Accounting for Strategy and Management Control - Juhani Vaivio - Essay Example

Accounting for strategy and management control - Critical Analysis of the study of Vaivio (1999) Introduction One of the key priorities of academic research is the identification of the issues that most reflect the characteristics and the status of the subject under examination. The methods used by researchers in the achievement of the above target are not standardized. However, it is necessary that an academic methodology is chosen taking into consideration the conditions and the requirement of the research. A detailed plan of action is always necessary. In practice, most academic researchers are likely to face two important challenges: a) the changes on the issues under discussion – referring to the period between the development of the research and the publication of the study, b) the lack of sufficient findings in order to support the study – this is a problem occurring in these two cases: b1) the subject of the research has not been extensively studied by academic researchers or b2) the number of participants in the research developed – when the study is based on empirical research – has been less than estimated at such level that the credibility of the study’s research methodology part would be set in risk. Current paper focuses on the examination of the study of Vaivio (1999); the study refers to a specific aspect of Management Accounting (MA): the potential use of non-financial measures in MA is evaluated using apporpriate academic research methods. The structure, content and credibility of the study are evaluated in this paper; emphasis is made on the study’s effectiveness – in terms of the achievement of the research goals. Also, the study of Vaivio (1999) is compared with that of Roslender & Hart (2003) – also related to MA – in order to identify any points – referring to the study of Vaivio - that need to be improved. 1. Critical Analysis of the Research Paper: Vaivio (1999) 1.1 Overall description/summary of the research paper – information about the author Vaivio (1999) has tried to examine the potential use of non-financial measures in management accounting. Moreover, emphasis is given on the fact that the use of non-financial measures in modern firms can help to the increase of innovation in regard to the strategic decision making processes involved in crucial management plans – the case of the interactive management control is made as an indicative example. In the case under examination reference is made to a particular company: Lever Industrial – U.K. The literature published on the specific subject has been combined with the findings of empirical research – field interviews – in order to support the author’s arguments on the issues under discussion. The research developed by Vaivio (1999) leads to the conclusion that non-financial measures could be successfully used in the context of management accounting; however, it has been made clear that the effects of the above interaction are not standardized. Juhani Vaivio works as a professor of Management Accounting in the Accounting Unit of the Aalto University School of Economics – Finland. He was born in 1961 in Helsinki. He graduated from the Lycée franco-finlandais (Helsinki); his educational background includes an MSc in Economics and a Doctor of Science in Economics from the Helskinki School of Economics. His publications on Economics (especially on Management Accounting) are significant – referring for example to the study entitled as ‘Examining the Quantified Customer’ (1999) and the study entitled as ‘Management Accounting Change’ (2001) (Helsinki School of Economics, Juhani Vaivio). Most recent publications of Juhani Vaivio are the following ones: the study entitled as ‘The Business Controller, Non-financial Measurement and Tacit Knowledge’ (2006) and the one entitled as ‘Qualitative Management Accounting Research: Rationale, Pitfalls and Potential’ (2008). In accordance with a biographical notice released by the above author, his current research focuses on the examination of the various aspects of strategic control (Helsinki School of Economics, Juhani Vaivio). 1.2 Critical Analysis 1.2.1 Issues addressed In the study of Vaivio (1999) emphasis is given on the potential use of non-financial measures in modern organizations. Moreover, the following issues are addressed: a) the need for change of MA in order to become more effective; extensive reference is made to the use of non-financial measures as a tool for achieving the change of MA; the mechanism of change and the processes used for changing the traditional form of MA are critically discussed, b) would be the change attempted necessary for the improvement of MA, c) how plans of change can be effectively developed in modern organizations; it is explained that the dynamics and the interaction of change in the organizational environment need to be identified before initiating any plan of change within a particular organization (Vaivio, p.411), d) how the success of change in modern organizations can be depended on external plans of reform, for instance the Total Quality Management (Vaivio, p.411), e) how can the non-financial measures be incorporated in a firm’s existing strategic processes and f) which would be the role of non-financial measures in the overall increase of organizational performance; reference is made to the ways through which the non-financial measures could help to the limitation of the strategic uncertainties of modern organizations – a fact that can result to the increase of organizational efficiency and profitability. Moreover, the level at which existing financial measurement strategies can be alternated using non-financial measures is identified and critically discussed. 