Business strategy is the means whereby managers can influence the nature of the external environment, technologies of the organization, structural arrangements and the control culture and the MCS (Chenhall, 2003). The strategic perspectives that are relevant to profit-oriented organizations most often include financial, customers, internal processes and innovation (Verbeeten & Boons, 2009).
Business strategy has been classified in many ways. The two prominent strategy types generally adopted by researchers in accounting are those put forward by Miles and Snow (1978), and Porter (1980). According to Porter (1980) there are three overall strategies - focus, cost leadership, and differentiation. The widely accepted categorization of strategic types propounded by Miles and Snow (1978), identifies four strategic forms of organizations in line with the changing rate of their products and markets. The strategic types include prospector, defender, analyser, and reactor. The prospector type has a continuous development of new markets or products by stressing that its technology as well as its structure should be flexible. On the other hand, for the defender type, the domain of the product market is rather narrow. It has a technology that is cost efficient and a specialized structure that is also formalized. Between the prospector type and defender type stands the analyser strategy. The analyser strategic type shares the features of the two types (prospector and defender) of strategy. The last strategic type is the reactor whose consistency of its strategy is lacking.
The most generally used strategy typology in accounting studies is that of Miles and Snow, which is based on contingency, and has been found to be very helpful in categorizing generic strategies over a broad spectrum of industries (Shortell & Zajac, 1990). The Miles and Snow typology is based on the notion that proper implementation of strategic types, such as prospector, defender and analyser, can result in effective organizational performance. According to Gerdin and Greve (2004), the Miles and Snow classifications - prospector, analyser, and defender strategies - are stable forms of organisations. The prospectors within this context tend to pay attention to non-financial measurements relating to products, employees quality and customers. On the other hand, financial measurements, like variances, are emphasized by the defenders (Gosselin, 2005). Therefore, this study focuses on three strategic archetypes - prospector, defender, and analyser.
Firms adopting the prospector type of strategy always have their products and services continuously changed with the addition of others by trying to emerge as first in the market. The firms are innovators with their exhibition of flexibility and entrepreneurial skill in their frequent undertaking of the development of new products and markets (Miles, Snow, Meyer, & Coleman 1978). A strategy such as prospector needs informal, open MCS which have the features of more subjective long term controls and the employment of budgets which pay attention to informal communications (Chenhall, 2003).
Defender pays attention to the maintenance of the market share and carries out its operation in areas where products are stable. The market share is sustained via cost leadership, and quality of service, and through the combination of the defender and the prospector's strengths (Miles, Snow, Meyer, & Coleman 1978). The categorization of the firm's defender type of strategy depends on the product of the firm, firm's market, its technology, and the system of the firm's administrative strategies. The defender strategy type is related to the formal performance of the systems of measurement, which include targeted performance objectives of the budget as distinct from the prospector strategy type (Chenhall, 2003).
According to Miles et al. (1978), the organizational literature suggests that the improved business performance requires an organizational structure, information system and management style that are related to a specific-firm strategy. Furthermore, the traditional organizational model suggests that connections between organizational structure, strategy, technology, environment, and MCS are very important (Chenhall, 2003; Langfield, 1997). Performance measurements perform a fundamental function in transforming the strategy of an organization into behaviour and results that are desirable (Chenhall & Langfield-Smith, 1998; Kaplan & Norton, 2001). For this reason, the nature of PMS relies on the form of business strategy chosen in the organization. For instance, non-financial performance measurements are employed with the objective of realizing a long-term advantage of competition,s which relies on the managerial goals and strategies (Hussain & Gunasekaran, 2002b; Lorenzo, 2008). The choice of performance measurements and strategy in the evaluation of performance is essential for the improvement of organizational performance (Govindarajan & Gupta, 1985; Ittner, Larcker, & Rajan, 1997; Simons, 1995) .
