Category: Financial and Management Accounting

From Relevance Lost to Relevance Regained: Management Practice in the New Millennium

December 2000

INTRODUCTION
In Relevance lost, Johnson and Kaplan (1987) attributed the post World War 2 decline of American enterprise competitiveness and performance, to the use of inappropriate planning, control and decision making mechanisms, for the growing number of information and capital intensive industries. The failure of management accounting practices to adapt quickly to the needs of the "new" enterprise could be attributed to two primary reasons (Johnson and Kaplan, 1987; Johnson, 1994). First, there was a new and powerful accounting profession after World War 1 that stipulated rigid financial reporting rules. These rules carried a high compliance cost that prohibited the development of management and control systems for more effective decision making. Second, accounting educators increasingly encouraged the use of financial accounting information for managerial decision-making, and indoctrinated the mindset of future business managers.

Since Relevance lost, there has been a burgeoning of new management practices for improved decision making. These include activity based costing and management (Cooper and Kaplan, 1991; Cooper et al, 1992); the balanced scorecard, (Kaplan and Norton, 1992); quality (Deming, 1986; Oakland,1989; Hill 1991a; 1991b; Petty, 1997), and benchmarking (Balm, 1992; Bogan and English, 1994). However, an unsettled issue is whether these emergent practices have complemented or substituted traditional management accounting practices such as budgeting, absorption costing, cost volume profit analysis, variable costing and target costing. One view suggests that these emergent management practices have played a prominent role in revitalising the discipline of management accounting by acting as substitutes for the financially orientated mindset that plagued post World War 2 corporations (Johnson 1994). These new management practices now explicitly incorporate non financial information and recognise strategy in management processes to improve decision making (Chenhall and Langfield Smith, 1998a). Another view suggests that comparing traditional and emergent management practices requires a more holistic view as both sets of practices tend to complement one another (Chenhall and Langfield Smith, 1998a, 1998b). The choice and selection between traditional and emergent managerial practices is therefore particularly relevant for the business manager in the new millennium, as ultimately this decision could determine an organisationís survival and success. In an attempt to provide some insights into this issue, the perceptions of CPA business managers in a cross section of industries of the benefits of some key traditional and emergent management practices are compared.

The remainder of this paper is organised as follows. First, a framework for comparing a selection of traditional and emergent practices is discussed. Next, the key questions that need to be evaluated are derived from the framework. Finally, the method used to evaluate the key questions, and results and conclusions are highlighted.

FRAMEWORK FOR COMPARING TRADITIONAL AND EMERGENT PRACTICES

Table 1: Framework for Traditional and Emergent Management Practices*
Traditional Practices
Budgeting systems

• controlling costs
  
• evaluating managers performance
  
• planning cash flows
  
• planning financial position
  

Traditional Costing Methods

• Absorption Costing
  
• Variable Costing
  

Product Analysis

• Cost Volume Profit Analysis
  
• Target Costing
  
• Product profitability
  
• Product Life cycle Analysis
  

Emergent Practices
Employee Based measures

• Team performance measures
  
• Qualitative measures
  
• Employee Attitude measures
  

Benchmarking

• product characteristics
  
• operational processes
  
• management processes
  

Strategic Planning techniques

• Formal Strategic Planning
  
• Long range forecasting
  
• Benchmarking with outside organisations
  
• Benchmarking strategic priorities
  

Balanced Performance measures

• Balanced Scorecard
  
• Non Financial Measures
  

Activity Based Techniques
Activity based Costing
Activity Based Management
Value Creation methods

• Shareholder Value Analysis
  
• Value Chain Analysis
  

Other**
Capital Budgeting techniques (NPV, IRR, Payback)
Customer satisfaction surveys
Benchmarking within the wider organisation
Developing Strategic plans separate from budgets
Residual Income (eg. Interest adjusted profit)
Ongoing supplier evaluations
*The categories for traditional and emergent techniques above have been derived from theoretically and empirically validated models (Chenhall and Langfield Smith, 1998).All items have been scored on a 7 point scale ranging from 1=No Benefit; 4=Neutral; 7=High Benefit.
** The Other items were not classified as part of traditional and emergent categories because of issues of statistical reliability and validity. Results of all techniques prior to classification are reported in Appendix A.

