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You are on page 1of 15

Despite longstanding concerns over stagnation and lack of progress, work in the area of contingency

theory has in fact taken significant steps forward since the time when we wrote this chapter. The

degree of change makes piecemeal edits to the text insuffictent. Given that, we leave the chapter in

its original form as what we hope remains a useful introduction to the basics of contingency and

forms of fit, and as a junlping off point into the origins of this literature. Veare grateful to have the

opportunity to point the reader in the direction of a small selection of articles published since we

wrote the chapter which we feel are particularly noteworthy in mapping the contours of

developments in the field subsequently, however.

One piece to which we 'would direct the interested reader is Hall (2016).Students of the origins of

contingency work in the field of accounting will appreciate that early studies that helped to kick start

an interest in theorising contingencies drew on various pschological variables. This piece offers an

interesting link back to such early studies and sets out some promising lines of future

theoretical integration.

(2016) provides a systematic review of 'work in recent decades. ln general, attention to the issue

of fit in contingency theory has received considerable attention since the time originally wrote

this chapter, and the piece by Burkert, Davila, Mehta, & Oyon (2014) offers a recent attenlpt to

synthesise much of this work, together with interesting observations on some less commented

upon matters of fit, as well as detailed discussion of the development of statistical technique

in the area.

A particular trend that we note in our observations of developments is that: it is in the area of

systems fit that the greatest progress is to be found. The theoretical analysis of this issue

presented by Graebner & Moers (2013) offers a compelling opportunity for engagement between

complcmctarity theory and contingency theory, in both directions. Their theoretical lead is

followed up empirically in Bedford, Malmi, & Sandelin (2016), who also introduced to the

accounting literature the statistical technique of Fuzzy set comparative qual ita live analysis .

Introduction

substantial and diverse body of research . whilst this literature includes studies that have adopted

a wide array of empirical and statistical approaches the central issue required to inform an

understanding of their contribution is the concept of 'fit'. This concept has been described as 'the

heart of contingency theory' (Donaldson, 2001, p.1Sl). In MCS research a contingency framework

has been utilised to identify how MCS are best designed and implemented to 'fit' the

context, or contingencies, within which M.CS are employed. Fit is thus a question of alignment

between three primary pieces of an organisational puzzle: (1) The characteristics of MCS,

(2) Organisational Performance, and (3) Contingency factors that might affect the relationship

between the first two. Figure 1 shows an overview of the basic question of contingency

research together with an indication of some of the main contingency variables that have

been examined in the MCS literature to date.

Building on the contingencies that formed the interest of classic contingency studies from the

organisational literature, MCS based researchers have studied the effects of environment,

technology and size on organisational structure. More recently much attention has been given to

the importance of strategy as a contingency. This raises interesting questi.ons 1'01' the contingency

framework, blurring as It does the distinction between endogenous and exogenous variables. In

relation to the environment, for example, notions such as enactment and selection of the

environment through strategic choices raise questions as to the validity of assumptions that

the environment is something external that imposes on organisations. For a comprehensive

review of l'vCCS studies that have worked with these various factors, the primary ways in

which they have been conceptualised as variables amenable to study, and an overview of the

resulting propositions concerning their impact, see Chenhall (2003; forthcoming).

Over time, contingency-based. MCS research has been subject to a number of critiques. Otley

("1980), for example, was concerned about the relative lack of attention to measuring

performance, an issue that has subsequently received much more attention including the use of

stock market performance information as a measure in studies such as Ittner et aII. (2003). Chapman

(1997) argued that whilst much attention had been devoted to the development of research

instruments that addressed an increasingly wide variety of contingency factors, relatively less

effort seemed to have been devoted addressing more processual aspects of MCS. The increasing

appearance of studies building on the notion of interactive Control Systems show that progress

continues to be made on this front (Bisbe el al., 2005). VVhlist much remains to be done in these

areas, such progress is cheering.

