1 - Research related to the choice of objectives in VBM programs

Study

Main Point

 Copeland et al, 
 1996.  Stern et al,
 1995.  KPMG
 Consulting, 1999.

To have congruence between organizational goals and shareholder goals, primary objectives must specify measures of economic value such as EVA & Cash Flow ROI.  These measures are more closely aligned to changes in shareholder wealth & should replace traditional accounting measures for goal setting purposes.

 Anctil, 1996. 
  Rogerson, 1997.
  Reichelstein, 1997.

Residual income-based measures such as EVA can assure goal congruence between principal and agent

 Milunovich &
 Tseui, 1996. 
 Lehn & Makhiga,
 1997.

Market value was more highly correlated with EVA than ROE, EPS, and other traditional measures.

 O'Byrne, 1996

Best model found to predict market value used EVA after controlling for industry and capital for each firm.  In the same paper, the best model for predicting market value using net operating profit after tax found no additional benefit by controlling industry and firm capital.

 Chen & Dodd,
 1997

"Although the EVA measures outperform accounting earnings in explaining stock returns, the earnings measures provide significant incremental explanatory power above EVA (p. 359).”

 Biddle, 1997

"Traditional accounting measures generally outperform EVA in explaining stock prices.  While EVA measure's capital charges and adjustments for accounting "distortions" have some incremental explanatory power over traditional accounting measures, the contribution was not economically significant (p. 359)."

 Gjesdal, 1981. 
  Paul, 1992.

Stock returns are irrelevant objectives.

 Zimmerman, 1997

While corporate EVA may be aligned with stock price, divisional EVA may not be an indicator of value creation.

 Garvey &
 Milbourn, 2000

"The correlation between performance measures and stock returns is a useful input into the choice of internal objectives (p. 360)."

 Wallace, 1997

Compared to companies who did not adopt residual income-based compensation measure, firms who did adopt these measures "decreased new investments, increase payouts to shareholders though share repurchases, and utilize assets more intensively, leading to significantly greater change in residual income (p. 360).  Also, found that stock market participants responded favorable to the adoption of these types of compensation plans, but evidence was actually weak.

 Hogan & Lewis,
 1999

Extends (Wallace, 1997) to investigate performance over a 4-year period, instead of 1.  After introducing past profitability into their analysis, they conclude that economic value plans offer no benefit above traditional plans.

Limitations and/or Future Research

 1. Studies usually obtain their data from a consulting company who does not adjust 
    public financial data needed to derive approximate economic profits. As such, the
    benefits of EVA may be understated.  Also, it's questionable whether conclusions
    should be drawn about EVA from companies who have not implemented EVA systems.

 2. Research needs to focus on EVA for something besides executive compensation, 
     such as for goal setting or capital budgeting.

 3. Studies tend to focus on EVA as an economic value measure, but there are others 
     such as Cash Flow ROI.  These alternative measures should be investigated.

 4.  Should the maximization of shareholder wealth be the main focus or are other
      stakeholders more important?

2 - Strategy Development & organizational design choices

Study

Main Point

 Briskly etal, 1995. 
 Milgrom & Roberts, 1995.

Support the idea that step 2 in the VBM model should be to develop a strategy and an organizational design to accomplish strategy.

 Miles & Snow, 1978. 
 Porter 1985.

Many studies look at firm strategy as somewhere between being the low cost leader to being the first to market innovator. Additional strategies include differentiation based on quality, customer service, market niche, and customization. Some firms' strategy is merely imitation.

 Fisher, 1995

Environmental uncertainty and competitive strategy are related and there is more uncertainty with an innovative strategy than with a cost leadership position.

 Daniel & Reitsperger, 1991;
 Banker et al. 1993, Young &
 Selto, 1993.  Abernethy & Lillis
 1995.  Ittner & Larcker, 1995 &
 1997.  Perera etal 1997.  Sim &
 Killough, 1998.  Scott & 
 Tiessen, 1999.

Instead of looking at corporate wide or business unit strategy, some studies looked at operational strategies such as JIT, TQM, and flexible manufacturing systems

 Vancil 1978

"Diversification strategies are positively associated with the number of functions performed by a profit center and the degree to which profit center managers have control over the assigned costs of centralized operations (p. 364)"

 Milgrom & Roberts, 1995. 
  Wruck & Jensen, 1994.

To successfully adopt advanced manufacturing strategies, firms must at the same time change the organization's design and management's processes.

 Abernethy & Lillis, 1995. 
 Selto etal, 1995.  Scott &
 Tiessen, 1999.

Results were mixed as to the relation between organizational design and manufacturing strategies.

Limitations and/or Future Research

 1. The authors do a factor analysis on a questionnaire they administered 
     regarding strategy proxies.  As a result, they say that researchers "need to
     incorporate constructs that capture multiple strategic dimensions, and to 
     examine their individual and joint effects on managerial accounting practices 
     and firm performance.

 2. Should objectives, strategies, and organizational design be decided 
     simultaneously rather than sequentially as shown in Figure 1?

 3. What is the direction of causality among accounting system design, strategy,
     objectives, and organizational designs?

 4. How to organizational objectives affect strategy and organizational design?

 5.  What other factors affect organizational design?

3 - Identification of value drivers

Study

Main Point

 Foster & Gupta, 1990

A cross-sectional data analysis does not provide strong evidence that "complexity or efficiency-related variables explain overhead costs (p. 368)."

 Banker etal, 1995. 
 Banker & Johnston, 1993.

Complexity variables were strongly associated with overhead.

Anderson , 1995.  
  Platt, 1996.  Ittner
 et al, 1997.  Fisher & Ittner, 1999.