Such connections between strategy and measurements have been stressed in the literature pertaining to PMS (Ittner, Larcker, & Meyer, 2003; Kaplan & Norton, 1996a, 2001; Otley, 1999). The significant association of the type of performance measurement (such as financial and non-financial), and the factors associated with contingency (such as strategy, decentralization, environmental uncertainty) have been reported in previous studies (Gosselin, 2005). There are differences in the nature of PMS depending on the business strategy type chosen (Lorenzo, 2008). The prospectors choose to link their systems of performance measure to their strategy. For this reason, attention is paid to non-financial measurements with respect to customers, products, employees and quality. On the other hand, defenders choose to focus more on financial measurements like variance (Gosselin, 2005). As reported by Ittner et al. (1997), the relative weight attached to non-financial measurements is more for the firms who adopt an innovative oriented strategy, such as prospector, than in the firms who adopt a strategy, such as defender.
2.3.2 Organizational Structure
Focus more on decentralization relation PM and OP
The Organizational structure provides the basic foundation within which functions of organization (Chia, 1995). organizational structure is a formal control framework that covers reporting relationships interactions between information flows, employees, and the distribution of authority with regard to implementing activities within the organization (Germain, 1996). It also encompasses the formal stating of various functions or tasks for the member of the organization or group members in order to make sure that the organization's activities are executed (Chenhall, 2003). The essential way in which the results of the structure and the structural mechanisms differ lies in the definition of organizational structure. Structural arrangements affect work efficiency, the individuals' motivation, flow of information and the system of control to the extent of assisting to shape the organization's future (Chenhall, 2003).
Organizational structure has been described in various ways by the authors. For example, Lawrence and Lorsch (1967) describe structure as the differentiation and integration of the organization where such differentiation entails the decentralization of the authority and the integration encompasses the rules, procedures for operation, and committees. Perrow (1970) describes structure with respect to bureaucratic and non-bureaucratic approaches. According to Burns and Stalker (1961), structure is described generically with respect to mechanistic and organic approaches.
Damanpour (1991) notes that in line with the mechanistic and organic categories, organizational structure affects an organization's ability to adopt and execute innovation effectively. Mechanistic organizations have a tendency to possess more organizational levels, greater centralization, more formal rules, a narrow range of control, and are more dependent on vertical communication instruction. Conversely, organic structures have fewer levels of hierarchy, greater decentralization, less formal rules, a broader range of control, and a horizontal communication mode of instruction (Hage, 1980; Nahm, Vonderembse, & Koufteros, 2003).
The mechanistic organizations have lower exposure to initiation and discretion from the individual and have a lower tendency to attempt innovation compared to organic organizations (Burns & Stalker, 1961). There are two main characteristics of organic structures (French & Bell, 1984) one of which is that organic structures are adaptive and flexible in addressing new problems. The second feature of organic structures is that they employ decentralized authority and control for the promotion of communication spread in the firm. In order to have proper coordination, communication and control at lower levels, the characteristics of the structures creates the process of information needed (Gordon & Narayanan, 1984). Furthermore, Lee and Yang (2011) report that fully developed the PMS is more dependent upon the firms having a greater organic structure, and they suggest that the influence of an integrated PMS process of execution on performance in organic organization requires further investigation. A variation in organizational structure results in more reliance upon the information of non-financial management accounting (Langfield, 1997). Little research has examined the fit between organic structure and MCS (Fakhr et al., 2009).
The important role of organizational structure in affecting performance (e.g., morale, efficiency, effectiveness, ) at the organizational levels.( Van de Ven
(1976) as well. However, as Dalton et al. (1980, p. 60))(Chia, 1995)p813
More than is generally presumed, the association of organizational structure with small firm performance is very important and complex (Meijaard, Brand, & Mosselman, 2005). Decentralisation refers to the authority given to individuals in the organization at the various managerial levels within the wider scope of activities of the organisation (Waterhouse & Tiessen, 1978). Furthermore, decentralization is one type of organizational structure that refers to where decisions are taken within the organization, the level of autonomy that is delegated to managers for their decision-making(Chia, 1995). The higher the degree of decentralization lead to take of decisions in the lower the hierarchical level in the organization .Significant associations of the measurements type with the contextual factors such as decentralization and strategy have been reported (Maurice, 2005). In addition, Waterhouse and Tiessen (1978) assert that decentralization is a good response to changing environments where wider scope, non-financial information is required..