Three main classes of traditional management accounting practices are examined: budgeting; traditional costing; and product analysis. These are compared against six classes of emergent techniques such as benchmarking; activity based techniques; employee based measures; strategic planning techniques; value creation methods and balanced performance measures. Table 1 summarises the items that constitute each class.
Key determinants that could affect an organisations choice and selection of these new techniques in the new millennium are its size, industry and strategic priorities. Size is a key determinant because large organisations are associated with, on average, a higher degree of decentralisation (cf. Emmanuel, Otley and Merchant, 1991). Decentralisation simply reflects (inter alia) a process of divisionalisation and departmentalisation within organisations, which is partly a response to environmental uncertainty and partly a process to achieve economies of scale and specialization (Williamson, 1970). Larger organizations tend to have more resources and employees and could therefore also invest in innovative and emergent management techniques. These organizations could substantially benefit from effective combinations of traditional and emergent management practices.

A second major determinant is industry. The nature of the industry could arguably influence the choice of management accounting practices. For instance, it may be argued organisations in a manufacturing setting with a high levels of indirect overheads could favour activity based costing methods because it provides the greatest benefits in terms of more accurate cost information for management decisions (Cooper and Kaplan, 1988, Cooper, 1995, Booth and Giacobbe, 1999). In Australia, Chenhall and Langfield-Smith (1998b) have compared the traditional practice of budgeting to other emergent techniques (such as employee based measures; benchmarking; strategic planning techniques; and balanced performance measures) in a manufacturing setting. Their results support the view that traditional and emergent practices complement one another. However, the results do not extend to the category of non-manufacturing, where different classes of management practices could be relevant, and therefore are not generalisable. Furthermore, Chenhall and Langfield-Smithís results do not include product analysis, traditional costing methods, and value creation methods as classes of management practices. The analysis in this paper presents results that are relevant to manufacturing and non-manufacturing industry sectors and incorporates three new classes of practice (traditional costing methods; value creation methods; and product analysis) for comparison.

A third major determinant for an organisation choosing a particular management practice, is strategy. An organisationís strategic priorities can be defined in one of two ways (Porter 1980, 1985): Product Differentiation or Low Price (or cost of production). Product differentiation incorporates features such as quality, product flexibility, delivery and design; low cost production allows organisations to produce products at a lower price than its competitors. Emergent practices like the Balanced Scorecard explicitly aim to translate an organisationís strategy into action by combining financial and non financial indicators (Kaplan and Norton, 1992). Organisations that explicitly aim to manage the price or differentiation strategies would arguably select management practices that allow them to achieve their strategic objectives. Furthermore, in reality organisations may also combine their differentiation and pricing strategies and select management accounting practices that would provide them the greatest benefit (Shank, 1989; Belohlav, 1993).

KEY QUESTIONS FOR CONSIDERATION

The discussion above suggests that the determinants of size, industry and strategy could influence the selection between traditional and emergent management practices. A number of key questions emerge:

(a) Are the relative benefits of traditional and emergent management accounting practices affected by an organisations size?
(b) Are the relative benefits of traditional and emergent management accounting practices affected by an organisations industry (manufacturing or non manufacturing)?
(c) Are the relative benefits of traditional and emergent management accounting practices affected by an organisations strategy (Price, Differentiation, or both)?

METHOD - "What was Done"

In June 1999, a questionnaire with a cover letter was mailed to random sample of 1500 middle level accounting managers selected from the confidential CPA membership database. Completed and useable responses were received from 332 managers, representing a response rate of 22% . The measures for size, management practices, strategic priorities, and industry classification were derived from existing measures that have been extensively used and tested . The surveys returned belonged to organisations of various sizes [Small (1), Medium (2), and Large (3)], the average size of each organisation measured in terms of employees was 1,100, with most belonging to the small and medium size category across a range of industry categories (see Figure 1). Manufacturing organisations constituted 20%, while non-manufacturing constituted 80% of the sample . The industry categories were collapsed to two categories, manufacturing and non-manufacturing, in the analysis. Approximately 12% of the sample (N=42) consisted of government departments.

