The British Accounting Review 43 (2011) 251263

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The British Accounting Review

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Performance management and organizational strategy: How to design

systems that meet the needs of confrontation strategy rms
Ralph W. Adler
Department of Accountancy and Business Law, University of Otago, Dunedin, New Zealand

a r t i c l e i n f o a b s t r a c t

Article history: The link between organizational strategy and performance management system design
Received 15 September 2009 has been examined in numerous studies. Invariably, strategy is conceptualized using
Received in revised form 4 January 2011 archetypes developed in the 1970s and 1980s. Scholars have increasingly questioned the
Accepted 13 January 2011
wisdom of relying on strategic archetypes that are plainly dated and conspicuously
disconnected from the possibility of rms competing head-to-head, not out of choice but
Keywords:
out of necessity. Cooper (1995) calls such a situation the undertaking of a confrontation
Performance management
strategy. Using an exploratory research design, this paper draws on nine qualitative case
Management control
Strategy studies to examine how performance management systems are designed to meet and
support the implementation of a confrontation strategy. Initially six rms, spanning
a variety of what were expected to be mature, highly competitive industries likely to
feature confrontation strategies, were recruited for participation. This initial study was
then followed by a more concentrated examination of one particular industry: the banking
industry. Findings from the total case study sample of nine rms lead to the presentation
of an original table contrasting the unique performance management system designs
associated with the three distinct strategies of cost leadership, differentiation, and
confrontation. In particular, and in contrast to rms pursuing cost leadership or differ-
entiation strategies, rms with confrontation strategies are likely to feature collaborative
organizational cultures, lean organizational structures, and training and development
programs that focus on developing empowered, multi-skilled teams of self-governing and
coordinating employees. The exploratory intent of the paper, and thus its reliance on
a small sample size of nine organizations, may limit the generalizability of the papers
ndings. In spite of this limitation, the ndings offer opportunities for researchers to move
beyond the exploratory approach presently adopted and empirically test the confrontation
strategy and performance management system linkages proposed. Additionally, practi-
tioners are likely to benet from a clearer understanding of the type of performance
management system design needed to support confrontation strategies.
2011 Elsevier Ltd. All rights reserved.

1. Introduction

Performance management systems embody the set of organizational activities employed by managers to focus employee
attention and motivate behavior for the ultimate purpose of implementing the organizations strategy (Otley, 1999). As such,
performance management systems are intended to help organizations plan and coordinate what they should do, provide
accurate and timely feedforward and feedback on how they are doing, and encourage corrective behavior as and when
needed (Anthony & Govindarajan, 2007). Some of the more typical organizational practices involved with performance
management are strategic planning, budgeting, incentive compensation design, and organizational structuring.

E-mail address: ralph.adler@otago.ac.nz.

0890-8389/$ see front matter 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.bar.2011.08.004
252 R.W. Adler / The British Accounting Review 43 (2011) 251263

Different organizational strategies require different performance management systems. Various scholars, including Miller and
Friesen (1982), Govindarajan and Gupta (1985), Simons (1987), and Anthony and Govindarajan (2007), have long argued that
regardless of how one conceptualizes strategy whether it be using Porters (1985), Miles and Snows (1978), the BCG, or some
other model different strategic orientations will require different approaches to strategic planning, budgeting, and incentive
compensation. As an example, Anthony and Govindarajan (2007) contend that the performance management systems of cost
leaders should consist of formal, nancially-based strategic planning; short-term, output-focused budgeting; and formula-based,
frequently determined and awarded incentive compensation. In contrast, rms that pursue a strategy of differentiation should
design performance management systems that feature informal, qualitatively-based strategic planning; long-term, outcome-
focused budgeting processes; and subjectively-based, infrequently determined and awarded incentive compensation.
Missing from the performance management literature is an inclusion of todays more highly evolved and contemporary
understandings of organizational strategy. Several scholars, including Chenhall (2003), Kotha and Vadlamani (1995), Miller
and Roth (1994), and Shortell and Zajac (1990), have questioned the utility of using strategic archetypes developed in the
1970s and 1980s for studying 21st century phenomena. As Chenhall (2003) so aptly notes, Strategies are being complicated
by the need for most organizations to be both low cost producers and to provide customers with high quality, timely, and
reliable delivery.
Tushman and OReillys (1997) concept of adaptive organizations, whereby organizations are capable of doing two very
different things at once (thus giving rise to the title of their book Ambidextrous Organizations), is certainly in harmony with
Chenhalls observations. Cooper (1995) recognizes this need, or what he more often refers to as a requirement, to excel on
multiple product/service dimensions (e.g., cost, quality, functionality, and innovation) as part and parcel of a highly
competitive business environment that features more of what Kim and Mauborgne (2005) call red ocean as opposed to their
hoped for blue ocean strategies. Cooper (1995), for his part, calls such strategies confrontation strategies.
The purpose of the present paper is to explore and describe the type of performance management system that is best
suited for organizations pursuing confrontation strategies. No literature to-date exists on this topic. The paper draws upon
nine qualitative case studies, all describing organizations familiar to the researcher and known to be pursuing a confrontation
strategy. A main nding of the paper is that rms with confrontation strategies are likely to feature collaborative organi-
zational cultures, lean organizational structures, and training and development programs that focus on developing
empowered, multi-skilled teams of self-governing and coordinating employees. The papers ndings are likely to assist
practitioners, who can benet from a clearer understanding of the specic characteristics of the performance management
system needed to support their organizations confrontation strategies, as well as performance management scholars, who
will have opportunities to undertake explanatory and predictive studies into the confrontation strategy and performance
management system linkages proposed.

