A Contingency Approach to

MCS/MAS Design
Week 5 Lecture 1

Readings: Lecture Notes Provided

Chapman, C.S. (1997)
 A Contingency Approach to MCS/ MAS Design
Learning Outcomes:

Understand contingency approach to MCS

Identify contingency variables

 Why study a contingency approach to MCS/MAS
design?
Historically organizational theorists searched for a ‘best’
universal organizational design.

Research subsequently indicated that many successful

organisations had quite different organizational designs

Hence the contingent nature of the ‘best’ organizational

design.

A contingent perspective suggests that the ‘best’

organizational design depends on a number of key
antecedent variables.
 Why study a contingency approach to MCS/MAS
design?

These contingency factors influence the choice of:

 Strategy
 Structure, and
 MCS/MAS design

Our aim is to design an MCS/MAS that ‘fits’ the

organisation’s:

 Antecedent factors
 Strategies, and
 Structure.
 Why study a contingency approach to MCS/MAS
design?
Accounting researchers have used Contingency Theory
extensively in their research concerning the best design of
MCS/MAS.

Their focus has primarily been on the impact of two of

the key contingency factors, namely:
 External Environmental Uncertainty (usually PEU)
 Technology (particularly as it affects organizational structure
and task uncertainty).

Accordingly, these are the two factors upon which we

concentrate in this ‘overview’ of the contingency
approach to MCS/MAS design.
 Contingency Factors
 Five factors influencing organizational design are:

 Environmental uncertainty
 Often measured subjectively and referred to as Perceived Environmental
Uncertainty (PEU)

 Goals and objectives

 Organizational Size

 Geographic dispersion

 Technology

 These antecedent factors are shown on the following Figure

Environmental
Technology
uncertainty

Goals and Organisation Geographic

programs size dispersion

Strategies

Structure

MCS/MAS
Design

National and Personality

Organisational
culture
traits

Organisational
effectiveness
The Impact of MCS/MAS design on Organisational
Effectiveness

Contingency theory argues that a good fit between the

MCS/MAS design and the antecedent factors, strategy and
structure will increase organizational effectiveness.

The Figure also shows that national and organizational

cultures, and users’ personality variables may affect the
effectiveness of the MCS/MAS in raising organizational
effectiveness.

A considerable body of management accounting research

concerning the above two claims has been undertaken.
 Overview of conceptualisation of aforementioned
factors
Following this overview we will be well placed to
consider some of the management accounting
research concerning the ‘best’ design of the MCS/MAS
and its impact on organizational (or managerial)
effectiveness.

In order to understand studies in management

accounting research it is essential that you have some
understanding of how the various factors in the above
contingency theory Figure are conceptualized (i.e.
thought about).
 External Environmental Uncertainty
Environmental uncertainty relates to the
organisation’s external environment.

Often the organisation’s external environment is

depicted as comprising a number of main sectors.

In assessing the degree of external uncertainty major

emphasis is given to those sectors most influencing
the organisation.

A list of sectors is shown on the following slide.

 External Environment Sectors
1. Industry sector
2. Raw material s sector
3. Human resources sector
4. Financial resources sector
5. Market sector
6. Technology sector
7. Economic conditions sector
8. Government sector
9. Socio-cultural sector
10. International sector
 External Environmental Uncertainty
 Although general sectors may have an impact on the uncertainty faced by an
organisation, environmental uncertainty is usually assessed by focusing on a
manager’s task environment.

 Research has shown that environmental uncertainty can be assessed in terms

of two major underlying dimensions, namely:

 Complexity of the environment.

 Assessed in terms of the number of elements affecting managers on a day to
day basis.

 The rate of change of this environment

 Assessed in terms of the degree of stability or instability of the environment.

 These two dimensions interact with each other to effect the overall
environmental uncertainty faced by managers.
 External Environmental Uncertainty
In assessing environmental uncertainty, consideration is given
to the total uncertainty across key sectors.

Because an objective measurement of this uncertainty is too

difficult, we assess PEU by asking managers to give their
subjective opinion of the degree of uncertainty they feel they
face.

This involves managers answering a number of questions on a

PEU assessment survey.

The use of PEU (rather than an objective EU measure) is

defended on the basis that managers make decisions based on
their perception of uncertainty, hence PEU is the more relevant
measure.
 External Environmental Uncertainty
To simplify our assessment of environmental uncertainty we
often cross the two key underlying dimensions to create 4
quadrants reflecting the relative extent of uncertainty.

The result of this analysis is that we can characterize

environmental uncertainty as reflecting one of 4 degrees of
uncertainty.
 This is shown on the following Figure.

Importantly, since uncertainty influences the amount of

information needed for decision making by a manager,
MCS/MAS design is strongly influenced by the extent of PEU.

Greater uncertainty creates a need for more information.