1.2.2 Why the research topic is important As noted above, the study of Vaivio (1999) focuses on a critical issue: the potential development of MA using non-financial measures. Management accounting is extensively involved in the strategic management of all firms worldwide. Therefore, the potential development – and improvement – of MA would be important for firms in all industries; strategic measures could be developed so that the MA techniques used in each organization to be improved. In accordance to Vaivio, the identification of the mechanism of change of MA would be a challenging task taking into consideration the existence of a series of forces, which can influence the success of such initiatives – referring to forces which are developed in the internal but also in the external organizational environment. Furthermore, Vaivio (p.409) notes that non-financial measures can be additionally used for controlling strategic uncertainties in modern organizations – these uncertainties need not to be related with the implementation of plans of change. In other words, in the study of Vaivio (1999) non-financial measures are considered as having two different roles: they can be used for promoting change or for minimizing strategic uncertainties. The issues presented above have not been adequately examined in the literature, a fact that increases the value of the research topic chosen by Vaivio (1999). On the other hand, up today, financial measurement techniques are likely to be preferred by management accountants worldwide. Therefore, current study would be important indicating the potential value of non-financial measures in measuring the performance of modern organizations. 1.2.3 Development of theories and hypotheses by the author The study of Vaivio (1999) is based on a series of hypotheses, which have been derived after exploring the literature published in the specific field. These hypotheses could be summarized as follows: a) the non-financial measurement can be used when having to introduce changes in management accounting plans, b) the non-financial measurement has the power to lead to a radical transformation of existing management accounting framework, c) non-financial measurement can be more effective from common financial measurement techniques – being independent from financial measures which can set significant limits to financial measurement and d) the measurement through non-financial measures could be expanded in ‘more tangible dimensions of performance’ (Vaivio 410). However, the author highlights the fact that non-financial measurement should be further explored before used for measuring organizational performance; the lack of sufficient evidence on the effectiveness of the specific technique is considered as one of its weaknesses – a gap which is expected to be covered – even partially – through the study of Vaivio (1999). At the next level existing theoretical frameworks have been used by Vaivio (1999) in order to support his study. The following theories constitute the basis on which the above study is based: a) the Balanced Scorecard of Kaplan & Norton, b) the Total Quality Management concept, c) the Tableau de Bord reporting system (Lebas, 1994), d) the ‘concepts of World Class Manufacturing, Customer Satisfaction, and the ‘Japanization’ of management (Howell and Soucy, 1987; Hiromoto, 1988, in Vaivio, 1999, p.410). Reference is also made to the studies of Fischer (1992) and that of Johnson (1990). The common point of all the above theories and studies is that they all emphasize on the potential value of non-financial measures in measuring organizational performance. 1.2.4 Data collection and analysis – description and implications The effectiveness and the credibility of the data collection and analysis used by Vaivio can be identified only by referring primarily to the research method chosen by the above author – aiming to test and verify the hypotheses mentioned in the previous section. The research developed by Vaivio (1999) for supporting the arguments and the theories included in his study can be characterized as multi-dimensional; the research focuses on a particular firm the Level Industrial United Kingdom (LI – UK), a firm operating in the British chemicals industry. The research has been divided into several phases; all the phases of the study have been developed during 1992-1993. Primarily, interviews were made – 42 in total – within different organizational departments (Vaivio, p.413) – aiming to increase the credibility of the research but also the volume of material used in the development of explanations in regard to the study’s hypotheses. At the next level, informal conservations have been made with employees in various organizational sectors; in this way, it has been easier to understand the points on which emphasis should be made – in regard to the issues under discussion. At the same time, documentary material – company reports and other similar documents – has been used for verifying the credibility of the findings but also for identifying data useful in the development of the study. Site observation has been also engaged in the research: the author visited units of the firm across Europe. The data gathered through the interviews developed by Vaivio (1999) have been categorized into thematic sections and are critically discussed referring to specific events – as described by interviewees. The events across LI- UK which have been considered as important for the issues under discussion have been divided into five categories: in the first section, reference is made to the first forms of non-financial measures used across the organization; these forms have been the basis for the development of the specific measurement schemes in LI-UK, in the second section, a particular type of non-financial measures, the ‘private’ non-financial measures, is discussed – always with reference to LI-UK; at this section, extensive discussion is made on the Total Quality Management scheme used for re-shaping the management practices in LI-UK. In the third section, the intervention of three factors – characterized as ‘two motivators and a catalyst’ – in the development of change in the firm’s existing management system is explained; reference is made to the merge of the firm with the Jeyes Hygiene and the