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kaiih Accounting, Organizatfons and Soclefy, Vol. 22, No. 2, pp.

105-122, 1997

Pergamon C 1997 Elsevier Science Ltd

All rihts reserved. Printed in Great Britain
0361-3682/97 $17.00+0.00

PII: SO361-3682(96)00031-l





This study examines the effect of strategic posture and organizational structure- on the adoption and
implementation of general forms of activity management (AM) approaches. To explain the decision to
adopt and implement AM, theories of strategy and of innovation in organizations are drawn upon.
Employing a survey methodology, a questionnaire was used to collect data on the organizational deter-
minants and business strategies of a sample of strategic business units in Canadian manufacturing fmns.
The questionnaire also collected data on the AM approaches these SBUs had adopted and implemented in
the last two years. The results show that strategy influences the extent to which SBUs adopt an AM
approach. As expected, organizations with high vertical differentiation are positively associated with the
adoption of activity-based costing (ABC) over other forms of AM. Furthermore, centralization and for-
malization are associated with organizations that actually implement ABC after adopting it. This study
provides some insight into the apparent paradox, in the part that despite the theoretical benefits of ABC,
relatively few companies employ it and that a material number of those that adopt ABC do not actually
implement it. It demonstrates that activity-based costing consists of a series of decisions and that managers
have several opportunities to revise their initial choice during the innovation process. It also shows that
organizations that adopt and implement ABC are bureaucracies. 0 1997 Elsevier Science Ltd. AIJ rights

In recent years, academics and management employing it? Ten years ago, Kaplan (1986)
accountants have demonstrated a great deal of suggested four explanations for the manage-
interest in activity-based costing (ABC). How- ment accounting lag: the lack of adequate role
ever, surveys have shown that the diffusion models, the prevalence of computer-based
process for ABC has not been intense (National accounting systems, the emphasis on financial
Association of Accountants, 1991; Institute of accounting and the fact that top management
Management Accountants, 1993; Armitage & does not emphasize the improvement of the
Nicholson, 1993; Innes & Mitchell, 1991, 1995; relevance of their management accounting sys-
Cobb et aZ., 1992; Lukka, 1994). Moreover, tems. This article provides additional explana-
there is evidence that some firms that had tions by examining to what extent contextual
started to implement AEK have decided to stop factors like strategy and organizational structure
the implementation process (Horngren, 1990; influence the adoption and implementation of
Innes & Mitchell, 1991; Nanni et al., 1992; ABC and, thus, by providing some insight into
Madison & Power, 1993). This is the essence of the ABC paradox. This article is one of the few
the AFK paradox: if AEK has demonstrated empirical studies on ABC (Swenson, 1995;
benefits, why are more firms not actually Shields, 1995).

The author would like to acknowledge the useful comments provided by Alfred J. Nanni, Krish Menon, J. Robb Dixon and
the anonymous AOS reviewers.