 Low

Environ.
Change

High

Simple Complex
Environmental
Complexity
 Low Uncertainty Low-Moderate Uncertainty
Low
Beer distributors Universities
Container Man’frs Appliance Man’frs
Food processors Insurance Co’s

Environ.
Change High-Moderate High Uncertainty
Uncertainty

E-commerce Telecommunications
Fashion clothing Airlines
Music industry Computer firms
High

Simple Complex
Environ. Complexity
 Responses to High Environmental Uncertainty
Buffering Departments reduce the impact of uncertainty
 Inventory warehousing
 Human resources

Boundary Spanning Roles Link the organisation to external

elements
 Mainly involve the collecting & dissemination of information
 Hence reducing uncertainty and speed up responsiveness
 Public relations Dept
 Competitive intelligence Dept
 Management accounting Dept (if ‘on the ball’)
 Responses to High Environmental Uncertainty
Differentiation and integration

 “Differentiation is the differences in cognitive and

emotional orientations amongst managers in different
functional departments, and the difference in formal
structure among these departments.” Lorsch (1970, p.5).

 The greater the uncertainty in EU, the greater the need for
differentiation.

 Lawrence & Lorsch (1969, pp.23-29) studied 10 large

organisations and found differences in external linkages, goal
orientation and other factors (see Figures on following two
slides).
 CEO

R&D Manufacturing Sales

Scientific Customers
Suppliers
journals Advertising
Raw materials
Research centres Agencies
Labour
Professional Distribution system
Prod’n equipment
Assn’s Competitors
Characteristic R&D Manufacturi Sales
Division ng Division Division

Goals Innovation Production Customer

Quality efficiency satisfaction

Time Horizon Long Short Short

Interpersonal Mostly task Task Social
orientation

Formality of Low High High

structure
Differentiation generates a need for integration
Differentiation creates organizational units often having
quite different cultures, employees, goals, structures and
informational needs.

From a MCS/MAS perspective it seems likely that

differentiation calls for a more sophisticated MAS ,
capable of generating a range of reports based on data
drawn from a variety of sources.

Equally important, differentiation drives a need for

integrating mechanisms that ensure these different
organizational units work together in the organisation’s
interests
Differentiation generates a need for integration

MCS/MAS can play a valuable integrating role

through techniques relating to, for example:

• Strategic and operational plans

• Budgeting (at unit and organisational levels)
• Transfer pricing
• Maintain consistent application of MAS policies &
procedures
Industry Plastics Foods Containers

Environmental High Moderate Low

Uncertainty

Divisional High Moderate Low

differentiation

% managers in 22% 17% 0%

integrating roles

Source: Lorsch & Lawrence (1972, p.45)

Mechanistic vs Organic Structures & Mngt Processes
Another response to environmental uncertainty is to vary the
amount of formal organizational structure and the extent of
control imposed on employees.

Bruns & Stalker (1961) studied 20 industrial companies in

England and found that organizational structure was related to
the extent of environmental uncertainty.

When EU was stable organisations organizations had many

rules and standard operating procedures. A clear hierarchy of
authority existed and most decisions were centralize, being
made by top management

Bruns and Stalker characterized such organisations as having a

Mechanistic management structure and processes.
Mechanistic vs Organic Structures & Mngt Processes
 When EU was high, organisations tended to have fewer rules and
standard operating procedures. Those that were written down were
often ignored. The hierarchy of authority was less clear and decision
making tended to be decentralized.

 The extent of management control over employees was diminished.

Under these circumstances employees tended to find their own way
through the system to find out what to do.

 Bruns & Stalker referred to such management structures and

processes as Organic.

 The reason for these shifts in management structures and processes

enabled organisations facing high uncertainty to be more flexible and
faster in their responses to the (now) less predictable external
environment (see Figure on following slide).
 Mechanistic Organic

1 Tasks broken down into Employees contribute to

specialised parts. departmental common tasks.
2 Tasks are rigidly defined. Tasks are adjusted and redefined
through employee teamwork.
3 Strict hierarchy of control. Less hierarchy of control, less rules.
Many rules and SOPs.
4 Knowledge and control of tasks Knowledge and control of tasks are
are centralised at the top of the located anywhere in the
organisation. organisation.
5 Communication is vertical Communication is primarily
(both up and down). horizontal.
 Organisational Goals: A Contingency Approach
 Contingency approaches to defining organizational effectiveness focus on
various parts of the organisation. The three main approaches are the:

 Resource inputs approach

 Focuses on the acquisition and maintenance of scare resources
(inputs).

 Internal process approach

 Focuses on the health of the organisation (employees, organisation
culture, etc) and the efficient transformation of inputs into outputs.

 Goal approach
 Focuses on product and service outputs and outcomes

 See Figure on following slide.

 Inputs Process Outputs

Resource Internal Goal

Based Process Achievement
Approach Approach Approach
 Organisational Size & Geographic Dispersion
There is a huge organisational theory literature
concerning the effect of size on organisational design.
We do not have time to review this area.

Moreover, little accounting research has investigated

the effects of organizational size on MCS/MAS design.

Accordingly, for our purposes we will accept that

larger organizational size and greater geographical
dispersion generally results in greater
Decentralisation:
 Organisational Size & Geographic Dispersion

Decentralisation often involves:

Creation of a Divisionalised structure

Location of authority and decision making lower down

the hierarchy

Need for greater control and integration amongst

divisions to retain organizational focus.