This paper reviews an article by Jermias and Gani (2004) titled 'integrating business strategy, organizational configuration and management systems with business unit effectiveness: a fitness landscape approach', published in the 'Management Accounting Research' journal. Jermias and Gani (2004) sought to clarify the relationship between situational factors and organizational performance. The study adopted a 'fitness landscape approach to test contingency hypotheses about the relationship between business strategy, organizational configurations, management accounting systems, and business unit effectiveness' (p.179). The contingency theory approach to studies relating management accounting, strategy and performance has attracted attention from researchers over the years (Gerdin and Greve, 2004; 2008; Chenhall and Lagnfield-Smith, 1998). The attraction stems from the need to fill the gap between practice and the academia (Roslender, 1995).
The central theme of the contingency theory is that there is no ideal or optimum form of management accounting system (Reid and Smith, 2000). Thus the concept of 'fit' between the structure of an organization and contingencies (technology, environmental uncertainty, globalization, demanding customers, organization size, diversity and formal structure) that impact on the design of these structures (Caniato et al., 2008).
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The research by Jermias and Gani (2004) is intended 'to contribute to the limited body of knowledge in this area by attempting to develop and measure the contingent fit between strategic priorities and its contextual variables using fitness landscape approach and investigate the association between the level of contingent fit and effectiveness at business unit levels' (p.180).
This review process is a critical appraisal of how the researchers have been able to meet their objectives. The review is structured as follows; background of the study, contributions to the existing literature, evaluation of the methodologies adopted and the philosophical assumptions informing the methodology, the appropriateness of the sample selection, the ethical considerations inherent in their chosen methodology, the thoroughness and robustness of their research design, the evidence warranting their conclusions and whether or not an alternative approach may have been more appropriate.
Background of the study
The contingency theory approach to studies relating Management Accounting, Strategy and Performance has been prominent in management accounting research (Gerdin and Greve, 2004; 2008; Takeuchi, 2009; Reid and Smith, 2000; Naranjo-Gil and Hartmann, 2007; Chenhall and Lagnfield-Smith, 1998). The attraction stems from the need to fill the gap between practice and the academia (Roslender, 1995), and to enhance the role of the management accountants in organizations through the contribution of valuable and relevant information (Abernethy and Guthrie, 1994; Tomlin, 2006). The contingency theory approach has emerged as one way of addressing this perceived gap between practice and academic research by testing for factors that affect organizational structures and designs. And to give insight into the impact of these factors on practice (Chenhall, 2008; Chenhall and Langfield-Smith, 1998).
Although not a particularly new phenomenon in the field of management accounting (Anthony, 1965), the approach has been found valuable in the analysis of situational factors which may impact on organizations. The contingency theory is rooted on the premise that many factors (contingencies) influence the way the organizations are structured and adapted. Jermias and Gani (2004) research is among the several studies which are designed to create an understanding of the contingencies that impact on organizational performance.
Like most other studies which have embraced the concept of contingency theory in management accounting research (Roslender, 1995; Govindarajan, 1988; Gerdin, 2005; Gerdin and Greve, 2008; Chenhall, 2003, Mitchell, 2002), the need for practically oriented research approach has been acknowledged and embedded in the motivation for the research by Jermias and Gani, (2004). This has been outlined as follows: 'from a practical perspective the findings of this study can help to increase understanding of how different strategic priorities may require different organizational configurations to positively affect performance' (p.181).
It was also intended to contribute to theory by providing 'insights into the development of the contingent fit construct to represent an appropriate matching between strategic priorities and its contextual variables and how to measure this construct' (p.181). But how well these objectives have been met will be critically appraised in the proceeding section by evaluating whether the researchers have been able to make these contribution(s) to the 'limited body of knowledge in this area' (p.180), and how much such contributions could be relied upon for practice and theory building as intended.