In this article, ABC is considered a level of impact on innovations in cost management sys-
activity management (AM). AM is classified into tems. Thereafter there is a description of the
three basic categories: activity analysis, activity survey methodology used in this research and
cost analysis and ABC. These three levels that an analysis of the data collected. The final sec-
represent the range from simple activity analy- tion includes a discussion of the contributions
sis without cost tracing to full activity-based and the limitations of this article.
cost reporting, are described in the second sec-
tion of this paper. Innovativeness in managerial
accounting systems is influenced by the pro- ACTIVITY MANAGEMENT: AN INNOVATION
pensity of organizations to innovate and their WITH MULTIPLE LEVELS
capability to implement innovations. Strategy
affects organizations needs for management Activity management (AM) is the effective and
accounting innovations. Simons (1987) (1988), consistent organization of a SBUs activities in
(1990) demonstrated that strategic business order to use its resources in the best possible
units (SBUs) that follow a prospector strategy way to achieve its objectives (Brimson, 1991). It
(Miles & Snow, 1978) adapt their cost manage- requires information on activities and their
ment systems to user needs to a greater extent contribution to organizational goals. AM repre-
than SBUs with a defender strategy. Organiza- sents a new way to organize production and
tional structure encourages or discourages the may also include an alternative method, ABC, to
implementation of innovations. Since the record manufacturing costs. AM may also sup-
beginning of the 196Os, organizational innova- ply accounting information for value chain ana-
tion theories have been developed and tested lysis (Hegbert & Morris, 1989) and strategic
empirically in many different organizations, cost management (Shank, 1989). Activity man-
mainly from the not-for-profit and public sec- agement (AM) can be divided into three levels:
tors (Hage & A&en, 1967; Aiken & Hage, 1971; activity analysis (AA), activity cost analysis
Baldridge & Bumham, 1975; Daft, 1978; Aiken (ACA) and ABC. Figure 1 depicts these levels.
et al., 1980; Kimberly & Evanisko, 1981; AA is the initial level while ABC is the final and
Damanpour, 1987). Very few of these theories most refined one. ABC subsumes ACA and AA.
were tested in the manufacturing environment AA is a prerequisite to performing an ACA.
(Burns & Stalker, 1961; Hull & Hage, 1982; Activity analysis (AA), the first and most
Ettlie et al, 1984; Dewar & Dutton, 1986). simple level, consists of identifying the activities
None of these innovation theories have been and procedures carried out to convert material,
studied in an accounting setting. This research labor and other resources into outputs (Brim-
has also mainly focused on technical innova- son, 1991). Activities that do not contribute to
tions rather than on administrative innovations
(Damanpour, 1991). As it will be demonstrated Activity Analysis
further in this article, ABC has characteristics of
both technical and administrative innovations. Activity Cost Analysis
Thus, this article is predicated on the notion
that it would be a contribution to both ABC and
innovation literature to examine the ABC ABC
paradox from a diffusion of innovation per-
The remainder of this article is organized as
follows. The next section consists of a descrip-
tion of the different approaches to AM. The fol-
lowing two sections include a discussion about
strategy, organizational structure and their Fig. 1. The three levels of activity management

the value of those outputs may be removed, contextual factors may affect the organizations
replaced or diminished. AA does not require decision to adopt an innovation. Once the
cost analysis and does not necessarily lead to a decision to adopt the innovation has been
new overhead allocation method. It is typically made, the organization has to develop the
a prerequisite to the process of installing an infrastructure needed to support the innova-
ABC system. Activity cost analysis (ACA) is the tion. This represents the preparation stage. If
next level in the AM process. Activity cost ana- the organization has adopted an AM approach,
lysis (ACA) subsumes AA, but adds the process several key actions will have to be completed.
of explaining the structural determinants of the First, managers and accountants wilI be trained,
costs of the activities. Many authors refer to this a consulting firm, if necessary, will be selected
level as cost driver analysis (Shank, 1989; Nanni and computer software will be purchased or
et cd., 1992). ACA enables management to developed in house. Second, accountants and
identify the costs of each activity and the fac- managers will have to identify activities, deter-
tors that cause them to vary. ACA may be mine the pools in which activity costs will have
accomplished without implementing a product to be collected and select the cost drivers that
costing system that allocates overhead costs on will be used to allocate activity costs to specific
the basis of these drivers. Nanni et al. (1992) cost objects. The preparation phase of ABC
suggested that many firms have not imple- comprises AA and ACA, which are the first two
mented an ABC system because most of the levels of AM. During the preparation process,
benefits are found in the cost driver analysis. the organization has the opportunity to re-
Organizations would prefer to take actions to examine the decision made during the adoption
reduce the effects of the drivers instead of using stage (Rogers, 1983; Leonard-Barton, 1988).
them to allocate indirect costs. Cost driver ana- Some organizations that have adopted ABC
lysis allows firms to prioritize the changes they have stopped the installation during the imple-
want to make. Activity-based costing (ABC) mentation process (Horngren, 1990; Innes &
enables management to measure product and Mitchell, 1991; Nanni et al, 1992; Madison &
service costs with more accuracy (Cooper, Power, 1993). From an innovation perspective,
1988). ABC traces costs to products and ser- these organizations may have decided to re-
vices in two distinct levels. First, overhead costs invent ABC and limit themselves to the AA and
are identified with homogeneous activity-based ACA levels. The implementation stage consists
cost pools. Second, pooled costs are applied to of introducing the innovation and evaluating its
products using measures of the activities con- impact. During the last stage, routinization, the
sumed. ABC requires the completion of the innovation becomes a part of daily practices.
ACA and AA levels. Organizations that adopt and implement
In this study, AM is considered as a multi- ABC, or other levels of AM, have specific char-
level innovation. Zaltman, Duncan, and Holbek acteristics in terms of their business strategy
(1973) defined innovation as the adoption of an and organizational structure. In the next two
idea or a behavior that is new to the organiza- sections, the literature on the influence of these
tion adopting it. The innovation process is two contextual factors on the innovation pro-
usually described as comprising four distmctive cess is briefly examined and three hypotheses
stages (Hage, 1980; Get-win, I988): adoption, about their effects are developed.
preparation, implementation and routinization.
Adoption is the first stage in the innovation
process. During this stage, the need for change BUSINESS STRATEGY AND THE DIFFUSION
is recognized and the organization makes the PROCESS FOR INNOVATION
decision to adopt or reject the innovation. This
stage is characterized by a high level of uncer- Strategy plays a key role in the diffusion of
tainty about the innovations returns. Several innovation process. The necessity to innovate is