2. Performance management systems

Anthony (1956: 27), writing nearly 50 years ago, described performance management, what was then exclusively termed
management control, as the process by which managers assure that resources are obtained and used effectively and
efciently in the accomplishment of the organizations objectives. This denition would appear to encompass much more
than what Horngren, Foster, and Datar (1994) proposed when they wrote, A management control system is a means of
gathering data to aid and coordinate the process of making planning and control decisions throughout the organization. In
fact, most accounting scholars would argue that the denition of management control/performance management extends
well beyond Horngren, Foster, and Datars rather static and highly mechanistic denition. As Hopwood (1976) long ago
pointed out, The purposes, processes, and techniques of accounting, its human, organizational, and social roles, and the way
in which the resulting information is used have never been static.
In fairness to Horngren, Foster, and Datar, later editions of their textbook add the dependent clause and to guide the
behavior of its managers and other employees (2006). This updated denition, along with ones that have been advanced
through the years by Emmanuel, Otley, and Merchant (1990), Merchant (1985), Simons (1995), and Garrison and Noreen (2000),
match quite closely with Anthony and Govindarajans (2007) relatively recent description of performance management as .
the process by which managers inuence other members of the organization to implement the organizations strategy.
In seeking to describe the inuence managers can exert on employee behavior, scholars have proposed various perfor-
mance management taxonomies. Anthony, Dearden, and Bedford (1989) for example, dichotomized performance manage-
ment into formal and informal controls. Ouchi (1979) used the categories of market, bureaucracy, and clan controls. Hopwood
(1974) described the choices as administrative versus social controls; while Merchant (1985) offered a trichotomy of results,
action, and personnel controls.
There are two main weaknesses associated with these various taxonomies. First, the language adopted is vague and
indenite, especially for practitioners. Second, while reference is made to human behavior, the expanded descriptions
predominantly concentrate on accounting systems. As a result, the literature has failed to move beyond Anthonys (1956: 115)
assertion that the center of a performance management system must be a nancial system.
Ferreira and Otley (2009) have recently presented a performance management framework that addresses the rst stated
weakness. In particular, Ferreira and Otleys framework uses plain, concrete, and practitioner-relevant language. Their control
typology includes the setting of organizational mission and vision, the development of key performance measures and
targets, and the use of performance evaluation and reward systems.
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Since the primary motivation of the present paper was to look for commonalities among the performance management
designs of rms pursuing confrontation strategies, it was believed the planned eld research would benet from adopting
a performance management framework that was readily understood by practitioners. Accordingly, the Ferreira and Otley
model offered an important advantage over earlier performance management taxonomies.
Unfortunately, the framework offered by Ferreira and Otley (2009) does not adequately address the second weakness of
with previous taxonomies: the inattention paid to non-accounting based performance management elements, such as
organizational culture and human resource systems of selection and training and development. While Ferreira and Otley refer
to organizational culture, it is given scant discussion. Instead, after initially labeling it a notable contextual variable (p. 267),
they quickly proceed to dismiss it as one item among a set of . contingent variables that might explain why certain patterns
of control are more or less effective, rather than characteristics of the control model that need to be incorporated into
a description (p. 267). Employee selection and training and development are awarded no discussion in the Ferreira and Otley
framework. This oversight occurs in spite of the fact that the literature has consistently reported a strong link between the use
of human resource systems and strategy implementation (Becker & Huselid, 2006; Fulmer, 1990).
In an attempt to overcome the shortcomings of existing performance management frameworks, a revised framework,
which heavily draws upon the elds previous scholarly work, is proposed in Fig. 1. This new framework is intended to both
unify existing taxonomies, as well as ensure that the often overlooked elements of organizational culture and employee
selection and training and development are more fully specied and recognized. The ensuing discussion describes this
frameworks operation and its linkages to previous performance management work.

3. A revised framework

The framework presented here shares many common characteristics with previous performance management taxon-
omies. The main similarity is the specication of a small group of salient controls. Although the nomenclature differs across
the various models, the underlying constructs are all quite similar. In particular, what Fig. 1 terms as operating systems and
procedures is a central feature of Anthony et al.s (1989) formal controls, Hopwoods (1974) administrative controls,
Merchants (1985) action and results controls, and Ouchis (1979) bureaucratic controls. Organizational culture, meanwhile, is
a dominant characteristic of Anthony et al.s (1989) informal controls, Hopwoods (1974) social controls, Merchants (1985)
personnel controls, and Ouchis (1979) clan controls. And nally, the control exerted through organizational structure is
present in Anthony et al.s (1989) formal controls, Hopwoods (1974) administrative controls, Merchants (1985) action
controls, and Ouchis (1979) bureaucratic controls.
In addition to unifying the previous performance management taxonomies, the present framework seeks to use
descriptors more likely to resonate with practicing managers. In this regard, the present model shares a benet of the Ferreira
and Otley (2009) model. A further similarity to Ferreira and Otley (2009) is the present models explicit recognition and

Fig. 1. A revised framework of performance management.