RESULTS

In order to facilitate a comparison between classes of management practices, all the practices outlined in Table 1 were grouped into traditional and emergent categories . The mean scores were used to indicate the level of benefit received from a practice. Higher benefits are associated with higher mean scores, with the standard deviation explaining the level of dispersion or spread in the level of benefit received. The key results for strategic priorities, and traditional and emergent practices are summarised in Table 2 below. Overall emergent practices were of marginally greater benefit when compared to traditional practices. The traditional practices that provided the most benefit were traditional budgeting and traditional product analysis. The emergent practices that provided the most benefit were balanced performance measures, and strategic planning techniques. In terms of the attributes for strategic differentiation flexibility was rated as being more highly beneficial that customer service.


Traditional Practices	Range	Minimum	Maximum	Mean	Standard Deviation	Rank
Traditional Budgeting	6.00	1.00	7.00	5.40	0.94	1
Traditional Product Analysis	5.75	1.00	6.75	4.22	1.34	2
Traditional Costing Methods	6.00	1.00	7.00	3.94	1.57	3
Emergent Practices
Balanced Performance measures	6.00	1.00	7.00	5.24	1.27	1
Strategic Planning techniques	5.50	1.50	7.00	5.22	0.94	2
Employee based Measures	6.00	1.00	7.00	4.98	1.26	3
Benchmarking	6.00	1.00	7.00	4.86	1.26	4
Activity Based techniques	6.00	1.00	7.00	4.56	1.64	5
Value Creation methods	6.00	1.00	7.00	4.00	1.75	6
Overall
Emergent Practices	5.79	1.17	6.96	4.79	0.93	1
Traditional Practices	4.83	2.00	6.83	4.53	0.99	2
Strategic priorities
Strategic Differentiation comprising	5.00	2.00	7.00	5.27	0.87	1
Flexibility	4.75	2.25	7.00	5.33	0.85	1
Customer service	7.00	1.00	7.00	5.19	1.42	2
Strategic Low Price	7.00	1.00	7.00	4.54	1.55	1

Ranks are based on means. Higher means have higher ranks. The minimum and maximum


are the actual minimums And maximums.

The actual scale for practices (priorities) ranged from 1= Low benefit (Low
emphasis);

4 = Neutral; 7= High Benefit (High Emphasis).

*Standard deviation is a measure of spread or dispersion of the values around
the mean.

For example, the first item for traditional budgeting a standard deviation of
.94 indicates

that most values lie around +/- .94 (between 6.34 & 4.45) of the mean.

Ranks are based on means. Higher means have higher ranks. The minimum and maximum
are the actual minimums And maximums.

The actual scale for practices (priorities) ranged from 1= Low benefit (Low
emphasis); 4 = Neutral; 7= High Benefit (High Emphasis).

*Standard deviation is a measure of spread or dispersion of the values around
the mean.

For example, the first item for traditional budgeting a standard deviation of
.94 indicates that most values lie around +/- .94

(between 6.34 & 4.45) of the mean.

(a) Are the relative benefits of traditional and emergent management accounting practices affected by an organisations size?
The relative benefits derived from traditional and emergent practices for different categories of size are compared in figure 2. Across all size categories, business managers believed that the emergent techniques had more to contribute than traditional techniques . However, the emerging management practices were considered to be significantly more beneficial for medium and large firms., The emergent techniques of value creation methods; activity based techniques (ABC) and strategic planning techniques were considered to be the most beneficial (see Figure 3). Activity based techniques and value creation methods became consistently more beneficial as firm size increased. The benefits from strategic planning techniques increased significantly between the small and medium sized organisations and small and large organisations. However, the medium and large organisations found strategic planning techniques to be of nearly equal importance .

(b) Are the relative benefits of traditional and emergent management accounting practices affected by an organisations industry (manufacturing or non-manufacturing)?

