11.vol. 0003www.iiste.org call for paper no. 2 pp 117-142

Issues in Social and Environmental Accounting
Vol. 3, No. 2 Dec 2009/Jan 2010
Pp 117-142

The Performance Implications of Fit among
Environment, Strategy, Structure, Control Sys-
tem and Social Performance
Hasan Fauzi
Faculty of Economics
Sebelas Maret University, Indonesia

Kamil M. Idris
College of Business
Northern University of Malaysia

Abstract

The paper examined concept of corporate performance. The paper seeks to examine the impact
of corporate social performance on the relationship among business environment, strategy, or-
ganization, and control system and corporate performance. The paper is based on a synthesis of
the existing literatures in strategic management and accounting filed. The paper finds that cor-
porate social performance defined as stakeholder relationship become one important dimension
of the strategic behaviors that an organization can set to improve corporate performance. The
contextual variables as discussed in strategic management and accounting domain will be con-
tingent upon strategic behaviors, which are behaviors of members in an organization. The
paper integrates the contextual variables including business environment, strategy, organization
structure, and control system with corporate performance by using corporate social perform-
ance as moderating variable by means of a recent literatures study from strategic management
and accounting field.

Keywords Contextual Variable, Strategic behavior, Strategy, Business Environment, corporate
social performance, corporate performance
Introduction corporate performance refers to the end
The outcome of management process, result of management process indicated
from strategic planning to implementa- by the attainment of corporate goal.
tion of the plan will lead to measuring Specifically, Daft (1991) defined per-
performance (Daft, 1991). Thus, term formance as the organization‘s ability to

Hasan Fauzi, Ph.D. is senior lecturer (Lektor kepala, equivalent to Associate Professor) at Faculty of Economics,
Sebelas Maret University, Indonesia and Director of Indonesian Center for Social and Environmental Accounting
Research and Development (ICSEARD) of Sebelas Maret University, email: hfauzi@icseard.uns.ac.id. Kamil Md.
Idris, Ph.D. is Associate Professor at College of Business, University Utara Malaysia, email: kamil@uum.edu.my. The
authors are very grateful to some reviewers including Prof. Mustaffa M.Zein of UiTM Malaysia, and Prof. Ku Noor
Izzah Ku Ismail of Universiti Utara Malaysia and others for their direction and helpful suggestion on final stage of
research project and to some anonymous referees for comments on earlier draft of this paper. The authors also would
like to acknowledge that main funding for this project

H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142 118

attain its goal by using resource in an ties in factor market such as suppliers or
efficient and effective manner. In strate- the other production factor owners, the
gic management literatures, the meas- corporate ability to pay in time and in
urement of corporate performance can agreed amount of the factor production
be varied perspectives (Lenz, 1980 and they rendered to will be important per-
Ventrakaman and Ramanujam, 1986). formance. Finally, from the perspective
For example, Ventrakaman and Ra- of customer market, corporate perform-
manujam (1986) classified business per- ance will be evaluated by parties in the
formance into categories of measures: market based on the ability of the corpo-
operational performance and financial ration to deliver products or services to
performance. The operational perform- customers with affordable price which is
ance include: market share, product the net effect, in turn, will be indicated
quality, and marketing effectiveness. in the corporate’s revenue. Overall, the
Furthermore, based on its sources, finan- Simons’s (2000) view of corporate per-
cial performance is broken down into formance parallels the Input-Output
two categories: market-based financial view of a corporation suggesting that the
performance and accounting-based fi- existence of a corporation is due to mere
nancial performance. However, in ac- contributions by stockholders/investors,
counting literatures, concept of corpo- suppliers, labors, customers with the
rate performance always refers to finan- hope of return for each party through
cial aspects such as profit, ROA and market mechanism (Donaldson et al.,
EVA, with the nick name of the bottom 1995). One difference between Simons
line, until Johnson and Kaplan (1987) (2000) and Donaldson et al (1995) is
coined idea of how to bring a company’s that in Simons’s work supplier and labor
strategy and used indicators together and are the same market (factor mar-
later on, Kaplan and Norton (1996) ket),while in Donaldson et al (1995)’s
popularized the idea as an extended per- work, the two parties are separated to
formance measurement often called bal- picture the flow of input and output.
anced scorecard. The main idea of the
new performance measurement is to bal- In some decades ago, topics in corporate
ance the domination of financial aspect performance have been important area
in corporate performance and non finan- of research in strategic management and
cial aspect. It is apparent that the Kap- accounting literatures. The research area
lan and Norton’s extended corporate started examining the construct of per-
performance has been in line with Ven- formance (both in corporation and
takraman and Ramanujam (1986)’s busi- managerial perspective) and relating to
ness performance. other constructs such as strategy
(Govindarajan and Gupta, 1985; Govin-
Simons (2000) defined corporate per- darajanand and Fisher, 1990; Govindara-
formance using an approach of market jan, 1988; Liao, 2005; Sandiono, 2005),
mechanism by which a corporation ac- business environment (Woodward in
tively interacts with some markets: fi- Azumi and Hage, 1972; Gul, 1992;
nancial, factor, and costumer. In Finan- Chenhal, 1986), control system
cial market, the corporate performance (Govindarajan and Fisher, 1990; Govin-
should satisfy stockholders and creditors darajan, 1988; Liao, 2005; Sandino,
in form of financial indicators. For par- 2005; Albernethy and Brownell, 1999;

