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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.

ln terms of mapping developments in the contingency literature more comprehensively, Otley

(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 .


Contingency-based studies in the area of management control systems now comprise a

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).

A particular challenge in understanding fit in terms of its theoretical and methodological

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.

Drazin & Van de Ven Donaldson

1. Selection fit 1. Managerial choice

2. Interaction fit 2. Congruence fit

3. Systems fit 3. Multifit

Table 1: Abbreviated Summary of fit relationships

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.

Testing selection fit

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

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.

Figure 2: Matching fit: isoperformance

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.

Testing matching fit:

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)

• Xrs= Score of ideal (1) type organisation on the Slhcontingency diruension

• Xjs= Score of Jth focal organisation on the 5th contingency dimension.

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.

Euclidean distance: theoretical approach

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.

Euclidean distance: empirical approach

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.

Deviation from empirically determined fit using residual analysis

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.

Multiplicative interaction fit

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

hypotheses and associated statistical test's.

Testing multiplicatioe interactionfit

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.

Govindarajan and Gupta (1985) show a non-monotonic interaction. In their study, it is

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.

An example of a monotonic interaction is Chenhall (1997). In this paper it is hypothesised that

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

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

- an expectation that change ceases to be a gradual process of realignment" becoming

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 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.

An example of a theory-driven duster analysis that involves an exploratory approach to identifying

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.