This is the authors’ final peer reviewed (post print) version of the item published as: Hui Wee,S, Yau Foong,S and Tse,MSC 2014, Management control systems and organisational learning: the effects of design and use, Accounting research journal, vol. 27, no. 2, pp. 169-187. Available from Deakin Research Online: http://hdl.handle.net/10536/DRO/DU:30072472 Reproduced with the kind permission of the copyright owner Copyright: 2014, Emerald
Management control systems and organisational learning: the effects of
design and use Shu Hui Wee
Faculty of Accountancy and Accounting Research Institute, Universiti Teknologi
MARA, Shah Alam, Malaysia
Soon Yau Foong
Graduate School of Management, Universiti Putra Malaysia, Serdang, Malaysia,
and
Michael S.C. Tse
School of Accounting, Economics and Finance, Deakin University, Burwood,
Australia
Abstract Purpose – The purpose of this paper is to present a study on relationships between the design of
management control systems (MCS), the use of MCS and organisational learning (OL).
Design/methodology/approach – This study adopted a survey method. A written questionnaire was
prepared and mailed out to collect quantitative data. After analysis of the empirical results, follow‐
up interviews were conducted to develop a deeper understanding of the empirical results.
Findings – Findings of the study show that both the design and use of MCS are significantly
associated with levels of OL activities in organisations, and the use of MCS is found to be a more
influential factor in OL.
Originality/value – This paper contributes to the accounting literature by providing empirical
evidence on the relative impacts of the design and use of MCS on OL activities in organisations and
the interaction between the design and use of MCS in influencing OL.
Keywords Knowledge, Organisational learning, Management control systems
Paper type Research paper
1. Introduction As business environment becomes more dynamic and competitive, organisations’ abilities to adapt
to the environment are critical to their success in meeting organisational objectives (Choe, 2002;
Kloot, 1997; Senge, 1990). Organisational learning (OL) facilitates the creation and retention of
knowledge that enable organisations to cope with the changing environment (Bapuji and Crossan,
2004; Driver, 2001; Sisaye and Birnberg, 2010; Teare and Rayner, 2002; Zhang et al., 2010). As such,
OL plays an increasingly important role in contemporary organisations.
Management control systems (MCS), as reservoirs of organisational financial and non‐financial
information, can be used as platforms to facilitate OL (Batac and Carassus, 2009; Chenhall, 2005;
Henri, 2006; Hedberg, 1981; Huber, 1991; Kaplan and Norton, 1996). A major purpose of MCS is to
induce individuals to behave in ways which contribute to overall organisational performance and
competitive advantage (Emmanuel et al., 1990; Kerr and Slocum, 1987; Lei et al., 1997). Information
provided by MCS can change individuals’ perceptions on whether existing strategies and structures
are still relevant in a changing environment, and changes in perceptions, in turn, can prompt
individuals to identify new sources of competitive advantage for their organisations through OL
(Coopey, 1995; Daft and Weick, 1984; Naranjo‐Gil and Hartmann, 2007a).
This paper presents a study on relationships between the design of MCS, the use of MCS and OL.
Examining MCS as potential facilitators for OL is grounded in the information processing perspective
advanced by Jones (1995), Kloot (1997) and Pentland (1992, 1995). Prior studies show that both the
design and use of MCS are influential to OL on their own (Batac and Carassus, 2009; Chenhall, 2005;
Choe, 2002, 2004; Henri, 2006; Kloot, 1997). Nonetheless, in prior studies, the effects of the two
aspects of MCS on OL have often been examined separately. Studies on the effects of MCS’ use on
OL generally consider existing MCS as given, whereas studies on the relationship between the design
of MCS and OL place little attention on how different types of MCS’ use affect organisations’ abilities
to learn. This study attempts to fill the gap by examining both the design and use of MCS in the same
study, with both quantitative and qualitative data. Studying the design and use of MCS concurrently
enables the researchers to develop insights into the relative effects of the two aspects of MCS on OL.