119 H. Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142

Pant and Yuthas; Wynn-William, 2003; cerned with a company are not only
Davila, 2000; Marginson, 2002; Haldma shareholder as discussed in the previ-
and Laats, 2002; Salmon and Joiner, ous theory, but also other parties or
2005; Coenders et.al., 2003; Alexander groups in society. Clarkson (1995 cited
and Alan, 1985), organization structure by Moir, 2001) and Gray et al. (1996)
(Woodward in Azumi and Hage, 1972; classified the parties or the groups into
Sandino, 2005). Furthermore, the area two categories: primary and secondary
of research continues to be developed by stakeholder. The primary stakeholders
focusing on predictor of corporate per- are those directly affecting and affected
formance as done Gupta and Govinda- by the decision to be made by the firm.
rajan (1984), Govindarajan and Gupta Those categories include suppliers, em-
(1985), Govindarajan (1988), and ployees, investors, and customers. The
Langfield-Smit (1997). with the find- second group called the secondary stake-
ings that factors affecting corporate per- holders is those in society affecting and
formance are matching of business envi- affected indirectly by the firm’s deci-
ronment, strategy, internal structure, and sions. They include local communities,
control system. The previous studies the public, business groups, media, so-
defined corporate performance by focus- cial activist groups, foreign government,
ing on financial aspect. Not only do the and central and local government. Con-
corporate performance imbalance the sequently, the decision made by the firm
financial aspect and non financial aspect, should positively satisfy the two groups.
but the performance also does not ac- The stakeholder view of the firm can be
commodate other parties outside the diagrammed in Figure 1.
market system. Therefore, the concept of
corporate performance that is consider- This theory can be justified using three
ing and measuring aspect of people aspects (Donaldson and Preston, 1995
(social) and planet (environment) as im- cited Cooper, 2004): descriptive accu-
portant part of a company’s performance racy, instrumental power, and normative
is needed. validity. Descriptive accuracy of the
theory explains that the parties related to
The objective of this paper is to discuss a company are not only shareholder but
the impact of the fit among business en- also other parties such as employee,
vironment, strategy, organization struc- government, and community. They have
ture, control system, and social perform- to be considered in the company’s deci-
ance on business performance. sion making. Therefore, it has been ar-
gued that stakeholder theory is important
Stakeholder Theory due to the fact that the theory correctly
reflects and predicts how business oper-
Under stakeholder theory, a company ates (Brener and Cochran in Cooper,
has connection with stakeholders de- 2004). Based on the argument of in-
fined as any group or individual who can strument power of this theory, a com-
affect or is affected by the achievement pany using the stakeholder approach in
of organization’s objective (Freeman, managing the business will have im-
1994; Clarkson, 1995a, 1995b; cited in proved organization performance in
Amaeshi et al., 2007 and Moir, 2001). terms of economics and other criteria.
Based on this view, parties that are con- That performance is important as sug-


Adopted from Donaldson and Preston, 1995
Figure 1: Stakeholder Theory
gested by Shankman (1999 and cited by their relationship with its stakeholders
Cooper, 2004) that a balance between (Ullman, 1985). In this context, stake-
the interests of different groups is holder theory framework is defined as a
needed in order for a company to con- construct having three dimensions:
tinue to be viable and achieves other stakeholder power, strategic posture, and
goals. On the other hand, this aspect will economic performance (Ullman, 1985;
say that stakeholder theory is tool used Elijodo-Ten, 2007a and 2007b; Chan
to improve result. From the perspective and Kent, 2003). Stakeholder power is
of the stakeholder theory’s normative an external dimension, consisting of
validity, it can be argued that based on shareholders, creditors and government
moral right of individuals a company power, affecting the condition of the
should reconsider all parties related to company. The strategic posture factor,
the company. It will be not appropriate an internal dimension, is the corpora-
in terms of ethical for a company to tion’s capabilities and willingness to use
maximize the shareholder’s wealth and its resources to improve social and envi-
stakeholder theory should be used to ronmental performance by integrating
achieve that goal (cooper, 2004). them with corporate strategy. The last
dimension, economic performance, is
According to stakeholder theory, corpo- the output of business activities that
rations disclose social and environ- arise from corporate strategy implemen-
mental information as means to maintain tations using economic indicator, such as