254 R.W. Adler / The British Accounting Review 43 (2011) 251263

representation of inuential contextual factors. Previous research in organizational theory, especially work based on
contingency theory (Lawrence & Lorsch, 1967), has demonstrated the important inuence such external factors as industry,
national culture, global economy, and natural environment (Hall & Tolbert, 2005), as well as such internal factors as orga-
nizational size, organizational life cycle stage, characteristics of organizational ownership, and leadership style (Brownell,
1987; Serenko, Bontis, & Hardie, 2007; Smith, Mitchell, & Summer, 1985), have on organizations structures, processes, and
outcomes. Fig. 1 portrays the four main external factors as the outside frame of the performance management framework.
Included in the industry factor are such sub-dimensions as the degree of competition, degree of government regulation,
customer demographics, marketplace predictability, nature and complexity of technology used, and the rapidity with which
this technology changes.
Operating just inside the frame provided by these external contextual factors is an organizations strategy formulation and
control system. This system is represented as an iterative process of strategic analysis, strategy formulation, and strategy
evaluation. Some of the major inuences shaping the outcome of an organizations strategy formulation and control process
are its external and internal contextual factors. Irrespective of ones view on the origin of strategy namely whether it is the
result of a deliberate process (Ansoff, 1980; Porter, 1985) or the unpredictable outcome of what emerges from the eventual
convergence of multiple personal strategies (Mintzberg, 1973; Mintzberg & Lampel, 1999; Mintzberg & Waters, 1985) there
will always be an interplay between the formulation and control of an organizations strategy and its external and internal
contextual factors.
Internal contextual factors affect the organizations strategic control process and its use of the four main components of
performance management: operating systems and procedures, organizational structure, organizational culture, and selection
and training and development. As an example, an organization with a relatively small size will face difculties attaining the
minimum threshold needed to achieve economies of scale, which in turn will limit the organizations ability to pursue a cost-
based strategy. Additionally, the organizations small size will impact the organizational structure (it is more likely to be
centralized) and its operating systems and procedures (they are likely to be informal).
The four main performance management components are represented in Fig. 1 by a series of four circles with arrows
connecting these circles to strategy implementation. Since the ultimate purpose of performance management is to encourage
employee implementation of the organizations strategy, Fig. 1 intentionally displays the arrows connecting the components
of performance management and strategy implementation as passing through employee behavior.
Earlier taxonomies and frameworks of performance management commonly showcased the control exerted through
operating systems and procedures and organizational structure. These same taxonomies and frameworks, however, either
failed to represent (Ferreira & Otley, 2009) or only vaguely alluded to (Anthony et al., 1989; Hopwood, 1974; Merchant, 1985)
the control that can be exerted through organizational culture and employee selection and training and development.
Accordingly, the most prominent way in which Fig. 1 differs from previous conceptualizations is its explicit inclusion and
development of these latter two types of control.
Fig. 1 also differs from previous taxonomies and frameworks in another important way. Each of the four main types of
control in Fig. 1 are shown to be providing the simultaneous encouragement of desirable behavior and discouragement of
undesirable behavior. Desirability is dened in terms of promoting behavior that is congruent with the implementation of the
organizations strategy. As represented in Fig. 1, each of the four types of control is divided into two parts, one part showing
a positive sign (denoting its encouragement and ability to reward conforming employee behavior) and the other a negative
sign (denoting its discouragement and ability to penalize nonconforming employee behavior). Each part of any particular type
of control depicts an arrow connecting that part to strategy implementation; and, as just mentioned, on all occasions this
arrow runs through employee behavior.
The concept of the dual sanctioning and constraining nature of control is consistent with Emmanuel et al. (1990), who
note, Management control consists, in part, of inducing people in organizations to do certain things and to refrain from doing
others. Simons (1995) echoes this same idea when he describes how performance management systems serve as . the yin
and yang that create a dynamic tension (p. 86); one that is positive, inspirational (p. 86) and the other that is the power of
negative thinking (p. 84).

4. Four main control mechanisms

Operating systems and procedures serve to both motivate and constrain. Budgets, a subset of this category, offer a prime
illustration. On the one hand, budgets motivate action. They do this by virtue of the nancial authority they bestow on
specic organizational members. Assuming the budget incorporates a difcult but achievable goal, then goal setting theory
posits that budgets will produce enhanced employee motivation (Locke, 1968). On the other hand, budgets routinely serve to
constrain employee action. Organizational resources are scarce and limited, and budgets are created as a way to commu-
nicate how these scarce and limited resources will be utilized. In other words, budgets dictate the means within which
employees and their subunits must operate. As a consequence, some employee-initiated plans may receive partial or even no
support.
Organizational structure, which is commonly communicated through organizational charts, both sanctions and constrains
employee behavior. Employees are endowed with authority to act by virtue of the specic organizational roles they occupy.
Meanwhile, employee behavior is constrained by the existence of specied lines of reporting and the presence of superior/
subordinate relationships.
 R.W. Adler / The British Accounting Review 43 (2011) 251263 255

Organizational culture serves to encourage as well as constrain employee behavior. Shared values, norms, and beliefs
dene an organizations culture, and these in turn play a strong role in inuencing or sanctioning allowable employee
behavior (Schein, 1985). While some organizations recruitment and selection processes ensure a good immediate t between
the organizations and a new members belief systems, such immediate harmony is not always achieved. It is on these
occasions that the organizations culture will standardize members behavior and shape it in line with the organizations
accepted norms.
Training and development represents the nal category of control. While it could be argued that training and development
belongs as a subset of the operating systems and procedures category, it is broken out separately to reinforce the human
resource dimension that underscores the performance management process. The inuencing role of performance manage-
ment is every bit as much about psychological/behavioral approaches as it is about technical/systems approaches; and one of
the more signicant and enduring ways to inuence behavior is through training and development. Training and develop-
ment invariably has two objectives: to standardize behavior by providing employees with missing skill sets and to up-skill
employees and thereby facilitate opportunities for greater challenge, growth, and ultimately motivation (Noe, 2005).
Managers will rely on and congure the four control mechanisms in different ways depending on existing contextual
factors and the strategy the organization is pursuing. As previously noted, while much attention has been given to the
conguration of performance management systems for competitive strategies that are either cost-based or based on some
form of differentiation, no work has explored the performance management design for rms pursuing confrontation strat-
egies. The paper now discusses this topic.

