Organic decision and communication processes and management accounting systems in entrepreneurial and conservative business organizations

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Omega, Int. J. Mgmt Sci. Vol. 23, No. 5, pp. 485497, 1995 Copyright © 1995 Elsevier Science Ltd 0305-0483(95)00033-X Printed in Great Britain. All rights reserved 0305-0483/95 $9.50 + 0.00

Pergamon

Organic Decision and Communication Processes and Management Accounting Systems in Entrepreneurial and Conservative Business Organizations RH CHENHALL Monash University, Australia D MORRIS INSEAD, France (Received November 1994; accepted after revision June 1995)

This study examines the combined effect of organic decision and communication processes (organic processes) and management accounting systems (MAS) on performance. A model based on 'effective paradoxes' is developed which suggests that the interaction of organic processes with use of MAS is more closely associated with superior performance in organizations pursuing entrepreneurial as opposed to conservative strategies. This hypothesized relationship was supported by evidence from a study of managers from 72 firms. The interaction was significant for entrepreneurial organizations but not for conservative entities. Moreover, in entrepreneurial entities performance was significantly associated with organic decision processes for organizations using MAS extensively, but not when MAS was used less extensively. Keywords--decision processes, accounting, strategy and statistics

INTRODUCTION IN RECENT YEARS researchers have indicated that there are systematic differences in the effective design of management accounting systems (MAS) between business entities pursuing different strategies [16, 21, 35, 52, 53]. However, these studies only considered formal control systems. Another stream of research, conducted by organizational theorists, has established that organic decision and communication processes (hereafter, organic processes) influence the effective development and implementation of strategies [4, 18, 37, 45]. There is little evidence on the joint effect of organic processes and MAS on performance. Indeed, there is a strong untested inference in the

literature that formal control systems and organic processes are antithetical. This study examines how organic processes and MAS act in combination to effect performance. Specifically, it is argued that the association between organizational performance and this interaction will be more pronounced in entities following entrepreneurial rather than conservative strategies. The remainder of the paper is organized as follows. First, reasons why the interaction between organic processes and MAS may be more closely associated with enhanced performance in entrepreneurial than in conservative entities are discussed. This is followed by sections addressing the research method, the results and finally conclusions of the study. 485

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STRATEGIC ORIENTATION, FORMAL SYSTEMS AND ORGANIC PROCESSES

Over recent years many firms have faced increasing competition both domestically and from foreign entities. This competition has been characterized by new and enhanced products and highly innovative technologies dedicated to continuously improving upon product features such as design, quality, timely delivery and low cost. Two distinct responses to developing strategies can be identified. On the one hand managers may seek to innovate products and technologies regularly and boldly, accepting considerable risks in their product market strategies. These firms conform to Miles and Snow's [33, 34] prospectors, Govindarajan's [15] builders and Mintzberg's [36] entrepreneurs. An alternative orientation is associated with managers who are less aggressive in their approach to innovation or risk taking. These have been described as reactors by Miles and Snow [33, 34], harvesters by Govindarajan [15] and adaptors by Mintzberg [36]. Because of the importance to contemporary business organizations of innovation in product lines, characteristics and technological innovation, the current study uses the typology of 'entrepreneurial and conservative', as developed by Miller and Friesen [35], to describe strategy. This categorization is based on the levels of product and technological innovation and on risk taking. Miller and Friesen [35] identify entrepreneurial managers as deciding that regular and extensive innovation in product design, lines or services should be a vital element of strategy. They try to obtain competitive advantage by routinely making dramatic innovations and taking the concomitant risks [35] (p. 2). Conservative managers view innovation as costly and disruptive to production efficiency. They will innovate only when they are seriously challenged by competitors or by shifting customer needs. There is a body of thought which claims that innovative decision making requires a high degree of flexibility in the structural and communication processes within organizations [6,37,56]. Organic approaches to decision making and communications provide the context whereby individuals throughout the organization can participate in formulating strategies, share ideas and information across the entity,