profit. Under this framework, corporate literatures. Based on the review of the
social responsibility not only focuses on literatures, it can be concluded that cor-
the philanthropic aspect (non market), porate performances are matching of
but also embracing activities relating business environment, strategy, internal
directly to market mechanism such as structure, and control system (Lenz,
the responsibility to employee (labor 1980; Gupta and Govindarajan, 1982
relation) and to the customer in case of and 1984; Govindarajan et al.,1988; Go-
product responsibility. vindarajan, 1988; Tan and Lischert,
1994; Langfield-Smit, 1997).
Contingency Theory
Some important studies had been con-
Generally contingency theory states that ducted to investigate the relationship of
organization’s effectiveness will be con- business strategy, control system, and
tingent upon some factors often called organizational structure and environ-
contextual variable (see for example mental and social performance(Gerde,
Hamberick and Lei, 1985; Gerdin and 1998; Pondeville, 2000; Husted, 2000,
Grave, 2004). Furthermore, focus in and Husted, 2001). In an effort to inves-
contingency theory will be on fit be- tigate stakeholders and organization de-
tween organization characteristics or sign, Gerde (1998) used business strat-
management practices and the contex- egy, control system, and organizational
tual variable in achieving the organiza- structure as the predictors of corporate
tion effectiveness (see for example social performance including the envi-
Alexander and Alan, 1985; Doty et al, ronmental aspect. His findings were that
1993; Gerdin and Grave, 2004). The the variables did not increase the social
organizational effectiveness can include performance. However, In his deductive
economic or financial performance and study, Pondeville (2000) synthesized
other criteria such social and environ- that control system and business strat-
mental performance as referred to the egy, as well as organization design
concept triple bottom line (TBL). The (structure) have contributed to the envi-
use of the contingency view as an alter- ronmental performance. In an effort to
native view to extreme view of business get good understanding of corporate en-
in both situations: specific and univer- vironmental and social performance,
salistic view is common and applied in Husted (2000) had constructed contin-
any setting of management practices gency model of corporate social per-
(Alexander and Alan, 1985; Gerdin and formance. The fit between social issues
Grave, 2004) and also in corporation and business strategy and structure had
social performance (see for example been predicted to affect the corporate
Husted, 2000). One of the reasons of the social performance. Husted et al. (2001)
commonly used contingency approach is in his deductive approach of another
due to the focus on the organizational study developed a model called inte-
effectiveness, a general and important grated view of business and social strat-
organizational goal-related concept. egy. In the model, business strategy had
been predicted to affect financial and
Concept of Fit in contingency theory in social performance.
the context of CSP can be traced to the
accounting and strategic management As mentioned by Olson et al. (2005), of


the factor affecting corporate perform- corporate social performance is strategic
ance (CFP) is the strategic behaviors in behavior to be influenced using control
organization. In the context corporate system and, in turn, to be expected to
social performance, the concept strategic improve the corporate performance.
behaviors can be extended using the
stakeholder theory to explain the varia- Business Environment and Corporate
tion in business performance. Accord- Performance1
ing to Chen (1996); Gatignon et al.
(1997); and Olson et al. (2005), the stra- Investigation on why an organization or
tegic behaviors can be identified into corporate has higher performance than
some components: customer-oriented other organization can be found in three
behavior, competitor oriented behavior, bodies of research: industrial organiza-
innovation-oriented behavior, and inter- tion, business policy, organization the-
nal-cost behavior. The concept can be ory research (Lenz, 1980). Based on
extended using components of stake- review of the bodies of research, it can
holder as contended by Donaldson et al. be found that performance variation in
(1995). Supplier-focused behavior, em- an organization or corporation can be
ployee-focused behavior, society aspect- explained using the variables of environ-
focused behavior, and environment- ment, strategy, and organization struc-
focused behavior are stakeholder-based ture used (Lenz, 1980; Gupta and Go-
behavior strategic to be expected to im- vindarajan, 1984; Govindarajan and
prove corporate performance. Gupta, 1985; Govindarajan, 1988; Tan
and Lischert, 1994; Langfield-Smit,
Concept of Strategic Behavior 1997). In addition, accounting litera-
tures also contributed to explanation of
As stated by Ouchi (1977) and Robbin the organization’s performance variation
(in Olson et al, 2005), organization be- (Gupta and Govindarajan, 1984; Govin-
havior refers to work related activities of darajan and Gupta, 1985; Govindarajan,
member of organization. That is the 1988; Langfield-Smit, 1997; Abernetty,
behavior of the organization members. 2004; Abernetty et al., 2004 and 2005).
Any company is very concerned about
controlling the behavior. That is done As one of the factors affecting the high
using a well designed control system of organization performance, organiza-
(Snell, 1992). One instrument to be tion or business environment can be de-
used in the control system is strategic fined as conditions that are normally
behaviors that can lead to expected or- changing and unpredictable an organiza-
ganization performance. Chen (1996); tion is facing. Lenz (1980) included
Gatignon et al. (1997); and Olson et al. market structure, regulated industry, and
(2005) listed the strategic behavior in- other relevant environments in the con-
cluding: customer oriented behavior, cept of the business environment as the
competitor oriented behavior, innovation factors to be affecting the corporate per-
oriented behavior, and internal/cost ori- formance defined as corporate financial
ented behavior. The list can be referred performance (CFP). Jaworski and Kohli
to input-output model of Donaldson et
1
al. (1995). The list can also be extended In this paper term business, corporate, and company
performance are used interchangeably for the same
using the contingency theory. Thus, meaning