Hartmann and Moers (1999) engaged in a comprehensive review of the literature addressing

questions of theoretical and statistical rigour with which contingency- based hypotheses have been

put forward and subsequently tested. One of their concerns was that very often past studies

had failed to elaborate their expectations regarding the nature of fit with sufficient

clarity. Recent publications show that whilst a central concept, fit remains subject to ongoing and

often spirited debate (e.g. Cerdin and Greve, 2004; Gerdin and Hartmann,2.005) many years after

seminal discussions of the topic such as (Drazin and Van de Ven, 1985).

nnplicatioos is the fact that there is considerable and confusing variation in the use of vocabulary

used to describe various fonns of fit between the main writers on the subject.' Table 1 shows a

comparison of the terms employed by two leading sources on the subject. we can see that whilst

noting that the adoption of a common set of terms is helpful, Donaldson (2001) nonetheless

proposes a comprehensive departure from the terms suggested by Drazin and Van de Ven

(1985). His arguments in support of his suggested re- naming of Selection and Systems fit

provide an excellent sumlnary of key arguments regarding the nature of relationships being

theorised and will be discussed below. In particular, his proposed renaming of Interaction fit

deserves more attention here since it stresses an important argument that highlights the

separation between theoretical concepts of fit and their statistical operationalisation.

Partly he wishes to avoid confusion caused by the use of multiplicative interaction terms

commonly used in statistical analysis of Interaction fit. His main concern is to elaborate

Matching fit (very little used in ivfeS research) from III ore general approaches that use multiplicative

interaction terms (the bulk of the MCS literature). Donaldson proposes Matching fit as the exemplar

of contingency research, and as we will see below it offers a far more precise theorisation of the

relationship between MCS, contingencies and performance.

In this chapter, we will examine the various notions of contingency fit (Selection, Matching and

Interaction, Systems) that have been used to model the relationships between ]vICSand

outcomes in the literature. Having clarified the specific assumptions underlying these different

forms of fit we will briefly address some of the wider theoretical debates related to different

notions of fit, and discuss briefly how they have been operationalised drawing on illustrative

examples from the MCS literature.

Selection fit

Selection studies examine the way contextual factors are related to aspects of l'v1CSwith no

explicit attempt to assess whether this association is linked to performance.' For example, it

may be that managers find that a reliance on accounting performance measures is most useful

in situations that are relatively stable and certain. Implicit in these approaches is the assumption

that firms operate in situations of equilibrium. As Such, researchers will observe only organisations

that have taken optimal choices to ensure that MCS suit the context of the organisation. Therefore

all firms are at optimal performance, given their situation, and it is not possible to identify firms that

have not aligned their MCS with the requirements of their context as they will not have

survived. In discussing critiques from reviewers in accounting journals that equilibrium

assumptions mean that performance effects of MCS are not to be expected, Ittner and Larcker (2001)

suggest this is a somewhat extreme stance, proposing instead,

A more defensible position ... is that people learn to make good decisions and that organizations adapt

by experimentation and imitation so there is at least fossil euidence' euailable for testing thecries

(Milgrom and Roberts (1992) quoted in Ittner and Larcker (2001, p.399».

Drazin and Van de Vcn (1985) in discussing this recognise that the equilibrium assumptions

underlying Selection fit models u1ay apply more to some aspects of organisation than others.

Arguing that in many studies there is some 'more- macro' level that imposes on the 'more-mirco'

level. Frequently these impositions are conditional (and hence of particular interest to

contingency theorists) involving switching rules to distinguish appropriate actions and situations

(such as the differential organisation of production and research and development, for example). In

doing so, they bring in the issue of the managerial decision. Donaldson (2001) prefers the term

'managerial decision' for this form of fit, arguing that appeals to concepts such as natural selection

and survival of the fittest downplay significant aspects of managerial choice.

The statistical techniques used to examine research questions concerning the extent to which MCS

are related to an element of context involve tests of association such as correlation analysis, or if

there are multiple elements of context, multivariate techniques such as regression analysis. A

distinctive feature of selection studies in MCS research is that have identified a novel aspect of MCS and

shown how they relate to various contingencies. we select just two examples, Simons (1987) and

Davila (2000) to show how selection studies identify novel aspects of l\1CSand examine associations

with context,

Simons (1987)expressed the primary concern of his study using the Null form H0 'Control system

attributes do not differ between Prospector firms and Defender firms'. In the study, he aimed to

elaborate on the meaning of MCS and identified ten specific MCS characteristics. The research

focused on how these were associated with the strategic archetypes of Prospectors and

Defenders. Correlations were used to identify the strength of the association between each

characteristic and the strategic archetype. ln addition, multiple regression (LOGIT) was used to see

how well the MCS characteristics could predict firms as prospectors or defenders. The study also

analysed performance eHeets in a separate set of analyses, but the primary interest of the study is its

Selection fit hypothesis.