The use of both quantitative and qualitative data in the study enables the researchers to identify the
rationale behind the relative strengths of relationships between the two aspects of MCS and OL.
The remainder of this paper is organised as follows. The second section presents a review of the
literature and the development of hypotheses for the study. The third section outlines the research
methods adopted in the study. The findings of the study are presented and discussed in the fourth
section. Concluding remarks are then made in the fifth section.
2. Theoretical development
2.1 Organisational learning The term “organisational learning” is coined by Argyris and Schön (1978). It refers to the processes
of knowledge acquisition, information distribution, information interpretation and organisational
memory within an organisation that influence organisational behaviour (Huber, 1991; Templeton et
al., 2002; Walsh and Ungson, 1991). The OL processes need not be conscious or intentional, and
changes in organisational behaviour caused by OL may not be observable (Huber, 1991).
The popularisation of OL as a field of study is partly attributable to the notion of a learning
organisation (Rebelo and Gomes, 2008). Learning organisations can create and maintain competitive
advantages by structuring themselves upon five core disciplines, namely, personal mastery, mental
models, team learning, shared vision and systems thinking (Bui and Baruch, 2010; Senge, 1990).
Personal mastery provides the spiritual foundation of learning organisations. It is about
organisational members’ ongoing commitments to clarify and deepen their personal visions, focus
energies, develop patience and see reality objectively (Appelbaum and Goransson, 1997).
Organisational members interpret and understand the world through certain deeply held
assumptions or metaphors (Senge, 1990). Collectively, these assumptions or metaphors form
individuals’ mental models. Mental models influence organisational members’ mindsets and guide
their actions (Bui and Baruch, 2010). Unlike individuals’ learning processes, OL is based on team
learning. Dialogues between organisational members and the members’ abilities to suspend their
own assumptions and enter into genuine thinking together are considered as key initiating factors of
OL (Senge, 1990). Through team learning, organisational members can create a shared vision that
fosters their commitment to a shared future and provides a focus for OL activities (Appelbaum and
Goransson, 1997; Senge, 1990). At the organisational level, organisational members’ ability to
examine the interconnect elements of a problem in a holistic way, systems thinking, plays a critical
role in integrating the other four disciplines (personal mastery, mental models, team learning and
shared vision) to establish a learning organisation (Senge, 1990).
A major focus of OL is continuous improvement (Senge, 1990; Wang and Ahmed, 2003). Senge
(1990) argues that members of learning organisations “continuously expand their capacity to create
the results they truly desire”. To facilitate the pursuit of continuous improvement, total quality
management (TQM) is practiced in organisations as both a philosophy and a set of techniques
(Sharma et al., 2010; Wang and Ahmed, 2003). TQM provides a vehicle for OL and enables
organisations to achieve continuous sustainable improvements in cost, quality, customer satisfaction
and profitability (Chenhall, 1997; Garvin, 1993; Terziovski et al., 2000; Wang and Ahmed, 2003).
OL has attracted significant interest from researchers and practitioners since 1990s (Bapuji and
Crossan, 2004; Easterby‐Smith et al., 2009). However, the evolution towards a generally accepted OL
theory is slow (Crossan et al., 1995; 1999; 2011). In the 1980s, Fiol and Lyles (1985) lament the
absence of a generally accepted theory of OL. The same concern is voiced by Huber (1991), Simon
(1991) and Weick (1991). Nonetheless, a generally accepted OL theory has yet to emerge in the
2000s after more than two decades of research in the area (Crossan et al., 2011). Bell et al. (2002)
attribute this lack of progress in the development of OL theory to the embedding of OL research
within different schools of thought.