(1993) extended the definition of busi- zation performance. This concept of
ness environment as including market business environment is in line with
turbulence, competitive intensity, and Simons’ (2000) concept of strategic un-
technological turbulence. The market certainty including technological de-
turbulence that is understood as the rate pendence, regulation and market protec-
of change in the composition of custom- tion, value chain complexity, and ease of
ers and preferences can be a predictor of tactical response. Technological de-
business performance (Jaworski and pendence has been close to the technol-
Kohli, 1993). An organization operating ogy turbulence, while regulation and
under market turbulence will tend to market protection can be referred to
modify its product or services continu- competition intensity. The strategic un-
ally in order to satisfy its customers. certainty variables of value chain com-
Adversely, if the market is stable indi- plexity and ease of tactical response par-
cated by no change in customers’ prefer- allel the concept of market turbulence.
ence, the organization is not likely to
change its product or service. Therefore, Furthermore, based on review of organi-
the market turbulence is expected to re- zation environment literature, it can be
late positively to organization perform- found that business environment can be
ance. Competitive intensity is referred defined in general way as the source of
to market condition in which a company information (Duncan, 1972; Lawrence
has to compete with. In the absence of and Lorsch, 1967; Tung 1979 and cited
competition, a company can perform in Tan and Lischert, 1994) and as source
well with no significant effort as the cus- of scarce resource (Tan and Lischert,
tomers have no choice or alternative to 1994). As source of information, busi-
satisfy their need. However, in the high ness environment is focused on per-
competition indicated by so many alter- ceived information uncertainty and sub-
natives for customers to satisfy their jective in nature, as source of scarce re-
want, a company has to devote its best source; business environment is resource
effort to satisfy the customers. There- dependence (Tan and Lischert, 1994).
fore, the competitive intensity is ex- Based on the understanding, corporate
pected to relate positively to organiza- performance can be controlled by using
tion performance. The last aspect of management ability to control over the
business environmental is the techno- resource. Meanwhile, the concept of
logical turbulence that is meant simply business environment can also be
as the rate of technological change. For viewed as multidimensional construct
a company having characteristic of sen- including three variables: dynamism,
sitive to technological change, innova- complexity, and hostility (Duncan, 1972;
tion resulting from the technological Lawrence and Lorsch, 1967; cited in
change can be alternative to increase the Tan and Lischert, 1994). In the last con-
company’s competitive advantage with- cept, components of dynamism and
out having to focus more on the market complexity have been close to the per-
orientation. By contrast, for the com- ceived information uncertainty, while
pany with no innovation in technology, hostility is similar to the resource de-
it should strive to focus more on market pendence (Tan and Lischert, 1994). Fol-
orientation. Therefore, the technological lowing the concept of business environ-
change is relating negatively to organi- ment as multidimensional construct,


Scott in Tan and Lischert (1994) and Based on the arguments and finding
Jauch et al.(1980) had extended the con- from the previous studies, it can be con-
cept of business environment becoming cluded that when business environment
institutional environment including lar- is uncertain, the CSP will increase. The
ger components similar to stakeholder increase in the CSP, based on good man-
concept. The dimensions covered in- agement theory will increase business
clude: (1) competitors, (2) customer, (3) performance. This argument can lead to
suppliers, (4) technological, (5) regula- following proposition:
tory, (6) economics, (7) social-cultural, P1: The increase in uncertainty of
and (8) international. Based on the con- business environment will im-
struct defined in the previous studies, the prove corporate performance by
business environment will come up with increasing CSP
the increase or decrease in corporate
performance as suggested by Dill Strategy and Corporate Performance
(1958). Organization facing high uncer-
tainty in business environment has less Concept of strategy is a complex con-
ability to attain the organization’s goal. cept and it leads to proliferation of defi-
This argument has been echoed by nition of strategy (Lenz, 1980). Mintz-
Simons (2000) by asserting that the busi- beg (1987 and cited in Simons, 2000)
ness environment is one of the factors had classified the views on strategy, in-
resulting in the strategic uncertainty and, cluding strategy as perspective, strategy
in turn, decreases the organization’s as position, strategy as plan, strategy as
ability to achieve the organization’s patterns of action, and strategy as ploy.
goal. Strategy as perspective refers to mission
and vision of a company to be a base for
In relating to the corporate social per- all activities of the company. This will
formance as means of strategic behavior determine core value of the company.
(Higgin and Currie, 2004) had identified Strategy as position indicates the way a
some variables affecting a corporate to company will pursue to compete in the
be ethical or legal behavior in running market. This view will lead to the use of
the company resulting in the high of cor- Porter’s typology of strategy: differen-
porate social performance. The factors tiation and low cost (Simons. 2000).
are: business climate, human nature, so- Strategy as plan suggests short-term plan
cietal climate, societal climate, the com- as series of long term plan in the strategy
petitiveness of the global business envi- as position. In this view, a company can
ronment, and the nature of competitive evaluate the success of the implementa-
organization Performance. Thus, argu- tion strategy. Strategy as pattern in ac-
ments for business climate or environ- tion is a company’s action plan to cope
ment discussed above, especially for the with the failure of the strategy imple-
concept of business environment derived mentation. It is in this view emerging a
from the larger concept similar to stake- new strategy called emerging strategy
holder concept can be applied to the re- (Simons, 2000). The last, strategy as
lationship between business environ- ploy is a tactic a company can do to
mental and corporate social perform- fight with competitor. If the views of
ance. strategy can be well implemented, then
strategy can be an important determinant