and take advantage of opportunities or react to threats. More mechanistic approaches to structural arrangements and communication processes are considered to be less responsive and potentially inhibit innovative action. MAS are often an important part of organizations' formal planning and control systems [16,39,52,53]. Typically, MAS are highly formal, articulating action plans derived from strategies by way of detailed financial budgets. The systems require explanation of variances of actual outcomes from these plans. This type of control tends to be mechanistic and as such may be considered inconsistent with innovation. However, recently it has been recognized that MAS have a potentially useful role in assisting in developing and implementing innovative strategies [53, 54]. It is claimed that MAS can help managers formulate strategies in ways to create sustainable economic value for the organization. Also, they can provide useful diagnostic control during the implementation of strategies, ensuring that operations are maintained on course. It will be argued in this paper that our understanding of organizational effectiveness, within different strategic modes, can be enhanced by considering the combined effects of organic processes and use of MAS. The paper, first, examines the role of MAS in both entrepreneurial and conservative organizations, then the potential effects of organic processes in both strategic modes, and finally presents an hypothesis proposing that the association between organizational performance and the combination of organic processes and extensive use of MAS will be greater in entrepreneurial than conservative entities.

Potential constraining effects of MAS on entrepreneurial organizations

Research on the differential effects of MAS on performance within entrepreneurial and conservative organizations is not well developed. In regard to entrepreneurial organizations, several commentators have argued that formal administrative procedures are inconsistent with the development of innovative policies [6, 34, 56]. This follows as formal structures and control systems tend to provide a mechanistic approach to decision making which can result in organizational members becoming inattentive to

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shifting circumstances and the need for innovation [51, 56]. Potential beneficial effects of M A S on conservative organizations In conservative organizations there is less pressure for innovation as strategies concern existing products and practices with more attention paid to internal matters, such as cost efficiencies, than to developing product and technical innovations. The management of internally focused strategies tends to involve higher levels of task predictability and greater understanding of the cause-effect relationships within decision tasks [6, 44]. In this situation, it has been claimed that mechanistic formal controls are an appropriate form of administration [6, 22, 54]. These ideas suggest that entrepreneurial organizations are likely to de-emphasize formal accounting control while conservative entities place a heavier reliance on formal accounting procedures. Potential beneficial effects of MAS on entrepreneurial organizations An alternative viewpoint suggests that use of formal control systems, such as MAS, can be beneficial to the generation and implementation of effective strategies within both successful entrepreneurial and conservative organizations. First, formal systems can provide an intelligence function which indicate a need for innovative ideas by identifying the level of maturity of existing products, the degree of innovation in competitive product markets [1, 26,49] and declining profitability due to factors such as a reduction in sales of older more obsolete products [35]. This intelligence function is considered most effective when applied to more conservative entities operating within relatively low levels of environmental uncertainty [23, 35, 591. Some authors have argued, however, that formal systems can also assist in formulating strategies within entrepreneurial organizations. In this case formal systems prevent entities that are continually seeking innovations from squandering resources on superfluous novelty [35]. Many authors have suggested that MAS can help ensure that ideas are tested for the ways in which they fit within overall plans, resource constraints and capabilities of the organization

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[2, 19, 24, 30, 48, 54]. Simons [52] claims that MAS can be used as part of the 'interactive controls' to stimulate search and learning by focusing managers attention on questions such as "what has changed and why?" In summary, while MAS provide control mechanisms which may assist in facilitating innovation within both entrepreneurial and conservative entities, there is a danger that within entrepreneurial organizations the use of such formal mechanisms generates inflexibility that inhibits idea formulation, thereby contributing to a decline in performance.

Organic decision and communication processes Many authors who assert that formal systems are inconsistent with innovation, claim that organic processes are necessary to ensure that individuals are motivated to participate in creative decision making and the free flow of ideas that are essential for developing entrepreneurial strategies [6, 25, 37]. In considering the development of entrepreneurial strategies it is important to recognize that developing and implementing new ideas within organizations is a collective process involving individuals with diverse interests, skills and resources [12, 561. Recognition of the importance to innovation of collective effort prompted early commentators to suggest that innovation will be encouraged by maximizing the opportunities for individuals to become involved in the process of innovation and that this is best achieved by implementing organic rather than mechanistic organizational structures and processes [6, 51]. More recently, several authors have supported these notions suggesting that individuals will make a commitment to entrepreneurial policies if the decision processes are participative and flexible, and that opportunities for identifying problems and developing ideas throughout the organization are enhanced if communications are open and free flowing [5, 18, 25, 37, 47]. Quinn [45] argued that the need to respond to problems is identified primarily by managers' networks that short circuit formal indicators. This speculation was supported by Lyles and Mitroff [27] who found that 8 0 0 of a sample of managers used informal indicators to become aware of problems and opportunities within their business environments.

