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Chapter 4 Managing businesses in a changing

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environment

“To cherish traditions, old buildings, ancient cultures and graceful

lifestyles is a worthy thing - but in the world of technology to cling to
outmoded methods of manufacture, old product lines, old markets, or
old attitudes among management and workers is a prescription for
suicide.” (Maddock, 1982)

4.1 Introduction

The rapid and often discontinuous change that is taking place in the environment has
a direct impact on the manner in which businesses are managed. Managers are
finding that old proven recipes for success and specialised routines are no longer
effective and are of necessity adopting new approaches to managing their
companies. These changes, both in the environment and in the organisation, also
have an impact on the accounting system and accounting function of organisations.
Accountants have to be aware of these changes so that they can adapt accounting
information to meet, and even anticipate, the changing demands of users.

The changes that are taking place in the environment were addressed in chapter 3.
In chapter 4 the impact of these changes on businesses and the manner in which
they are managed is considered; it is noted that a paradigm shift has taken place in
management theory, as a result of the rapidly changing environment. The nature of
the changes to which businesses are exposed determines the extent of the response
required by management. A survey of literature is used to identify the extent and
type of responses that are required both of businesses and their management in
adapting to a competitive and global business environment. These responses are
addressed as prescriptions for managing change in business organisations.

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4.2 A shift in managerial approach

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Managing a business in a volatile environment is fundamentally about handling

change. Nadler and Shaw (1995) contend that businesses surviving in the coming
decades will be those who are able to respond quickly and effectively to changing
environmental conditions. This puts a premium on certain capabilities, such as
adaptability, flexibility and responsiveness. They conclude that successful firms will
learn and act at a faster rate than the competition and their leaders will have no
choice but to be effective anticipators and managers of large scale change.

A paradigm shift has taken place in the literature on management theory in response
to the devastating effect that rapid change has had on businesses. Originally,
management theories were attractive because they were straightforward and not
laden with ambiguity and paradox (Peters & Waterman, 1982). However, these well-
tried methods fail to produce successful results in the new environment.

It is therefore not surprising that the approaches and methods suggested to

management in the literature have changed substantially in recent times. Sconberger
(1990) suggests that more have been learnt about the right way to run a business in
the 1980s, than in the preceding half century.

The evolution that has taken place in management theories is diagrammatically

depicted by Scott (1978) in a two-dimensional grid (figure 4.1).

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Figure 4.1 : Four stages of Management

University Theory and practice
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Closed system Open system

I III
1900-1930 1960-1970
Rational
actor Weber Chandler
Taylor Lawrence
Lorsch

II IV
1930-1960 1970-?
Social
Mayo et al. Weick
actor
McGregor March
Barnard
Selznick

Source: Scott, W. R. (1978) Theoretical perspectives in environments and organisations, in Peters,

W. J. & Waterman, R. H. (1982) In search of excellence, New York: Harper & Row, p.93.

On the one side of Scott’s grid there is a progression from mechanical thinking about
organisations (closed systems) to gestalt thinking (open systems). The closed
systems view ignores the effect of the environment on the organisation, while the
open systems view recognises its impact. On the second side of Scott’s grid, there is
a progression from a rational to a social view of organisations. Rational, in this
context, means that clear aims and objectives for the organisation are deemed to
exist, and that these can be determined. The social view holds that decisions about
objectives are based on value rather than mechanical choices and that such choices
are made not so much by clearheaded thinking as by social coalitions, past habit
patterns and other dynamics that affect people in groups (Peters & Waterman, 1982,
p.91).

In terms of this evolution, Management Theory has adopted increasingly complex

problem-solving approaches. Ackoff (1974) notes that the management process has
become “messy”. for management now concerns the handling of ambiguity and
paradox on a daily basis. The rational actor has been superseded by the complex
social actor, a human being with built-in strengths, weaknesses, limitations,
contradictions and irrationalities. A business insulated from the outside world has

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been superseded by the business buffeted

University by a fast-paced, ever-changing array of
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external forces.

The paradigm shift in management approach from a monistic, closed, rational view
to a holistic, open, social view is also addressed by Kanter (1982). She contrasts the
segmentalist assumptions of the old model with the integrative assumptions of the
new model by means of a table.

Figure 4.2 : Assumptions underlying Management Theory

Old model assumptions New (“political”) model assumptions

• Organisations and their participants have • Organisations and their participants face
choice; environmental constraints;
freedom of contract; resource limits;
limits set only by own abilities and conflict and unequal power.
capacities.
• Organisations tend toward “closed system” • Organisations tend toward “open system”
(rational focus and economic models). (“institutional” focus and political–economy
models).
• Organisations have limited purposes (and • Organisations have multiple activities and
are therefore able to stay bounded because impacts (“uses”), any one of which is
they produce bounded and identifiable subject to scrutiny by other groups;
outputs). bargaining by stakeholders to set
organisations’ “official goals”.
• Key management problems: • Key management problems:
Control (internal and external), “Strategic decisions”,
Coordination of isolated segments, Issue management,
Reduction of friction around the work External political relations.
process.
• Internal, micro-focus: • External, macro focus.
Primacy of leadership and inter-personal
issues.
• Need to study static or relatively invariant • Need to study bargaining, competition, and
properties of the organisation - e.g. how mutual adjustment.
size or formal structure affects “success”.
• Organisational effectiveness is a technical • Organisational effectiveness is a political
matter, based on objective standards and matter, based on standards set by an
relatively universal human and organisation’s “dominant coalition” after
organisational requirements. bargaining among constituencies.

Source: Kanter, R. M. (1982) The change masters: corporate entrepreneurs at work, London: George
Allen & Unwin, p.399.