One of the relevant variables affecting the design of management accounting systems is the organizational structure (Laitinen, 2006; Lorenzo, 2008). Moreover, Chenhall (2003) find that organisational structure is the core variable for understanding MCS design. To understand the control process in an organization, issues relating to authority and the distribution of power are essential (Waterhouse & Tiessen, 1978). In respect of research based on contingency, it has been suggested that the formal organizational structure influences the design of the MCS (Gosselin, 1997; Swenson & Foster, 1997). An integral part of an organization is its PMS, which interacts with the structure of the organization to improve control (Waterhouse & Tiessen, 1978). Furthermore, Anthony and Govindarajan (2007) note that financial measurements are essential at the upper levels of hierarchy, while non-financial measurements are very important at the lower levels like the work centres.
The literature of management accounting suggests important links between organizational structure and performance measurement, which have been argued to be two of the most important design decisions made by managers (Abernethy, Bouwens, & Van Lent, 2004; Langfield, 1997; Luft & Shields, 2003). It is noted that managers who have information with regards to the cause-and-effect relationships make a greater contribution to overall performance in organic organizations than in mechanistic structures because they have more authority to make decisions in such organizations (Lee, Yang, 2011).
2.3.3 Competition
Competition is where every seller tries to get what other sellers are seeking at the same time through sales, profit, and market share, by offering the best practicable combination of price, quality, and service. Where the market information flows freely, competition plays a regulatory function in balancing demand and supply. According to (Simons, 1990), greater competition causes an increase in the utilization of management control processes. The type of competition can vary from product competition to marketing competition and to price competition. Fakhri (2010) finds that the type of competition the firm faces has an impact on its use of management controls.
Global competition leads to the evaluation of processes by the organizations so as to have greater competitive power in the global economy (Galbraith & Lawler, 1993). The utilization of multiple performance measurement is determined in the marketplace by the firm's competition. Lynch and Koshland (1991) point out that organizations that face greater competition have a likelihood of utilizing multiple performance measurements. Sandra, Francis, and O'Connor (2008); and Hoque, Mia, and Alam (2001) note that the new competitive environment is caused by motivation for change in the practices of management accounting like the PMS. Moreover, empirical evidence has shown that the desirability in business organisations to have the right practices of management accounting in coping with the increasing competition could lead to a new competitive environment (Laitinen, 2006).
Furthermore, competition is a unique factor influencing the organizational design as well as performance (Lee & Yang, 2011). As noted by O'Connor et al. (2008), change in the practices of management accounting like PMS causes motivation which leads to a new competitive environment. Hussain and Hoque (2002) find competition to be an important influencing factor on PMS implementation. Hoque (2005) also notes that competition is the factor responsible for the use of non-financial performance measurements by an organization In most of the organizations, the competitive advantage of the company is found to be related to the organizational performance. Competitive advantage causes the company to realize greater profits due to the lower cost of products sold at lower prices, which leads to better performance in relative terms (Majeed, 2011).
2.3.4 Coercive Pressures
Institutional pressures refer to the pressures that issued from the institutional environments that can prompt firms to adopt shared standards and routines (Dimaggio & Powell, 1983). The institutional pressures have significant implications on both the relative balance between the different dimensions of performance and on the performance measurements (Hussain & Gunasekaran, 2002b). Among the institutional factors (coercive pressures, normative influences, and the mimetic factors), coercive pressures assist in identifying the organization's reaction and environment (Gimzauskiene & Kloviene, 2011). According to institutional theory some institutional sectors (coercive pressures) contain powerful environmental agents imposing structural forms or practices on subordinate organizational units (Dimaggio & Powell, 1983). Coercive pressures refer to the pressures on the firm to conform to the practices and rules that are considered important in its industry (Hussain & Hoque, 2002). The coercive pressures as variable has the following contents: regulatory control by central bank, the accounting standards legislation or financial legislation and pressures from socioeconomic and political institutions.
