and non-computer-aided manufactory and low and high competition firms. They also conclude the result that multiple performance measures will not be used in all the firms in the marketplace.

Hoque (2005) provide some view about the impact of environmental uncertainty on the relationship between the use of non-financial performance measures and organizational performance. Hoque explains the more and more important role of non-financial performance measures in improving the performance and proves that the positive association between the use of non-financial performance and the uncertainty of environment to produce a positive impact on organizational performance. Additionally, Hoque (2005) also states that firms improve their performance through pay more attention to some non-financial performance indicators such as customer satisfaction, learning and growth under a high-level uncertainty environment. More specifically, it also suggests that the more uncertain of the environment, the better impact of use non-financial performance to improve business performance.

Lamber (1998) finds that customer satisfaction measures are leading indicators of financial performance. It is leading indicators of customer purchase behaviour, customer loyalty and accounting performance. (Ittner 1998) These two researches qualified support for Kaplan and Norton (1996)'s view that include customer satisfaction indicators in internal performance measurement systems and compensation plans. Furthermore, Abdel-Maksoud et al., (2005) finds that most manufacturing companies in the UK measure delivery, timeliness and number of complaints from customers and these measures are considered critically important.

Perera and Harrison (1997) concluded that increasing customer-focus in manufacturing strategy, as proxied by the degree of implementation of AMP and AMT, would be associated with increasing use of non-financial measures. Perera (1997) shows that the correlations between each of the two components of customer-focus (AMP and AMT) and the use of non-financial performance measures are positive and significant, with that between AMP and non-financial measures being higher at r=0.606, p=0.000, than between AMT and non-financial measures at r=0.280, p=O.O04. He shows an interactive effect of AMP and AMT on the use of non-financial performance measures. The extent of use of non-financial performance measures is dependent on the levels of both AMP and AMT. The data, therefore, support the argument that there is a greater emphasis on non-financial performance measures for firms in which both AMP and AMT are high. (Perera and Harrison 1997)

5.2.2 Non-manufacturing Sector

Studies above have investigated non-financial performance measurement in manufacturing sector. The non-financial performance measures in the non-manufacturing sector such as banks, financial institutions, service institutions, and public sectors. The service sector contributing an important part of gross domestic product and employment in most advanced economies (Hussain and Hoque 2002). Thus, in order to meet the research propose, knowledge about what factors affect the design and use of an effective non-financial performance measurement in service organizations such as banks is necessary.

Cobb et al. (1995) reports the management accounting change in a large multinational bank. In their article, they states that management accounting changed by the reason of new competitors, developments information technology, and bad debt experience, increasing profit margins and the introduction of new products. They also conclude that environmental pressures were the primary reasons for many of changes of the management accounts. (Cobb et al. 1995)

Hussain and Hoque (2002) discuss the performance measurement practices in Japanese financial service sector. It concludes findings by analysis four Japanese banks. Hussain and Hoque (2002) is trying to find and explain the factors that will affect the design and implication of non-financial performance measurement in the financial service sectors, especially in banks. This research finds that the most forceful factor to influence the banks to implement a particular performance measurement is economic constraints. There are other factors have been found to affect the performance measurement such as competition, central bank's regulatory control, accounting standards, management's strategic focus, etc. In the years that Hussain and Hoque (2002) conducted his research, Japanese banks faced mass debts problem, which caused financial crisis in Japan. Such an economic climate creates pressures on management to focus on developing and improving non-financial performance measures because they have big pressures on improving financial performance. Interestingly, the global financial crisis 2008 makes us meet the similar economic constraints in Hussain and Hoque (2002). Its result will be quite valuable to this research.

The four banks discussed in Hassain (2002) are chosen from two categories. Two were ordinary/city banks and the other two were cooperatives banks. In case study 1, Bank Alfa Japan is an ordinary/city bank. The top management believed the financial performance measurements are very important. Measuring return on invest, earnings per share appeared to be a main practice at Alfa. Although Alfa's management considers an additional non-financial performance measurement to fit with the bank's strategy, mission better, non-financial performance measures were not conduct actively. Alfa's top management realized the importance of customer satisfaction, but the existing performance measurement cannot provide the information they want. Thus, they believe non-financial performance measures could be helpful to provide a real picture associated with financial performance measures.

In case study 2, Bravo Japan is a leading ordinary/city bank in Japan who has built reputation in many parts of the world. In bravo Japan, top management paid significant attention to non-financial performance measurement. A customer survey was conducted because the top executives believe customer satisfaction was one of the top priorities. The overseas investment that need enhance competitiveness globally is the main reason to choose customer-focused strategy. Furthermore, Bravo also focuses on the quality of services and corporate social responsibilities. In addition, top management in Bravo still consider introducing an alternative method to measure non-financial performance more comprehensively, but they failed to find any method fit their expectation at that time.

In case study 3, Charli Japan is a cooperative bank in Tokyo. As a part of Shinkin Bank Association, the Central Association of Shinkin Banks advises Charli's strategy, policies and all other necessary principal activities. The top management in Charli believes they need non-financial performance measure to survival in the competitive environment. Top management recognized that non-financial performance measures could increase their competition. They focused on customer satisfaction, quality service and social wellbeing. Although non-financial performance measures were less important when compared to the financial performance, efforts for social wellbeing were thought as a way to help Charli Japan to improve the performance of their business and increase bank's reputation.

In case study 4, Delta Japan is the same type of bank with Charli Japan. However, the attitude to non-financial performance measures at Delta is significant different from it at Charli. They considered non-financial performance to be the ultimate outcome of financial performance. Delta's managers didn't realize the importance of non-financial performance measurement and believe financial performance measures were fundamental to effective operating. The nature of business in Delta didn't allow managers to think of the non-financial performance aspects and only to dwell on profitability.

Hassian (2002) also gives a summary of the impact of various institutional forces on non-financial performance measurement practices in the four banks. The uncertainty of economic conditions is the first factor that created huge pressures on management to improve financial performance and non-financial performance. (Simon 2000) Competition is ranked at second place. For example, Alfa and Bravo's strategy is to extension to worldwide need to provide higher quality of service and satisfy their customers overseas. They meet much higher competition than Charli and Delta. Thus Alfa and Bravo want to improve both financial and non-financial performance. Top managers attitudes also influenced non-financial performance measurement. (Hassian 2002) Alfa and Delta both think that they cannot improve non-financial performance if they are not able to make profits. Conversely, Brabo and Charli improve the non-financial performance even in economic difficulties.

Hassian conducted another research for four banks in Omani and four banks in US in 2006. Three out of four banks in Omani think non-financial performance measures are "very important". Although these banks may not know and understand all the latest non-financial measures, they all use non-financial performance measures to evaluate performance. However, top executives in these banks still think financial performance is more important than non-financial performance in practice. The important of non-financia

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