Contribution to existing knowledge
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One of the contributions anticipated by the researchers is to create an understanding of how various contingencies could be blended into a 'fit' or brought to a state where they would enhance the effectiveness of a business unit. Building on the framework proposed by Porter (1980), the researchers identified two strategic priorities that are suggested to enhance competitive advantage. Thus an organization will either adopt a 'low cost approach' or 'product differentiation strategy'.
Using the fitness landscape approach which creates a link between adaptive factors, the researchers showed the combination of strategy, organizational design and management accounting system that could lead to business unit effectiveness. They developed a model which contributes to filling the gap in the literature of contingency theory research in management accounting. Their contribution to the contingency theory research in management accounting gives insight into the measurement of the 'construct of contingency fit' and broadens the contingency theory perspective to management accounting research.
Through a number of testable hypotheses, the study suggests that 'strategic choice, organizational design and management accounting systems enhance organizational performance' (p.187). They also suggested the elements that should be embedded into the various strategies and the possible combination of the various elements that would lead to improved performance.
However, the study analyzed the various factors individually following a 'bivariate interactive approach' (Govindarajan, 1988). The 'bivariate interactive approach' is based on the assumption that each situational factor contributes independently to the overall fitness value. This does not clearly show how these factors fit together as a unit to drive business unit effectiveness, which is implied in the research. An alternative quantitative approach to fit that may have captured the effects of these variables as a unit would have been the systems approach to 'fit.' The systems approach to fit is based on the premise that organizational performance is a function of the interaction between the various variables and not the independent contributions of the variables to the overall fitness value (Govindarajan, 1988).
Ittner and Larcker (2001) have also argued that measuring strategy 'using a simple continuum between firms following a cost leadership strategy and those following an innovation or growth oriented strategy' (is a limitation to contingency theory research). Given the multidimensional nature of corporate strategy, a single measure (as used in the study) is unlikely to capture many relevant strategic distinctions' (p. 17).
The researchers have also given the impression that organizations are restrained to making a choice between the two strategies studied. Thus it has been stated that '… a company must choose a particular strategic (either low cost or product differentiation) to achieve sustainable competitive advantages' (p.186). Ittner and Larcker, (2001) suggest the existence of other strategic choices like targeting a particular market segment, providing better customer services, rendering higher quality products and services and copying competitors' inventions . Porter (1980) also described a strategic alternative to 'low cost' and 'product differentiation' which combines both qualities but focuses on a particular market segment.
Methodology and Philosophical Underpinning
Researchers' conceptualization of reality (their ontological position) influences what is accepted as knowledge (epistemology) and drives the choice of methodology (Bryman and Bell, 2007). Methodological suppositions inform the research methods considered suitable for the gathering of convincing evidence (Chua, 1986). Johnson and Clark, (2006) contend that the paramount concern should not be the philosophical foundation of a research, but how well such philosophical perceptions are portrayed and defended with respect to alternative choices. Saunders et al., (2009) argue that the different philosophical positions allow for evaluation of the subject matter of a research from different perspectives which could be advantageous.
Research in accounting like most other disciplines are distinguished with respect to the fundamental supposition of knowledge, the phenomenon being studied, and the underlying relationship between practice and theory building. (Chua, 1986, p.601) stated as follows:
'Mainstream accounting is grounded in a common set of philosophical assumptions about knowledge, the empirical world, and the relationship between theory and practice. This particular world-view, with its emphasis on hypothetico-deductivism and technical control, possesses certain strengths…'.
This informs the research approach as either deductive (in line with the functionalist point of view) or inductive (in line with social constructionist perspective). The positivist approach epistemological view is informed by observation of phenomena. Thus only things which can be observed are reckoned with to provide reliable evidence. It focuses on developing causal inferences and generalization of outcome(s). The inductive approach tends towards what informs actions, details about circumstances and subjective factors informing a particular action.