Davila (2000) presents a study of the role of MCS in new product development. Following a series of

preliminary field studies and a careful analysis of the literature on the nature of uncertainty and its

consequent Information processing requirements, his study puts forward two sets of Selection (it

hypotheses. The study also includes a third set of hypotheses that explore Interaction fit relationships.

As discussed in detail by Gerdin and Creve (2004)and Cerdin and Hartmann (2005) in particular, care

must be used in mixing forms of fit since in some cases the underlying theoretical assumptions may be

mutually exclusive. At a statistical level, there is also the concern that if a contingency and MCS variable

have been tested using correlation analysis in support of a Selection fit hypothesis then it is

problematic to then test their Interaction fit with performance since regression analysis assumes

the independent variables are not significantly correlated. Davila (2000) presents an instructive

example of the careful integration of Selection fit and Interaction fit. So, for example, one of his

Selection fit hypotheses (supported in the study) concerns the relationship between market

uncertainty and use of customer information in MCS. Customer information in MCS is then tested in

Interaction with a customer focused strategy to show positive performance effects.

Interaction fit

Whilst the findings of selection fit studies have been instructive and they have generated streams

of subsequent studies, the question of performance is seen as important by many accounting

researchers. There is widespread interest as to whether different combinations of MCS and

context have different performance outcomes. Unlike Selection approaches, Interaction approaches

imply that whilst organisations are likely moving towards optimal combinations, there will be

some that have not achieved this combination. Others may have changed their context, say their

strategy or structure, and have yet to adjust MCS to suit the new situations. This dynamic process

of moving in and out of equilibrium means that researchers can expect to identify poor performing

organisations (with MCS that are not suitable for their context) at any given point in rime. In

considering how MCS, contingencies and performance come together Donaldson (2001) argues

that his concept of Matching fit is the most appropriate. We consider this first, and then, in a

subsequent section, discuss Multiplicative Interaction fit, the approach used most often in MCS

research.

Matching fit

Matching fit assumes optimal combinations between aspects of a contextual variable and

particular dimensions of an MCS. For each level of a contextual variable, there is assumed to be a

unique level of an MCS variable. If these two levels 'match' then the firm is in fit, and

performance is maximised. Any mismatch (in either direction) between the specific level of

the contextual variable and the appropriate MCS results in a decline in performance. A

Matching fit line can be conceptualised as one that joins all the points of fit derived from

marching the appropriate MCS with the level of the contextual variable.

For example, Figure 2 shows that in considering the locus of control of an employee there

might be a unique level of budgetary participation at which performance might be maximised.

In the figure, the assumption is made that scales of measurement have been found at which this

unique level is determined as having an equal score. Under Matching fit assumptions

performance is a question of how far from fit a situation is, not where on the fit line that the match is

positioned. Given this, performance is the same at any point on the line of fit, hence the use of the

term Isoperforrnance by Donaldson (2001).

A second significant implication of this form of fit is that by contrast with more COIUJnOI1 forms of

Multiplicative Interaction fit as found in MCS literature, performance is not simply a question

of more (less) of an MCS variable in interaction with more (less) of a context variable. In Figure 2,

faced with a locus of control score of 4 (indicating in this hypothetical case a more Internal focus),

then the appropriate level of participation is also 4 (indicating a relatively high level of

participation). Performance would be reduced by either less or more participation than this. As

will be shown in a subsequent section, Multiplicative Interaction fit clearly differs from the idea of

Matching fit, where the latter specifies a unique fit for participation at a given level of locus of

control. A further issue is that matching fit can entail an expectation of curvilinear

relationships, and not simply linear' ones, For example, it is often suggested that more organic forms

of management controls are better suited to conditions of environmental uncertainty than

more formal, mecherustic controls. However, while mechanistic controls suit relative certainty

and as the environment becomes more uncertain more organic systems provide for more

flexible responses. it is possible that at extremely high levels of uncertainty the

organisation's survival is threatened and the most suitable response is to employ more mechanistic

controls to ensure that TeSOUl'Ceasre conserved. Matching fit can model and test this situation by

recognising the three stages of uncertainty and the curvilinear relationship with the mechanistic-

organic typology.