effects of this merge to the efforts made for changing the firm’s existing management practices. The progress and the effectiveness of the attempted change in the firm’s management practices- focusing on the use of non-financial measures in the relevant activities – are presented in the fourth section. In the fifth section, the potential use of interactive non-financial measures in the process discussed above – change of existing management practices – is critically discussed. The events included in each section are analytically presented, however the following problem occurs: since the events are categorized using thematic criteria, a confusion is often caused in regard to the turn of these events – i.e. the order of their appearance. In this way, it is often difficult to understand whether a specific event has been actually the cause for the appearance or the development of another – subsequent – event. 1.2.5 Findings, description and importance The importance of the study of Vaivio (1999) can be understood by referring to the findings of the research developed by the above author – referring to the interviews but also the examination of relevant documentation – as explained above. The key findings of the study under examination can be summarized as follows: a) the forms of non-financial measures adopted by each organization can be differentiated – in accordance with the organizational characteristics and needs (Vaivio, p.414), b) The use of non-financial measures has not always the expected results; however, the involvement of well-known (and tested) management schemes when trying to change a firm’s existing management strategies offers the following advantages: failures in the criteria used for choosing management practices can be revealed. For instance, in LI- UK the use of Total Quality Management in the development of such activity has revealed that the non-financial measurement developed across the organization has mostly served the ‘private’ needs of the Managing Director (Vaivio, p.417) – it is in this context that the phenomenon of private non-financial measures has been identified in the particular organization, c) the factors, which may influence the change in a firm’s MA strategies may be differentiated – in terms of requirements and results – from non-financial measures; at this point, the effectiveness of non-financial measures employed in a specific organization may be adversely affected (Vaivio, 421) and d) non-financial measures can offer various benefits in modern organizations – for instance, in LI-UK the use of non-financial measures has led to the increase of the interactive control developed across the organization (Vaivio, p.424). The value of the above findings for MA is high; aspects of the MA which were not analytically explored in the past – referring especially to the interaction of MA with non-financial measures of different forms - are presented and discussed. The presentation of the findings by Vaivio (1999) supports the explanation of the relationship between the non-financial measures and the MA – even if a different mode of presentation of the findings would be more effective – in the context discussed in the sections that follow. 1.2.6 Achievement of research goals The level at which the study of Vaivio (1999) has achieved the research goals can be identified primarily by observing the alignment of the findings with the research hypotheses. However, the findings of the empirical research – interviews – developed for this study are not closely related to the research hypotheses – or else, they do not verify directly the hypotheses on which the research of Vaivio (1999) has been based. More specifically, through the interviews made and the documents examined, it has been revealed that a) non-financial measurement can be an effective strategic tool for initiating change in modern organizations – see the case of the Commercial Director (Vaivio, p.425), b) change within organizations may not be systematic, i.e. carefully planned and closely monitored – as revealed through the relevant initiatives of the Managing Director (Vaivio, p.417), c) non-financial measures in organizations may serve the needs of specific employees – and not the needs of all stakeholders, as expected (Vaivio, p.417), d) the use of non-financial measures in organizations may not only support the organizational activities; they can also reveal organizational weaknesses (Vaivio, p.419); in the last case, non-financial measures can be further used for limiting the uncertainties appeared – as a result of the appearance of organizational failures. In accordance with the above, the goals of the study of Vaivio (1999) are achieved but this achievement is not full; research hypotheses are discussed by referring critically to issues, which are relevant to the study’s subject, but they are more general than required. 1.2.7 Contribution of the study The contribution of the study in the MA field is important. The above assumption is based not only on the importance of the research topic (as explained in section 1.2.2) but also on the following facts: a) emphasis is given on a subject which has not been adequately examined in the existing literature – referring to the non-financial measures as tools for change of MA practices, b) an extensive literature review has been developed for supporting the arguments developed in the study under examination and c) the potential differentiations in the role of MA in modern organizations is critically explained using findings from empirical research; in this way, the actual value of MA for the development of organizational activities is made clearer. 