Bell et al. (2002) identify four principal schools of OL research, namely, economic, developmental,
and managerial and processes. The economic school focuses on single‐loop learning (also known as
lower‐order learning) with the interest on gains in the stock of tacit knowledge. Experience yields
tacit knowledge, which leads to a reduction in production costs. The developmental school of
thought focuses on double‐loop learning (also referred to as higher‐order learning) and the stages
that must be followed to reach such levels of learning. The managerial school also focuses on the
achievement of double‐loop learning through following a set of prescriptive guidelines and not
through hierarchical stages. The process school focuses on the fundamental processes underpinning
learning and takes both single‐ and double‐loop learning into account.
2.2 MCS and OL The study of MCS in the organisational context has drawn considerable interest from accounting
researchers. Researchers’ interest in the behavioural and organisational factors relating to MCS
dates back to the 1950s (Otley, 1988). Otley (1988) notes that management accounting practices are
rooted in organisational life, and management accounting processes are part of wider organisational
processes. MCS and other organisational processes are complementary in nature, so it would not be
sensible to study one without considering the other.
The relationship between MCS and OL is bi‐directional. On the one hand, organisations’ abilities to
learn can be influenced by their MCS (Chenhall, 2005; Choe, 2002, 2004; Kloot, 1997; Simon, 1999).
Kloot (1997) argues that the four aspects of OL (knowledge acquisition, information distribution,
information interpretation and organisational memory) are inextricably linked to MCS. Prior
knowledge in an area can influence organisations’ ability to assimilate and exploit new knowledge
(Cohen and Levinthal, 1990; Libby and Waterhouse, 1996). It can also be stored within organisations
as organisational memory and disseminated to relevant parties through MCS (Virkkunen and Kuutti,
2000). The design of MCS determines the types of information that the systems can provide and the
types of MCS’ use can influence the ways that individuals use information provided by MCS
(Abernethy and Brownell, 1999; Chenhall, 1997; Naranjo‐Gil and Hartmann, 2007b; Tse, 2011; Tse
and Gong, 2009). On the other hand, OL contributes to the evolution of MCS in organisations.
Through feedback, detection of errors and performance monitoring, organisations may change their
beliefs and assumptions from time to time, and adjust organisational routines such as their MCS
accordingly (Levitt and March, 1988). The knowledge of organisations and their environments
generated from OL can provide inputs to this adjustment process and an organisation’s learning
requirements can influence how an MCS is used (Choe, 2004; Driver, 2001).
As information provided by an MCS can be used as an input to OL, the design of an MCS can have
direct implications on OL. The design of an MCS can be conceptualised in terms of its informational
characteristics. Chenhall and Morris (1986) identify four broad characteristics of information
perceived to be useful to top management, namely, scope, timeliness, aggregation and information
on how activities are integrated. A broad‐scope MCS is one that provides information on the
external environment and is non‐financial and future‐oriented. The timeliness of MCS information
refers to the speed and frequency of reporting information. Aggregation of MCS information refers
to the extent of information aggregated over multiple periods of time and/or across different
departments or functions. Information provided by an MCS which assists integration includes
information on the effect of sub‐unit decisions on the overall organisation. The four information
characteristics of MCS, taken together, represent the overall MCS design. With effective
dissemination of relevant information among its members, an organisation with MCS that exhibits
strong informational characteristics is likely to have higher levels of OL activities (Chenhall, 2005).
Besides the design of MCS, the extent of MCS’ use can also influence OL. Prior studies identify six
major types of MCS’ use, namely, improve understanding, focus attention, scorekeeping, improve
learning, performance evaluation and reward and provide feedback (Chenhall and Langfield‐Smith,
2003; Chenhall and Morris, 1993; Henri, 2006; Kerr and Slocum, 1987; Kloot, 1997). Individuals often
use different types of MCS information for different purposes (Tse, 2011). Information may be
available from an MCS, but OL would not occur if the information is not actually used by members in
organisations. When individuals make more extensive use of an organisation’s MCS, a broader range
of MCS information is likely to be used. The use of a broader range of MCS information in an
organisation can, in turn, stimulate OL activities.
Based on the above arguments, the following hypotheses are developed:
H1. The design of MCS is significantly associated with the level of OL.
H2. The use of MCS is significantly associated with the level of OL.