5. Organizational strategy

The link between strategy and performance management has been explored in dozens of normative and empirical studies
(Andon, Baxter, & Chau, 2003; Chenhall, 2003; Hartman & Vaassen, 2003; Langeld-Smith, 1997; Manzoni, 2002; Miles &
Snow, 1978; Otley, Broadbent, & Berry, 1995; Porter, 1985; Speckle, 2001). While the various ndings are not always consistent
(Hartman & Vaassen, 2003; Porter, 1985), Chenhall (2003), among others, argues that a general pattern prevails. More
specically, organizational strategies characterized by conservative orientations, featuring defender, harvest, or cost lead-
ership strategies, are best served by performance management systems based on centralized control systems, specialized
and formalized work, simple co-ordination mechanisms, and attention directing to problem areas (Chenhall, 2003: 150).
Furthermore, organizational strategies characterized by entrepreneurial orientations, featuring prospector, build, and
differentiation strategies, are best served by performance management systems based on a lack of standardized procedures,
decentralized and results oriented evaluation, exible structures and processes, complex co-ordination of overlapping project
teams, and attention directing to curb excess innovation (Chenhall, 2003: 150).
The performance management and organizational strategy literature is largely based on conventional, 2030 year old
conceptions of organizational strategy, resulting in a number of researchers questioning its usefulness (Andon et al., 2003;
Campbell-Hunt, 2000; Chenhall, 2003; Hartman & Vaassen, 2003; Otley et al., 1995; Speckle, 2001; Manzoni, 2002; ). In
particular, it has been argued that in an increasingly competitive business world, the ability for a rm to secure and maintain
uncontested ground on which to implement a strategy, or at least one that possesses Porters (1996) hallmarks of deliver[ing]
a unique mix of value, is becoming less likely. The emergence of corporate behemoths, presumably as a consequence of the
Ricardian model, or what economists call the theory of comparative advantage, is shrinking the survival zones of many
industries. Survival zone size, or what can best be described as the cost, quality, and functionality thresholds a rm must
achieve to remain in business (Cooper, 1995), ultimately determines not just the number of competitors but the nature of the
competition as well.
Unlike blue ocean strategies (Kim & Mauborgne, 2005), whereby rms operate in largely uncontested market space with
high growth potential, confrontation strategies are characterized by head-to-head, toe-to-toe, cut-throat competition.
Comparing confrontation strategies to other scholars strategic frameworks, the closest comparison would be Mintzberg and
Waters (1985) idea of imposed strategy. According to these scholars, the strategy occurs less out of choice and more out
succumbing to the inescapable environmental pressures being exerted on the organization (p. 268). This idea of inescap-
ability is similar to Coopers ideas, although the latter largely views the environment in terms of competition.
According to Cooper (1995), industries whose main products/services have reached the mature stage of their product life
cycles and which feature high levels of competition are likely to experience a shrinking survival zone. While the automobile,
computer, and telecommunications industries are commonly showcased examples, Cooper (1995) contends more industries
are likely to follow suit. As rms in other industries become increasingly adept at mass producing specialist products or
services and expand into offshore markets, these industries will experience a collapsing of their survival zones and the
commencement of the head-to-head competition a confrontation strategy entails. Consequently, an important question for
managers is what form should performance management systems take to support the implementation of confrontation
strategies?

6. Performance management systems and confrontation strategies

One approach to designing performance management systems for confrontation strategy rms is to adopt operating
systems and procedures, organizational structures, organizational cultures, and training and development programs that fall
256 R.W. Adler / The British Accounting Review 43 (2011) 251263

midway between what is presently advocated for Porters (1985) cost leader and differentiator. This compromise approach,
however, is unlikely to prove successful. What, for example, is the midpoint between output and outcome-focused budgetary
systems? Or what is the midpoint between conservative and entrepreneurial organizational cultures?
A second approach is to utilize features of both the cost leader and the differentiator. However, as with the compromise
approach, trying to devise performance management systems that span the cost leader and differentiator strategic positions
is unlikely to prove feasible. Instead it is likely to promote organizational schizophrenia as the organization tries to pursue
diametrically opposed objectives, e.g., both standardized and non-standardized work procedures and both frequently- and
infrequently-timed performance incentives.
Neither the compromise nor the combination approach is likely to provide an adequate platform to support an organi-
zations pursuit of a confrontation strategy. Instead, a more tailored approach is needed. To help identify the composition of
this new performance management design, an exploratory study of six rms operating in six highly competitive, mature
industries and therefore likely to pursue confrontation strategies was undertaken. Before detailing the studys ndings,
and the advice they offer for performance management design, a description of the six rms and the method used to collect
the data is provided.

7. Sample and research method

The development of confrontation strategies is seen as the inevitable strategic response by a rm faced with the conditions
of a mature product life cycle and a highly competitive industry (Cooper, 1995). Accordingly, some industries are more likely
to feature confrontation strategies than others. Six rms, spanning six industries, were approached to participate in the
research. All six rms were known by the researcher, who had knowledge of their respective pursuits of confrontation
strategies. All six rms agreed to participate.
One of the interviewed rms is a US integrated circuit manufacturer and is based in California. It began operating in 1971
as the subsidiary of a large Japanese company. The US plant has 300 employees and annual sales of $150 million. Its Japanese
parent has a worldwide workforce of nearly 60,000 employees and annual sales of $12 billion dollars. Both the California
subsidiary and its parent have excellent reputations for producing high quality products featuring robust reliability, the
most up-to-date technology, and high rates of on-time delivery at competitive prices.
The second rm is a large regional bank operating in the states of New York, New Jersey, and Connecticut. The bank has
operated for over 100 years, beginning as a small town-based bank. It grew especially rapidly in the 1990s as the result of
a series of aggressive acquisitions in the New York metropolitan area. It has total assets equivalent to about $55 billion, is the
16th largest bank in the US, and has earned a reputation for providing stock market returns that outpace the industry average.
The bank increasingly faces substantial competition from traditional banks (both large and small), as well as from a host of
non-banks including American Express, ING Group, brokerage rms, Sears, and more.
The third rm is an 80 year old small-medium sized Chrysler franchise car dealership. It has won numerous awards and
recognition for its sales and service, including Chryslers celebrated 5-Star Award, and is consistently ranked among the top
dealerships in the country according to the Daimler-Chrysler Customer Satisfaction Index. Although ostensibly operating in
the safe competitive environs of eastern New York, in actual fact customers can easily travel the 1 hours to any of New York
Citys metropolitan dealerships or stop at any of the numerous dealerships located en route. For many potential customers,
who commute daily to New York City for their work, there is no real disadvantage to bypassing their local Chrysler dealership.
Accordingly, the car dealership faces enormous competition from neighboring Chrysler dealerships and non-Chrysler deal-
erships, all of whom are inexorably pushing the industry toward selling a commodity-based product.
The fourth rm is an Australasian whiteware manufacturer. It has annual sales of about $1 billion, with markets in North
America, Europe, Asia, and Australasia. The company had a particularly stellar period of sales growth and stock market returns
starting in the late 1990s and continuing to about 2004, which was largely seen to stem from its reputation for product
innovation. More recently, the company has come under a seemingly unending barrage of competition from copycat, me-too,
low cost imitators, especially from manufacturers in Korea and China. Every decision, in the words of one senior manager,
must now be not only about maintaining the companys reputation for high quality, innovative products, but also about the
cost implications created.
The fth rm is an Australasian wool products manufacturer, which has been in operation for over 125 years. It has annual
sales of $30 million and employs 300 workers. Its primary customer markets are the US, Southeast Asia, and Australasia. Order
winning criteria mandate the simultaneous achievement of excellent service, top product quality, and competitive prices.
The sixth rm is an Australasian airline company. The company has about 11,000 employees, ies nearly 12.5 million
passengers annually, has annual revenues of $3 billion, and has been operating for over 70 years. Though its prots are modest
relative to its asset size, the company has avoided the afiction of many other airlines by virtue of being able to report prots.
The difcult operating environment is well captured by one of the companys general managers who described the air
transport part of the airline industry as the worst competitive position on the value chain, characterized by intense, cut-throat
competition on what he calls an increasingly commodity-based service. In support of his claim, there are nine separate
airlines operating in his companys main market. This compares to a worldwide situation where nearly three-quarters of the
regional airline sectors have ve or fewer airlines in direct competition.
Site visits were conducted at each of the six participating rms, and a set of semi-structured interviews were held with
senior managers from each rm. In general, two senior-level managers were interviewed. In the case of the whiteware
 R.W. Adler / The British Accounting Review 43 (2011) 251263 257