Kanter (1982) suggests that organisations that can be studied and managed in terms
of the internal dynamics have been replaced by organisations that are highly
dependent on and is formed by a volatile environment. The idea of free choice with
own ability as the only constraint to success has been replaced by external; decision

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making which is not based onUniversity

organisational criteria. Explanations for the failure
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within the organisation were originally sought in factors internal to the individual such
as incompetence, greed and lack of motivation. Now it is recognised that the actions
of individuals often arise from the context in which they operate. The old view held
that the ideal organisation should be divided into specific functions with
specialisation, job descriptions and clear lines of authority. According to the modern
view, co-ordination is more critical than differentiation and individuals should have
responsibility for the consequences of their actions far beyond their job descriptions
and areas of specialisation. As a result, increasing use is made of cross-functional
teams in which people with different areas of specialisation and job descriptions work
together to achieve the goals of the enterprise.

This shift in management theory has far-reaching implications for management,

employees and business organisations. The manner in which a business is run will
impact on its information system, and more specifically its accounting information
system. If the organisation is managed as an open system, its accounting system
should also be an open system so that it can respond to the changing needs of its
users. The accounting information system should be user- or customer-driven. If the
organisation is deemed to consist of social rather than rational actors, the content
and use of the accounting information system should be adapted in line with these
new assumptions. Accounting information should thus be used less as a control
mechanism and more as a facilitator of change and continuous improvement.

4.3 Types of organisational change

Industries and businesses are exposed not only to different levels of change, but
also to different types of change, with the interaction of the two determining the
extent of the required response and ultimately adaptation. High levels of change will
call for high levels of response by businesses, whereas discontinuous change will
require more radical action than in the case of incremental change.

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Nadler and Tushman (1995, p.24) identifyoffour

University types of organisational responses that
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are required for the different types of organisational change, namely tuning,
adaptation, reorientation and recreation (see figure 3.1).

Tuning is required where management anticipates certain events or seeks to

improve efficiency in a business, and therefore initiates incremental change in the
organisation. The requirement for change is not immediate, the change originates
internally and the process is often initiated to enhance the fit between organisation
strategy and structure.

Adaptation is usually initiated externally, in that changes in the environment calls for
organisational responses in order to avert negative consequences. Although these
organisational responses may be major, they do not usually require a fundamental
reorganisation of the organisational strategy, culture and structure.

Reorientation is required when management anticipates events in the environment

that will substantially affect the industry and the organisation. It calls for a
fundamental re-evaluation of organisational strategy, culture and structure. This type
of change is anticipated and initialised in the organisation before the need for
organisational change becomes imperative, thus allowing the gradual introduction of
fundamental change.

Recreation is required where management has failed to anticipate future events in

the environment that requires fundamental changes to the business organisation.
Consequently the organisation is required to respond to fundamental changes in its
strategy, culture and structure over a short time span in order to survive. Because of
the limited time available to effect such change it is often disruptive and may
therefore result in the destruction of elements in the organisation, as well as in a
departure from existing core values.

Nadler and Tushman (1995) note that the well-known term of “re-engineering” no
longer encompasses the extent of change required in organisations in response to
especially discontinuous change.

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The extent to and pace at which the of

University prescriptions
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literature are implemented in business organisations are influenced by

management’s assessment of the levels of change, the nature of the change and
their willingness to act proactively. If management acts proactively in initiating
change, the change will be introduced in a planned and organised manner. Such
change will be less disruptive to the organisation than in cases where management
is forced to implement change reactively within short time span.

4.4 Prescriptions for business change

A proliferation of literature on how to manage a business in a changing environment

has prescribed a number of ideas and responses for survival and success.
Schonberger (1990) describes the new movements in management as earthquakes,
tremors and aftershocks. He suggests that these ideas and prescriptions did not
develop simultaneously, but rather in the form of tradition-shattering movements over
time with the first movement lending support to and creating an incentive for the
second, and so forth. His diagram of earthquakes, tremors and aftershocks is shown
in figure 4.3.

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Figure 4.3 : Earthquakes,University

tremors ofand aftershocks
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Product design

Q Manufacturing
u Marketing
a
l
Accounting
i
t
y
Employee involvement

1978 1980 1982 1984 1986 1988

Source: Schonberger, R. J. (1990) Building a chain of customers: linking business function to create a
world class company, New York: The Free Press, p.2.

The first and largest movement arose from the need of especially US companies to
improve the quality of their products in order to remain competitive with Japanese
companies. The idea of quality was entrenched in organisations by techniques such
as Total Quality Management, Quality Function Deployment and the introduction of
quality circles. The aim was to supply products and services that would meet the
quality requirements of customers. It required that the whole organisation become
customer oriented.

The second movement addressed the manufacturing techniques such as Just in

Time, Total Preventive Maintenance, Computer Numerically Controlled Machines
and later Flexible Manufacturing Systems. The aim of the second movement was not
only to improve the manufacturing process by reducing labour, scheduling, material
handling, stockkeeping and inspecting, but also by providing a better service to the
customer through shorter lead times, better quality, and customised and
personalised products.

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The third movement arose University

from theofinvolvement
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employees in the organisation resulting in all employees, at all levels, and all
functions, having a say in virtually everything (Peters, 1991). Empowerment
developed through increased ownership in the organisation, training, crossfunctional
responsibility, a bottom-up approach to management and a flexible approach to
control. The employees of the organisation were recognised as the prime source of
value added in a new and rapidly changing environment, and the prime means of
achieving and sustaining a competitive advantage.