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The survey research design has been employed for the purpose of the study reviewed. Surveys are linked with the deductive approach built on the realist ontological assumption. Contingency theory studies have generally been considered on positivistic studies (Chenhall, 2003; Krumwiede, 1998; Abdel-Kader and Luther, 2008). They employ surveys research design to produce answers to the what, who, where and quantification questions of how many or how much Saunders et al., (2009). Surveys enhance data collection in large quantity in an economical way which could then be analyzed using inferential statistics. On the basis of the analysis, a framework could be established or causal relationship inferred which could be generalized to the entire population. Survey designs afford the researcher control over the research process.
The survey design as adopted by the researchers is appropriate for the study as it enabled the collection of large data which was analyzed by the researchers to test the hypotheses they formulated. It enabled them to draw inferences on the contingencies that impact on effectiveness of a business unit. The adoption of the survey design to conducting the research suggests that the researchers have a positivist perception of reality and rely on concrete evidence to reach their conclusions.
Jermias and Gani (2004) select their sample of companies listed on the 'Jakarta Stock Exchange under the consumer goods industry' (p.188). The researchers have stated that the choice of companies in a single industry has been informed by the desire to 'minimize the effects of environmental heterogeneity (p.188). Efforts were also made to involve a diversified approach to strategy, and multiple products which aimed at ensuring that different organizational design, management accounting, and control mechanisms were in force in the different companies selected in the sample.
Chenhall (2003) suggested that industry specific factors are likely to impact on the design of management accounting systems (MAS). Caniato et al., (2008) contend that different industries are exposed to different challenges and contingencies which inform their structures and MAS. Based on the evidence from previous studies as stated above, the selection of an industry for study is appropriate given the need for sampling.
However, it may be argued that although selection of a single industry for study 'minimizes environmental heterogeneity' (p.188), it implies that the researchers have assumed that every firm in the industry is exposed to the same situational factors. It may be argued that the industry (consumer goods) ranges may be broad and result in differences which would not allow for direct correspondence to the business of individual company.
Also, where the same factors impact on all the firms in the industry, the rate at which these factors may impact on individual firm may differ from the other. The strategy adopted by a firm, and its objectives may also affect the manner at which the impact of certain factors are felt within the industry. Ittner and Larcker, (2001) have argued that generalization in management accounting studies are difficult as a result of research methods, diversity in samples and theories employed.
In the sample selection process, the researchers after making initial contacts and 'obtaining approval from senior management, asked a contact in the top management to nominate a business unit and contact person to be surveyed (p.188; 189). The researchers have also suggested to top management a particular specification of the contact person, thus:
'a manager responsible for a particular product or group of products that adopts similar strategy, a controller or a management accountant… this is considered necessary to ensure that the respondents have an understanding of the market in which the business unit operates as well as the strategic and operating decisions they make' (p.189).
While it is useful to have the appropriate person(s) with the right skills and knowledge participate in the research to give it credibility, this raises some ethical concerns. Asking a contact in the top management to nominate a person to be surveyed may bring to bear issues about 'informed consent'. It also draws attention to issues of coercion as the nominees may not be willing to participate on their own volition. Questions may also arise as to whether the nominated person(s) were appropriately informed of their right to refuse to be a part of the survey process, and the consequences that may follow withdrawal since a superior has selected them to participate.
Krumwiede (1998) argues that selecting controllers or management accountants and managers may bring in bias in responses relating to their professional duties. In the same vein, being selected by a superior to participate in the research process may put on the participant the burden of protecting the organizational image and hence responses may be tailored to suit the image the superior would want portrayed of the organization.
To address this sort of concerns, Govindarajan, (1988) sent individual letters addressed to the selected participants explaining the purpose of the study and assuring them of confidentiality in whatever information they make available for the study. This resolved the ethical concern of voluntary participation, informed consent and issues of accessibility. Alternatively, a qualitative research approach requiring face-to-face interviews would have allowed for more detailed probing.