manufacturer, however, four senior managers were interviewed, while nine (two senior-level and seven middle-level
managers) were interviewed at the integrated circuit manufacturer. Typical job titles included chief executive ofcer, senior
vice-president, site manager, operations manager, general manager, global HR manager, director, and nancial manager. The
interviews generally lasted between 1 and 2 hours. The initial part of the interviews focused on the rms customer market
and, more specically, what the rm needed to do to compete successfully in its market. Subsequent questions concentrated
on various features of the rms performance management systems, including salient organizational systems and procedures,
organizational structure, organizational culture, and employee selection and training and development programs. In other
words, the interview questions closely followed the major categories shown in Fig. 1.
The interview data was further complemented by various archival data, including nancial statements, internal
performance reports, and business publication news items (e.g., from the Wall Street Journal and National Business Review).
This archival data served to help corroborate and, at times, provide opportunities for further elaboration of the interview
data.
When permission was granted, the interviews were taped for later transcription and comparison with the researchers
set of eld notes. The researcher provided opportunities for the interviewed managers to read and correct his eld notes.
Emails from the managers conrmed the eld notes accuracy. Two of the six rms accepted the opportunity to have the
researcher present the studys ndings. Here again, there were opportunities for the interviewed managers, and even
other managers who were not interviewed but attended the presentation, to correct any factual inaccuracies. No factual
corrections were suggested. In sum, the protocols used to collect the data, including the procedures used to corroborate
the eld notes and allow for the correction of any factual inaccuracies, offer some degree of condence in the datas
validity and reliability.

8. Interview ndings

The following paragraphs disclose the interview ndings as they relate to each of the four main categories of performance
management system design: organizational structure, organizational culture, operating systems and procedures, and
employee selection and training and development.

8.1. Organizational structure

All six rms stressed the importance of having lean, at structures to enable the successful pursuit of their chosen
strategies. The interviewed managers perceived lean, at structures as an indispensable vehicle for driving down costs and
enhancing nimbleness, both of which they felt were associated with supporting their respective rms quest to constantly
improve the value proposition offered customers. A senior manager of the New Zealand whiteware manufacturer repeatedly
mentioned how every decision is a cost decision, and he frequently linked decisions about the organizations structure to
this maxim. As an example, shortly after being hired he made a change to his companys team-based production system.
Although still operating with a team-based system, he incorporated a matrix system to, among other things, minimize the
number of functional specialists that had to be attached to any one production team. This change led to a leaner and less costly
organizational structure.
The US regional bank also noted the importance of its at structure to its ability to remain in the race. One of the banks
regional managers prided his bank on what he described as no more than a couple layers between any given branch
manager and the banks president. As this manager frequently observed, customers will switch banks if they believe they can
obtain even as little as a percent increase (decrease) in interest earned (paid). Noting that front line customer service could
not be traded off with cost, for to do so could squeeze his rm outside the survival zone, the cost savings focus at his bank was
necessarily shifted to parts of the banks organizational chart that were above the level of bank teller and other customer
support staff. Middle-level manager positions became the point of scrutiny for reconguration and elimination. Of course, to
be successful, any streamlining of an organizations structure must include safeguards that the skill sets and work activities, at
least the value-adding ones, of the displaced employees will be absorbed into the skill sets and duties of the remaining
employees. Otherwise, the organizations muscle is lost along with its supposed fat. Through a program of front-line worker
empowerment, the bank was able to manage successfully its quest for a lean, but effective organizational structure.

8.2. Organizational culture

Managers at the six rms consistently referred to their respective rms organizational culture as collaborative. The
managers noted the essential need for their employees to band together for the common purpose of meeting the external
competitive threat. While collaboration was the mantra, the managers followed this main description with such further
descriptors as empowered, unselsh, friendly, and cost conscious.
The friendly, almost family-like, culture of the wool products manufacturer and the car dealership was typical of the
collaborative cultures observed. The nancial manager at the wool products manufacturer described the camaraderie-fueled
passion of his company. Meanwhile the managing director of the car dealership said, You have to be a nice guy to work here.
It was his view that unless everyone got along well, the integrated parts of the business (i.e., new sales, used sales, parts, and
service) would not function effectively.
258 R.W. Adler / The British Accounting Review 43 (2011) 251263

The integrated circuit manufacturer reinforced its culture of collaboration by adopting what it called a highly transparent
operating system. The companys managers credited its use of transparency for the success of its highly decentralized, prot
center oriented organizational structure. In particular, the sharing of information among and between all units, no matter
how small or how far down the organizational hierarchy, was seen as vital to ensuring the prot centers acted in a coordi-
nated and cohesive manner. Since production sections which were often the basis for determining prot centers relied
upon each other for their inputs and outputs, it was deemed essential that information relating to downstream sales orders,
sales backlogs, product quality, and even production costs be freely available. This information was deemed as critically
important to making decisions related to the timing of production, the scheduling of labor, and the prices charged to internal
and external customers. As one of the managers noted, Samsung, a former employer of his, only shared nonnancial infor-
mation (i.e., information on product quality) with its workers. At his present employer, both nonnancial and nancial
information were shared. It was also noted that his present employers culture of transparency was further supported through
the use of open plan ofce spaces. No one at the plant, and this included the Vice Chairman and the President, had a separate
ofce.
The interview questions also attempted to explore whether any preferred forms of organizational structure were used to
encourage collaboration. For example, various questions explored the use of team-based work congurations. Only at the
whiteware manufacturer and the integrated circuit manufacturer were the use of teams strongly prevalent. All six rms did,
however, describe how they attempted to build collaboration through the formal remuneration systems they operated, a topic
discussed in more detail below.