Examples of Matching fit in the MCS literature are relatively rare. Two studies that use a deviation

score rather than a multiplicative interaction terrn (see below) are Brownell (1982) and Frucot

and Shearon (1991), In their footnote 12, Frucot and Shearon ('1991) describe their approach as

similar to Brownell's, being based on 'matching' their two variables of interest. Both studies

examine Locus of control and budgetary participation (with the latter study adding in effects of

specific aspects of Hofstede's dimensions of national culture). Both use a deviation score

approach, testing the relationship between the absolute difference between the two main

variables and performance, Whilst their approach does produce a different profile of

performance expectations than simple multiplicative interaction (see Figure 4 bel ow) as

they argue is appropriate, it is worth noting that Figure :3 shows that they are not using

Donaldson's form of Matching fit (as shown in Figure 2). The use of the term 'matching' has

caused confusion in subsequent analysis of the field, with Hartmann and Moers (1999) noting

on page 299 that if Matching fit was being applied, then appropriately worded hypotheses would

have made reference to a single unique level of participation given locus of control.

Tn both Brownell (1982) and Frucot and Shearon (1991) an external locus of control was scored

highly, and so a high locus of control score is best served by a low participation, and vice versa. As

sud) their theory predicts a relationship between performance and the maximum deviation

between variables, as opposed to minimum deviation seen in Figure 2. The salient differences

with Matching fit are that there is no assessment of a theoretically optimum value, thus there is

no isoperformance line of fit. Neither does their deviation score relationsbip allow for too much

(or little) participation. In their model more (Jess) is strictly better. At medium levels of locus of

control. their operationalisation also raises the issue of equifinality, whereby there are two equally

good solutions in the same situation. Given a locus of control score of 3, then the deviation score is

maximised by both very low and vely high participation. Donaldson (2001) argues strongly that

equifinality is not a part of contingency theory, and that where it has been argued it represents

a failure to consider other relevant contingencies that vary between apparently similar situations.

Matching fit requires measuring the deviation of the actual MCS score from the appropriate

unique score of the MCS that ensures a fit at each level of the contextual variable. A common

method to calculate the deviation from fit is Euclidean distance. This technique first identifies the

appropriate MCS score for a level of context and then subtracts the actuall MCS score at that level of

context. High scores indicate misfit, while a score of zero would be on the isopcrforrnance line as

indicated in Figure 2. When using Euclidean distance the fit scores for lvlCS and context may be

determined from theory or empirical analysis.

Euclidean distance is a way of measuring the distance between the actual MCS score and the

'ideal' score that the organisation should have if it fits with the contextual variable (Drazin and

Van de Ven, 1985, pp.350-351). The formula is:

• Distu = Euclidean Distance for the jth focal organisation to its ideal type (I) (theoretically or

empirically determined)

This 'nay be positive (above the isoperformance line) Or negative (below the isoperformance line).

The technique was developed to measure multiple dimensions of fit.3 To capture absolute

distance i.gnoring sign effects the squared deviation scores are added and then the square root is

taken. The deviation score is then associated with performance with the predication of a

negative association. To determine fit it is necessary to identify the 'ideal' score. This can be done

theoretically or empirically. An alternative approach that we will examine is the residual

method of determining deviation from the fit.

This approach requires the researcher to identify from the theory that certain combinations of

l'vfCSand context are fits and other combinations are not. It is then necessary to identify those

organisations in fit or misfit and see if this identification predicts performance, The approach can

be illustrated by reference to the isoperforrnance graph in Figure 2. In this approach, fit is determined

from theory and is represented by points along the isoperformance line. That is, each point along

the isoperforrnance line is assumed to be optimal, as given a priori from theory, with fit scoring O.

Each movement or deviation away from 0 is a move into misfit (more or less MCS for a level of

context) and scores .1. From Figure 2, a maximum negative score would be •4, moving in either

direction away from the isoperformance line.

There are few studies in MCS research that have used deviation from the theoretical fit

approach. Govindarajan (1988) provides an example where administrative procedures, defined

in terms of three attributes (a budgetary style of evaluation, decentralisation and manager's' locus

of control) are argued to result in high performance only In firms lIsing strategies of

product differentiation. lf applied in firms following strategies of cost leadership they result in a

decline in performance. To test this Matching fit model the Administrative Procedures

scores were standardised with end points at -'1 and +1, with -1 predicted to fit with 10'" cost

(scored •1) and +1 to fit with product differentiation (scored +1). The fit was measured as the

Euclidean distance between the organisational unit's scores and scores of its ideal type, identified

for the unit's particular strategy. Thus, for example, a unit that has a low cost strategy (scored

-l) will be in a fit if it scores -1 on each 01' the administrative mechanisms. If one or more of the

administrative scores is greater than -1, the Euclidean distance score increases and the unit moves

into misfir. The Euclidean distance score is then regressed against performance. A negative

association with performance supports the proposition of good fit. Govindarajan (1988) found

support for (it when using the total sample. However, when examining Systems fit for the

separate strategy groups, only fit for product differentiation had significant fit. In addition, the

study found support for the Systems fit model when defining ideal scores within the range -1.00

and 0.50 for low-cost and +1.00 to +0.50 for product differentiation.