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In examining the potential effects of informal networks, the benefits of encouraging innovative thinking accrue primarily to organizations seeking entrepreneurial strategies. It is these entities, rather than conservative organizations, that seek competitive advantage by a continuous flow of new ideas on products and technologies. In conservative organizations strategies are developed within operating situations perceived by managers to be more stable. It has been suggested that it is less efficient to apply organic structures and processes in conservative entities. Rather, it is more appropriate to employ standardized procedures and a higher degree of bureaucratization to achieve effective performance [6, 11, 22]. THE INTERACTION EFFECT-EFFECTIVE PARADOXES

Notwithstanding the persuasiveness of the argument that organic processes encourage innovation, it is important to recognize that organic processes may not, in the absence of formal systems such as MAS, be sufficient to promote effective performance. While organic processes may encourage generating ideas, they may not ensure that the ideas will be translated into effective innovations which enhance performance. It is the potential for MAS to provide a discipline for resource planning and integration that assist in the translation of ideas into effective innovations. In addition, it is not clear that the ideas generated from organic processes will be consistent with managerial intentions [28, 29, 57]. It is through MAS that management can maintain a focused view of organizational direction, capabilities and constraints. While the combination of organic processes and MAS may appear paradoxical, recent research has indicated that such combinations can generate a creative tension that helps foster organizational effectiveness [7, 14]. Cameron [7] proposed that effective organizations possess mutually exclusive opposites in structures and decision processes. These opposites maintain a dynamic balance between competing values, thus avoiding potential dysfunctional effects of extremism. He referenced the need for both 'loose-coupling' to encourage the search and initiation of innovation and for 'tight coupling' to encourage implementation and functional reciprocity. In addition, he noted that while

proactivity and entrepreneurship are important for some organizations, too much concern with these values can create a loss of direction, wasted energy and a disruption of continuity. While control and co-ordination provide a balance to extremes of proactivity, too much formal planning and co-ordination can produce stagnation and loss of energy and declining morale. Cameron claimed that it is the presence of balanced paradoxes that energizes and empowers systems. Additional support for the beneficial effects of mutually exclusive opposites on creativity, flexibility and unity within organizations has been referenced by Medawar [31], Schumacher [50] and Rothenberg [46]. To summarize, it is proposed that enhanced performance will be associated with the combination of organic processes and relatively higher use of MAS in entrepreneurial organizations. In conservative entities, managerial use of MAS may assist in developing and implementing strategies, however, the orientation of strategies to gain internally focused efficiencies limits the usefulness of organic processes. Consequently, in conservative organizations, it is expected that the association between improved performance and the combination of organic processes and more extensive use of MAS will be less important than in entrepreneurial organizations. The following hypothesis formalizes this prediction:

Hypothesis: The association between enhanced performance and organic processes together with extensive use of MAS will be significantly greater in entrepreneurial than in conservative organizations. RESEARCH METHOD

Sample The choice of research method was influenced by a desire to utilize existing concepts and measures of strategy from the viewpoint of conservative and entrepreneurial modes [35]. It was decided, therefore, to use the same research method and where appropriate the same measures as this prior study [35]. Data were collected by approaching 170 general managers of strategic business units, from different large companies, who were attending executive development programs at an

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international business school. From this group 154 individuals participated in the study by completing a structured questionnaire. Since the questionnaire used to collect data was anonymous, it was not possible to directly evaluate the effects of non-response bias. However, the demographic characteristics of the respondents were not significantly different from those of the total group as recorded in program registration details. Firms were spread between the industries of heavy engineering, light engineering and instruments, electronic equipment, electronics, chemicals, textiles and foodstuffs. The firms were spread about equally between France, Germany, UK and the USA. The age of respondents ranged from early forties to middle fifties. All organizations could be classified as large, employing in excess of 1500 individuals. In all cases the managers had experience with the existing MAS within their entities and were closely involved in the development of their entity's strategy. While the broadly based sample assured that the study represented a diversity of business conditions, we can not claim to have a random sample since there was no control over firms registering in the executive development programs and managers selected to participate. Measures

The questionnaire was developed using existing instruments, where possible. However, in the case of MAS and organic processes, existing instruments were supplemented or modified on the basis of descriptions received during pilot studies conducted before implementing the survey. All questions used 7-point Likert scales. Appendix A presents an abbreviated version of the questionnaire. Procedures developed by Miller and Friesen [35] to determine strategic orientation were followed. To ensure that the strategic groups were unambiguously conservative and entrepreneurial, Miller and Friesen suggest the following steps. First, entities were classified on the basis of their orientation to innovation and risk. The items used to measure these character~As an orthogonal rotation was used in the factor analysis the correlation between the dimensions calculated using factor scores was not significant. This supports the existence of separate dimensions to the instrument.