8.3. Operating systems and procedures

The operating systems and procedures of the six rms were generally quite simple and streamlined. The presence of
empowered, collaboratively working employees generally led to collective employee decision making and shared respon-
sibility. As such, there was a diminished need for coordinating mechanisms. Coordination occurred as a natural and ongoing
part of employees jobs.
The remuneration systems of all six companies featured some form of a skills-based pay component. The main reason for
the skills-based component was to build a multi-skilled workforce capable of promoting organizational exibility and
responsiveness. Whether it was being able to service different types of planes, meet different types of customer queries about
banking products, or to cover the production cell of a missing employee, the common focus was always about exibility and
responsiveness. This need for multiskilling is discussed further under the section Training and development.
Four of the six rms offered organization-wide prot sharing plans. Such plans serve to promote employee collaboration
and help focus the collective organizations attention on the need to prevail against its competitors. As such, and this idea was
forcefully referred to by a senior manager at the whiteware manufacturer, success is only dened in terms of the whole
organization, as opposed to any single part. For the two rms that did not use prot sharing plans, their management cited
their unionized workforces as being the primary reason.
The budgeting systems of the six rms also showed substantial uniformity. Although the rms differed greatly in terms of
the time they devoted to the budgeting process, all shared a strong commitment to budgeting and tracking key performance
indicators. The reliance these rms attached to budgets can be contrasted with what Hope and Fraser (2003) see as the
growing irrelevance of budgets. All six rms appear to exhibit what Chenhall (2003, p. 151) nds to be the effective
combination of organic decision styles and communication (i.e., empowered work groups) with tight control (i.e.,
adherence to budgets).
One of the rms, the whiteware manufacturer, tracked its key performance indicators on a real time basis. Additionally, for
one if its key performance indicators, namely its throughput rates, the company used centrally located, color-coded displays
to provide real time information on the throughput rates of its two main production cells. More specically, the displays
showed the cumulative throughout rate for a given production run, with the number appearing in either green or red
depending on whether the throughput rate was ahead of or behind budget.
Contrary to the expectation that benchmarking would be a common practice of confrontation strategy rms, this did not
prove to be the case. Only for some rms (the airline, bank, and car dealership) was the fear of falling outside the industrys
survival zone, as the consequence of failing to keep pace with best practice, prevalent. For the wool manufacturer, the
integrated circuit manufacturer, and the whiteware manufacturer, benchmarking played a signicantly lesser role. As one
senior manager at the whiteware manufacturer stated, the extreme between-country and therefore between-competitor
differences in salaries meant that matching some international best production standard often provided little solace. As an
example, he pointed out that the international standard for building a refrigerator was 24 labor hours. The benet to his
company of simply matching this benchmark would not be sufcient. The vastly different workers salaries between his
company and his Chinese competitors meant his company had to achieve a much lower labor input if it was to survive. It was
the total product costs which most mattered. Accordingly, his company had to learn how to make a refrigerator using just
three labor hours.
The interviews at all six rms provided evidence that confrontation strategies appear to rely on interactive strategic
planning and control systems (Simons, 1990). Interactive planning and control systems involve regular, frequent, face-to-face
employee meetings, the central purpose of which is to monitor changes in the internal and external environment and
proactively manage the organizations ability to cope with this changing environment. The ultimate goal of interactive
 R.W. Adler / The British Accounting Review 43 (2011) 251263 259

strategic planning and control systems is to ensure that the organizations strategy and the tactics it employs remain
competitive and sustainable.
For those rms pursuing confrontation strategies, the ability to manage proactively environmental threats and to antic-
ipate and gain advantage from any market opportunities that develop is critical to their success. The use of interactive
strategic planning and control systems, due to their emphasis on environmental scanning, sense making, and double loop
learning, offers such possibilities (Argyris & Schn, 1978). All six rms devoted signicant time and effort to tracking their
external environments and making use of double loop learning. Often these rms could provide highly detailed explanations
of how changes in specic environmental factors (e.g., jet fuel prices for the airline company) could inuence nancial
performance. In many ways, these companies had highly evolved cause and effect strategy maps, which formed and informed
the agendas of the employees daily meetings and informal discussions.

8.4. Employee selection and training and development

The need to build empowered, multi-skilled employees was passionately spoken about by ve of the rms, with the wool
products manufacturer being somewhat less passionate. Empowerment and multiskilling form the backbone of a rms quest
for exibility, agility, and responsiveness. For the regional bank, as an example, multiskilling allowed the use of JIT stafng. For
the whiteware manufacturer, it served a key role in helping to manage a typical days absenteeism.
The creation of training and development programs that help employees to become skillfull collaborators, capable of
taking collective responsibility for their actions, would appear to be an essential ingredient to achieving the lean structures
commonly associated with confrontation strategy rms. Although formal training programs dedicated to helping develop
worker skills of collaboration failed to feature at the rms interviewed, informal often mentoring-based programs were
common.
Several of the managers at the six rms described how their respective organizations highly challenging, fast-paced, and
highly unpredictable environment inuenced the employee selection process. In particular, the managers commented on the
need for employees to possess attitudes that were consistent with their rms collaborative, empowered organizational
cultures. Four of the six rms explicitly and even passionately described the devoted commitment they made to ensuring
their employee selection processes produced incoming employees with the right mix of skills, and this included skills of
collaboration.
The interviewed managers consistently remarked that not everyone had the potential to assimilate successfully into
a culture featuring collaboration and empowerment. Two of the more commonly cited misalignments were people with
a propensity for individualism and selshness and people for whom uncertainty was unwelcome or disconcerting.
A manager at the integrated circuit manufacturer stated that when hiring he looked for employees who showed an ability
to be exible. The need for a multi-skilled workforce meant that workers needed to be prepared to move from one job to
another. The same manager also looked for employees who had good attitudes. This idea of a good attitude was further
elaborated on as someone with a positive, can-do personality and a willingness to learn.