3. Research methods
3.1 Data collection This study adopted a survey method. A written questionnaire was prepared and mailed out to collect
quantitative data. In total, 3,000 questionnaires were mailed to chief executive officers (CEOs) or
managing directors of listed and non‐listed companies in Malaysia. The questionnaires were
addressed to CEOs and managing directors, as it was expected that recipients of the questionnaires
will either be able to complete the questionnaires themselves or pass them to appropriate persons
in the organisations to complete. An ID code was printed on each questionnaire and the
accompanying return envelope for identification of late respondents. Recipients were given two
weeks to respond and reminder letters were sent to recipients who did not reply after two weeks. In
total, 272 questionnaires were returned to the researchers, representing a response rate of 9 per
cent. Among the returned questionnaires, 123 were received after reminder letters were sent.
Questionnaires from late respondents were used as the proxy of non‐respondents, and an
independent group t‐test was performed to determine whether there was any significant difference
between early respondents and non‐respondents.
Results of the test indicated that there was no significant difference between the two groups.
Regression analysis was used to test the significance of the association of the hypothesised
relationships between MCS and OL. After analysis of the empirical results, follow‐up interviews with
managers from five companies were conducted to develop a deeper understanding of the empirical
results.
3.2 Measurement of variables The measurement of four information characteristics of MCS design was based on 13 5‐point Likert
scale items adapted from Chenhall and Morris (1986). There were five items for scope, two items for
integration, four items for timeliness and three items for aggregation. Anchors for scope and
integration scales were “non‐existent” (1) and “very comprehensive” (5) and anchors for timeliness
and aggregation scales were “strongly disagree” (1) and “strongly agree” (5). The use of MCS was
measured by 31 5‐point Likert scale items developed by the researchers with reference to prior
literature in the area (Chenhall and Morris, 1993; Ittner and Larcker, 1997; Sahraoui, 2002;
Vandenbosch, 1999). There were four items for improve understanding, two items for focus
attention, three items for scorekeeping, three items for improve learning, 11 items for performance
evaluation and reward and eight items for feedback. Anchors for improve understanding, focus
attention, scorekeeping and improve learning scales were “never” (1) and “always” (5) and anchors
for performance evaluation and reward scales were “strongly disagree” (1) and “strongly agree” (5).
Six of the eight feedback items had anchors “never” (1) and “always” (5) for their scales and the
anchors for scales of the other two items were “strongly agree” (1) and “strongly agree” (5). For
measurement of OL, 22 5‐point Likert scale items were adapted from Templeton et al. (2002). The
items were grouped into four categories, namely, knowledge acquisition (eight items), information
distribution (four items), information interpretation (five items) and organisation memory (five
items). Anchors for all OL item scales were “strongly disagree” (1) and “strongly agree” (5).
Confirmatory factor analysis (CFA) was performed on each dimension to check the validity using
LISREL. The results of the reliability and validity tests are presented in Table I. The Cronbach’s alpha
test was used to test the reliability of the research instrument. All the reliability coefficients
(Cronbach’s alpha) had Cronbach’s alphas exceeding 0.7. Validity tests using CFA were performed on
all dimensions that had more than three items. Table I shows the results of CFA performed on all
dimensions.
Descriptive statistics are presented in Table II. Of the four characteristics of MCS design,
“aggregation” had the highest mean (3.81) and “scope” had the lowest mean (3.15). For the use of
MCS, “scorekeeping” had the highest mean (4.02), whereas “improve understanding” had the lowest
mean (3.53).
4. Findings and discussion The correlation matrices in Tables III and IV indicated significant and positive associations between
all dimensions of MCS design and use and all dimensions of OL. The greater use of MCS in
scorekeeping indicated the prevalence of the traditional role of MCS and provided an indicator of
the prevalence of adaptive or single‐loop learning. Table IV indicated a stronger association (r = 0.55)
between MCS’ use and OL than that between MCS design and OL (r = 0.47).