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istics are reported in Appendix A. Factor analysis, using an orthogonal rotation, of each variable confirmed the construct validity of these instruments with individual items loading above 0.40 onto single factors. • Cronbach [8] statistics of 0.60 and 0.72, respectively, indicated satisfactory internal consistency for exploratory studies of this kind. Appendix B reports these results. Second, to ensure that the strategic groups were clearly entrepreneurial or conservative, selection involved categorizing entities as entrepreneurial that had scores on the innovation and risk scales greater than or equal to 4.5 on the 7-point scale. Entities that had scores less than or equal to 3.5 on these scales were classified as conservative. [The innovation and risk scales correlated at 0.43 ( P < 0.01).] Entities with average scores of greater than 3.5 and less than 4.5 were deleted from the sample. While the selection of the cut-off scores was essentially arbitrary, entities deleted from the study were in a grey area, manifesting high risk taking and low innovation, or vice-versa, and as such could not be classified unambiguously. This procedure generated a sample of 72 responses, 35 entrepreneurial and 37 conservative. Organic processes were measured using a 10-item instrument which included three questions developed by Khandwalla [20] and seven identified as important aspects of decision and communication processes during pilot studies. Khandwalla's questions emphasized adapting to change without concern for past practice, initiative and local adaptation rather than specialization and overall control from the top, and open channels of communication. Additional items considered the emphasis on consensus and participative decision making, ease of informal access to senior managers, involvement of managers in generating new ideas even if outside their area of responsibility, tolerance to manager's mistakes and consequent learning and sharing of lessons, sharing of information between managers, quick reactions to take advantage of opportunities, importance of informal channels of communication. Items were coded (or recoded) to score organic processes as high and mechanistic as low. Factor analysis of this instrument revealed two factors suggesting that there were two dimensions related to organic processes. The factor analysis is provided in Appendix B. The first dimension appears to capture the formality of decision

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Table 1. Descriptive statistics of composite variables Actual

Theoretical

Mean

SD

Max.

Min.

Max.

Min.

5.24 5.09 5.05

0.80 0.85 0.78

7.00 6.60 6.30

1.00 1.80 3.00

7.000 7.000 7.000

1.000 1.000 1.000

5.40 5.22 5.10

0.68 0.87 0.83

7.00 6.60 6.30

2.00 2.80 3.00

7.000 7.000 7.000

1.000 1.000 1.000

5.00 4.97 5.00

0.88 0.83 0.74

7.00 6.60 6.00

1.00 1.50 3.00

7.000 7.000 7.000

1.000 1.000 1.000

Working Sample (72) Performance MAS Organic processes

Entrepreneurial Group (35) Performance MAS Organic processes

Conservative Group (37) Performance MAS Organic processes

processes and openness of communications, while the second dimension focuses on an emphasis of adaptability and change. ~ An ct Cronbach of 0.83 indicated a high level of internal reliability and provides a justification for using the 10 items to construct a single organic processes instrument for further analysis. The study sought to measure the use of MAS within the entities. A variety of questions drawn from Khandwalla [20, 21], Miller and Friesen [35] and Simons [53] were tested for their content validity, for this study, with managers during preliminary pilot studies. The final list of questions focused on the use of periodic financial reports, expectations to meet overall budget targets, the extent of corrective action as a result of variances from budget questions, reliance on tight formal financial control and sophisticated control and information systems, and the extent of a financial control function. The thrust of these items is somewhat similar to Simons [53] 'tightness of budget goals' used to measure control system attributes. 2Items were coded such that high scores represented extensive use of MAS. Appendix B provides a factor analysis which reveals that all items loaded onto a single factor. An at Cronbach of 0.69 indicated satisfactory internal reliability for the 5 item instrument. 2The first four items of the instrument measure how M A S are used, while the final item establishes the extent o f an M A S function. These two aspects m a y appear to be measuring different aspects o f MAS. However, the final item was significantly correlated with the average of the four items measuring use (0.48, P < 0.01). The results of the various regressions completed as part of the analysis were not significantly different when either including or excluding the fourth item from the M A S instrument. The analysis reported in the paper uses the measure of M A S including all five items.