The relative benefits derived from traditional and emergent practices for different categories of industry [manufacturing (man); non-manufacturing (non-man)] are compared in figure 4. Both traditional and emergent practices for manufacturing firms and emergent practices or non-manufacturing firms had similar levels of perceived benefits. However, traditional practices in non-manufacturing firms were perceived to offer lower benefits. The classes of traditional management practices that varied significantly with the organisations manufacturing and non-manufacturing classification were product analysis and traditional costing methods (see Figure 5). These traditional practices were relatively less beneficial to the non-manufacturing industry.

In recent times, the emphasis of manufacturing firms to develop accurate product costs and business valuations provides an explanation for the ratings of traditional and emergent techniques. For manufacturing firms, all forms of traditional costing (i.e. absorption, variable, and target), capital budgeting, cost volume profit analysis, product life cycle analysis, and product profitability were significantly more beneficial. Among the emergent techniques, benchmarking of product characteristics and operating processes and shareholder value analysis and value chain analysis were significantly more beneficial. Techniques such as performance evaluations based on teams and employee attitudes were significantly more beneficial for non-manufacturing firms.

(c) Are the relative benefits of traditional and emergent management accounting practices affected by an organisations strategy (Price, Differentiation, or both)?

Pricing and Differentiation strategies did not significantly interact with one another to affect the benefits from traditional and emergent practices. Pricing and differentiation strategies individually affected the benefits received from traditional practices. Combinations of Low and High Differentiation strategies, and Low and High emphasis on pricing strategies, on benefits received from traditional practices are summarised below (see figures 6). Traditional practices were more beneficial under all combinations of pricing and differentiation strategies.

Combinations of Low and High Differentiation strategies, and Low and High emphasis on pricing strategies, on benefits received from emergent practices are also summarised (see figure 7). Organisations that placed a greater emphasis on setting lower prices, received less benefit from emerging practices. Differentiation strategies significantly affected the benefits received from emerging practices. Emerging practices were beneficial for differentiation strategies.

When viewed together, the results indicate that both emerging and traditional practices are beneficial for both Low and High differentiation strategies. In terms of the level of emphasis, organisations that followed a Low differentiation strategy received less benefit from emerging practices when they also placed a high emphasis on a pricing strategy. An intuitive explanation for this result is that the adoption of new practices generally carries costs (of implementation) that affect prices and consequently the benefits received.

CONCLUSIONS

The results of this study show that organisations in the new millennium will need to adopt a more holistic approach to management. Managers will require both traditional and non-traditional management accounting methods to make better decisions. Key contextual determinants such as size, industry, and strategic priorities have a differential impact on management practices. Size is significant for emerging practices, while Industry is significant for traditional practices. Moreover, strategic priorities also dramatically affect the benefits from traditional and emergent practices. Managers need to be mindful of these organisational determinants and others such as the operating environment if they are to choose practices that are beneficial and relevant in the new millennium.

REFERENCES

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MANAGEMENT PRACTICE	Current Rank	Mean	Benchmark Mean	Benchmark Rank
High Benefit*
Formal Strategic Planning	1	5.83	5.73	2
Budgeting system for controlling costs	2	5.73	5.85	1
Strategic plans developed together with budgets	3	5.66	5.39	6
Detailed budgeting for planning financial position	4	5.54	5.41	5
Detailed budgeting for planning cash flows	5	5.37	5.24	7
Balanced Scorecard	6	5.31	4.83	16
Non Financial Measures	7	5.16	4.94	13
Budgeting systems for evaluating managers performance	8	5.14	4.41	25
Benchmarking of strategic priorities	9	5.13	4.81	17
Benchmarking of operating processes	10	5.10	5.15	10
Long Range Forecasting	11	5.09	5.21	8
Benchmarking of Management Processes	12	5.07	5.12	11
Performance evaluation based on qualitative measures	13	5.06	4.78	19
Performance evaluation based on team performance	14	5.04	4.89	15
Benchmarking carried out within the wider organisation	15	4.96	4.96	12
Customer satisfaction surveys	16	4.90	5.17	9
Moderate Benefit*
Product Profitability analysis	17	4.88	5.61	3
Capital Budgeting	18	4.88	5.44	4
Employee attitude measures	19	4.84	4.63	23
Benchmarking with outside organisations	20	4.81	4.78	20
Activity Based Costing	21	4.65	4.68	22
Cost Volume Profit Analysis	22	4.49	4.37	26
Activity Based Management	23	4.46	4.33	28
Developing strategic plans separate from budgets	24	4.42	4.37	27
Benchmarking of product charecteristics	25	4.41	4.69	21
Ongoing supplier evaluations	26	4.27	4.94	14
Shareholder value analysis	27	4.06	4.25	29
Variable Costing	28	4.02	4.47	24
Value Chain Analysis	29	3.96	3.24	33
Target Costing	30	3.93	3.48	32
Absorption Costing	31	3.89	4.8	18
Residual Income (eg. Interest adjusted profit)	32	3.78	3.66	31
Product Life cycle analysis	33	3.59	3.67	30