The product design movement resulted in the simplification of product design

through standardisation, modularity and reduction of the number of parts, the
number of operations and the need for resources. The accounting movement,
focusing more on managerial accounting, developed new techniques such as activity
based costing and target costing to deal with the increased demand for more
accurate and useful information. The marketing aftershock too resulted in a change
of focus from national to international marketing and competition. The marketing
department formed closer alliances with people in operations, design and
development, working as a team to ensure that the correct type and quality of
products and services were marketed to the correct market segments.

It appears from the figure that the accounting movement is complete. However, it
only starting to gain momentum, as new opportunities for experimenting, innovating
and adapting the accounting information system have only been recognised in recent
years.

The Schonberger diagram does not identify a number of other aspects that are
necessary components of the survival kit of a business operating in a dynamic
environment. A successful business need to be innovative and introduce and use
new products, services, techniques and structures to stay ahead of competitors.
These firms will move quickly to develop and use new technology to its advantage.
The management style will change from a prescriptive and control-oriented approach
to a supportive and facilitating approach. Leadership as a business quality will
become increasingly essential to steer the firm through complex, highly competitive
times. Decision making in the business will become more strategy oriented and the

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future direction of the firm willUniversity

be determined largely by its vision. (The area of
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strategic decision making has received little attention in accounting and is an area
which is discussed in more detail in the next chapter.) Finally, the structure of the
organisation will change to support the new management strategies. Thus all of
these changes to organisations will affect the accounting information system which
will have to adapt to the changing demands for information.

The prescriptions for managing an organisation in turbulent times are discussed in

more detail in the following sections. They are not necessarily applicable to all types
of organisations. The manufacturing and product design sections will for example not
apply to service companies. It is also necessary to consider the reinforcing
relationship between categories, in that a philosophy and strategy of total quality
management will influence product design, manufacturing and marketing.
Concluding each section is a brief discussion on the recognition and measurement of
each of the prescriptions, together with a brief discussion on how the accounting
information system will be affected by the new management philosophies and
techniques of the organisation.

4.4.1. Quality

Quality does not only refer to goods and services but includes quality of time, place,
equipment and tools, processes, people, the environment and safety, information
and measurement (Schonberger, 1990). Quality is an ongoing process that has to be
so pervasive throughout the company, that it becomes the philosophy and culture of
the whole company. All firms and each unit within the firm need to adopt the same
strategy, to serve the customer with ever better quality, lower cost, quicker response
and greater flexibility (Schonberger, 1990). This perspective of Schonberger will be
developed further in chapter 6, where quality, cost and time are identified as three of
the four strategic aspects of flexibility. Flexibility itself is not viewed as a dimension or
aspect but rather as an comprehensive construct which encompasses all these
dimensions. Quality should be viewed from the perspective of the customers and
potential customers. The aim should be to satisfy existing needs of customers with
quality products or services, and to identify, anticipate and create new needs. This

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requires the cultivation of a close relationship

University between the organisation and its
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customers.

A serious threat to an organisation that has attained a certain level of quality is

sustaining that level. The process of quality products and services requires continual
renewal to maintain and improve quality throughout the organisation. Peters (1991)
suggests that the following attributes are amongst others, necessary to sustain
quality in the organisation:

• A management obsessed with quality;

• One guiding system or ideology on total quality;
• The measurement of quality;
• The creation of quality incentives;
• An organisation structure supporting quality improvement;
• Involvement of distributors and customers, together with management
information systems, personnel, accounting, treasury, sales, order entry and
shipping as part of the quality programme.

The process of quality improvement can only be sustained if the quality within the
company is measured on an ongoing basis. Ansari et al. (1997) define quality costs
as costs that are incurred to ensure that a product or service meets or even exceeds
customers’ expectations and maximises the value customers receive for a product.
An accounting system that measures quality costs is essential in pursuing quality as
a strategic goal. The old cliché “ What gets measured gets done,” applies to quality
improvement as well as to other prescriptions. Improvement is only possible once
something has been measured repeatedly to indicate the trend, level, speed,
direction and acceleration of the phenomenon. Measurement should commence at
the start and continue throughout each function of the programme. The type of
measures that can be used to assess quality are

• product quality as perceived by customers, and measured by the number of

customer complaints, returns, warranty expenses and service calls;

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• poor quality costs, measured by scrap,

University rework, defect rates, and machine and
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labour downtime;
• assessments of suppliers measured by number of returns, the percentage or
number of poor quality products to total products; and
• share of revenue from repeat sales to old customers in relation to total sales.

These and other measures should be initiated in the accounting information system
to support the quality objective and the process of continuous improvement in
organisations.

The accounting function itself should also strive to produce a product of high quality,
namely useful and relevant information. This requires close and ongoing cooperation
between accountants and the users of financial information so that their changing
needs can be identified and met.

4.4.2 Innovation and technology

The dynamic business environment requires that innovation become a way of life.
Innovation is difficult to define and often poorly understood. According to Toffler
(1985), innovation is not just a matter of products or technology, but is also about
people. A definition of innovation that encapsulates all these different aspects is
provided by Kanter (1982, p.20):

“Innovation refers to the process of bringing any new, problem

solving idea into use. Ideas for reorganising, cutting costs, putting
in new budgeting systems, improving communication, or
assembling products in teams are also innovations. Innovation is
the generation, acceptance and implementation of new ideas,
processes, products or services.”

Foster (1986) comments that successful companies such as IBM, Hewlett-Packard

and Johnson & Johnson have made a number of assumptions regarding change and
innovation: They assume that the day after tomorrow will not be like today. They
assume that when change comes, it will come swiftly. They believe that innovation is
inevitable and manageable. They believe that managing innovation is the key to

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sustaining high levels of performance forof their

University shareholders. They assume that as
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risky as innovation is, not innovating is riskier.