Finally, performance was measured using items applied by Khandwalla [20] to assess business entity performance. These items request managers to indicate how their strategic business unit compared with the industry average, in terms of long-run profitability and growth rate of sales or revenue. An additional question was asked to rate the overall performance of their unit on a scale ranging from below average to well above average. Factor analysis indicated a single construct for performance with all items loading onto a single factor. The ct statistic for these items was 0.85. Final scores for each variable were obtained by calculating the average of their respective constituent elements. Descriptive statistics for the final sample and for entrepreneurial and conservative groups are provided in Table 1. RESULTS The hypothesis of this study is that organic processes together with extensive use of MAS would be associated with enhanced performance to a greater extent in entrepreneurial than in conservative entities. This hypothesis can be interpreted as proposing a significant association between performance and a three-way interaction comprising organic processes, use of MAS and strategic orientation. The following procedures were taken to examine the nature of this association. First, the significance of a three-way interaction within the total sample of 72 firms was established by regressing performance against strategic orientation, organic processes, MAS, the two-way interactions between each pair of independent variables, and the three-way interaction of all independent variables. The analysis involved constructing the strategic

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Table 2. Results o f regression analysis for the three-way interaction Coefficient Organic processes MAS Strategy O r g process × M A S Strategy × M A S O r g process x Strategy O r g process × M A S × strategy

fl~ f12 flj f14 f15 //6 fl~

Value

Standard error

t

Probability

- 0.208 0.416 41.492 --0.743 -- 9.010 - 7.235 1.589

0.373 0.344 14.794 0.428 2.844 2.901 0.559

- 0.556 1.211 2.805 - 1.738 - 3.168 - 2.494 2.848

0.580 0.230 0.007 0.087 0.002 0.015 0.006

Ad. R 2 = 0,18, F = 3.17, P <: 0.01.

orientation variable by scoring entrepreneurial entities + 1 and conservative 0. The interaction terms were created by multiplying the respective component variables [42]. The regression equation was of the following form: y = flo + flla + fl2b + fl3c + fl4ab + flsac + fl6bc + fl7abc

(1)

where y = a = b= c=

performance, organic processes, management accounting systems, strategic orientation.

Table 2 indicates that there is a significant three-way interaction between organic processes, MAS and strategic orientation. However, a test of the hypothesis involves examining the difference between the association of performance with the two-way interactions of organic processes and MAS in both entrepreneurial and conservative groups. Performance was regressed against the twoway interaction term together with organic processes and use of MAS in each of the sub-samples. The regression equations were of the following form: y, = flo + fl,a, + fl2b, + fl3a~b,

(2)

where y: = performance, i = 1,2 for entrepreneurial and conservative entities respectively a , = organic processes, i = 1,2 for entrepreneurial and conservative entities respectively 3The calculation of the t-statistic involved the following:

fl3a,b, - fl,a2b2 t = ~(SEfl3albl): + (SEfl3a~b2) 2 - 2Covarfl3ab

b~ = management accounting systems, i = 1,2 for entrepreneurial and conservative entities respectively The results of the regressions for each sub-sample are contained in Table 3. Recall that the hypothesis requires the interaction to be greater in the entrepreneurial than the conservative group. Table 3 indicates that the coefficient for the interaction term (f13) in the entrepreneurial group is larger than in the conservative sample. To determine the significance of the difference between the respective coefficients, a t-test was completed using the difference between the interaction term coefficients for each group, the standard errors of each coefficient, and the variance/covariance matrix of regression coefficients generated from fitting a regression, of the form specified in equation (2), to the sample including both entrepreneurial and conservative groups) This result indicates significant differences between the coefficients (t = 4.29, P < 0.01), with the value for the entrepreneurial sub-sample being greater than the conservative group. This result is consistent with the significant three-way interaction found in equation (1). While this result supports the hypothesis that the significance of the interaction is different between the entrepreneurial and conservative groups, it does not indicate the significance of the interaction within either of the groups. In particular, it is expected, in entrepreneurial entities, that the association between performance and organic processes together with use of MAS will be significant, while in the conservative group it will not. Statistical support for a significant interaction requires that f13 in equation (2) be significant within the respective groups. These results are reported in Table 3. As expected, it is only in the entrepreneurial group that the interaction term is significant. Moreover, the positive sign of this interaction