Coercive pressures can be exerted on the target organization by the institutional environments formally through rules or laws, or informally through certain cultural expectations (Teo, Wei, & Benbasat, 2003), the central bank is one of important institutional environments formally, particular in supervision on banks (specialised and commercial bank). The central bank has a positive effect on economic performance, particularly in achieving lower inflation rates, on cushioning the impact of political cycles on economic cycles, on boosting fiscal discipline without any additional costs or sacrifices in terms of reduced economic growth (Laurens, 2005). These objectives are realized by the central bank via its influence on commercial and specialized banks. Hussain and Hoque (2002) note that the regulatory control exercised by the central bank is a forceful means entrenched in coercive pressures and institutional forces which impact on the commercial and specialized banks. Especially , banks are required to function within the regulations and guidelines of central banks (Munir. et al., 2011). The CBL examines and analyses the financial positions of commercial banks as well as issued the guidelines and laws governing the work of commercial banks .(http://www.cbl.gov.ly/eg/index.php?option=com_content&view=article&id=152&Itemid 56) . Failure of the banks to abide by the regulations and guidelines of the central bank will necessitate financial penalties or withdrawal of the banking licence, which affects their performance (Hussain & Gunasekaran, 2002a).
The coercive pressures and performance are significantly related (Oliver, 2003) and the coercive pressures affect organizations to the extent of improving their environmental performance (Zhu & Sarkis, 2007). By their very nature, the operation of banks is guided by the principles and guidelines laid down by the central bank, which influences them in the realization of their main business decisions, such as pricing and planning for the long term (Powell & DiMaggio, 1991). Hence, this influences the revenue of the banks, and, consequently, their performance.
Verbeeten and Boons (2009) report that the institutional factors seem to influence the utilization of particular measures of performance. In choosing the performance measure, the role of the coercive pressures are central. Specifically, the study expresses further that coercive forces exert more pressure within the industry on the banks to place attention on financial measures (Tapanya, 2004). The nature of the service organization is the reason for the difficulty for management to measure non-financial performance, such as quality. Therefore, banks need to improve their performance measurement to be in accordance with the standards set by the central bank and Basel Accord. This pressure will lead to an improvement in performance measurement over the next few years after the implementation of Basel Accord (Munir. et al., 2011). Particularly, in that the subject banks appear to operate under the principles of the central bank, which, effectively, influences major business decisions (Dimaggio & Powell, 1983), as the obligations and requirements from the central bank impact on the management's planning and establishment of a long-term strategy to improve and measure non-financial performance (Hussain & Hoque, 2002).
2.4 Performance Measurement System
Why choose the Performance Measures as mediator between IV and DV?
The performance measurement system (PMS) is described as a mechanism that deals with the allocation of responsibility and rights for decision making, the setting of targets for performance, and provides rewards for the realization of targets (Merchant & Van der Stede, 2007). The PMS is one component of the management control system. PMS is an essential function of management accounting, which is operated for controlling, assessing and enhancing processes through the comparison of the performance achieved by each level of the organization (Drury, 2004). The PMS concerns the allocation of rights for decision making and responsibility, the setting of targets for performance, and giving rewards for the targets realized (Otley, 1999; Van der Stede et al., 2006). The PMS helps managers to follow the progress or development of the execution of business strategy through the comparison of actual outcomes with the goals and objectives of the strategy (Simons, 2000). In addition, it assists in evaluating and communicating the progress of strategic goals, allocating resources and assessing the managerial performance (Ittner & Larcker, 2003).
The measurement diversity is a wide concept having a relationship with different dimensions, such as subjective versus objective measures, driver versus outcome measures, internal versus external measures, financial versus non-financial measures, and aggregate versus specific (Ittner et al., 2003; Kaplan & Norton, 1996a). The measurement diversity particularly describes the degree to which managers gather and make use of information connected with the wide set of financial and non-financial measures (Henri, 2006b). The designation of PMS is for the provision of financial and non-financial measures to the managers.