Being innovative requires continued creativity throughout the organisation. Drucker

(1985) contends that innovation has to be decentralised, ad hoc, autonomous,
specific and micro-economic and it should rather start small and be tentative and
flexible. He argues further that innovation is not to be found in the massive
aggregates with which the planner deals with of necessity, but in the deviations
therefrom – in the unexpected, in the incongruity, in the difference between “The
glass is half full” and “The glass is half empty”, in the weak link in the process. To
successfully obtain and maintain a steady flow of innovation in the organisation,
everyone needs to be committed and involved. It is a fallacy to believe that
innovation takes place only in the research and development department. If
everyone, in every function, constantly pursues innovation, the average firm’s overall
capacity for innovation will of necessity increase dramatically (Peters, 1991).

The role of management in this process is to remove barriers to creativity and to

build an environment and create a culture in the organisation that is conducive to
innovation. This may require further training of staff, restructuring of the organisation,
the development of a reward system linked to innovation, the setting of innovation
targets and the deliberate creation of instability within the firm.

Since innovation is central to success in a changing environment, the rate and extent
of successful and unsuccessful innovation should be measured, although there are
difficult issues such as specification and definition that need be addressed. Even
though measures may not always be reliable, new ways need to be developed to
measure the flow of innovation and creativity in the organisation. Management may
set the targets for innovation to serve as a benchmark. Measures such as the
number of innovative projects started, the number of pilot tests undertaken, the
amount of incentives paid to innovators and the number of failed projects, could be
used to monitor progress in the organisation. Such innovation and incentives should
also extend to the accounting system. It is only through creativity, innovation and
experimentation that Accounting will be able to maintain its position as the language
of business.

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University of Pretoria.etd

Companies are using new technology to improve their competitive advantage in

global markets to an increasing extent. Successful companies are flexible and quick
to abandon old technology and introduce the new. They focus on using the right
technologies at the right time, on protecting their positions and on having the best
people (Foster, 1986).

A number of decisions are made about technology in companies:

• Whether to invest in new technology or not;

• Which technology to invest in;
• Whether the people in the organisation will be able to adapt to the new
technology;
• When to adopt new technology; and
• How to implement the new technology.

The acceptance, implementation and use of technology is crucial if the organisation

is to gain the maximum benefit. The use of new technology often has important cost
and risk implications for an organisation, as a large proportion of the total costs may
have to be incurred before production or utilisation even commences. It may be
useful to consider the life cycle costs of technology vis á vis the costs incurred from
the date of investigating the new technology to the date of its discontinuance. Life
cycle costing recognises that the majority of costs are incurred or committed before
production or implementation and that the management and control of costs should
already commence during this phase (Ansari et al., 1997). The recovery of such
costs is dependent not only on the steady flow of cash and/or benefits, but also on
the intellectual abilities within the organisation to ensure that the technology is
managed in an increasingly efficient, innovative and productive manner.

Technology should be used to attain, sustain and improve competitive advantage for
the organisation, but an incorrect, unproductive or inefficient use of technology may
very well have the opposite effect. The application of technology in the organisation
should be measured to ensure optimised and continuously improving usage. This is

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an aspect that has received University

virtually no attention in Accounting and is seldom
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disclosed in corporate reports. The development of measures of the extent and

efficiency of use of new technology in an organisation depends on the nature of the
technology. For flexible manufacturing systems, for example, Jaikumar (1986)
suggests indicators such as system development time, types of parts produced,
annual volume per part, extent to which systems are unattended by labour and the
utilisation rate of the system in terms of shifts. Innovative and appropriate indicators
should be developed for each type of new technology which is introduced into the
organisation. Business organisations use technology to achieve competitive
advantage. Accounting information systems could also use technology to gather,
process and distribute information more efficiently both within and outside the
organisation.

4.4.3 Product design

A company can gain competitive advantage through product design. The impact that
product design may have on the organisation has often been underestimated. Ford
and General Motors have found that although design accounts for only 5% of the
cost of a car, it determines about 70% of the manufacturing costs. If it is borne in
mind that eight out of ten new products ultimately fail in the USA (Welter, 1989), the
importance of successful and cost effective product design will not be
underestimated. In rapidly changing times, where the needs of customers and the
positioning of competitors change continuously, it is a prerequisite that the opinions
of the customers and suppliers and as well as employees and management be
considered in product design.

Schonberger (1990) identifies six main directives for good product design:

• Design partnerships: This refers to the use of extended design–build teams in

which a product designer works with suppliers, customers, assemblers and
purchasing.
• Design for operations: Here the aim is to design products or services that are
easy to make or provide. This includes minimising the parts used,

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standardising the type ofUniversity

part used, ensuring that parts can perform multiple
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functions, designing parts that are easy to join and separate and so forth.

• Design for cost means that the cost implications of the products or services
should already be considered at the design stage. Marketing specifies a cost
target based on an expected selling price and the cost of manufacturing the
product is monitored as the design of the product progresses. This cost
should be compared to the original marketing target on an ongoing basis to
assess whether the project is still feasible.

• Structured product development concerns the use of mapping techniques so

that the development and manufacturing phases of the product can be
planned in advance. Planning the design, development and manufacture
allows for the early detection of threats and problems.

• Competitive analysis is based on a comparison of the organisation’s products

and services to those of competitors. There are five source of competitive
analysis according to Schonberger (1990, p.231): (1) Buy and try out the
competitor’s product or service, (2) Check with your competitor’s customers,
(3) Be active in trade associations and speciality groups, (4) Trade data with
competitors, or (5) Hire knowledgeable people from outside your firm.