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Table 3. Results of regression analysis for the two-way interactions Coefficient

Value

Standard error

t

Probability

Entrepreneurial Entities Organic processes MAS Org process x M A S Ad. R 2 = 0.36, F = 7.25, P < 0.01

fl~ t2 t3

0.647 -- 0.568 0.846

0.300 0.282 0.303

2.154 -- 2.015 2.789

0.040 0.053 0.009

fl~ f12 t3

- 0.208 0.416 --0.743

0.420 0.387 0.481

-- 0,494 1.076 - 1.544

0.624 0.290 0.132

Conservative Entities Organic processes MAS Org process x MAS Ad. R2 = 0.05, F = 1.74, P < 0.17

term indicates that the association between performance and organic processes is stronger in situations with relatively high use of MAS. Figure 1 illustrates the nature of the interaction in the entrepreneurial group. The slope of the curve representing the association between performance and organic decision processes is steeper (more significant) in situations in which more extensive MAS are used, relative to conditions with less emphasis on MAS. The lack of significant results for the conservative group makes interpretation meaningless. Further analysis was undertaken for the entrepreneurial group to identify if the association between organic processes and performance was significantly different from zero in situations of either high or low use of MAS. This issue is of practical importance to managers as they will have a particular interest in whether performance is enhanced by the application of organic processes, in situations with high or low use of MAS. The analysis involves constructing

High use of MAS

a new regression, equation (3), by rescoring the independent variables used in equation (2). First, MAS observations above the mean were scored + 1, and - 1 if below the mean. Second, the scores for organic processes were standardized to measure high scores positively and low scores negatively. The interaction term was calculated by multiplying organic processes by MAS, using the revised scores. The regression was as follows: yi = to + fl~a~ + fl2b~ + fl3a~b~

(3)

where yi = performance, i = 1,2 for entrepreneurial and conservative entities respectively ai = organic processes, with scores standardized at the mean, i = 1,2 for entrepreneurial and conservative entities respectively b; = management accounting systems, with scores greater than the mean = + 1 and scores lower than the mean = 1, i = 1,2 for entrepreneurial and conservative entities respectively The results of equation (3) are provided in Table 4. Next, equation (3) was decomposed into two separate equations, one relating to higher use of MAS and the other to lower use. Using the recoded MAS as + 1 for scores above the mean, equation (3) can be reconstructed for high use of MAS as:

L o w use of M A S

Y = (to + f12) + (fl, + fla)a

(3a)

Similarly, using the recoded low MAS as - 1, equation (3) can be reconstructed for low use of MAS as: Organic process Fig. 1

Y = (to - f12) + (fl~ - fl3)a

(3b)

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Table 4. Results of regression analysis for the two-way interactions--scoring high M A S + 1, low MAS - I and standardized scores for organic

processes Coefficient

Value

Standard error

t

Probability

Entrepreneurial Entities Organic processes MAS Org process × M A S Ad. R z = 0.35, F = 7.15, P < 0.01

fl~ /32 /33

0.706 - 0.058 0.874

0.295 0.234 0.295

2.396 - 0.248 2.966

0.023 0.806 0.005

13, /32 /33

- 0.033 0.355 -0.596

0.417 0.303 0.417

-0.079 1.163 - 1.430

0.935 0.253 0.162

Conservative Entities Organic processes MAS Org process × M A S Ad. R 2 = 0.02, F = 1.22, P < 0.31

Inserting the value for the respective coefficients from Table 3 into equation (3a) and equation (3b) we obtain: Y = 4.80 + 1.58a (high use of MAS) (3c) and: Y = 4.92 - 0.17a (low use of MAS) (3d) The composite coefficients for equation (3c) and equation (3d) and their standard errors were developed from the coefficients and the variancecovariance matrix generated from equation (3). The coefficient for high use of MAS [(ill + f13)in equation (3a)] was positive and significant (t = 6.66, P < 0.01). By contrast, the coefficient for low use of MAS [(fl~ - f13)in equation (3b)] was negative but not significant at conventional levels (t = 0.65, NS). These results indicate that, for entrepreneurial entities, there was a significant association between enhanced performance and use of organic processes in entities employing MAS more extensively. CONCLUSION AND DISCUSSION In recent years the nature of decision and communication processes and formal systems have been identified as important factors in understanding the effectiveness of various orientations to strategy. One line of argument suggests that organic processes are essential to ensure an innovative approach to strategy [6, 18, 25]. However, some authors assert that both entrepreneurial and conservative strategies are enhanced by locating the formulation, evaluation and implementation of innovative ideas within tight formal control systems, such as MAS [2, 17, 19, 30, 35]. Other commentators have argued that formalized control systems may