Several classifications have been proposed in the literature based on the mix of performance measures, of which, one of the important classifications is the balanced scorecard developed by Kaplan and Norton (1992, 1996). This model includes three areas of performance that have been added to the traditional financial dimension, namely, customers, internal business process, as well as innovation and learning (non-financial). The basic framework of the current study makes use of four dimensions of the balanced scorecard to define the dimension of measurement diversity. The motivation of this choice is that its (balanced scorecards) adoption has been on the increase in organizations coupled with their usage in recent empirical studies (Hoque, 2004; Hoque & James, 2000; Ittner et al., 2003; Lee & Yang, 2011; Van der Stede et al., 2006).
2.4.1 Performance Measures
The performance measures (PM) are useful for managing the tension between growth opportunities and financial performance, they play a key role in developing strategic plans, evaluating the achievement of organizational objectives and compensating managers (Verbeeten & Boons, 2009). PM has come to be a significant issue for academicians and practitioners since the early 1990s. Kaplan and Norton (1992) note that PM in multiple forms ought to be multidimensional to cover the financial and non-financial measurements. Therefore, multiple performance measures, as defined in accordance with the BSC framework, cover four perspectives including financial and non-financial (internal business process, learning and growth, customer). Following the financial crisis, which occurred in 2008, banks are taking steps to improve their performance measurement capabilities in light of the change in economic and market conditions and new management needs.
According to Gosselin (2005), managers should design new PMS that include financial and non-financial measures. As suggested by the literature, organisations should make use of non-financial measurements in addition to financial measurements in order to furnish managers with sufficient information regarding the overall performance of the organization (Banker et al., 2000; Kaplan & Norton, 2001). In addition, to develop an innovative PMS, the simplest method is to utilize the integration of the set of financial and non-financial measurements (Ittner & Larcker, 2003). Proponents of the method have argued that it could lead to superior firm performance (Banker et al., 2000; Hoque & James, 2000). Many researchers (Hussain & Hoque, 2002; Kaplan & Norton, 2001; Lorenzo, 2008) have stressed that in the service sector, like the banking industry, it is necessary to make use of multidimensional performance measurements. More so, previous empirical studies in developing countries like Libya that have investigated the use of financial and non-financial measurements for measuring performance in the banking sector have been very few (Fakhr et al., 2009).
Financial performance measures are useful in furnishing financial information to managers and other users for the assessment of the organization's efficiency and effectiveness. For example, the often used financial performance measures includes branch profit, revenue growth, and return on net assets (Ittner et al., 2003). In performance measurement, the use of financial performance measures is very significant, even though it financial performance measures has some limitations in that it is historical, too financially oriented, focuses on inputs rather than outputs, short term oriented, and internal looking (Kaplan & Norton, 1996a).
Non-financial performance measures are a better predictor of a firm's long-run performance, they assist the managers to oversee and evaluate the progress of their firm with respect to the goals and objectives of their strategy (Kaplan and Norton, 1996, 2001). The non-financial measures emerged because of, one, the limitations encountered by traditional financial performance measurements; two, due to the pressure from competition; three, because of the power of information technology; four, as a result of changing external demands; and five, because of the changing roles of the organization (Neely, 1999). The non-financial measures provide timely information pertaining to the causes and drivers of success to managers, which may be employed for the designation of integrated systems of evaluation (Banker et al., 2000; Kaplan & Norton, 1996a). Hussain and Hoque (2002) point out that the management wishes to measure non-financial measures to satisfy customers by making available to the customer reliable, quality, on-time, and prompt service for competitive advantage. In addition, researchers have contended that non-financial measures could assist managers in being aware of the business environmental changes, determine and evaluate the progress of business objectives, and confirm the realization of the performance goals.
The non-financial measures incorporates the values of the intangible as well as the intellectual assets of the company, such as highly motivated and skilled employees, product quality, responsive and predictable processes, and satisfied and loyal customers for the reflection of the critical assets and capabilities for success in the current competitive environment (Kaplan & Atkinson, 1998). For this reason, it has become necessary to study management accounting practices in respect of the financial measurement of the service sector (Hussain & Gunasekaran, 2002b). The utilization of non-financial measurements is essential in organizational performance (Hoque, 2004). As pointed out by Kaplan and Norton (1996), the PM is a reflection of the changing business environment of the organization as well as the realization of its objectives.