• Time to market refers to the competitive advantage that may be gained by a

quick design-to-market response. Beating the competitors to the market with
an innovative new product allows the organisation to reap larger profits. A
substantial reduction in lead time of product design and manufacture may
therefore result in the organisation gaining a competitive advantage.

The importance of product design is well established through the method of target
costing in Management Accounting. Target costing is a system of profit planning and
cost management that is price led, customer focused, designed centred and cross
functional (Ansari et al., 1997). Target costs are established by determining the
market price and deducting the required profit margin. The target cost analysis is

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based on customer requirements. Product

University design forms the key to identifying and
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managing product costs, through the elimination of costly parts and by simplifying
designs and minimising changes. Crossfunctional teams are responsible for the
development of the product. Cost management commences at the early stages of
design and development and continues throughout the life cycle of the product.
Finally, the value chain of the organisation extends beyond its legal boundaries to
include the contributions of suppliers, dealers, recyclers and distributors. This
extended view of the enterprise is adopted in target costing to improve the
management of costs.

The need exists for measurement of the performance of the design process, not only
on a cost basis, but also in terms of time to completion, rate of designing of
successful products, number of parts used per product, percentage common versus
percentage unique parts, number of subassemblies and other measures that support
the design aims and targets of the organisation. The design function can have
significant cost implications for a business. Much of the success of the introduction of
new products and services depends on product design. On a similar basis the
accounting system can apply the principles of efficient product design to its product
information. The accounting system design, too, should be based on simplicity,
flexibility, multipurpose uses and cost effective implementation.

4.4.4 Manufacturing

The manufacturing process can be used together with the design function to gain
competitive advantage in highly competitive market segments by beating competition
to the market, or by producing customised or cost effective products and services.
These functions can in turn be used as powerful marketing tools.

One of the first new developments aimed at improving the efficiency of the
manufacturing process was the introduction of the concept of Just in Time (JIT).
Where Western companies tended to focus on optimising inventory policies,
Japanese companies viewed inventory as a form of waste that had to be eliminated
and as the buffer used to cover up multiple manufacturing problems. Johnson and
Kaplan (1991) noted that Japanese companies tried to understand the fundamental

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forces that led them to holdingUniversity

inventoryofinPretoria.etd
the first place. These forces were then
targeted with the aim of systematically removing them. JIT is in essence a production
philosophy that results in products being pulled through manufacturing as they are
needed. The result of the JIT philosophy is that total quality improves, set-up times of
machines are reduced substantially and closer relationships are formed with
suppliers to reduce the lead times and improve the quality of material supplies. The
layout of machinery in the factory is redesigned to reduce both bottlenecks and
manufacturing lead times. JIT also removed waste resulting in substantial cost
savings – firstly by substantially reducing the costs of holding inventory, with a
concomitant drop in financing costs and secondly by saving factory floor space.
Companies also discovered the fundamental truth that inventory hides problems:
attempts to reduce inventories, lead to the emergence of a number of other
problems, such as quality problems, bottlenecks, co-ordination problems,
obsolescence, shrinkage and supplier unreliability (Johnson & Kaplan, 1991).

Technology has also had a substantial impact on the manufacturing process.

Organisations using sophisticated computerised equipment find that virtually labour
free manufacturing becomes a possibility. Technology could also be used to
customise and personalise products. However, Schonberger (1990) makes the point
that world class status is not achieved merely by purchasing the latest equipment, for
the successful implementation of advanced technology depends mainly on the
personnel of the organisation. The danger exists, for example, that the level of
technological sophistication and the level of competency of employees may be
mismatched (Perrow, 1983). Furthermore, technically advanced machinery may not
be used for the correct purposes or at maximum productivity levels. Examples of
misuse of sophisticated technologies in the manufacturing processes are found in
digital computer production technology machines, robots, computer-aided
manufacturing (CAM) and flexible manufacturing systems (FMS). The following is
one example of misuse: The purpose of FMS is to manufacture several kinds of
parts in low to medium volumes. All the activities in the system (metal cutting,
monitoring tool wear, set up, inspection, tool adjustment, etc.) are under precise
computer control, similar to a miniature automated factory (Jaikumar, 1986).
However US companies used FMS for high volume production of few parts rather
than variety production of many different parts at a low cost per unit. The inefficient

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use of FMS in US companies is in contrast

University to the efficient use by Japanese
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companies, which showed up in a further increase in the competitiveness gap

between these companies. The latter companies gained a competitive advantage by
being able to produce differentiated, low cost and high quality products.

The introduction of technology together with methods such as JIT also has
implications for the information system of organisations. Traditional measures such
as individual worker output and machine up-time are no longer appropriate in a JIT
or automated environment. The efficiency of the manufacturing process must be
measured by more unconventional yardsticks. One of the indicators is lead time, in
other words the time taken from the start to the completion of production and delivery
to the customer. Other indicators which assess manufacturing efficiency include the
number of bottlenecks experienced in production, the average time taken to remove
bottlenecks, the length of the set-up time of machines, the number of breakdowns in
machines, number of reworked parts, average distance travelled by products in the
factory and the average levels of inventory.

Although these indicators are used within the business to monitor progress, they are
seldom communicated to stakeholders outside the organisation, unless in the form of
a marketing tool. Consequently external users find it almost impossible to assess the
manufacturing efficiency of a company from the information supplied in the financial
reports.