stultify creativity thereby inhibiting the process of innovation [11,44,51]. Theorists such as Cameron [7] have suggested that the management of innovative strategies may be encouraged by the application of mutually exclusive opposites, such as organic processes but combined with formal systems. The current study provided evidence consistent with the view that the association between enhanced performance and the interaction of organic processes with use of MAS is stronger in entrepreneurial than in conservative entities. The proposed association was significantly different from zero in the entrepreneurial but not in the conservative entities. Moreover, the study demonstrated that, in entrepreneurial entities, there was a significant association between performance and organic processes in situations with high usage of MAS, but not when MAS were less extensively used. Of particular interest to the designers of management control and information systems is the finding that MAS can co-exist with organic processes to assist in generating effective performance in entrepreneurial organizations. This conclusion is inconsistent with the ideas of Burns and Stalker [6] that formal administrative systems are incompatible with organic approaches to decision making, but is supportive of more recent views that formal systems can be amalgamated and embedded within a variety of approaches to management planning and control [4, 9, 10, 13, 14, 32, 39, 40, 52, 53]. Several limitations of the current study may be noted. First, while both established and new instruments were used to measure variables they capture only limited aspects of organic processes and MAS. Additional dimensions of these variables would enhance the content validity of these measures. The measurement of performance was relatively crude. Supplementary

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measures, which were externally verifiable, may have enhanced the measurement of performance. However, this is difficult in studies which assure the anonymity of the respondents. Secondly, the research did not examine the moderating affect of environmental or organizational variables on the proposed relationships. It is most likely that other variables are implicated in the way in which organic processes and MAS influence the development and implementation of strategy within both entrepreneurial and conservative organizations. However, there is no reason to suspect that the exclusion of contextual variables from this study represents a misspecification of the proposed model. Thirdly, only a single manager of a strategic business unit from each of different firms completed the questionnaire. This created the potential for bias caused by common response artefacts. However, notwithstanding the potential for bias in studies of this nature, the interaction model provided evidence of contradictory bi-variate correlations drawn from the same data set. Lastly, as with all cross sectional survey studies the results do not constitute proof of the relationships. Rather the evidence must be considered as consistent with the theoretical position developed in the paper. Despite these limitations the study does provide evidence that improved understanding of the effective design of management control and information systems can be assisted by considering the differential role of organic processes and MAS in organizations pursuing entrepreneurial or conservative strategies. The variables selected in this study are consistent with calls by several commentators for research which examines formal systems within the context of other informal systems and procedures [9, 10, 38, 40, 41, 58].

age successful strategies of innovation. Rather, the effective development of the interaction will involve MAS operating dynamically within organic processes, providing a means whereby information and opinions on potential areas for development can be made visible and given direction in ways that are reinforcing to those developing ideas. Green [14] referred to the dual roles of formal systems in terms of both the traditional functional purpose of focusing on economic rationality, and a symbolic role of adjusting and reproducing organizational shared meanings and social relations which the systems articulate. Green proposed that the use of formal systems is a distinct phase in the evolution of organizational adaptation whereby management works with other organizational members in an attempt to create symbols which focus actions in certain directions, and influences the interpretation of situations and events. This symbolic role of MAS derives from the suggestions of authors such as Pettigrew [43], Brown [3] and Trice and Beyer [55] who argued that senior management is involved constantly in a wide range of symbolic activities to encourage developing shared meaning, including attitudes towards innovation [55]. These notions are consistent with Simons [52, 53] who noted that MAS can be particularly helpful in uncertain business conditions as mangers use the MAS interactively to manage and learn about tasks that are non-routine and unstructured. Further research which considers how formal systems, such as MAS, evolve within informal organizational control and decision systems is required to develop our understanding of these complex processes. Such studies are likely to be most valuable when applying longitudinal research methodologies which can identify how variables evolve collectively over time.