ENDNOTES

Williamson (1970), for instance, argued that growth of a firm is normally associated with the establishment of functional areas in the organisation, in order to achieve economies of scale and specialisation. With an increase in growth of the firm, the functional areas develop into divisions in order to cope with the uncertainty from serving specific markets. This uncertainty affects the degree of differentiation among the divisions, the structure of the divisions, and the nature of financial and other controls used to integrate divisions (see also Lawrence and Lorche, 1967; Scott, 1987).

Non response error was compared by comparing the characteristics of respondents and non respondents from the CPA database. No significant differences were noted. In addition, of the first 20 % of returns were compared with the last 20% of returns and differences analysed using t tests. No differences were identified, providing further support of the absence of non response bias.

The measures for emergent and traditional management practices and strategic priorities were derived from Chenhall and Langfield Smith (1998b). The importance of traditional and emergent practices over the next 3 years were compared and contrasted with an organisations current strategic priorities in pricing and differentiation. Size was measured in terms of number of employees (Kimberley, 1976) and was ultimately reported in three categories: Small (0-1,000 employees); Medium (1001-10,000 employees); Large (above 10,001 employees). Industry classification was based on 15 categories that have been used in prior surveys (See SMAC, 1997). These were ultimately reclassified to form the manufacturing and non-manufacturing groups. The strategic priority items were low price comprising low price; product availability; and customised products and services to customers needs. Differentiation was defined in terms of customer service and flexibility. Customer service comprised providing high quality products; providing fast deliveries; making dependable delivery promises; and providing effective after sales service and support. Flexibility comprised making changes in design and introduces new products quickly; making rapid volume and/or product mix changes; providing unique product features, and low production cost. All items were scored on a seven point scale (with 1= No emphasis and 7=high emphasis) and were equally weighted and summed. The reliability of each item forming the strategic priorities, and traditional management practices was assessed using the Cronbach Alpha statistic (Cronbach, 1951; Nunnally, 1978;). All Items that were used had Cronbach statistics greater that .65. Items in the other category (Table 1) were deleted because of unsatisfactory Cronbach Alphas. The management practice items were also subjected to a factor analysis for construct validity (Kerlinger, 1964; Pedhauser, 1982). The items correctly weighted on one factor. Overall, the results generated were comparable to Chenhall and Langfield Smith (1998) thereby supporting the choice of the measures used.

Categories for size were: Small: 1= 0-1,000 Employees; Medium: 1001-10,000 employees; Large: Above 10,000 employees.

Manufacturing was the biggest single group in the sample (N=67).

The benefits of individual management practices for the entire sample were also benchmarked against the Chenhall and Langfield Smith (1998a) manufacturing group sample (see Appendix 1). Furthermore, Validity and reliability tests were also used to confirm the traditional and non-traditional categories.

The Multivariate Analysis of Variance procedure was used in two stages to generate the comparison for each of the questions [(a); (b); (c)]. In the first stage, the significance of size, industry, and strategy in explaining the benefits from traditional and emergent categories were compared. The significant classes of traditional and emergent practices were then used to explain the variation in the traditional and/or emergent categories.

The mean benefit scores were 5.4 for medium sized organisations versus 5.5 for large sized organisations.