driven by the type of strategy employed by a than organizations following a defender strategy
SBU. Miles and Snow (1978), (1994) identified (Slocum et al., 1985; Govindarajan, 1986). Pros-
four strategic types of organizations according pectors have structures that enable them to
to the rate at which they change their products facilitate and coordinate numerous and diverse
and markets: prospectors, defenders, analyzers operations. Thus, the adoption of innovation
and reactors. The fundamental difference would be easier for prospectors than for defenders.
among these types is the rate of change in the Prospectors needs for information cover a
organizational domain. Prospectors are char- much broader range than defenders due to
acterized by their dynamism in seeking market their quest for product-market opportunities.
opportunities, their capability to develop and Sin-ions demonstrated that prospectors tend to
produce new products to meet customers adapt their cost management systems to user
needs, their investment in large amounts of needs to a greater extent than defenders
financial resources related to research and (Simons, 1987, 1988). Thus, the following
development, and their enhancement of team- hypothesis is tested:
work. Defenders have a strategy which is the
Hypothesis 1 (Hl): A prospector strategy is positively
polar opposite from prospectors. Defenders associated with the adoption of an AM level.
operate within a narrow product-market
domain characterized by high production
volume and low product diversity. Defenders ORGANIZATIONAL STRUCTURE AND THE
compete aggressively on price, quality and cus- DIFFUSION PROCESS FOR INNOVATION
tomer service. They engage in little or no pro-
duct/market development and stress efficiency Organizational structure influences the cap-
of operations. Analyzers stand between these ability of an organization to successfully adopt
two categories, sharing characteristics of both and implement an innovation (Damanpour,
prospectors and defenders. Reactors do not fol- 1991). Considerable efforts have been directed,
low a conscious strategy. They are viewed as a in the business literature, at gaining a better
dysfunctional organizational type. The premise understanding of the diffusion process for
of the Miles and Snow typology is that pro- innovation in organizations during the last
spector, defender and analyzer strategies, if twenty years. Theories of organizational inno-
properly implemented, can lead to effective vation have emerged based on the mechanistic/
performance l. organic continuum developed by Burns and
The decision to adopt an AM approach relies Stalker (1961). In this section, the dual-core
on the perception that SBUs need to have bet- model and the ambidextrous model are linked
ter information on activities and their related to the adoption and implementation processes
costs and on their impact on product cost and for AM approaches. These two theories rely
product profitability. Prospectors are organiza- mainly on distinctions in the nature of the
tions that continually experiment with innova- innovation and in the stages of the diffusion
tion. Prospectors are organizations that face a process. Damanpour (1991) found support for
more unpredictable and uncertain environment those models.