In this approach, rather than using 11 priori theory to determine fit, an estimate of fit is determined

empirically. It is assumed that organisations are in the process of moving towards fit and that

the nature of fit can be determined by an examination of the relationship between IvlCS and

the relevant contingency variable for the highest performing entities in a sample of organisations.

that is, the appropriate fit score for the MCS can be determined by using the MCS scores for each

level of context for the highest performers in the sample as a benchmark. Alternatively, applying

regression analysis to relate MCS to context will produce a regression line that represents fit

combinations of MCS for each level of context. To ensure that this relationship is truly fil, a sample

of the highest performers can be used for the regression analysis of MCS on context, given

sufficient numbers in the sample, In each case, the fit scores can be compared with the actual

score for the MeS at the level of context, to provide a deviation score. This deviation score can be

used to predict performance with high deviation scores being associated with low performance.

Selto, Renner and Young (:1995)illustrate the use of the empirical approach to Euclidean distance.

This is included in a test of Systems fit in their study of JIT and context (e.g. size, cultures,

environment, technology), organisational structure (formality, flexibility, delegated authority,

incentives), and controls (communications, information flows, management controls). Systems

fit was examined by considering the effect of fit on 42 workgroups. the highest performing

workgroup (a composite of efficiency, yield, defects, schedule) was taken as the benchmark for

determining the ideal score on each dimension of the study, and this was subtracted from actual

scores in the remaining workgroups to determine the Euclidean distance. The Euclidean

distance was regressed against the outcome measures. Significant results were not found, The

study examined the extent to which each difference score for context, structure and control

variable were associated with outcomes. In their analysis of deviation using the mean scoring of

the individual respondents making up each work group, there were modest results.

An alternative approach is to use residuals trorn regressing MCS on context as a measure of misfit

(Duncan and Moore, 1989). As in the prior approach, it is assumed that organisations are moving

towards equilibrium. Those that are in fit will lie on the regression line that relates MCS to context,

and the residuals will measure the extent of rnisfit or the extent to which organisations are off the

fit regression line. The next step is to regress the residuals on performance with the predication that

there will be a negative relationship between the residuals (degree of misfit) and performance,

An example of this approach is found in Ittner, Lanen and Larcker (2002). They found that extensive

use of ABC adoption in plants and improved financial performance depended on the fit of

ABC with the plants' operational characteristics. Operational characteristics found to be

relevant in this relationship were mixed rather than discrete Gob shop) settings, high product

mix facility, volume, more recent new product introductions, advanced manufacturing

practices, but volume did not have an affect. Ittner and Larcker (2002)used a logit regression to

show that extensive use of ABC (ABC use = +1, non-use = 0) was associated with the plant's

operational characteristics. They assumed that 'all firms nlay be moving towards optimal

practices, but at any point in time some firms will be off equilibrium'. This allows performance

differences to be examined by assessing the extent to which performance is associated with

deviations from 'optimal practices'. It is then shown that the residuals from the logit equation

of ABC use on operational characteristics represent sub-optimal over or under investment in

ABC.' Over and under inveshng are captured by positive and negative residuals, to capture

potential different effects of over or under investment. These represent positions above and

below the fit regression, respectively. A plant's over investment score is the residual scored

positively (the plant uses ABC extensively but it is predicted not to use ABC because the context is

inappropriate) and zero if not. An under investment is the residual scored negatively and zero if

not (the plant does not use ABC extensively and it is predicted that it should use ABC). These

residuals are regressed against performance with the expectation that the regression

coefficients signs are negative for the positive residuals and positive for the negative residuals,

and if significant indicate poor performance from mis-fit. Support for contingency effects were

found when measuring performance on return on asset.

Matching and multiplicative Interaction fit models differ, the latter being less theoretically

precise. For any given level of context the Matching fit approach has only one level of the MCS

variable that ensures optimal performance, all other levels of the MCS variable result in

deviations from the optimal, with a consequent decline in performance. For general

multiplicative interaction approaches (by far the majority of MCS contingency studies), relationships

are expressed in more general terms, with higher (lower) values of context require higher (lower)

values of MCS to achieve higher (lower) performance. Tl1US,for example, given a high level of

uncertainty, more flexibility in budget use will produce better performance than less budget

flexibility. This kind of relationship can be simply tested using a multiplicative interaction term.