1.3 Implications for Management Accounting 1.3.1 MA issues raised in the study In the study of Vaivio (1999) there are specific MA issues set: a) MA schemes can be changed using non-financial measures, b) the role of non-financial measures in changing MA strategies is not standardized – it can be differentiated across organizations of different industries, size and leadership style, c) MA strategies can be affected by the general strategic options of each firm – for instance the Total Quality Management framework can influence the structure and the performance of MA either in the short or the long term. 1.3.2 Importance of the research findings in the context of MA The study of Vaivio (1999) has revealed the strengths and weaknesses of the plans developed in modern organizations regarding the change of existing MA strategies. The findings of the above study lead to the assumption that MA strategies adopted by each organization can be alternated but the relevant procedure need to be carefully monitored; the risk for failures is high. Moreover, the study of Vaivio (1999) establishes the following belief – in regard to the future of MA: MA could be highly developed in case that alternative strategic tools are used for the completion of its tasks; however, the effectiveness of these tools cannot be guaranteed, a problem that needs to be resolved in order for any progress to exist on the development and the improvement of traditional MA. 1.3.3 Implications for the future of MA One of the most important effects of the study of Vaivio (1999) on the future of MA is the establishment of the rule that Management Accounting does not have a standardized support mechanism; various strategic tools and schemes can be used for the promotion and the development of MA. Non-financial measures are indicative examples of such case. From this point of view, it is also assumed that the development of MA in the future cannot be precisely estimated – nor guaranteed. For this reason, it is quite important that effective strategic tools are used when developing MA tasks. At the next level, the study of Vaivio (1999) sets the following issues: a) Non-financial measures could support MA but the terms of the specific relationship are difficult to be identified in advance – being depended on the local political and economic conditions, b) in case that non-financial measures are not accepted as strategic tools, a problem of management of financial activities could appear, c) MA can be open to changes; however, firms with non-flexible strategic frameworks would need to alternate their strategic criteria and goals before attempting to change their MA policies. 2. Suggestions for improvements The study of Vaivio (1999) offers valuable information on the potential development of MA through non-financial measures. In most of its parts, the above study can be characterized as quite satisfactory offering adequate explanations on the issues under examination; moreover, the study’s hypotheses have been effectively verified both through the literature and the empirical findings engaged in the study. However, there are certain points of the study that should be improved, in order for the study’s quality and credibility to be increased. Relevant suggestions are presented below; emphasis is given on specific parts of the study of Vaivio (1999), for instance the title of study, the research methods used, the areas to research and the presentation and analysis of findings; these parts of the study have been identified as most weak – at least compared to the average level of the study. The suggestions of improvements on the study – as presented below – should not be considered as indications of low quality or credibility of the particular study; on the contrary, the improvement of these parts is suggested in order for the level of quality of the study to be increased at the highest possible level. 2.1 Appropriateness of the title The title of the study of Vaivio (1999) ‘Exploring a ‘ non-financial’ management accounting change’ can be characterized as not totally reflecting the context and the goals of the study. As explained above, the study focuses on the examination of the role of non-financial measures in the development of organizational change but also in the stabilization of performance of a firm’s strategic plans – when strategic uncertainties have appeared. In accordance with the above, the title chosen for the study of Vaivio (1999) should indicate clearer the research aims; a title that would meet the above requirement would be the following one: ‘The use of non-financial measures by strategic planners’. In other words, it would be necessary for the title of the study to refer clearly to the central point of the study: the non-financial measures and to avoid limiting the study’s aims – which refer to the involvement of financial measures not only in organizational change but also in the limitation of strategic uncertainties. The fact that various issues on organizational change are explored in this study cannot lead to the assumption that organizational change is the main subject of the study; it is just one of the issues examined in the context of the study, even if its analysis is more detailed than would be normally expected. 2.2 Areas to research In regard to the issues discussed in the study of Vaivio (1999) no particular suggestions for improvement could be made. A key subject has been set – non-financial measures and their role in the change of a firm’s management processes – followed by sub-issues, which are also critically discussed. The areas to research would not be expanded – above the issues set by the author, as explained in previous sections – since there would be the following risk: the study’s theme would become too generic and thus it could not be effectively explored by using relevant academic research tools. 