Efforts were made by the researchers to ensure that the effects of 'environmental heterogeneity' are reduced by concentrating the research on a single industry. While this has made the results difficult to generalize, this has been intended to give more credibility to the research. Consumer goods industries which are supposed to possess the necessary characteristics suitable for this research have also been selected among the industries in the 'Jakarta Stock Exchange'.
Data collection was done through 'mail survey and personal interviews'. The personal interviews served as a pilot study which enabled the researchers to test for the understanding of the questionnaires among a few of the intended respondents. This enabled them to refine the data collection instrument for clarification and simplicity. The process adopted by the researchers in the design of the data collection instrument is ideal for this kind of study with similar processes followed by prior and subsequent studies (Abdel-Kadar and Luther 2008; Chenhall and Langfield-Smith, 1998; Govindarajan, 1988).
Govindarajan (1988) for instance employed interview to refine the questionnaires to capture the specific objective(s) intended, reviewed prior studies to find questionnaire instruments fitting for the study, discussed the draft questionnaires with experts who help fine-tune it to give it 'content validity' and ensured a pre-testing of the instrument among the class of intended respondents to ensure clarity and understanding. Jermias and Gani (2004) have followed a similar path to giving validity to the research instrument.
However, improvements could have been made to the data collection process by involving more than one respondent per firm (in different sub units) so as to be able to compare the different responses for commonalities. Where a member of the top management has been selected to make a nomination of the participant, Govindarajan (1988) ensured a cover letter was sent to the nominated official explaining the rationale of the study and giving assurance that information given will be confidential. This has the effect of allowing the nominated personnel to be as open as possible in giving responses without the fear of what consequences my follow certain responses. The researchers failed to create that impression among respondents.
Data Analysis/ Warranted Conclusion
Given a high response rate to the survey and data from the interviews, the researchers found it compelling to analyze the data without taking into consideration a test for non-response. A total of 106 valid responses representing a 92% response rate were recorded. Statistically these responses were subjected to thorough analyses, first to sort the data into strategy adopted by organizations (product differentiation or low-cost). They then evaluated the concept of fit by 'calculating the weighted sum of the fitness contribution of each contextual variable using the formula derived from the fitness landscape theory…' (p. 193).
A correlation test was run to ascertain the relationship between the concept of fit and business unit effectiveness. Comparison was also made between the variable studied. A reverse coding of some of the variables analyzed was done to ensure consistency in result. Overall, a thorough analysis was conducted on the data gathered, the results of which gives insight to the measurement of contingency variables.
On the basis of the analyses of the data collected by the researchers, they asserted that the effectiveness of a business unit was dependent on the fitness between its contextual variables and the strategy adopted. Their finding upholds the concept of the contingency theory, that there are no optimal systems for organizations. Rather organizational structures leading to effectiveness are the outcome of various situational or contextual factors acting on them. Although the researchers did not show how these factors interact as a bundle to drive performance.
The 'implication for future research' implies the researchers had tried to establish a relationship between strategy, contextual variable and performance. They however suggested that future researchers could do that by integrating the variables studied instead of working on the assumption that variables contribute independently to the fitness concept.
The basis of warranted conclusion, given the quality of the data collection instrument and the rigor in the data analyses process, it might be argued that the researchers' conclusions are based informed evidence. Thus the conclusions drawn from the evidence they were able to show from their statistical analysis warrants their claims. The subject of warranted conclusion holds that the evidence informing the conclusions should be convincing enough to draw a logical link to the conclusions (Gorard, 2002).
However like previous studies, the study reviewed is not explicit about the impact of situational variables on performance; which is central to how the research will affect practice. This is crucial as Gerdin and Greve (2004) contend that such omissions may have implications on the choice of theory building and testing. They argue that: 'With a contingency approach, it is assumed that organizations may have varying degrees of fit. Thus, the researcher must show that a higher degree of fit is associated with higher performance' (p.305).
Gerdin and Greve, (2008), contended that studies which fail to link the studied variables to performance would be more appropriately referred to as congruence studies rather than contingency studies. Congruence studies assumed that only the best-performing organizations survive to be observed. Therefore context-structure paradigm could be evaluated without relating it to performance.