.
The performance measurement process has recently given attention to the management of intangible assets rather than tangible assets both non-financial and financial in nature (Kaplan & Norton, 2001). The recent performance measurement literature suggests that organizations should put more emphasis on non-financial measures in their PMS (Maurice, 2005). In addition, the non-financial measures have been frequently used compared to the financial measures in PMS since the measures of non-financial measures drives future financial performance better and affects long-term profitability positively (Hussain & Gunasekaran, 2002a). This implies that the performance of the organization is not clearly shown by the financial measures (Bourne, Neely, Platts, & Mills, 2002). Many studies have reported an increased use of non-financial measures by organizations for the assessment of performance in previous years (Ittner & Larcker, 1998; Kaplan & Norton, 1996a).
2.5 Review of previous related literature
This section deals with the review of literature concerning the association between contingency factors (such as business strategy, competition, and organizational structure), institutional factors (such as coercive pressures) and organizational performance. The performance measures are used as a mediator variable.
2.5.1 Business Strategy, Organizational Structure, Competition and Coercive Pressures, with Organizational Performance
By matching the environment of the organization, with the strategy, and internal structures and systems, it is likely to have high organizational performance (Govindarajan & Gupta, 1985). The study of organizational literature by Miles and Snow (1994) indicates that to have an improvement in business performance there is a need for a management style that is connected with a particular strategy of a firm. Higher performance will be realized by firms if managerial practices go along with the strategic preference of the organization (Venkatraman et al., 1993). In addition, Hoque (2004) points out that the most important factor for organizational performance is the strategy. In support of this argument, Van der Stede et al. (2006) report a positive influence of the quality based manufacturing strategy on performance.
The association of organizational structure with firm performance is very important, and even more than is generally presumed (Meijaard et al., 2005). In the Japanese non-life insurance, there is a significant positive effect of organizational structure on firm performance (Lai & Limpaphayom, 2003). Through innovation, organizational structure directly enhances performance (Hao, Kasper, & Muehlbacher, 2012). Decentralization has a relationship with organizational performance in that information is aggregated and integrated (Chenhall & Morris, 1986). In addition, managers who possess information about the cause and effect association do contribute immensely to the general performance in the organic organizations compared with the mechanistic structures since they possess greater authority for decision making in those organizations (Lee & Yang, 2011).
A company's competitive advantage has a relationship with its performance (Majeed, 2011). The performance of firms in the presence of competition, such as low cost of manufacturing and low price of goods is better (Neely, 2005). Furthermore, competition has an effect on the firm's overall performance (Hussain & Hoque, 2002). In addition, Agha, Alrubaiee, and Jamhour (2011) conducted a study on the UAE Paint Industry and found that competitive advantage significantly affected organizational performance. On the other hand, the relationship between market competition and organizational performance is negatively and significantly associated (Lee & Yang, 2011)
Institutional pressure has significant implications for the balance between different performance dimensions (Hussain & Gunasekaran, 2002b). In addition, Verbeeten and Boons (2009) report that the institutional factors seem to influence the utilization of particular measures of performance. There is a significant association of the institutional factors with organizational performance (Oliver, 2003). Furthermore, the coercive pressure causes organizations to improve their environmental performance. (Zhu & Sarkis, 2007). Specifically, the controls, and regulations exercised by the central bank on the banks actually influences the banks' normal function, and, hence, influences their performance (Hussain & Gunasekaran, 2002a).
2.5.2 Business Strategy, Organizational Structure, Competition, and Coercive Pressure, with Performance Measures
In order to have a better insight into the performance measures there is a need for more studies to examine both the institutional and contingency factors (Tapanya, 2004). Furthermore, not much has been said on the issue of factors influencing the design and use of PMS in the service sector such as the banking industry (Brignall, 1997). The connection between strategy and measures has been stressed in the PMS literature (Ittner et al., 2003; Kaplan & Norton, 1996a, 2001; Otley, 1999). In addition, Nanni et al. (1992) point out those firms ought to raise their level of competence in performance measurement, the extent of competence will rely upon the fit of the strategy with the design of the PMS.