of the company’s performance. Further- mentioned above. Using the same fit,
more, in practical, strategy choice for a but with different position for the contin-
company is depending upon the environ- gency factor, Albernethy and Brownell
ment faced by the company. In this re- (1999) also provided the fit relationship
gard, Mitzberg (1973) defined the strat- to the performance.
egy as patterns of stream of decision
focusing on a set of a resource allocation Equivocal results from empirical studies
in an attempt to accomplish a position in into the CSP-CFP relationship point to
an environment faced by the company. the need for a contingent perspective to
Using focus on decision as developed determine the conditions that affect the
Mistzberg (1973), Ventakraman nature of the CSP-FP relationship
(1989b), Miller and Frieson (in Ventra- (Rowley and Berman, 2000). Husted
kaman, 1990), and Tan and Lischert (2000), for instance, proposed that the
(1994) extended the concept of strategy CSP-CFP relationship is a function of
using dimensionality approach includ- the fit between the nature of relevant
ing: (1) analysis, (2) defensiveness, (3) social issues and the organization’s cor-
futurity, (4) proactiveness, and (5) riski- responding strategies and structures.
ness. Further, McWilliams and Siegel (2001)
proposed that the impact of socially re-
There are some studies on the fit be- sponsible actions on financial perform-
tween strategy and corporate performance would be contingent on the econo-
ance (CFP) identified by Fisher (1995) mies garnered from the organization’s
using the product life cycle as contin- size and level of diversification, product
gency factor and performance appraisal mix, advertising, consumer income, gov-
system as dimension control, Simons ernment contracts and competitors’
(1987) utilizing competitive strategy as prices. The products, markets and ac-
contingency factor and budget flexibility tivities that define organizational strat-
as dimension of control system, Govin- egy also define the organization’s stake-
darajan and Fisher (1990) employing holder set. Consequently, a firm pursu-
Porter typology as contingency factor ing socially responsible initiatives that
and behavior and output control as di- lack consistency with its corporate strat-
mension of control system, Govindara- egy is not likely to meet the particular
jan (1988) exploiting Porter typology as expectations of its stakeholders. Due to
contingency factor and budget evalua- the stakeholder context of CSP, an or-
tion style and locus of control as dimen- ganization’s socially responsible initia-
sion of control system, and Fisher and tives will be assessed relative to stan-
Govindarajan (1993) applying Porter dards important to its stakeholders
typology and product life cycle as con- (Wartick, 2002).
tingency factor and incentive compensa-
tion as dimension of control system. Based on the arguments and finding
Except for Fisher and Govindarajan from the previous studies, it can be con-
(1993) finding the conflict result, they cluded that the strategic behaviors in the
supported the fit relationship to the per- improved CSP will help the implementa-
formance. In more recent studies, Liao tion of business strategy and, in turn,
(2005) and Sandino (2005) contributed will improve corporate performance.
to the same finding as the prior studies The proposition of the situation is:


P2: The social performance as a gain the benefit of using the rules and
company’s strategic behavior is a procedures. In this regard, the use of the
means for the success of strategy rules and procedures can lead to the in-
implementation to improve corpo- crease in efficiency and the decrease in
rate performance administrative cost especially in the nor-
mal environment situation characterized
Organization Structure and Corpo- by simple and repetitive tasks (Ruekert
rate Performance et al., 1985; Walker et al., 1987; Olson
el at., 2005). A company with highly
Corporate performance is highly deter- formal rules and procedures is called
mined by how effectively and efficiently mechanic organization, while one with
the company’s business strategy is im- fewer formal rules and procedures is
plemented (Walker et al., 1987 and cited referred to organic organization (Burs
in Olson, 2005). The success of the and Stalker in Olson et al., 2005). Or-
company’s strategy implementation is ganic organization enables people in a
highly influenced by how well the com- company to have vertical and horizontal
pany is organized (Vorhies et al., 2003; communication to manage the com-
Olson, 2005) and the use of strategic pany’s works. Therefore, benefit that
behavior such as customer focus, com- can be gained from using the organic
petitor analysis, and innovation (see for organization include rapid awareness of
example Chen, 1996; Gatignon, 1997; and response to the changes in competi-
Olson, 2005). The organization struc- tion and market, more effective informa-
ture is needed to manage the works in tion, reduced lag time between decision
organization that are divided into small and action (Miles et al., 1992; Olson,
parts to achieve the intended strategy. It 2005).
is the management of works leading to
the emergence of variety of alternative Centralization is a condition on whether
of organization structure and, in turn, autonomy of making decision is held by
can shape the company. The organiza- top manager or be delegated to the lower
tion structure can be defined using three manager. In management literature, this
constructs: formalization, centralization, construct includes two terms in the op-
and specialization (Walker et al, 1987; posite ends: centralized and decentral-
Olson et al., 2005). The three compo- ized organization (Olson, 2005). In cen-
nents are central points of Mintzberg’s tralized organization, autonomy to make
analysis of organization structure (Olson decision is held by top manager. Al-
et al., 2005). though fewer innovative ideas can be
created in centralized organization, im-
Formalization refers to the level of for- plementation of the decision is straight
mality of rules and procedures used to forward after the decision is made
govern the works in a company includ- (Ullrich and Wieland in Olson, 2005).
ing decision and working relationship However, the benefit can only be real-
(Olson, 2005). The rule and procedure ized in stable and in noncomplex envi-
can explain the expected appropriate ronment (Olson et al., 1995; Ruekert,
behavior in working relationship and 1985; Olson et al., 2005). In unstable
address the routine aspect of works. As a and complex environment indicated by
result, people and organization itself can rapid changes in competition and mar-