9. Further examination of the banking industry

To investigate whether the cases presented above are illustrative of what might be discerned among a wider set of rms
pursuing confrontation strategies, a further, more in-depth examination of the banking industry was undertaken. Senior
managers from three New Zealand banks were interviewed, following a set of interview protocols similar to what was used
with the original six interviewed rms. Two of the three banks are among the four major banks operating in New Zealand. The
third bank is a smaller, more regionally-based bank.
The bank managers uniformly described New Zealands banking sector as the most competitive banking sector in the
world. As described by one senior manager, New Zealands population of 4.5 million makes the New Zealand market not only
very, very competitive, but with the high number of banks (19 banks) competing in New Zealand it makes for an over-
banked market.
All three banks spoke about the importance of the service its people provided for winning and retaining customers. But all
three banks were then equally quick to point out that operating with very tight margins (the difference between the cost
a bank borrowed money at and what it lent it out at), as well as the ability to design innovative products were essential to
surviving. In other words, the simultaneous achievement across all three factors (service, competitive prices, and innovative
products) was mandatory as opposed to optional.
The organizational cultures of these banks were described again and again with the words collaborative and
empowered. As one senior bank manager stated it, his banks kaizen philosophy depended on the presence of employees
who were willing to be active participants working in a highly decentralized organizational structure. Each employee was
expected to put forward 56 employee suggestions (what his bank called thoughts) each quarter. Furthermore, the
banks senior management encouraged branch level employees to operate their branch as if they were the branchs
owners.
Another term often used to describe the organizational culture was collective responsibility. One of the benets of
having cultures marked by collective responsibility, and similar to what was reported above with the other six organizations,
was the natural occurrence of coordinated action, with no further coordinating mechanism(s) required.
260 R.W. Adler / The British Accounting Review 43 (2011) 251263

To support their collaborative and empowered organizational cultures, the interviewed managers uniformly spoke about
their banks simple organizational structures. Similar to the US bank described above, the three New Zealand banks had at
structures, featuring only a few management layers between the branch manager and the banks President.
In order to operate these at, empowered structures, the selection and recruitment of staff was described as key to the
banks success. Signicant time was spent ensuring the correct employee prole. At one bank, the senior manager described
the need to be very selective with its recruitment, for his bank needed to hire people who could survive and thrive in an
empowered environment. At another bank, not only did the branch manager personally interview all prospective employees,
but so too did the area manager. As the senior manager stated, these interviews were important in evaluating a prospective
employees communication skills and enthusiasm, two factors that the senior manager went on to say cant be taught. The
banks training was instead focused on developing a multi-skilled workforce that was capable of supporting the banks at
organizational structure.
Benchmarking was a central feature at the banks. Similar to what was observed at the US bank, the three New Zealand
banks paid specic attention to benchmarking its cost/income ratio. Driving this ratio as low as possible was a constant focus
of the banks. The banks also benchmarked market share and independently-published credit-worthiness ratings.
Sales were tracked daily, as were customer ratings of bank service. The latter was collected by one bank using an electronic
customer surveying system. In particular, after conducting their business, customers were encouraged to visit a website
where they could rate the banks service. These customer surveys were analyzed overnight and the performance data pre-
sented to the relevant branches as a discussion item at their regular morning meetings.
The strategic planning of the New Zealand banks could best be described as interactive. This interactive nature was
showcased in a variety of ways. At one bank, for instance, its branches morning meetings became a popular springboard for
this interactivity. So too did the frequent visits of senior managers to discuss and plan with branch staff the banks strategic
milestones. At one of the banks, the banks president of its New Zealand operations visited each branch once every two
months to have these strategic milestone conversations.
Rewards and incentives generally formed a signicant part of all employees total remuneration. As an example, a typical
employees total remuneration at one of the interviewed banks consisted of a 1020% bonus. This bonus was based on the
results and behavior achieved by the individual, as well as his/her team, branch and overall company.
In sum, most of the ndings from this set of three New Zealand banks are very similar to what was observed in the US
bank. More specically, the banks were observed to operate at structures. Their cultures were based on collaboration and
collective responsibility. Each branchs employees were encouraged to operate as if they were the owners of a mini-bank, and
were accordingly empowered and instructed to self-manage their work activities. The operating systems and processes
featured the daily collection of sales and customer assessment of employee service data. These performance measures were
further supplemented by the benchmarking of a banks cost-income ratio, as well as market share and independently-
published credit-worthiness rating. Strategic planning was interactive and employee remuneration had a signicant
portion that supported the banks common goal of collective responsibility. And nally, the banks training and development
was geared toward the promotion of empowerment, multiskilling and collective responsibility.

10. Lessons for confrontation strategy rms

Performance management systems need to be aligned with the competitive strategy being pursued (Chenhall, 2003;
Chenhall & Morris, 1995; Dent, 1990; Langeld-Smith, 1997). Earlier in this paper it was reported that rms pursuing cost
leadership strategies are best served (Chenhall, 2003, p. 150) by performance management systems that consist of conser-
vative organizational cultures; centralized organizational structures; specialized and formalized work procedures; simple
coordinating mechanisms; formal, nancially-based strategic planning; short-term, output-focused budgeting; and formula-
based, frequently determined and awarded incentive compensation (Miles & Snow, 1978; Miller & Friesen, 1982; Porter, 1985;
Chenhall, 2003.) Meanwhile, rms that pursue differentiation strategies should design performance management systems that
display entrepreneurial organizational cultures; decentralized organizational structures; an absence of standardized work
procedures; complex coordinating mechanisms; informal, qualitatively-based strategic planning; long-term, outcome-focused
budgeting processes; and subjectively-based, infrequently determined and awarded incentive compensation (Govindarajan &
Gupta, 1985; Van de Stede, 2000; Chenhall, 2003) The performance management system design characteristics for these
competitive strategies of cost leadership and differentiation are shown in the rst three columns of Table 1.
The fourth and nal column of Table 1 displays the characteristics of a performance management system intended to align
with the pursuit of a confrontation strategy. It is based on the ndings from the nine case companies studied. In particular,
rms pursuing confrontation strategies are likely to benet from adopting performance management systems featuring
collaborative organizational cultures; lean, at organizational structures; workgroup-inspired work procedures; interactive
strategic planning; hybrid customer-oriented and tight control budget systems; group-based incentive compensation; and
training and development programs that focus on developing empowered, multi-skilled teams of self-governing and coor-
dinating employees.
Table 1 provides convenient comparisons and contrasts between the types of performance management systems best
suited for the competitive strategies of cost leadership, differentiation, and confrontation. It encapsulates the rst attempt to
explore the performance management system required to support a confrontation strategy, enabling practical advice for
managers and possible avenues for scholarly investigation by researchers.
 R.W. Adler / The British Accounting Review 43 (2011) 251263 261