4.4.5 Employee involvement and empowerment

The shift in the focus of management theory from a closed system, rational
perspective to an open system, social perspective, has emphasised the role that
people can play in the success of an organisation. It is now recognised in the
literature that competitive advantage is gained through the brain power, initiative,
resourcefulness and creativity of employees. According to Peters (1991) people
must become the primary source of value added, and should not remain merely “a
factor of production” to be optimised, minimised and/or eliminated. Rhinesmith
(1995) argues that as companies gain a better understanding of the new global
world, they learn that people provide the competitive edge while Naisbitt and

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Aburdene (1990) predict that the most exciting

University breakthroughs of the 21st century will
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occur not because of technology, but because of an expanding concept of what it

means to be human.

Organisations should be prepared to expend time and money to recruit the right
people. Line staff should dominate the process and the qualities required of new
recruits should be clearly specified up front. The potential of existing employees
should be unlocked by more training in among others problem-solving ability,
strategy, finance, technical aspects of manufacturing and design, marketing and
quality improvement. Daniels (1994) contends, however, that training is not
sufficient, what is needed is a learning organisation: This is an organisation that
promotes learning among its employees – and also an organisation which itself
learns from that learning process. She concludes that employees within a learning
organisation would be and feel empowered – empowered to take responsibility for
their own work area and/or tasks, for their own careers and for personal
development.

The involvement of people can be encouraged by forming self-management teams in

which people from different functions work together as focused teams. These teams
need three commodities to operate successfully, namely information (data, technical
knowledge, expertise), resources (funds, material, space, time) and support
(endorsement, backing approval, legitimacy, commitment) (Kanter, 1982). A sense of
ownership should be created among employees, combined with a total commitment
and willingness to participate and take responsibility. Throughout the organisation,
people should own and manage their processes with the help from anyone who has
the required expertise (Schonberger, 1990). To encourage involvement, the
organisation should provide financial incentives as recognition for contributions to
innovation, quality, product design, team work and productivity. Employee ownership
can be extended by encouraging shareholding in the organisation by means of share
incentive schemes and performance bonuses paid in the form of shares.

The accounting information system is not designed to measure the primary resource
of organisations, namely people. As a result of this narrow recognition and
measurement criteria, the contribution of human resources to businesses are not

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recognised in the conventionalUniversity

financialofstatements.
Pretoria.etd Certain aspects of employee

involvement, such as total training costs, training costs per employee, staff turnover,
percentage people involved in teams, amount of incentive payments, absenteeism,
recruiting success and skills, can be measured quantitatively while other aspects,
such as the level of involvement, commitment, cultural differences and continued
learning, do not lend themselves to direct quantitative measurement. Quantitative
surrogates such as the percentage of people involved in teams could be used as an
indication of involvement here. In other instances more qualitative assessments such
as opinion surveys or performance assessments could be used.

4.4.6 Global competition and a customer orientation

The development of a global market has profoundly changed the manner in which
businesses are managed. Globalisation means that it now possible to produce a
product anywhere, using resources from anywhere, by a company located
anywhere, to be sold anywhere (Milton Freedman in Johnson, 1992). As a result, the
number of decisions facing management on a day to day basis has risen
significantly. Global scanning, in other words searching for and creating opportunities
in the global environment, will increasingly become a prime concern of management.
As competition is now waged on a global basis, organisations will have to produce
products and services of a world standard, be committed to ongoing innovation to
attract and create new markets, use technology and employee productivity to supply
competitive products and services, and differentiate products and create unique
products through brands and trademarks. Even local business cannot escape the
impact of worldwide competition when high quality products and services from global
corporations are being sold faster, cheaper and more efficiently in local markets.
Allen (1994) maintains that alongside the rapid pace of change, globalisation has
occurred to such an extent that few organisations can be thought of in purely local
(including national) terms. He points out that a firm does not have to be import or
export to be exposed to the risks arising from currency fluctuations, it requires just
one competitor, existing or potential, who is based abroad.

World competition and marketing have made customers more selective, more
informed and more demanding. According to Schonberger (1990) customers have

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come to demand variety and change.

University Consequently, the management of
of Pretoria.etd

organisations are striving to increase the attractiveness of their products and

services by introducing different types, designs, colours, models, brands, labels and
marketing. At the same time product life is declining rapidly, requiring many
organisations to become product innovators rather than remaining low cost
producers. For these organisations the key to success is the continual introduction of
high performance products, timely delivery, customised or niche products, and the
flexibility to adapt to customer preferences as they gain experience with new
products (Johnson & Kaplan, 1991).

Prices of products and services are being determined by the value to the customer
and less by the actual cost of production to an increasing extent. Foster (1986)
states that yield is a function of the value of a particular product to a customer and
the degree to which its manufacturer can protect that value from competitive
duplication. It becomes increasingly important to measure the margins on products
and manage the costs of production. If advanced technology allows a company to
make the product at a lower cost and recover the cost of the investment in capital, it
will make more money than its competitor and yet succeed in selling the product at a
lower price. On the other hand, the company can enhance the value of its products
by adding product attributes for which customers will be willing to pay more (Foster,
1986). In the past the company that knew how to standardise most effectively was
able to beat its competitors, but in the future the company that knows how to
customise effectively may prove to be the victor (Toffler, 1985).

Current accounting practice is still driven by internal costs and cost cutting practices.
It has not yet adopted the customer-oriented approach necessary for companies to
survive global competition. Some indicators such as the market share in different
market segments, markets entered and left during the period under review, the
strategic aim of the organisation in different segments either as a niche, innovator or
a low cost producer, a geographical analysis of sales, the amount spent on
advertising, new advertising campaigns launched and the level of investment in
intangibles such as brands, patents and trademarks, may be developed to monitor
the competitive position of the company. This type of information is often not
available to users of financial information outside the organisation.