The hypotheses of this study were tested with standard multiple regression analysis.
The following regression equation was used to test the hypotheses:
Table I. Reliability and validity statistics
Where, Y represents OL; D represents the design of MCS; U represents the use of MCS; and e
represents an error term.
Table II. Description statistics
As summarised in Table V, the results of the multiple regression analysis model indicated a
significant positive relationship between MCS and OL (R2 = 0.33, F(2, 199) = 49.08, p = 0.001). Both
the quality of MCS design and the extent of MCS’ use had significant positive relationships with OL,
as indicated by the t‐values. The regression coefficients for both MCS design and use were positive.
The design and use of MCS explained 33 per cent of the variance in OL. This was particularly high by
behavioural research norms (Kalagnanam and Lindsay, 1998). The results indicated that both H1 and
H2 were supported. Comparatively speaking, the beta coefficient for MCS’ use was greater than that
for MCS design. This finding indicated that MCS’ use has a more significant effect on OL than MCS
design, and was consistent with the outcomes reported in Table IV.
Feedback from follow‐up interviews with three of the respondents (hereafter referred to as GA, GC
and KH) provided additional insights into the relationship between MCS and OL in practice. While
quantitative data collected from the questionnaires supported the hypothesised relationships
between MCS and OL, the data did not provide information on the reason that the use of MCS has a
more significant effect on OL than the design of MCS. Follow‐up interviews with respondents of the
questionnaires enabled the researchers to look into the issue.
The interviewees suggested that the use of formal MCS in dissemination of information was
restricted in their organisations. As discussed in the second section, OL was more likely to occur
when information was widely disseminated within organisations (Huber, 1991; Garvin, 1993).
However, individuals’ levels of access to formal MCS were determined by their positions within the
organisational hierarchy. Senior managers had full access to the information available in formal MCS
and selectively released part of the information to low‐level managers whom they deemed were in
need of the information.
We do not give standard information to everybody. For example, there is no reason to pass sales
information to other departments. Other departments may get general but not detailed information.
In theory, it is good for employees to share ideas but, in practice, our employees are “hand‐tracked”.
Only senior management and no one else could retrieve official information stored by the various
departmental heads.
General Manager, GA
Due to the restriction on access to formal MCS, lower‐level managers normally did not receive all
available information. Consequently, they might not be able to make full use of the information
available on an MCS. As senior managers determined the levels of access granted to lower‐level
managers based on their own perceptions, there might be a mismatch between lower‐level
managers’ information needs and the information available to them. In addition, managers might
not be aware of the existence of some of the information available on an MCS that is relevant to
their decision‐making and, hence, might not ask for it.
The restrictions on the distribution of information via formal MCS were partly mitigated by
information sharing among individuals via informal MCS. Informal exchange of information often
took place through face‐to‐face committee meetings (Chow et al., 1999). During committee
meetings, individuals shared information with each other.
Table IV. Correlations of MCS characteristics, MCS use, overall MCS, dimensions of OL and overall OL
Table V. Regression of OL against MCS design and MCS use
When an individual was involved in more than one committee, information acquired from one
committee could be passed to another committee through the person’s participation in meetings.
Information is shared through individuals working in teams. For example, when there was a project
to shift factory, it was normal for an individual to be on more than one committee or team. The
sharing of information took place when an individual shared what went on in other teams.
General Manager, GA.
Information is distributed at the monthly head of department meetings, monthly departmental
meetings and the quarterly financial review meetings.
Financial Controller, KH.
Beside face‐to‐face meetings, an informal exchange of information might also occur through
electronic means.
The directors in Singapore shared information with us. Additionally, information comes from other
branches from other countries. Knowledge was shared more on an informal basis through telephone
and email. Employees share ideas which are then used to bring about improvements (in
organisational processes and outcomes).
Information is distributed through email, at our quarterly meetings, product development meetings,
production planning meetings and during the annual budget review. Employees are encouraged to
share ideas and to a certain extent, their ideas are implemented. Finance department provides input
on finance, purchasing department provides financial and non‐financial input. Non‐financial inputs
are not systematically distributed.