The prospectors tend to pay attention to non-financial measurements relating to products, employees quality and customers. On the other hand, financial measurements like variances are emphasized by the defenders (Gosselin, 2005). Also, Ittner et al. (1997), report that the relative weight attached to non-financial measurements is more in firms that adopt an innovative oriented strategy, such as 'prospector' than in firms that adopt a strategy, such as defender.
Many researchers report the existence of a significant association of the organization's strategy with the PMS (e.g., Abernethy & Guthrie, 1994; Govindarajan & Gupta, 1985). In addition, Hoque (2004) finds that strategy is positively significant in influencing the use of non-financial measures for the evaluation of performance by the management. Also, a significant association has been found between the type of performance measurement (financial and non-financial) and contingency factors, such as strategy, decentralization and environmental uncertainty (Gosselin, 2005). Furthermore, Van der Stede et al. (2006) studied the relationship between business strategy and the type of performance measure used by Belgian and US managers. They find that there is a positive relationship between business strategy and the extent use of non-financial performance measures. Fakhr et al. (2009), in their study, report that defenders have a negative association with the non-financial performance measures. Boons (2009) suggests the necessity for more empirical studies to investigate further how PM could be used given various strategies.
PMS differs with respect to the type of business strategy chosen (Hussain, 2004; Lorenzo, 2008). The effect of contingency factors was investigated on the use of financial and non-financial performance measures by Fakhr et al. (2009) and the results indicate that prospectors are positively related to performance measures. In addition, Ittner et al. (1997) report that organisations adopting the prospector strategy use more non-financial measures.
Organisational structure is considered essential as a variable in gaining insight into MCS design (Chenhall, 2003). According to Cobb et al. (1995), organisational structure (centralization or decentralization) is an essential factor that affects the design of management accounting systems. The type of measure is significantly associated with contextual factors, such as strategy and decentralization (Maurice, 2005). In recent times, Lee and Yang (2011) investigated the influence of organizational structure on the design of PMS and also looked into their joint influence on performance. They find that organizational structure and the design of PMS are significantly associated. In addition, Gosselin (2005) explores manufacturing firms in Canada by examining the influence of contingency factors on performance measures and finds that the type of performance measure (financial and non-financial) is significantly associated with the contingency factors like strategy and decentralization. Fakhr et al. (2009) investigate how the contingent factors affect the use of financial and non-financial performance measures and their results indicate that organizational structure (decentralization) positively affects the use of PM.
Hussain and Hoque (2002) note that the more competition in an environment causes banks to pay more attention to non-financial performance measures. In addition, Fakhr et al. (2009) investigate the influence of contingent factors on the use of financial and non-financial performance measurements and find that competition positively affects the use of PM. Recently, Lee and Yang (2011) reported that more competition among various firms leads to a positive association between the developmental stages of PMS.
Tapanya (2004) suggests that managers should have insight into the factors that are likely to affect their practices of performance measurement, which includes institutional factors. It is noted that institutional pressures have a significant effect on the PM (Hussain & Gunasekaran, 2002b), while coercive pressures causes a change in performance measurement practices (Dimaggio & Powell, 1983; Munir. et al., 2011). In addition, Hussain and Hoque (2002) conducted a case study of banks for the understanding and explanation of the factors influencing the design and use of non financial performance measurement systems. Their findings suggest that many institutional forces have an effect and that the regulatory control of the central bank is found to be one of the essential factors. In addition, the central bank's controls and regulations over the banks influence their normal function and operation to the extent of influencing their performance measures (Hussain & Gunasekaran, 2002a).