The relationship between structure and context, or the degree of fit between an organization structure and contingencies is suggested as the explanation for any variation in performance in organizations. Itterner and Larcker (2001) suggested that improved outcome(s) of research in this area (contingency theory) could be enhanced by improving the measurement of strategy. They argued that measuring strategy as a band between companies following 'low cost' or 'product differentiation' would unlikely pick-out many vital distinctions
Appropriateness of Alternative Approach
Researchers have argued that the formulation and implementation of strategy is a social process which is dynamic in nature (Helliar et al, 2002). Therefore the quantification of such variables may not appropriately generate results that are applicable to other situations. However, contingency theory research has attracted a functional appeal in which quantification and analyses of data using correlation and regression is a common norm (Langfield-Smith, 1997; Caniato et al., 2008).
Studies adopting the positivist perspective which is informed by quantification produce results which could be widely applied. This is the strong point of quantitative studies and a disadvantage of the qualitative approach. Qualitative research approaches aim at evaluating; in a much detailed manner the impact situational factors on a studied case. It therefore produces outcomes that cannot be easily generalized.
In the study by Jermias and Gani (2004), although the researchers have adopted a positivist perspective, it is difficult to generalize their findings as a result of the sample selection which may not depict the likely pattern in similar situations. If the results of the study were not intended for generalization, then a case study research design would have been a more suitable approach to conducting the study.
A case study would have given the researchers the opportunity to have an in-depth understanding of how these contingencies combine into a state of 'fit' in actual circumstances to drive performance. This research design would have enabled the researchers to inductively infer what situational factors impact on organizational performance and to what extent, instead of having to test priori hypotheses. Adopting a case study design would also have enabled the researchers gain an understanding into what internal factors besides the external factors studied that affect performance in organizations (Helliar et al, 2002).
Given the second of objective of the paper to contribute to theory building, a case study design would have enhanced the achievement of this objective by building theories rather than the testing of hypotheses. Studies adopting the dynamic contingency model suggest firms in the same industry are not exactly exposed to the same situational factors at the same rate and in the same manner. It also asserts that these factors influence but do not determine the functionality of the organization (Mintzberg, 1985).
A case study design to this kind of study would have enabled an understanding of how these contingencies influence organizational choices of strategy and other policy decisions which impact on a particular firm; further studies comparing the effect of a particular factor on different firm would then give credence to the effect of that factor on organizations if a consistent result is found. For instance Hellier et al. (2002) adopting a longitudinal case study design were able to gain understanding into factors that persistently affect organizational strategic choices and others whose impact may be for a while. These kind of study would have enabled the researchers to come to the understanding of other variables besides the ones anticipated by them which influence performance in organizations.
The researchers set themselves the task of developing a model that measures the contingency fit between variables that impact on organizations. They were also keen at contributing to theory building. Although their work has enhanced understanding on the measurement of contingency fit as intended, they failed to show how these variables interact to drive performance which is needed for practice.
Their findings give credibility to the contingency theory which is grounded on the notion that there is no universally optimal system that fits into any organizational setting, but rather, various situational factors impact on the design and strategies of organizations (Ittner and Larcker, 2001; Abdel-Kader and Luther, 2008). Thus suggesting that adequate considerations should be given to these factors if an organization is to meet its objective(s) (Gerdin and Greve, 2004; Cadez and Guilding, 2008).
The researchers have however given readers the impression that there are only two strategic choices from which a company must choose one. This supposition has been refuted by other researchers who acknowledge the existence of other strategic choices. Their choice of firms in a single industry although has the advantage of reducing 'environmental heterogeneity', suggests that all firms in the same industry are exposed to the same situational factors at same rate. As a result, the impact of contingency factors would be felt in similar manner. Researchers have suggested that impact of situational factors on individual firms vary.