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O'Clock, P. and K. Devine. 2003. The role of strategy and culture in the performance evaluation of international strategic business units. Management Accounting Quarterly (Winter): 18-26.

Summary by Charlie Nowlin
Master of Accountancy Program
University of South Florida, Fall 2004

Behavioral Issues Main Page | International Aspects Main Page | Strategy Main Page

When multinational organizations choose to expand operations into a new country they must consider the cultural environment of that location when determining the best method of performance evaluation.

Strategic Objectives

Developing an adequate control system for a company and its business units requires recognition of the culture of the manager and workers within the different segments of the company. To obtain goal congruence within a company, the control system developers must recognize employee perceptions related to how the company should function and their place within the system. Three different approaches to control system design have been used including: situation specific, universalistic, and contingency. The situation specific model states that each situation requires a unique solution. The underlying assumption of the universalistic approach is that there is one best way to measure the success of a business unit and that method should be used regardless of the culture of the employees. The contingency method suggests that depending on the circumstances, a new evaluation method may be necessary, or a previous method may be used if the situations are similar.

Strategic Mission or Business Unit Strategy

There are four types of strategic missions, or business unit strategies including: build, hold, harvest, and divest. A build mission or strategy is one in which the business unit seeks to increase market share. A hold strategy is focused on maintaining a high market share. A harvest mission or strategy is where a business unit attempts to maximize its short-term cash flows and profits regardless of the effects this will have on market share. The divest strategy occurs when the business unit is exiting the market and seeking to withdraw or sell its share in the market. The authors' recommendations related to evaluating business unit strategies are briefly summarized in the table below.

Strategy Recommended Measurements
Build Sales, or market share targets
Hold Profit oriented financial measurements, and other non-financial measurements such as market share, customer service, and quality
Harvest ROI, RI, EVA, and cash flow
Divest Probably cash flow

Competitive Strategy

There are five distinct competitive product line strategies. These include low cost, differentiation, focus, defender, and prospector. A company that chooses a low cost competitive strategy attempts to increase its margins by decreasing its costs relative to competitors. A differentiation strategy requires a company to focus on distinguishing its products from competitors by providing extra features and quality. The focus strategy is one in which a company focuses on a certain market segment. A defender strategy requires a company to compete using cost and quality control. Companies that choose to use a prospector strategy focus on developing products in new markets. Each of these strategies should be handled using different performance evaluation methods. Some of the authors' recommendations are provided in the following table.

Strategy Recommended Measurements
Low Cost Cost variances, cycle time and inventory turnover
Differentiation Some financial measurements plus non-financial measurements such as quality, on time delivery, customer satisfaction, and number of products
Focus on a narrow segment of the market Either a low cost or differentiation strategy may be appropriate with the measurements associated with those strategies
Defender The measurements associated with a hold or harvest life cycle strategy are recommended here, e.g., ROI, RI, EVA, cost, and quality
Prospector Measurements associated with build business unit strategy are mentioned for this strategy, e.g., sales, market share, plus other measurements such as number of new products, customer satisfaction and quality

Cultural Factors

Another set of factors that must be considered when developing control systems are those related to the cultural environment. According to Hofstede1, there are five important cultural dimensions. These include power distance, uncertainty avoidance, individualism vs. collectivism, masculinity vs. femininity, and Confucian dynamism. Power Distance is a measure of how a society accepts authority or an unequal distribution of power. Uncertainty avoidance relates to a cultures desire to have the rules and rewards system either rigidly structured or flexible. Individualism vs. collectivism refers to the extent to which people within a society think of themselves as separate entities, or as part of a group. Masculinity vs. femininity relates to whether masculine or feminine characteristics are more valued in a culture2. Confucian dynamism is a measure of a person's willingness to forego current gratification to achieve success in the future. It's essentially a measure of long run orientation vs. short run orientation. A table in the article includes Hofstede's cultural dimension scores for 19 selected countries (Table 1, p. 21). The scores for a few countries are included below to convey the idea.

Country Individualism Uncertainty Avoidance Power Distance Masculinity Confucianism
Canada 80 48 39 52 23
Germany 67 65 35 66 31
Great Britain 89 35 35 66 25
Guatemala 6 101 95 37 NA
Japan 46 92 54 95 80
United States 91 46 40 62 29

Integration of Strategy and Culture

Developing appropriate control systems for business units requires the integration of both strategy and cultural environment. Since business unit strategies and cultural dimensions differ, control systems should be developed for each business-unit, rather than for the company as a whole. For example, if a business unit in a highly individualistic society has a harvest strategy, the recommended measurement tools are return based metrics. The manager would also be more likely to follow strict rules and want individual performance rewards rather than group awards. The authors include a rather involved table that matches cultural dimensions with various combinations of business unit and product line strategies. The cells of the table include their recommended measurements (Table 2, p. 24).

The integration of strategy and culture in the development of control systems is a very complex process in which the company must seek to understand the perceptions and motivations of its citizens so that the company's goals will become the goals of the strategic business units.


1 For more on Hofstede's cultural dimensions, see the Cushing summary below.

2 See the Reiter summary below for an interesting article related to the masculinity vs. femininity dimension.

Related summaries:

Chow, C. W., F. J. Deng and J. L. Ho. 2000. The openness of knowledge sharing within organizations: A comparative study of the United States and The People's Republic of China. Journal of Management Accounting Research (12): 65-95. (Summary).

Chow, C. W., Y. Kato and K. A. Merchant. 1996. The use of organizational controls and their effects on data manipulation and management myopia: A Japan vs. U.S. comparison. Accounting, Organizations and Society 21(2-3): 175-192. (Summary).

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Cohen, J. R., L. W. Pant and D. J. Sharp. 1993. Culture-based ethical conflicts confronting multinational accounting firms. Accounting Horizons (September): 1-13. (Note).

Cushing, B. E., editor. 1987. Accounting and Culture: Plenary Session Papers and Discussants' Comments from the 1986 Annual Meeting of the American Accounting Association. American Accounting Association. (Summary).

Graham, J. L. and N. M. Lam. 2003. The Chinese negotiation. Harvard Business Review (October): 82-91. (How to deal with China. Understand the cultural context of Chinese business style). (Summary).

Langfield-Smith, K. 1997. Management control systems and strategy: A critical review. Accounting, Organizations and Society 22(2): 207-232. (Summary).

Luehrman, T. A. 1998. Strategy as a portfolio of real options. Harvard Business Review (September-October): 89-99. (Summary).

Martin, J. R., W. K. Schelb, R. C. Snyder, and J. C. Sparling. 1992. Comparing the practices of U.S. and Japanese companies: The implications for management accounting. Journal of Cost Management (Spring): 6-14. (Summary).

Porter, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press. (Summary).

Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review (May-June): 43-59. (Summary).

Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).

Reiter, S. A. 1994. Beyond economic man: Lessons for behavioral research in accounting. Behavioral Research in Accounting (6) Supplement: 163-185. (Summary).

Shields, M. D., and S. M. Young. 1989. A behavioral model for implementing cost management systems. Journal of Cost Management (Winter): 17-27. (Summary).