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. According to Chenhall (2007, p. 172), environment refers to “ particular attributes such as intense price competition from existing or potential competitors”. Uncertain environment, which is impacted from high competition, is an important contextual variable in contingency-based research.
Globalization has changed external environmental factors in developing countries, which in turn affect the internal operations of organizations as well as their management accounting practices. This relationship is explained using contingent theoretic arguments that changes in management accounting practices and internal operations of organizations are contingent on the “fit” with changes in the external environment that surrounds them (for a review, see Abdel-Kader & Luther, 2008;
Haldma & Laats, 2002; Macy & Arunachalam, 1995). Competitive environment and technology advancement have generally been assumed in the literature, to influence the manufacturing company to change its management accounting practices, as well as its organizational design and strategies. However, there is little empirical research to support such relationships and little, if any, research has been conducted in the context of developing countries.
This study investigates how the alignment between the adoptions of management accounting practices with organizational structure and strategy in a competitive environment with advanced technology, influence performance. As compared to a developed country, Malaysia is categorized as an ‘uncertain’ country, with rapid pace of change and which has the opportunity for economic growth. Fluctuating interest rates, inflation, exchange rate and stock exchange indices, are evidence of a business environment in Malaysia which is volatile. Increased economic uncertainty is an important cause of changes in management accounting practices5 (Luther &
Longden, 2001). Mia and Clarke (1999) found a positive relationship between the intensity of market competition and the usefulness of management accounting information.
The pressure of management accounting and organizational change may come from the environment of the firm. The most obvious environmental factor is market competition (Hoque, Mia, & Alam, 2001; Libby & Waterhouse, 1996; Mia & Clarke, 1999). Literature has identified that organizations which operate in competitive business environment tend to change their management accounting practices, organizational structures and strategy in order to succeed (e.g., Baines & Langfield- Smith, 2003; Chenhall & Morris, 1986; Chong & Chong, 1997; Libby &
5 Luther and Longden found that the mean response to the importance of increased uncertainty of the economic environment as a cause of changing management accounting practices in South Africa (high economic uncertainty) is higher than in the UK (more certain economic).
Waterhouse, 1996; Luther & Longden, 2001; Mia & Clarke, 1999; Pratt, 2004;
Waweru et al., 2004). For example, Luther and Longden (2001) found evidence that the organization’s ability to sell abroad and to compete against imports changed managerial and business practices, forcing change in management accounting.
Technology also becomes an important aspect of management accounting and organization research drawing on the manufacturing sector. Previously, issues concerning the role of MAS within advanced manufacturing settings such as Just-In- Time (JIT), Total Quality Management (TQM) and Flexible Manufacturing (FM) have been explored. According to Emmanuel, Otley and Merchant (1990), technological contingency factors include the nature of the production process, its degree of routine, how well means-end relationships are understood and the amount of task variety.
It has been evident that new technology will lead to a change in cost structure (Haldma & Laats, 2002). Since manufacturing technology becomes more advance, the MAS also becomes more complex and sophisticated to cope precisely with the manufacturing process. Tight global competition associated with advanced manufacturing technologies has prompted the need for better cost management which can be achieved by adopting appropriate MAS. But the adoption of appropriate MAS alone is not enough in order for the firm to remain competitive;
manufacturing technologies need also to be consistent with business strategy and organizational structure. Thus, an appropriate fit between technologies, MAS, strategy and structure helps to build a competitive advantage, thereby enhancing organizational performance (Hyvửnen, 2007).
Hypotheses are formulated in this study using the contingent theoretic arguments that changes in management accounting practices and internal organizational factors are contingent on the “fit” with changes in the external environment. Contingency-based studies have examined MCS as both dependent and independent variables. Good fit means enhanced performance, while poor fit implies diminished performance (Chenhall, 2007). This study also use an old institutional economic (OIE) theory perspective, to explain the reverse causation relationship between organizational and management accounting change (known as formal and informal change).