2.5.3 Performance Measures and Organizational Performance
The increased attention on measures of performance evaluation by academics and consultants reflects the increased pressure to improve organizational performance (Hoque, 2004; Nanni et al., 1992). Furthermore, Banker and Mashruwala (2007) find that the information of performance measures is significant in explaining performance ratings. PM have a positive effect on the revenue and profit of the organization, which may not indicate immediate but rather long-term improvement (Hussain & Gunasekaran, 2002a). To develop an innovative PMS, the simplest method is to utilize the integration of the set of financial and non-financial measurements (Ittner & Larcker, 2003).
Proponents of the method have argued that such could cause superior firm performance (Banker et al., 2000; Hoque & James, 2000). Non-financial performance measures have been argued to be better measures, which lead to financial performance in the future and have a positive effect on the long-term profitability (Hussain & Gunasekaran, 2002a). Firms who make use of greater non-financial performance measures beyond the benchmark are considered to perform better financially (Verbeeten & Boons, 2009). In addition, many researchers have empirically reported that non-financial performance measures have a positive influence on the financial performance of the organizations in respect of long-term profitability (Banker et al., 2000; Van der Stede et al., 2006).
Hoque and James (2000) note that the greater use of balanced scorecard has a relationship with performance improvement. In addition, Fakhr et al. (2009) argue that banks that possess a comprehensive system of performance measurement, especially non-financial measurements can improve their performance. Al-Enizi, Innes, Kouhy, and Al-Zufairi (2006) find that firms that have an extensive system of performance measurement are likely to have higher performance. In a similar way, improvement in organizational performance is likely to result from the non-financial measurements of performance (Hoque, 2005). Moreover, Ittner, and Larcker (1998) find that there is a significant positive relationship between the non-financial measures of quality and customer satisfaction, to the extent of affecting financial performance. However, Banker et al. (2000) report that customer satisfaction measures are positively associated with financial performance.
2.5.4 Business Strategy, Organizational Structure, Competition, Coercive Pressures, and Performance Measures, with Organizational Performance
According to contingency theory, the optimum design of PMS relies upon the strategy of the organization (as well as other features of organization), and better performance will be realized if they are aligned (Chenhall, 2003). In addition, Simons (1990) suggests that the MCS should be tailored explicitly to support the business strategy to lead to competitive advantage and superior performance. The business strategy and the choice of PM in performance evaluation are essential to enhance organizational performance (Govindarajan & Gupta, 1985; Ittner et al., 1997; Simons, 1995). In a survey conducted by Hoque (2004), a significant and positive association was found between management's strategic choice and organizational performance through management's high use of non-financial measures for performance evaluation. In addition, Van der Stede et al. (2006) investigate the association of quality-based manufacturing strategy with the use of PM, and the combined impact on performance. The findings reveal that with greater use of non-financial performance measurements, strategy has a positive impact on performance.
Lee and Yang (2011) report that within the organizational structure, the use of integrated performance measurements has a positive relationship with organizational performance. In addition, Chia (1995) carried out a study to investigate the association of decentralization with the management accounting systems information and how the relationship affected managerial performance. The findings of the study indicate that a higher degree of decentralization has a positive influence on the complex system of management accounting with respect to scope, integration, timelines and the aggregation level on managerial performance. Lee and Yang (2011) suggest that in respect of organizational structure (organic), the impact of an integrated implementation process of PMS on performance should be investigated further.
Growing competition lead to increase the appeal of non-financial performance measures, as these can be leading indicators of performance (Banker et al., 2000). Furthermore, Banker and Mashruwala (2007) also report that there is a strong relationship between non-financial performance information and financial performance in the face of high competition. Recently, Lee and Yang (2011) investigated how the organizational structure and competition affect the PMS, and subsequently, find their combined impact on performance. Their findings reveal that with high competition among the firms, the stages of PMS development and performance are positively related.
Many studies have been conducted to examine how the institutional forces are associated with organizational performance (Oliver, 2003; Zhu & Sarkis, 2007). Others have investigated how institutional forces are related to PM (Gimzauskiene & Kloviene, 2011; Hussain & Hoque, 2002; Munir. et al., 2011). However, the use of PM to serve as a mediator between the association of the institutional factors (coercive pressures) and the organizational performance has been a major gap.