Simply multiplying MCS by context produces the interaction terms for each combination of

MCSand context as presented in Figure 4. if it is assumed that increasing values on these

interaction terms are significantly associated with high performance then inspection of Figure 4

reveals the nature of the implied relationship between MCS context and performance. To return to

the variables used to describe Matching fit, first we note that performance is enhanced by the use of

more participative budgeting at each level of locus of control, although the relative improvement is

higher at higher scores of locus of control (e.g. at locus of control score 2, increasing budget

participation to 5 produces a maximum of 10; whilst at locus of control score of 5 increasing budget

participation to 5 produces a maximum of 25). This suggests that more participation is

appropriate at all levels of locus of control, although this is accelerated at higher levels. Figure 4

then expresses a monotonic interaction between context and MCS on performance, The

theory lnight dictate that a non-monotonic relationship between the 1"1"0, however. That is to

say, one where the effect of an interaction on performance is positive for one level of an

independent variable and negative at another. This can be seen by centering variables before

producing a multiplicative interaction term. Figure 5 shows that, as the locus of control increases above

the mid-point, the interaction term is positive for high levels of participation but negative for

10\\' levels. Regressing these interaction terms on performance produces a coefficient, which if

significant, the sign can be used to support the propositions that the sJope of regression in one

condition or the contingency variable group is greater than in the other.

These two figures are intended to elaborate the intuition behind monotonic and non-monotonic

interactions but, see, Luft and Shields (2003) appendix J for graphical presentations of the

complete range of possible permutations and combinations of sign effects. See also Hartmann and

Moers (1999) Appendix Al for a helpful summary of forms of interaction with examples of verbal

There are olany examples of multiplicative interaction studies in the area of MCS research, Hartmann

and Moers (1999) provide an extensive review of the use of interaction models and the role of

moderated regression in budgetary research. we select examples of studies that have shown the

strength of the interaction, the form of the interaction both monotonic and nonmonotonic, Studies that

examine the strength of interaction fit relationships often also include an examination of form, It should

be noted that strength examines the difference in associations between MCS and performance in

different contexts (e.g. a correlation of 0.30 compared to 0.70), whilst form provides information on

differences in how changes in context affect the prediction of performance by MCS (e.g. different

slopes in the regressions used to predict performance from MCS depending on context).

In their study, Abernethy and Lillis (1995) examine if manufacturing flexibility influenced the

relationship between performance measures, integrative liaison devices and performance. In a test of

a strength interaction, their sample was split into flexible and non-flexible firms and

correlations between the performance measures and performance were estimated. For efficiency-

based measures there was a significance difference between the levels of correlation observed in

the two groups (positive for non-flexible, and, negative for flexible subgroups). The test of strength

interaction for integrative liaison devices was not found to be significant.

To test the form of the contingency model, it is usual to employ multiple regression to

examine if the slope of the regression between an outcome variable (say, performance) and MCS

differs in different conditions of the contextual variable. The approach is to regress the

outcome variable against the MCS variable, the contingency variable and a multiplicative

interaction term, constructed by multiplying the MCS by the contingency variable. As indicated

earlier, form is indicated by the slope of the regression line between outcome and MCS in each

condition of the contingency variable (e.g. high or low uncertainty). Both monotonic and non-

monotonic relationships are possible.

proposed that a greater reliance on long-run performance measures (e.g, sales growth, market

share, new product development, R&D, personnel development, political/public affairs) to

determine incentive bonuses for strategic business unit managers will have a stronger positive

impact on effectiveness for units following build strategies compared to those following harvest

strategies. A significant interaction term between strategy and reliance on long-term criteria

within a regression equation that included main effects and the interaction indicated that

the positive impact on effectiveness was stronger for build compared to harvest strategies.