ket, the use of organization structure Tuden in Husted, 2000). Information is
providing the lower manager with auton- not disseminated widely, but directly to
omy of making decision is needed. In the individual decision maker. For ex-
the decentralized organization, a variety ample, rules in the form of ethics codes
of views and innovative ideas may can work effectively to resolve problems
emerge from different level of organiza- to the satisfaction of stakeholders where
tion. Due to the fact that autonomy of stakeholders and the firm share similar
making decision is dispersed, it may values and understandings of what hap-
take longer to make and implement the pened. Often, companies will have spe-
decision (Olson et al., 1995; Olson et al., cific departments (those have been close
2005). However, in the non routine task to the type of decentralization and spe-
taking place in complex environment, cialization constructs) to handle routine
the use of decentralized organization is processes such as environmental assess-
more effective to achieve the organiza- ment, corporate philanthropy, and public
tion goal as the type of organization em- relations. These structures usually form
powers managers who are very close to the heart of a firm's ethics program
the decision in question and to make the (Center for Business Ethics, 1986). Re-
decision and implement it quickly search indicates that the presence of
(Ruekert et al., 1985). such routinized structures can have a
positive impact on corporate social per-
Specialization is the level of division of formance (Reed, Collin, Oberman, and
tasks and activities in organization and Toy in Husted, 2000).
level of control people may have in con-
ducting those tasks and activities (Olson, Based on the finding and the logic, the
2005). Organization with high speciali- concern of this study is that the fit be-
zation may have high proportion of spe- tween organization structure and CSP
cialist to conduct a well-defined set of will affect the financial performance.
activities (Ruekert et al., 1985; Ol- Proposition for this relationship is as
son,2005). Specialist refers to someone follows:
who has expertise in respective areas P3: Formalization, decentraliza-
and, in certain condition; he or she can tion, ands specialization will im-
be equipped with a sufficient authority prove corporate performance mod-
to determine the best approach to com- erated by the CSP as strategic be-
plete the special tasks (Mintzberg in Ol- havior in the company
son, 2005). The expertise is needed by
organization to respond quickly the Control System and Corporate Per-
changes in competition and market in formance
order to meet organization goal (Walker
et al., 1987). In mapping the contingency-based con-
trol system and performance studies,
In the case of nonissues, typical bureau- Fisher (1995) classified the studies in
cratic structures, referred to formaliza- four level of analysis. In the first level,
tion aspect, work well. Information can relation between contingent factor and
be routed to the relevant specialist who management control system was made
can make decisions on the basis of stan- without going further to see the impact
dard corporate policies (Thompson & of the organizational outcome


(performance). In the second, third, and tiveness (corporate performance-CFP).
fourth level, analysis of the relationship Wynn-Williams (2001) used public hos-
between contingent factor and control pital setting in testing the role that man-
system was conducted and related to the agement control system had played in
performance. The difference was placed explaining the determinant of effective-
on the choice of contingency factor and ness in the hospitals. In his study on
management control system. The second management control system design in
level dealt with one factor for contin- new product development, Davila
gency and one for management control (2000) also found the correlation be-
system, while one factor for contingency tween some variables of management
and more than one dimensions of man- control system and performance. Some
agement control system was for the third other studies trying to relate the manage-
level. The fourth level had more than ment control system and company’s per-
one contingency factor and more than formance or effectiveness have been
one dimensions of management control conducted by others (Marginson, 2002;
system. Haldma and Lääts, 2002; Salmon and
Joiner, 2005; Sandino, 2005; Coenders,
Gul (1991) study investigated the inter- Bisbe, Saris, and Batista-Foguet, 2003;
action effect (fit) between management Liao, 2005, and Alexander and Alan,
accounting system and business environ- 1985). In addition, using concept per-
ment on company’s performance and formance measurement system to refer
found that business environment defined to management control system, Kaplan
as perceived environment uncertainty and Norton (1996); Chenhall and Langs-
(PEU) affected the relationship between field-Smith (1998); Mahama (2006)
management accounting system and found that management control system
company’s performance. At the second has association to corporate performance
level of analysis, Ginzberg ( in Fisher, (CFP).
1995) used formality and procedural as
dimension of control system design that One important function of Management
interacted with environment found that Control system or control system for
the control system affected the perform- short is management tool to implement
ance, while Govindarajan ( in Fisher, the organization strategy. Of the typolo-
1995) study that focused on performance gies in control system, Simons’ (2000)
appraisal system as a dimension of man- typology is complete and comprehen-
agement control system concluded that sive, including: belief system, boundary
the control system had effect on the per- system, diagnostic control system, and
formance. The both studies were sup- interactive control system. In its devel-
ported by the Gul (1991) study. opment stages, the control system had
undergone evolution in terms of ap-
In an effort to explain the role of manage- proach used and complexity of environ-
ment control system to improve corpo- ment faced by a company. The evolution
rate’s competitive advantage, Pant and included the use of direct control ap-
Yuthas, (2000) have stressed the impor- proach focusing on manager’s observa-
tance of management control system to tion of what is going on the company till
identify and build company’s dynamic indirect control approach relying upon
capabilities in order to improve its effec- accounting control. For the last evolu-