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University of Pretoria.etd

4.4.7 Management style and leadership

There are two types of executives in business – incremental executives and radical
executives (Toffler, 1985, p.23). An incremental executive assumes that continuity
exists, formulates straight-line strategies and defines problems cleanly, treating each
as it comes along, more or less in isolation from others. This type of executive is
good at logical solutions and tends to use the well-tried methods of the past to solve
problems. A radical executive recognises the growing importance of discontinuity,
tends to define problems less neatly, and rather sees them in relation to the each
other. This executive is open to “unthinkable solutions”, carefully examines mind sets
and preconceived mental models, and does not seek solutions in rigorous plans,
diagrams and budgets. Senge (1990) suggests that this executive sees
interrelationships rather than linear cause-and-effect chains and processes of
change rather than snapshots. The radical executive acts as a facilitator and
supporter of crossfunctional teams.

The level of stability or turbulence in the environment determines which type of

executive skills are the most needed in particular circumstances. The management
style should match the demands of the times. Therefore the style and skills of the
radical executive are best suited times of rapid change and turbulence, while times
of stability are suited to the talents and the style of the incremental executive. A
mismatch between the management style and the state of the environment can have
catastrophic results for the business.

A shift is discernible in the literature away from management to leadership.

Management, in this context, is viewed as ruling and controlling employees, whereas
leadership is viewed as enabling and helping others to perform their work by
removing barriers and constraints. Allen (1994) confirms that command and control
have been replaced by leadership and enabling skills. Leadership can be defined as
the art or process of influencing people so that they will strive willingly and
enthusiastically towards the achievement of organisational goals (Koontz et al.,
1982, p.423). Jago (1982, p.314) suggests that leadership is both a process and a
property: It is a process in the sense that it uses non-coercive influence to direct and

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co-ordinate the activities of University

members of an organised group towards the
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accomplishment of group activities. It is a property in the sense that leadership is the

set of qualities or characteristics attributed to those who are perceived to employ
such influence successfully. Bennis (in Mc Elroy, 1982, p.413) sums up the diverging
definitions of leadership that are found throughout the literature as follows:

“Probably more has been written and less known about leadership
than any other topic in the behavioural sciences.”

The accounting system does not recognise, nor attempt to measure an elusive
quality such as leadership. Yet leadership or the absence thereof directly influences
the performance and success of the organisation. It is difficult to measure or assess
the level and extent of leadership within a particular organisation, even more so from
the perspective of an external user of the financial statements. However, some
indirect or surrogate indicators may be used to obtain some idea of the level of
leadership and type of management style in the company, such as a description of
the age, qualifications, years with the company, track record, and interests of top
management. The vision and mission statements as well as a discussion and
overview of management on the progress of the company during the past year, and
its prospects for the future, could also serve as qualitative measures.

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4.4.8 Vision and strategy University of Pretoria.etd

A vision and core values are widely identified in the literature as being essential
elements of a successful business in a volatile environment.

The term “vision” can be divided into three concepts:

• The future state or destination of the business – a pattern of what the
business is going to be at some point in the long-term future;
• The driver or motivater of business behaviour – a pattern of becoming;
• The business philosophy, culture or shared belief about what the purpose of
the business: what it is, why it so, what makes it successful, and how people
in it should behave – thus a pattern of being (Stacey, 1992a).

A vision should be unique yet specific enough to give direction to the decision and
actions within the organisation. It should on the other hand be general enough to
allow for radical new and bold decisions in a rapidly changing environment. The
central idea or core of the vision will usually remain fairly stable. Growth to the vision
will normally take place at the edges, by means of the introduction of minor changes,
some shifts in focus, the introduction of new ideas and the abandonment of the old.
A vision should never inhibit the ability of the organisation to respond and adapt to
change in the environment.

The vision of the organisation directs the decision making process in an organisation.
Ansoff (1988) identifies three categories of decisions in an organisation, namely
strategic, administrative and operating decisions. The aim of operating decisions is
to maximise the efficient use and conversion of resources and includes decisions on
aspects such as resource allocation, scheduling and supervision of performance.
Administrative decisions are concerned with structuring the resources of the firm in
such a manner that it will maximise performance potential and includes decisions on
the structuring of authority, work flows, information flows and location of facilities.
Strategic decisions are primarily concerned with external rather than internal
problems of the firm. Hussey (1976) defines strategy as an evaluation of the various
alternatives open to the company and a selection of what appears to be the optimum

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course or courses of action toUniversity

take. According to Christensen, Andrews & Bowen
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(1973), strategy is the pattern of objectives, purposes or goals and major policies
and plans for achieving these goals, stated in such a way as to define the business,
or future business of the company.

Strategy concerns with the relationship between the enterprise and its environment
(Katz, 1970). The time and attention required by management on each of the types
of decisions are determined largely by the business environment. If demand in the
firm’s markets is growing, technology is stable and customer demands and
preferences change slowly, a firm can remain successful by focusing its attention on
the operating activities and letting its products, markets and competitive strategies
evolve slowly and incrementally. If, however, the environment becomes turbulent
and changeable, and/or demand approaches saturation, continued success and
even survival are possible only if management gives a high priority to the firm’s
strategic activity (Ansoff, 1988). This explains why strategy has become increasingly
important in a turbulent business environment.

To enable users of accounting information to judge the performance of an

organisation in terms of its vision and strategy, strategic expectations must be
formulated, described and disclosed and the vision be stated. The “soft” nature of
information on the vision and strategy of the organisation makes measurement
difficult and its assessment will probably have a qualitative and descriptive rather
than a quantitative nature.