FUTURE RESEARCH

The main purpose of this study has been to demonstrate that the effect of the interaction between organic processes and MAS on performance differs between strategic modes. While not examined within the current research, it is important to note that developing formal systems within an organic decision environment is unlikely to be a simple instrumental process of specifying systems design, communication networks and decision procedures in ways that top management believe are appropriate to encour-

APPENDIX A Questionnaire Items

Appendix A presents itemsused in the questionnaire to measure each of the variables. Organic Decision and Communication Processes

An emphasis on consensus-seeking, participative decision making.

Strong emphasis on adaptation without concern for past practice. Open channels of communicationsand free flowof information.

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Emphasis on initiative, and adaptation to the local situation rather than specialization and top level co-ordination. Easy informal access to senior managers. Managers encouraged to develop new ideas even if they fall outside the individual's area of responsibility. Tolerance of manager's mistakes, learning and sharing lessons from them. Managers share information with colleagues. Fast reaction to take advantage of unexpected opportunities. Culture encourages informal signalling of potential problems.

Management Accounting Systems Tight formal control of most operations by means of sophisticated financial control and information systems. Periodic reports on financial performance are reviewed carefully by senior management. Corrective action must be taken to eliminate variances from budgeted performance, even if this involves tough measures, Overall performance targets must somehow be met, even if events are occasioned by events outside the manager's control.

The organization has a strong central controllers' function which develops and implements financial control systems and monitors their use.

Innovation A strong emphasis on R&D, technological leadership and innovations. Development of many new product lines or services in the past 5 years. Changes in product lines have been dramatic.

Risk taking A strong proclivity for high risk projects (with chances of very high returns). Bold, wide-ranging acts are viewed as useful and common practice.

Performance Compared to industry averages how does the long run profitability of the entity rate. Compared to industry averages how does the growth rate of sales or revenue of the entity rate. Rating of the overall performance of the entity.

APPENDIX B

Composite Variables Appendix B provides the results of factor analysis and Cronbach ~ statistics for items related to each variable. Organic Decision and Communication Processes (at = 0.83) Factor 1 An emphasis on consensus-seeking, participative decision making. 0.576 Strong emphasis on adaptation without concern for past practice. -0.204 Open channels of communications and free flow of information. 0.819 Emphasis on initiative, and adaptation to the local situation rather than specialization and top level co-ordination. 0.507 Easy informal access to senior managers. 0.587 Managers encouraged to develop new ideas even if they fall outside the individual's area of responsibility. 0.251 Tolerance of manager's mistakes, learning and sharing lessons from them. 0.528 Managers share information with colleagues. 0.641 Fast reaction to take advantage of unexpected opportunities. 0.182 Culture encourages informal signalling of potential problems. 0.433 Factor 1 2

Factor 2 -0.795 0.475 0.087 0.342 0.353 0.577 0.322 0.225 0.498 0.365

Eigenvalue Cumulative variance 3.540 55.4 1.899 67.3

Management Accounting Systems (~ = 0.69) Tight formal control of most operations by means of sophisticated financial control and information systems. Periodic reports on financial performance are reviewed carefully by senior management. Corrective action must be taken to eliminate variances from budgeted performance, even if this involves tough measures. Overall performance targets must somehow be met, even if events are occasioned by events outside the manager's control. The organization has a strong central controllers, function which develops and implements financial control systems and monitors their use. Factor 1

Factor 1 0.763 0.693 0.78 l 0.600 0.478

Eigenvalue Cumulative variance 1.963 69.3%

contmued

Chenhall, Morris--Organic Processes and MAS

496

Table cont. Innovation (at = 0.60)

A strong emphasis on R&D, technological leadership and innovations. Development of many new product lines or services in the past 5 years. Changes in product lines have been dramatic. Factor Eigenvalue Cumulative variance 1

2.0613

Factor I 0.798 0.863 0.824

60.7 %

Risk Taking (at = 0.72)

A strong proclivity for high risk projects (with chances of very high returns). Bold, wide-ranging acts are viewed as useful and common practice. Factor Eigenvalue Cumulative variance 1 1.525 76.3%

Factor 1 0.874 0.882

Performance (at = 0.85)

Compared to industry averages how does the long run profitability of the entity rate. Compared to industry averages how does the growth rate of sales or revenue of the entity rate. Rating of the overall performance of the entity. Factor Eigenvalue Cumulative variance 1 2.585 74.9%

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