2.3 Research methods The methods employed in the study under examination reflect the following scope: emphasis is made on the practices of a particular firm in regard to the issues under discussion. In other words, the use of non-financial measures in the change of existing management strategies is explored from a specific perspective: the conditions (internal and external) in LI-UK; in this way, there is no space for the development of general assumptions – the findings refer to the specific company and may not reflect similar activities in firms of different industries, of different size or in different markets. The use of documentation along with interviews does not help to the development of assumptions that can be applicable on a wide part of the market; all the material used in the development of the study of Vaivio (1999) is related to LI- UK, a fact that can be considered as negative when evaluating the importance of the study for Management Accounting. Of course, the value of the literature used for the development of the study of Vaivio (1999) cannot be ignored; however, the author fails in testing the relevant findings in practice. It is suggested that a different empirical research method is used: the survey through a questionnaire would be a more appropriate research method offering the following advantages: a) a wide sample of findings would be retrieved – the number of participants could be high, b) more objective responses could be identified – the lack of face-to-face contact for the development of the research would lead the participants to state their view clearer and c) a wider range of themes/ issues could be covered – depended on the number of questions included in the questionnaire. Another important advantage of the survey is the availability of the graphical representation of its results (as percentages) – an option non available in interviews. 2.4 Presentation and analysis of findings The presentation and discussion of findings by Vaivio can be characterized as quite effective – in accordance with the research method chosen. However, the following problem has been identified: the categorization of the findings by subject has not been followed by a clear distinction of the chronological success of the events involved. Moreover, the events of each category are not compared; it is easy for the reader to be confused in regard to the order of the events and their role in the development of change in the firm’s management strategies. Even if the views of interviewees in regard to the issues under discussion are analytically presented the correlation between these views is not made clear. It is suggested that the events were presented chronologically – at the next level their effects on the issues under discussion could be identified by referring to the views of interviewees. In this way, an integrate view could be developed regarding the causes, the order of occurrence and the role of events in the completion of the changing process using non-financial measures. 3. Comparison of the study of Vaivio (1999) with the study of Roslender & Hart (2003) The value of the study of Vaivio (1999) in regard to the needs of the particular field – Management Accounting – can be identified more accurately by referring to a study focusing on a similar subject. The study of Roslender & Hart (2003), which focuses on a particular form of Management Accounting –the Strategic Management Accounting –, can be quite valuable for understanding and highlighting the strengths and the weaknesses of the study of Vaivio (1999). The similarities and differences of the two studies are related to specific issues/ elements: their subject, their goals, their research methods, their presentation of results and their material – referring to the material used for the development of each of the above studies. The study of Vaivio (1999) is similar to that of Roslender & Hart (2003) only regard to their field; both these studies refer to management accounting; however, their goals and the structure of their studies are different. The study of Vaivio (1999) focuses on the examination of the potential change of MA using non-financial measures; the study of Roslender and Hart (2003) focuses on a particular aspect of Management Accounting: the Strategic Management Accounting (SMA). In other words, the examination of the terms of change of MA using non-financial measures are set by Vaivio (1999) as the main goal of its study while Roslender and Hart (2003) discuss the development of a particular form of MA – the SMA. In terms of the research methods employed, Vaivio (1999) has used a qualitative research method – interviews, combined with documentary material – Roslender and Hart (2003) also use interviews for exploring the issues discussed in their study; however, their interviews have been conducted among 10 firms – offering a wide range of findings on the issues under discussion. However, in the study of Vaivio (1999) the research hypotheses are set in advance – in the beginning of the study – while in the study of Roslender and Hart (2003) the research hypotheses seem to be derived after examining the literature related to the particular subject. The time period to which each study also indicates the level of achievement of the research goals, which in this case is proved to be equal among the two studies: in the study of Roslender and Hart (2003) reference is made to the past 20 years (in relation with the issue under discussion); Vaivio (1999) also refers to the MA practices of LI-UK from 1969 onwards providing a detailed view in the historical development of non-financial measures within the particular organization. Another common success factor of the two studies is the uniqueness of each research topic – referring to existing literature. Under these terms, both the above studies can be characterized as valuable, contributing in the development of different aspects of MA. The differences noted between these studies prove that academic researchers can use different tools and methodologies for approaching a specific subject; each such study needs to be evaluated by the achievement of the research goals and not by the tools and methodology used. References Roslender, R., Hart, S. (2003). In search of strategic management accounting: theoretical and field study perspectives. Management Accounting Research, 14: 255–279 Vaivio, J. (1999). Exploring a ‘ non-financial’ management accounting change. Management Accounting Research, 10, 409-437 Online Source Helsinki School of Economics, Juhani Vaivio, 2010, available from Read More