To test for monotonicity the partial derivative of the regression equation MCS calculated. That is,

the change in effectiveness as a result of a change in reliance on long-term measures is equated with

levels of the strategy variable. This revealed that for build strategies, a reliance on long-term criteria

has a positive effect on effectiveness, while for harvest strategies a greater reliance on long-term

criteria has a negative effect on effectiveness.

the interaction between a reliance on manufacturing performance measures (MPM) will

be significantly associated with organisational performance, such that profitability of entities

employing more extensive TQM will be enhanced where the approach to measurement entails

reliance on MPM, After establishing the significance of the interaction, the sample is split into

four groups based on high and low TQM and reliance or no reliance on MPM, Using an ANOVA

the effectiveness means for sub-groups could be inspected. lt was shown that performance for

both high and low TQM groups was positive, but the performance of firms with a reliance on MPM

was greater than those that did not rely on manufacturing MPM. for the low TQM groups,

performance was positive but not significantly different between groups with high or low reliance

MPM.

Systems fit

While most selection and interaction fit approaches consider how performance measures are

related to only one or two contextual variables, there is a view that this approach is overly molecular

and that MCS design should be considered in tenus of the many contextual variables that

describe the operating situation (Drazrn and Van de Ven, 1985). Examining how performance

measures should best be designed becomes more than coosidering the sum of the effect of each

contextual variable or their interactions. The holistic combinarion of performance measures and

multiple contextual variables provide a Systems form of fit. The exact consequences of multiple

contingencies may be difficult to predict. A contextual variable may act synergistically or

antagonistically with other variables, intensifying or reducing the effects of context on a requisite

aspect of MCS. A frequent consequence of such complexity is the attribution to Systems fit

instead a process of quantum leaps between successful archetypes.

There are two main ways that MCS researchers have testing systems fit: Euclidean distance

and Cluster analysis. we discussed Euclidean distance under the section on Matching fit as a way of

determ ining a deviation between ideal fit and actual. The technique attempts to study how MCS

and contextual variables act simultaneously to affect performance outcomes. The analysis

identifies patterns of underlying dimensions of context and MCS. ldeal patterns of scores on the

variables of interest are identified either from theory, or empirically from high performing firms.

The Euclidean distance formula is used to generate a single 'distance score' for each

organisation that represents the SUl1lof all the deviations across the multiple variables in the

systems fit model.

Earlier we explained the use of Euclidean distance to test Matching models of fit. ln th.is case, only

one aspect of an MCS and one contextual variable are examined. In a sense, the Euclidean

distance technique as an operationalisation of the systems approach can be considered as

examining multiple 'matchmgs' between MCS variables and contextual variables. However, it is

'important to note that to many theorists the systems approach aims to caprure the holistic

pattern of interdependencies between multiple variables and it represents more than the sum of

each variable considered separately," The Euclidean distance approach to testing Systems (it is

restricted to being an additive model. Jt adds the separate 'matching fits' of each contextual

variable and as such the final distance measure is the sum if the component parts. As described

above, Selto et al. (1995) and Govindarajan (1988) use Euclidean distance to measure systems fit.

In considering attempts to analyse systems fit adopting a more holistic approach, Cluster analysis has

been used to identify sets or dusters of organisations that share a common profile along

conceptually distinct variables that capture the complexity of organisational context. The clusters

of organisations are formed such that the distance between variables within a cluster is minimised,

while the distance between clusters is maximised. While this technique provides a powerful way

of identifying how organisations can be grouped on the basis of sirnilanty in contextual and MCS

variables it requires the researcher' to make several important decisions. The resulting clusters are thus

very much the result of the choices made. With regards to the distance between clusters, for' example,

options include the shortest distance, the maximum distance and the average distance between

variables. In addition, the distance between centroids of clusters may be used: and one method

SU1nsthe squares between two clusters summed over all variables (Aldenderfer and Blashfield, 1984)

Clusters might beformed either by adding elements (agglomerative) or deleting them (divisive).

Clusters may be formed hierarchically or non-hierachically , with the later requiring pre-

specification of the number of clusters. When using duster analysis to examine systems models, the

researcher must decide on the number of dusters to represent the Systems fit concept for use in the

final interpretatioo. This may be done on the basis of theory, say clustering organisations into the

three elements of Miles and Snow's (1978) taxonomy of viable strategy: analyser, prospector and

defenders. Alternatively, the technique can rely on execution rules to determine empirically the

relationships between variables within groups of organisations and how' they differ between groups.

configurations of (inns is Chenhall and Langfield-Smith (1998).10 this study, it is argued that a selection

of traditional and contemporary MCS fit with combinations of manufacturing practices that suit either

low cost or product differentiation strategy. Cluster analysis was employed to identify configurations of

strategies (product differentiation by way of customer service and flexibility, or low price),

manufacturing techniques (human resource management, integrating systems, manufacturing

systems innovations, quality systems, improving existing processes, team-based structures), and

management accounting practices (traditional practices, benchmarking, activity-based techniques,

balanced scorecards, employee-based measures, strategic planning techniques). Six dusters were

identified, three that emphasised product differentiation and three that were relatively more

concerned with low price, although all dusters had some concern with both differentiation and low

price. The performance of organisations within these clusters was determined. The results showed

that those different configurations were associated with enhanced performance, thereby

supporting a Systems fit interpretation.