Financial Controller, GC
The feedback from follow‐up interviews provides supporting evidence for the findings of the study.
As pointed out in the second section, information distribution is a key aspect of OL. Advances in
information and communication technology enable organisations to design and implement an MCS
that is capable of collecting and disseminating large volumes of information (Tse and Gong, 2009).
However, as highlighted by the feedback from follow‐up interviews, the dissemination of
information in respondents’ organisations is strongly influenced by the ways that individuals use
formal and informal MCS. Individuals can use their positions and networks with other members of
the organisation to influence the flow of information within an organisation. While the design of an
MCS would determine the types of information available in an MCS, it can influence OL only when
the available information is disseminated within an organisation. As dissemination of MCS
information is moderated by individuals’ use of MCS, the impact of MCS design on OL would also be
moderated by MCS’ use. In contrast, the impact of the use of MCS on OL is not influenced by the
design of MCS. As the use of MCS can influence OL on its own and moderate the relationship
between the design of MCS and OL, it would play a more influential role than the design of MCS on
OL.
5. Conclusion In the current study, the effects of two aspects of MCS, design and use, on OL are examined. Both
the design and use of an MCS are found to be positively associated with levels of OL activities in
organisations but, comparatively speaking, the use of an MCS is found to be a more influential factor
on OL. The association between the use of an MCS and OL is stronger than that between the design
of MCS and OL. Individuals’ abilities to use the information available on an MCS in their decision‐
making depends on their position within the organisational hierarchy and networks with other
members of the organisation.
This paper contributes to the accounting literature by providing empirical evidence on the relative
impacts of the design and use of MCS on OL activities in organisations, and the interaction between
the two aspects of MCS in influencing OL. While prior studies on relationships between MCS and OL
have examined the effects of both the design and use of MCS on OL, they tend to focus on only one
of the two aspects of MCS. In practice, however, the two aspects of MCS influence OL
simultaneously. By examining the design and use of MCS concurrently, this paper contributes to the
knowledge of the relationship between the two aspects of MCS and their relationships with OL.
The findings of the study also have direct implications for practice. To facilitate OL, an MCS needs to
be designed with the ability to collect and disseminate relevant information to individuals in a timely
manner. However, a well‐designed MCS is necessary, but not sufficient for OL to occur. The ways
that formal and informal MCS are used by different members of organisations could have significant
impacts on OL activities in organisations. Senior managers of organisations should balance the needs
to control information flows and to facilitate OL in determining the ways that formal MCS are used
by their subordinates. Lower‐level managers should acknowledge the fact that not all information
that is relevant to their decision‐making is available to them via the formal MCS, and actively seek
relevant information for their decision‐making from various sources.
A number of limitations originating from the adoption of the survey method are acknowledged. As
discussed in the theoretical development section, MCS and OL influence each other over time. The
current study can only examine the relationship between MCS and OL at one point in time.
Therefore, the long‐term implications of interactions between the two aspects of MCS and OL have
not been studied. In addition, the study suffers from the normal limitations of survey studies such as
low response rate and limited control over who have completed the questionnaires.
Future research could extend the current study by examining the two‐way interactions between the
design and use of MCS and their relationships with OL from a longitudinal perspective. While the
findings of the current study show that the use of formal and informal MCS moderates the effects of
MCS design on OL, the long‐run interactions between the use of MCS and the design of MCS remain
unknown. Does the design of an MCS influence the ways that members of organisations use the
systems in the long‐run? Do organisations change the designs of their MCS in light of the ways that
their members actually use the systems? It is also unclear how OL needs and OL activities influence
the relationships between two aspects of MCS in the long‐run. A longitudinal case‐based study on
multi‐directional interactions between different aspects of MCS and OL could help answer these
questions.
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Corresponding author Michael S.C. Tse can be contacted at: [email protected]