The rising importance attached to strategy as a result of turbulence in the

environment has a direct influence on the accounting information system. The
increasing demands of users for information to support strategic decisions, requires
a shift in focus regarding the accounting system. While Accounting had an internal
focus and collected information mainly from within the organisation in the past, it will
increasingly have to focus on information gathered from external sources, such as
from customers, suppliers and markets. Similarly, where Accounting focused on
supporting operating and to a lesser extent administrative decisions in the past,
information will to a greater extent have to support strategic decisions.

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4.4.9 Flexible organisational University

structureof Pretoria.etd

According to Chandler (1962) structure follows strategy. Organisational structure

should fit the vision and strategy of the organisation. Both are influenced to a large
extent by the state of the environment in which the business operates. Changes in
the environment of the firm leads to changes in its strategy, which in return
generates changes to the internal structure of the corporation (Hedlund & Rolander,
1990). However, Adizes (1995) argues that while structure should in theory follow
strategy, strategy in reality follows structure. He ascribes this to the political nature of
organisations, and argues that if the power structure is known, the strategy can be
predicted. People follow their own self-interest and strategy is the manifestation of
those self-interests.

In the past the organisational structure could be depicted in terms of the formally
structured, hierarchical charts and boxes approach or “military model”. This provided
a suitable structure for a management philosophy based on a closed system and
rational approach. This approach worked well in a stable environment where events
repeated themselves and solutions of the past could successfully be applied to
present and future problems. A different organisational structure is however needed
if the organisation is viewed as an open system and people are recognised as social
beings with strengths, weaknesses, contradictions, irrationalities and limitations. An
informal, organic enterprise structure with a flat hierarchy, loose job descriptions,
self-focusing teams, and crossfunctional involvement meets the requirements of an
organisation that needs to respond almost instantaneously to a turbulent
environment. Such an informal structure of the company will be flexible in that it will
evolve and change continuously in response to the environment. Indeed, Drucker
(1988) compares this organisational structure to a large symphony orchestra.
Unfortunately, in most companies the existing organisation structures are still
designed for the repetitive production of a few basic kinds of decisions (Toffler,
1985). This mismatch between a “charts and boxes organisation” and a volatile
environment results in an organisation that is inflexible and slow to adapt and
respond to changes in the environment.

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The accounting function too, isUniversity

influenced by the changing organisational structure.
of Pretoria.etd

This implies that the manner in which the accounting function is structured in firms as
well as the collection and distribution channels of accounting information will have to
change. In an informal structure the accountant will become a member of
crossfunctional teams and the prevailing mainly centralised accounting function will
become increasingly decentralised.

4.5 Summary

In response to the rapidly changing environment, business managers have had to

change the structure, culture and strategy of their organisations. Organisations are
moving from an era dominated by incremental change to one of discontinuous
change, where the focus will be on changing the fundamentals of companies through
recreation and reorientation. These fundamental changes are being promoted by a
profusion of literature on how to manage a business in a changing environment (see
Peters, 1991; Peters & Waterman, 1982; Schonberger, 1990; Kanter, 1982; Foster,
1986 and Du Pree, 1989, to name but a few). The central idea of the proposed
organisational changes is that change should be managed through a process of
fundamental and continuous improvement and renewal instead of merely applying ad
hoc reorganisation and restructuring. Change has to be integrated into the corporate
culture.

The following areas of fundamental organisational change are mentioned in the

surveyed literature:

• Achievement of total quality, not only in respect of goods and services but
also regarding time, place, equipment, processes, people, safety, information,
measurement and the environment.
• Continuous innovation throughout the organisation, with all employees being
committed to and involved in innovation.

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• Effective use of the University

latest technology to improve the organisation’s
of Pretoria.etd

competitive advantage and remain ahead of competitors – the attacker’s

advantage (Foster, 1986).
• Continuous elimination of waste through product design and manufacturing,
in respect of materials, time, space, labour and costs.
• Involvement, training and empowerment of employees, and the recognition
that they are the primary source of a competitive advantage.
• Creation of a customer-oriented culture in which satisfying the needs of
existing and potential customers is the primary concern of the organisation
(Schonberger, 1990). This does not only apply to products and services, but
also to information.
• Changing the management style from an emphasis on command and control
to an emphasis on leadership, with leadership being viewed as enabling and
helping others to perform their work by removing barriers and constraints.
• Creation of a vision to direct decisions and actions in the organisation and
increasing the emphasis on a strategy that is aimed at positioning the
organisation optimally within its environment.
• Changing the organisational structure, from the mechanistic charts and
boxes of command reminiscent of the military, towards an informal, organic
enterprise with a flat hierarchy, self-focusing teams and involvement of people
across functions.

These prescriptions and directives in the literature are, in effect, signposts for
organisations to become more flexible (Volberda, 1998). More and more, managers
are coming to recognise that flexibility is the key to survival in a volatile environment.
Some authors view the developments in Management Theory as a paradigm shift
from a mechanistic view of organisations (closed system approach) to gestalt
thinking (open system approach), and from a rational view in which clear aims and
objectives for the organisation are deemed to exist, to a social view, in which
objectives are based on value choices rather than on mechanical choices (Scott,
1978; Kanter, 1982).
The changes that are occurring in organisations impact directly on the information
systems and in particular on the accounting systems of those organisations

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(Thompson, 1995). Indeed, many of the

University prescriptions for managing change in
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business organisations are also applicable to the accounting system. The accounting
information system should not only measure change, but should contribute to
anticipating and supporting change as well as reporting on it and the strategies
adopted by the organisation in respect thereof. The momentum for changing and
adapting the accounting system should be initiated not only by the users of
accounting information, but first and foremost by the accounting profession.

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