129 Fauzi and K.M. Idris / Issues in Social and Environmental Accounting 2 (2009/2010) 117-142

tion, it included using static and flexible The careful and consistent use of the
budget till adopting the concept of profit control system typology, often called
or investment center (see for example levers of control, can lead to the im-
Horngren, 1996). The concept of con- proved performance (CFP). The follow-
trol system centers on the concept of ing is discussion on how the components
bottom line (financial performance). of levers of control can be associated
Not only did the concept have some with the performance and, therefore, the
flaws on imbalances due to the domina- expectation of the impact of the use of
tion of financial aspect, but also it cre- components of the control systems on
ated some paradoxical situation between the relationship between CSP and CFP
control and innovation, opportunity and can be based upon.
attention, and short term and long term
goal, and human behavior. One reason Belief system is the one used in an or-
of the problems is that the old concept of ganization to communicate an organiza-
control had been defined as diagnostic tion’s core value to inspire people in the
control only. In that definition of con- organization to search for new opportu-
trol, the control process had been fo- nities or ways to serve customer’s needs
cused on the matter of routine mecha- based on the core values (Simons,
nism or process of comparing some ex- 1994,1995a,1995b,2000). In an organi-
pected and realized performances. Ac- zation the belief system has been created
cording to Simons (1995a, 1995b, and using variety of instruments such as
2000), to avoid the problem concept of symbolic use of information. The in-
control should be extended by adding struments are used to communicate the
three more levers: belief system, bound- organization’s vision, mission, and state-
ary system, and interactive control sys- ment of purpose such that people in the
tem. The function of belief system is to organization can well understand the
inspire the people in an organization to organization’s core value. Westly et al.
search for new ways and alternatives by (1987; cited in Simons, 1995) supported
providing them with the organization’s the use of the instrument by arguing that
clear vision, mission, statement of pur- great leaders and competent managers
pose, and credos through using format understand the power of symbolism and
and informal system. It is expected from inspiration. The benefit of using the
the belief system mechanism, creativity symbolic instrument especially at indi-
and innovation in the organization will vidual level is also provided by Feldman
be continuously updated to meet the ex- et al. (1981) by delineating that symbols
pected growth. The use of boundary produce belief and belief can stimulate
system lever is meant to prevent un- the discovery of new realities. In this
wanted impact of creativity and innova- regard, Westly (1987 cited Simons,
tion by setting some rules limiting peo- 1994) contended that managers will not
ple to do in the form of code of business be very eager to participate in search for
conduct, strategic boundary, and internal opportunities if they do not understand
control. The role of interactive control the beliefs of organization and are not
system is to provide an organization get involved in converting the beliefs
with solution to cope with emerging into actions and strategies.
strategic uncertainty and with new strat-
egy given that emerging situation. There is a need for an organization to


formally communicate the core value, ment, competitive, and franchise risks
especially when it is facing the dramatic (Simons, 2000). On the other hands, the
change in business environment such as boundary system provides allowable
competition, technology, regulation and limits for opportunity seeker to innovate
other factors. The Change in the busi- as conditions encouraged in the belief
ness environment creates a need for system.
strong basic values to provide organiza-
tional stability (Simons, 1995b). The There are two instrument used in bound-
importance of understanding the core is ary system to establish the limit in order
also supported by study of Kotter (in avoid the risks: business conduct and
Simons, 1995b) concluding that inspira- strategic boundaries (Simons, 1995;
tional motivation can be created by (1) Simons, 2000). The business conduct
communicating vision that can address boundaries are focused on behavior of
the value of people in an organization, all employees in an organization. The
(2) permitting each individual to be source of the boundaries is of three
pleased about how he or she can contrib- folds: society’s law, the organization’s
ute to implementation of that vision, (3) belief system, and codes of behavior
Providing eager support for endeavor, promulgated by industry and profes-
and (4) promoting public recognition sional association (Gatewood and Car-
and reward for all success. roll, 1991; Simons, 1994). When uncer-
tainty resulting from new opportunities
The belief system can make people in an is highly or internal trust is low, the
organization inspired to commit to or- business conduct boundary is highly
ganization goal or purpose. In this re- needed (Kanter in Simons, 1994). In
gard, commitment means believing in the environment of high uncertainty,
organizational value and willing to at- Merchant (1981) found that chances to
tempt some efforts to achieve the organ- manipulate the profit figures by manag-
izational goal (Simons, 1995). There- ers is high. The manipulation is one of
fore, the goal commitment can lead to risks that can endanger the managers’
improved corporate performance (Locke company. Therefore, the business con-
et al., 1988). The conclusion is consis- duct boundary will be imposed in that
tent with what Klein et al. (1998) found situation to avoid the risk and, in turn,
in their study on situation constraints improve the corporate performance. The
including goal commitment and sales low in internal trust can result in the ab-
performance. Chong et al.(2002) study- sence of shared commitment to the or-
ing the effect of goal commitment and ganization goal. No commitment to goal
the information role of budget and job can affect the corporate performance.
performance provides the same finding. The objective of applying the business
conduct boundary is to maintain the em-
The resultant of belief system is new ployee’s commitment to organization
opportunities that may contain some goal and, in turn, can improve the per-
problems. The boundary system con- formance.
cerns on how avoid some risks of inno-
vation resulting from the belief system Strategic boundaries are defined as rules
(Simons, 1994). The risks that possibly and limitation applied to decisions to be
emerge can be operating, assets impair- made by managers needing the organiza-