Table 1
Organizational strategies and performance management systems.

Cost leader Differentiator Confrontation

Organizational culture Conservative
Organizational structure Centralized
Operating systems 1. Specialized and formalized
and procedures work procedures
2. Simple coordinating mechanisms
3. Formal, nancially-based
strategic planning
4. Short-term, output-focused
budgets
5. Formula-driven, individually-oriented,
frequently timed incentive compensation
Training and development Promote specialization and task efciency,
with an emphasis on cost control
Entrepreneurial
Decentralized
1. Lack of standardized work
procedures
2. Complex coordinating
mechanisms
3. Informal, qualitatively-based
strategic planning
4. Long-term, outcome-focused
budgets
5. Subjective, individually-oriented,
infrequently-timed incentive
compensation
Promote prot consciousness
and bottom-line thinking
Collaborative
Lean, at
1.Workgroup-inspired
work procedures
2. Collective responsibility
facilitates naturally occurring
coordinating mechanisms
3. Interactive strategic planning
4. Hybrid customer-oriented
and tight control budget
systems
5. Group-based incentive
compensation
Promote empowerment,
multiskilling, and collective
responsibility

11. Conclusion

Organizations performance management systems are meant to depend on and be a function of their rms strategies.
While Anthony and Govindarajan (2007), among others, have offered substantial advice on the design of such systems for
rms with, for example, build and harvest strategies, there is an absence of advice for rms which pursue confrontation
strategies. This is unfortunate, for the prevalence of such strategies is likely to grow as competition among businesses further
intensies. The present paper seeks to ll this gap, arguing that rms with confrontation strategies are likely to benet from
the employment of collaborative organizational cultures, lean organizational structures, and training and development
programs that focus on developing empowered, multi-skilled teams of self-governing and coordinating employees.
Furthermore, these rms are likely to operate group-based incentive compensation systems, rely on interactive strategic
planning, and engage in the real-time collection, communication, and use for control purposes of key, leading customer-
oriented performance indicators in combination with tight budget control.
The ndings of this paper are not without limitations. The main limitation of the paper relates to its generalizability. The
paper was conceived and executed as exploratory research. The nine rms showcased were intended to provide illustrations
of confrontation strategy rms performance management systems. Just how representative the nine rms are of the wider
population of confrontation strategy rms and their performance management systems must await further research. For now,
this paper represents the start to a (hopefully) fuller programme of research investigating the design and alignment of
performance management systems for rms pursuing confrontation strategies. The future appearance of larger-scale
descriptive work and ultimately explanatory and predictive work is eagerly encouraged and awaited.
This paper offers practical advice and empirically testable propositions for practicing managers and researchers,
respectively. In terms of the former, the paper describes and discusses confrontation strategies, a concept that rarely features
in the literature. While rms may nd the siren calls of Kim and Mauborgnes (2005) blue ocean strategies seductive and
alluring, the business reality for many rms is likely to call for quite the opposite: red oceans. Preparing for this more probable
reality involves managers becoming knowledgeable of and ready to undertake a confrontation strategy.
As a second contribution to practitioners, the paper provides a revised framework of performance management,
grounding it in concrete organizational phenomena as opposed to the abstractions predominantly used to date. It is hoped
that the present model will resonate more fully with todays managers. Performance management is too important a process
not to feature prominently in a managers attempt to lead his/her organization or unit.
The paper will further benet managers through its enumeration of the performance management characteristics that
align with and support confrontation strategies. To date, the management accounting literature has rarely recognized the
existence of confrontation strategies and failed altogether to match performance management design with confrontation
strategies. This failure is a serious oversight, for there is growing evidence of the presence of, and even need for, confrontation
strategies.
Researchers will also benet from the ideas in this paper. Table 1 of the paper offers the equivalent of a conceptual
framework for exploring a variety of testable research propositions concerning the design of performance management
systems and the pursuit of different organizational strategies. While the most signicant contribution is likely to comprise the
identication of organizational techniques/practices intended to support confrontation strategies, it is also likely that the
papers fuller enumeration of the organizational techniques/practices intended to support cost leader and differentiation
strategies will prove useful as well.
Future research could also examine the most appropriate performance management system for situations where partial
confrontation strategies blend with either a differentiation or cost leadership strategy. Presently this paper only makes
recommendations about pure confrontation strategies. Organizations, especially as the industries in which they operate
262 R.W. Adler / The British Accounting Review 43 (2011) 251263

mature and become hyper competitive, will nd themselves being pulled into a more restricted competitive space. No longer
will these organizations be able to rely upon their pure cost leadership or differentiation strategies. Instead they will begin to
take on a blended differentiation/confrontation strategy or a blended cost leadership/confrontation strategy. Research into
what would be the most appropriate performance management system for these types of organizations would seem highly
relevant and useful.
The rejuvenation of performance management research, which includes a more contemporary understanding of strategy
and features confrontation strategies, is long overdue. Research that incorporates updated conceptions of organizational
strategy as opposed to what are now nearly 30 year old conceptions would certainly constitute a step in the right direction
toward addressing one of Chenhall (2003) and Nixon and Burns (2005) concerns about the state of todays performance
management literature.

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