What Is Diffusion

FPC Assignment

Anonymous code: Z0939049

Introduction

The question of how well are we doing is always concerned by the managers of any organization. Many companies utilize performance measurement and management system in order to standout from the competitive business world. In fact, various studies have suggested that measurement-managed companies outperform non-measurement-managed companies. For example, the study by Ashton (1997) demonstrated that an investment portfolio based on the business excellence model and investors in people criteria outperformed others by 16 per cent in the short-term and 38 per cent in the long-term. But on the down side, companies may misuse the performance measurements causing negative effects to the companies. Underneath these result, the innovation, change and continuity underlying the well-designed performance measures and its correct adoption by the corporations played important role driving companies operating more efficiently. This essay will discuss the factors that affected the design and adoption of management accounting in terms of innovation, change and continuity with various examples.

Forces of change, innovation and continuity underlying the design and adoption of management accounting

Environments change, organizations change, and so performance measurements also need to be redesigned in order to sustain their relevance and usefulness. There are different reasons why change appeared in the organizations and business environment. And so, the new designs and adoption of performance measurements would be conducted accordingly regarding different reasons. Studies suggested that the organization and business environment change over the time because of mainly several reasons (Andy Neely, 1999):

(1) The changing nature of work; For example, in the 1950s and 1960s this was appropriate because direct labour often constituted in excess of 50 per cent of the cost of goods sold. By the 1980s, however, direct labour rarely constituted more than 5 or 10 per cent of the cost of goods sold, because of the massive investments that had been made in process automation. So managers would made wrong decision base on the accounting system based on direct labour.

(2) Increasing competition; Competition is being more intense for the companies on a global basis. Firms are trying to reduce cost and enhance the value they deliver to customers.

(3) The power of information technology (IT). The developments and innovation of IT have improved the ability for organizations to capture, analysis and present the data. Many software packages are now proactively linking their product offerings to balanced measurement frameworks, such as Kaplan and Norton’s balanced scorecard. [pic 1]

One more point need to be mentioned is, according to the building block of performance management (Fitzgerald and Moon, 1996), the change in strategies can be expected to have impact on adoption of the performance measurements. So prior to choose which performance measurement to adopt, managers need to understand the new strategies of the corporation.

Due to the changes mentioned above, the traditional performance measurements such as profits, sales are no longer capable to indicate the performance of a company. Therefore, managers will make the wrong decisions base on the measurements raising difficulty for corporations to improve or expand. So at some point, the change of environment and organization can push the companies forward. On the other hand, thanks to the increased competition and development in IT technology, some companies may not be able to react quick enough will be outperformed by the others.

Due to the changes mentioned above, the developments and innovations of performance managements are necessary. Apart from dealing with changes, the innovation of performance measurements aims to resolve the internal management problems as well.

Going back to early 20th century, the appearance of decentralized, functional organization required a performance measurement system to motivate and evaluate departmental performance and to guide overall firm strategy (Robert S, Kaplan, 1984). In order to meet the demand, the DuPont Company, an American company founded in 1802, devised Return on Investment (ROI) as performance measure to serve both as an indicator of the efficiency of its diverse operating departments and as a measure of financial performance of the company as a whole (Robert S, Kaplan, 1984). Later in 1912, ROI was decomposed into the product of the sales turnover ratio (sales divided by total investment) and the operating ratio of earnings to sales. So that every department knew how its performance affected the sales turnover or the operating ratio. As a further benefit, the disaggregation of the ROI measure enabled management to explain the reasons why actual ROI would have differed from budgeted ROI in any given period.