tion’s resource allocation as response of “routines that guide behavior” (Levitt
opportunities identified in the belief sys- and March, 1998, 320). Therefore, con-
tem (Simons, 1995 and 2000). Applica- trol system can be said to be a learning
tion of ROI of 20% as hurdle rate in the tool. To support this conclusion, Kloot
capital budgeting decision is one exam- (1997), in his study using case study
ple. Updated of negative list on business approach, investigated the link between
area that is not allowed to go into is an- control system and organizational learn-
other example. In his study using case ing and found that control system can
approach in UK Telecommunication facilitate organization control. Based on
company, Marginson (2002) found that organization theory literatures, organiza-
the boundary system-strategic boundary tion learning has impact on performance
can motivate people in that company to (Slater and Narver, 1995; Levitt and
search for new ideas or opportunities March, 1988). The argument underlying
within the prescribed acceptable area. the association is that organization learn-
Thus, if well implemented, this system ing is very critical to competitive advan-
can avoid the potential risks and, in turn, tage. Organization with learning orien-
can improve the organization perform- tation will have improved performance
ance. (Tippin and Soha, 2003). Chenhal
(2005) provided support for the finding
Diagnostic control system is the one by investigating the relationship control
used by management to evaluate the im- system and delivery service using or-
plementation of an organization’s strat- ganization learning as mediating vari-
egy by focusing on critical performance able.
variables, which is the ones that can de-
termine the successful of strategy imple- In addition to providing organization
mentation and, at the same time, can learning aspect, the use of diagnostic
conserve the management attention control system also can conserve man-
through the use of management by ex- agement attention trough the application
ception (Simons, 1995 and 2000). As a of management by exception tool
system relying upon the feedback (Simons, 1995 and 2000). With the tool,
mechanism, the diagnostic control sys- the control system reports to manage-
tem is an example of application of sin- ment only if the deviation things happen.
gle loop learning whose purpose is to Therefore, efficient aspect will be re-
inform managers of outcomes that are sulted from the use of the tool. Simons
not meeting expectation and in accor- (1991) also provided empirical evidence
dance with plan (Argyris in Simons, from the health care industry that man-
1995; Widener, 2006 and 2007). The agers feel overloaded with information if
single loop learning is a part of organi- their attentions are focused on broad
zation learning that indicates benefits of scope of control attributes and con-
implementing management control sys- cluded that diagnostic control system
tem in general. Organizational learning could facilitate the efficient use of their
originates in historical experiences that attentions. According to Schick et al. (in
are then encoded in routines (Levitt and Widener, 2006 and 2007), the informa-
March, 1988; cited Widener, 2006 and tion overload occurs when demand for
2007). Based on historical experiences, information exceeds its supply of time.
the organization adopts and formalizes To encourage the efficient use of man-


agement attentions (time), the manage- the search, scanning, and communica-
ment attentions should be focused on the tion process allow new strategies
critical success factors and core compe- emerge, strategy of which, in the Mintz-
tence that are likely associated with im- berg’s (1978) strategy typology, often
proved performance. called emerging strategy. Levit and
March (1988) echoed that situation by
In an attempt to implement the organiza- stating that if the structural problems in
tion strategy, it is necessary to note that organizational learning cannot be elimi-
strategy initially set in strategic plan- nated, they can be mitigated. In their
ning, often called intended strategy, in study in the hospital area, Albernetty
the classification of Mintzberg’s (1978) and Brownel (1999) also support the
typology of strategy, may not become conclusion that interactive control sys-
realized strategy due to the fact that any tem can facilitate the organization learn-
strategy has inherent strategic uncer- ing. Considering the importance of or-
tainty defined as external factors result- ganization learning as mentioned above,
ing from market dynamics, government the process in turn can improve the or-
regulation, and dramatic change in tech- ganization performance.
nology triggering the intended strategy
become invalid (Simons, 1995; Simons, Most prior literature considering the mo-
2000). He proposed the use of Interac- tives for socially responsive decision
tive control system to solve the obsta- making derives from the business ethics
cles. The control system will detect the literature. Considerable attention has
driver of intended strategy invalidity and been given to determining the factors
follow them up by working together be- that influence ‘ethical’ organizational
tween top managers and their subordi- decision making (Soutar et al., 1994).
nates to create dialog and to share infor- For example, models of ethical behavior
mation in order to solve the problems. have been developed which indicate
This process, if well designed, can there is a set of situational variables
stimulate double loop learning in which which interact with and influence ethical

STRATEGIC BEHAVIOR-
CORPORATE SOCIAL
PERFORMANCE
BUSINESS
ENVIRONMENT

(P1- P4)
BUSINESS
STRATEGY

CORPORATE
ORGANIZATION PERFORMANCE
STRUCTURE

CONTROL
SYSTEM

Figure 2: Contingent CSP of the relationship Business Environment,
Strategy, Structure, Control System, and Performance


decision making processes (Bommer et rate social performance defined as stake-
al., 1987; Stead et al., 1990; Trevino, holder relationship become one impor-
1986). One set of situational variables tant dimension of the strategic behaviors
deemed to influence ethical decision that an organization can set to improve
making include work environment and corporate performance.
organizational factors (Bommer et al.,
1987; Falkenberg and Herremans, 1995; The theoretical implication is that to be
Singhapakdi et al., 2000; Verbeke et al., successful strategic behavior, CSP
1996). For instance, employee socializa- should be tied to the corporate culture
tion processes aimed at internalizing and a part of the company’s core value.
socially responsive/ethical standards It means that CSP cannot view as phil-
within individual employees have been anthropic activities. Rather it is means
held to influence socially responsive to maintain the stakeholder relationship.
decision-making (Smith and Carroll,
1984; Soutar et al., 1994). Control sys-
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