Relationship found between overhead and non-volume cost drivers, but incremental value of the measures was small.

 Noreen & Soderstron, 1994.  
  Maher & Marais, 1998.

ABC systems that assume costs are strictly linear in proportion to their drivers overstate relevant costs.

 MacArthur & Stranahan, 1998

A hospital's complexity was jointly determined with the level of overhead costs needed to support the complexity.

 Data etal, 1993.

Interdependencies among cost drivers are investigated.  Supervision, maintenance and scrap costs were simultaneously determined at a plant that was studied.

 Ittner etal, 1997

Manufacturing measures generally corresponded to (Cooper & Kaplan's 1991) cost hierarchy; but activities for these hierarchies are not independent.

Limitations and/or Future Research

 1. To what extent, if any, does the linear assumption of ABC and other such costing
     systems harm decision-making?

 2. Research should be undertaken to determine the direct and indirect effects of 
     cost drivers on overhead.

 3. What factors moderate the effects of cost drivers on overhead?

 4. How and when do structural and executional drivers affect the value chain?  
     How do they interact? What and when are there tradeoffs?

 5. Research should study interaction between nonfinancial value drivers.

 6. Does understanding cost drivers lead to better decision-making? This has already 
     been studied from the perception of managers so should look at it a different way.

 7. Existing studies "examine only one of many potential non-financial value drivers 
     (p. 373)"

 8. "Non-financial value driver studies also ignore contingent factors, even though it is
      likely that issues such as strategy, competitive environment, and customer
      requirements moderate the relation between these drivers and economic 
      performance, and may explain the mixed results in prior studies (p. 373)."

 9. What affect does IT have on the identification & importance of value drivers?

 10. How do companies develop business models & how to models vary based 
      upon strategy, firm objectives, and organizational structure?

 11. Does performance increase by using balance scorecard and other value 
      driver techniques?

4 - Develop Action Plans, Select Measures, and Set Targets

Study

Main Point  

 Klammer, 1973. 
 Haka etal, 1985.

"Found no evidence that more sophisticated capital budgeting techniques improve performance (p. 376)."

 Haka, 1987

"Shareholder returns are higher when discounted cash flow techniques are used in predictable environments and are accompanied by the use of long-term reward systems and decentralized capital budgeting processes.  Other factors such as firm strategy and environmental diversity have no significant impact on DCF effectiveness (p. 376)."

 Larker, 1981

"Results suggest that non-financial and external information are important in capital budgeting (p. 376)".

 Carr & Tomkins, 1996

Successful companies focus on competitive issues, value chain considerations, and fundamental cost drivers more than they focus on financial calculations.

 Numerous studies

"This set of studies generally supports theories that the choice of performance measures is a function of the organization's competitive environment, strategy, and organizational design, but the performance effects of these choices remains uncertain (p. 379)."

 Bushman etal, 1996. Ittner etal,
 1997.  Ely, 1991.Lambert &
 Larcker, 1987.  Sloan, 1993. 
  Lewellen etal, 1987.  Gaver &
 Gaver, 1993.  Bizjak et al,
 1993.  Clinch, 1991. 

Research involving types of performance measures used for compensation.

 Busman etal, 1995.  Keating,
 1997.  Ittner & Larcker, 2001.

"Examine organizational level at which performance criteria are measured (p. 380."

Limitations and/or Future Research

 1. Some of the authors mentioned above tend to use subjective measures and their
     studies also lacked statistical testing.

 2.  Most studies examine only a limited number of uses for performance measures.

 3.  "the studies do not investigate the consistency in performance measures used 
       for different purposes or the alignment between the measures and the firm's 
       specific value drivers (p. 382)."

 4.  The studies "overlook the quality of information used for decision-making
      and control, even though information system characteristics are likely to 
      influence decision-making quality and the incentive effects of control 
      systems (pg. 382)."

 5.  Possible research questions posed by the authors (p. 384) - Do the same
      contingency factors influence the performance measures chosen for different
      purposes?  Does consistency in the measures used for various purposes 
      improve performance?  Are some performance measure choices more
      important than others?  Are greater measurement gaps associated with lower
      organizational performance?  

 6.  Other than employee motivation, what reasons are there for implementing 
      performance evaluation and reward systems?

 7.  Need novel sources of data as most studies use publicly available information
      and surveys.

 8.  The authors note good future research topics - "(1) Role & benefits of real 
      option techniques for investment justification as opposed to DCF (2) How
      performance measures defined in different dimensions should be combined
      (3)What are the benefits from including EVA measures in compensation plans? 
      (4) research on setting of performance topics (p. 390-392)."

5 & 6 - Evaluate Performance & Reassess Objectives and Plans

Study

Main Point

 Smith, 1993.  Myers et al,
 1991.  Gordon & Smith, 1992.

"The benefits from formal review and reconciliation procedures vary depending on a variety of contextual factors (p. 392)."

 Lorange & Murphy, 1984. 
  Goold & Quinn, 1993. 
  Fiegener, 1997.  Ittner &
 Larcker, 1997.

"Strategic control system studies indicate that the advantages of formal processes for determining whether a strategy is being implemented as planned and assessing whether the strategic results are those intended can actually be counter-productive in some environments
(p. 393."

Limitations and/or Future Research

 1.  In what scenarios are frameworks such as the balanced scorecard process relevant?

 2.  Are all 6 steps in the VBM framework necessary?

 3.  What is the role of formal vs. informal controls in implementing and monitoring 
      VBM systems.

 4.  Is there enough substantive differences between newer techniques such as ABC,
      balanced scorecard, and EVA or to justify their study or are they merely fads
      comparable to traditional accounting techniques?