Environment can be broadly characterized as phenomena that are external to the organization and which have either potential or actual influence on the organization (Macy & Arunachalam, 1995, p.67). The external environment may thus relate to technology, law, politics, economics, culture, and demographics. In this section, hypotheses are developed that examine how changes in competitive environments and advanced manufacturing technology cause changes in organizational structure, organizational strategy and management accounting practices.
4.2.1 Changes in Competitive Environments, Technology and Organizational Structure
Changes in competitive environment and technology put pressure on organizations to adapt and change their structure (Schwarz & Shulman, 2007). In adopting this change, horizontal (decentralized) structures like work-based teams have emerged, (Cohen & Bailey, 1997). It is argued that the use of decentralized structures in a competitive environment and advanced technology development enables organizations not only to improve their speed and flexibility of response, but also to improve the quality of that response. For example, Choe (2004), DeLisi (1990) and Harris (1996) agree that the successful implementation of information technology and computer networks in an organization, as well as the use of a high degree of automation and computer aided technology in the production system, often require the blending of technological and social skill, which can be best achieved through the adoption of work-based teams. Thus, the following hypotheses are proposed:
H1a Organizations facing a more competitive environment will change to a flatter organizational structure.
H1b organizations facing changes in manufacturing technology advancement will change to a flatter organizational structure.
4.2.2 Changes in competitive environment, technology and organizational strategy
Increasing globalization has resulted in change in the dynamic nature of competition and technology. As a result, strategy development has also had to change (Shields, 1997). In intense and aggressive competition with increased customer demands and a shorter product life cycle, a proper link between strategy and manufacturing operations, are all keys to developing sustainable competitive advantage (Porter, 1996). Customer-focused strategies are of particular interest in this study and it is a form of product differentiation strategy (Hyvửnen, 2007). Recently, customer focus has been identified as an important aspect of the strategy of the firm (Hyvửnen, 2007;
Kaplan & Norton, 1992). This form of strategy provides potential for firms to effectively differentiate their products or services from competitors by satisfying customer demands for product features or for timely and reliable delivery and after sales service (Hyvửnen, 2007).
Many companies seek to gain competitive advantage by applying customer-focused strategy, and a customer focus ideology is embedded in many management philosophies, i.e. in total quality management, just-in-time or flexible manufacturing.
Li and Ye (1999) found that firms need to make greater investment in information technology if they are in more dynamic environments and are also pursuing more externally oriented strategies involving product market expansion. Information technology is one basis of the application of advanced manufacturing technology, such as just-in-time. Several empirical research studies suggest that the organization should change its strategy to accommodate change in competitive environment and technology. For example, Baines and Langfield-Smith (2003), Chenhall and Langfield-Smith (2003), Harris (1996), and DeLisi (1990) show that firms facing a more competitive environment and technology advancement will change towards a
differentiation strategy, in addition, Fuschs et. al. (2000) found that successful firms aligned key elements of strategy with the environment. Therefore, the following hypotheses are proposed:
H2a Organizations facing a more competitive environment will change towards a differentiation strategy.
H2b Organizations facing manufacturing technology advancement will change towards a differentiation strategy.
4.2.3 Changes in competitive environment, technology and management accounting practices
It is argued that with an increase in uncertain environments, managers need specific forms of management accounting information to support their decision needs and to assist them in monitoring progress against strategies. This is supported by a contingency style of management accounting research which assumes that an appropriate fit between the environment and organizational system is needed for management accounting systems to change, and to support managers’ new information requirements (see for example, Chenhall, 2003; Gerdin & Greve, 2004;
Haldma & Laats, 2002; Lapsley & Pallot, 2000; Waweru et al., 2004).
Literature also suggests that changes in environmental factors surrounding an organization can have a significant impact on its management accounting systems (Baines & Langfield-Smith, 2003; Hoque & James, 2000; Innes & Mitchell, 1995;
Libby & Waterhouse, 1996; Scapens, 1999; J. A. Smith et al., 2005; Waweru et al., 2004). For example Waweru et al. (2004) had identified factors which facilitate change in the organizations examined in the face of competition, technology, new shareholders, new customers, new accountants, and poor financial performance.
Market competition and technology advancement have been identified as major triggers for management accounting change (Baines & Langfield-Smith, 2003; Libby
& Waterhouse, 1996; Waweru et al., 2004).
In response to the changes in competitive environment, it is important for companies to increase focus on production quality and customer service. It had been found that effective and efficient MAS is an important tool for the companies to remain competitive (Hoque et al., 2001). Previous studies found that organizations had changed their MAS to a more effective and efficient systems in order to cope with the high market competition (for example, Baines & Langfield-Smith, 2003; Haldma
& Laats, 2002; Hoque et al., 2001).
It is also argued that with the introduction of new technologies in manufacturing operations, the structure of manufacturing costs has changed. Manufacturing technologies, such as computer integrated manufacturing and just in time systems, emphasize the way in which direct labour and inventory are vanishing from the factory, so that speed of operation is determined by the type of automation and manufacturing system used, and not by how fast the operators can work.
Consequently, a traditional cost control system itself cannot help managers to manage resources as well as identifying relevant costs. Choe (2004) in his study on Korean manufacturing firms, found a significant positive relationship between the level of advanced manufacturing technology and the amount of information produced by the management accounting information system. This leads to the hypotheses:
H3a Organizations facing a more competitive environment will change their management accounting practices.
H3b Organizations adopting advanced manufacturing technology will change their management accounting practices.