A second example of cluster analysis that examines a more limited number of contextual variables is

Cerdin (2005).This research is concerned with the may in which organisational structure and

interdependence interact and how differences in MCS best fit the combinations of these variables.

The study argues that organisational structure can be categorised as comprising functional

(centralised, bureaucratic, rigid formalised communication), lateral (dccentralised,

product group focus), and simple units (centralised, small, less formalised). Interdependence is

defined as sequential (one-way flows between segments) and reciprocal (two-way flows between

segments). Six combinations of structure and interdependence are predicted and the type of MCS

to suit is argued. The MCS are classified in terms of budgeting, standard costing,

manufacturing operational information. A rudimentary MCS had low use of all practices, broad

scope MCS emphasises non-financial information and traditional M.CS focuses on standard costing

but not operations information. The research argues that it is possible that more than one

form of MCS may suit the configurations of interdependence and structure.

Cluster analysis was used to develop categories of structure and MCS. The segments were

separated into sequential and reciprocal interdependence. This provided six cells (three dusters

for each category of interdependence) (hat were used to examine the extent to which the three

dimensions of MCS were emphasised (over or under represented) in the cells. The results

provided varying support for the hypothesised role of MCS in the structural-

interdependence configurations. TIle study stressed the likelihood of some organisations not

being able to bring multiple aspects of context into a fit at any given time.

Concluding comments

In this chapter, we have briefly considered the major forms of fif adopted in the MCS contingency

literature. This literature addresses the relationship between MCS, performance and contingency

variables that affect this relationship. The different forms of fit through which these relationships

are theorised entail detailed and specific sets of expectations and assumptions. AI stake

are significant issues such as the nature of organisational equilibrium, the gradual or quantum

nature of organisational change, the linearity or non-linearity of relationships. Given the far

reaching significance of the assumptions involved in concepts of fit in it is perhaps surprising that it

has only recently come to the fore-front of MCS contingency debates.

Hartmann and Moers (1999), in particular, criticised the failure of many studies to explicitly state

the nature of interactions that they were both expecting and testing. Many significant studies in

the extant literature use the Null. hypothesis form, whereby expectations are written out as not

expecting to see an interaction between the variables of interest. Even if such an approach is

adopted, the contribution of future studies would be greatly enhanced if they were to go on to state

in their Null hypotheses what kind of interaction they were not expecting to find. The central

concern in Hartmann and Moers (1999) paper is that appropriate statistical techniques are

applied and their results interpreted appropriately. Cerdin and Greve (2004) widen the

significance of clarity concerning studies' theorisation of fit. They point out that given the specificity

of assumptions underlying different forms of fit, the synthesis of results (both within and

between studies) that are based 01.1 different forms of fit requires considerable caution in order

to avoid the drawing of erroneous conclusions.

Luft and Shields (2003) in their analysis of the managen1cnt accounting literature lament the fact that

only a tiny handful of the theory consistent relationships that they found in the review comprised

non-linear relationships. Much of the extant literature has adopted simple forms of Interaction fit,

typically multiplicative interaction, with consequently linear analyses of relationships. Donaldson

(2001) proposes Matching fit as the exemplar of structural contingency. Matching fit offers the

challenge of thinking through in a more precise may the conceptualisation of the nature

of contingency relationships. This includes enabling researchers to explore non-linear situations,

where, for example, aspects 01' management control systems may switch between being

important, less important; and then more important as the organisation moves between various

aspects of a contextual variable. We hope that our detailed discussion of Matching fit here

makes a compelling case for its wider adoption in future.

Our aim for the brief discussion provided in this chapter is to offer both theoretical

clarifications of the concept of fit, together with some practical gutdance to its application in

particular studies. We feel that the richness of analysis opened up is helpful in understanding

why the contingency approach continues to enjoy such popularity despite suffering from ongoing

critique. In particular, we sec that the concept of fit is central to rebutting casual assertions that

contingency research is not a strongly theoretical activity.

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