The Miles and Snow typology was chosen for this study for the three following reasons. First, the capacity of an organi-
zation to innovate is the key dimension of this typology. Therefore, this typology is appropriate for examining the issue of
innovation in management accounting systems. Second, this typology is consistent with Porters lowcost and differentiation
generic types (Porter, 1980, 1985) , as it is considered in several studies. Hambrick (1983) suggested that prospectors are a
particular type of a differentiation strategy and defenders another type of a differentiation or a cost leadership strategy
Miller (1987) associated prospectors with a differentiation strategy; this strategy was labeled complex product innovation.
Govindaraja_n(1986) compared a differentiation strategy to prospectors and a low-cost strategy to defenders. Third, the
Miles and Snow typology is academically well accepted and internally consistent. Additionally, it has been empirically tested
in several studies (Hambrick, 1981; Snow& Hrebiniak, 1980; Hambrick, 1983; Slocum &al., 1985; Simons, 1987, 1988, 1990).

me dual-core model adoption stage described earlier. It consists of

The dual-core model rests on the distinction all the actions leading to the decision to adopt
between administrative and technical innova- the innovation such as problem perception,
tions @an, 1966; Daft, 1978). Accounting information gathering, attitude formation and
innovations are usually classified as adminis- evaluation and resource attainment (Daman-
trative innovations (Dunk, 1989). Evan (1966) pour, 1991). The implementation stage com-
argued that administrative innovations tend to prises all activities between the adoption and
lag behind technical innovations because they the routinization of the innovation (Rogers,
are perceived by management as being less 1983). According to this theory, the initiation of
closely associated with the profit objectives of innovations is easier in organic organizations
manufacturing organizations. According to the while implementation is facilitated in mechan-
dual-core model, mechanistic characteristics istic organizations. Damanpour (199 1) showed
facilitate the adoption and the Implementation that the research in this area has not produced
of administrative innovations. Technical inno findings in the direction of the theorys propo-
vations are easier to adopt and Implement in sitions. However, Zmud (1982) in a study of
organic organizations. Daft (1978), Kimberly the influence of centralization and formalization
and Evanisko (1981) and Damanpour (1987) on the diffusion of modern software practices,
(1991) found results that are consistent with found that the propositions of the ambidex-
this models propositions. trous model were accurate for technical inno-
AM has characteristics of both technical and vations but not for administrative innovations.
administrative innovations. AA and ACA are AA and ACA are the initiation stages of ABC.
classified as technical innovations because their Organizations that adopt ABC have to go
focus is mainly on processes and activities. AA through these two levels to collect the infor-
and ACA have an impact on how products are mation necessary for the implementation.
manufactured and services are rendered. If Horngren (1990), Nanni et al. (1992) Innes and
organizations decide to go beyond the AA and Mitchell (199 1) and Madison and Power (1993)
ACA levels and install ABC, then the innovation have pointed out that many organizations that
becomes more administrative than technical. adopt ABC terminate the process before the
ABC is an administrative Innovation because its Implementation. Organic organizations that
implementation may lead to new administrative adopt ABC may be more tempted to limit the
procedures, policies and organizational struc- innovation process to the AA or ACA level.
tures. If we consider AA and ACA as technical Mechanistic organizations that adopt ABC
innovations and ABC as administrative, the dual- would prefer to pursue ABC all the way.
core model suggests that organizations with Therefore, the following hypothesis is tested.
organic characteristics will more easily adopt
AA and ACA while mechanistic organizations Hypothesis 3 (H3): Among organizations that adopt
ABC, a mechanistic structure is positively associated
will decide to pursue ABC. Thus, the following
with organizations that implement ABC.
hypothesis is tested.

Hypothesis 2 (H2): Among organizations that adopt

an AM approach, a mechanistic structure is positively
associated with organizations that adopt ABC.

In this study, a mail survey was employed to

T&eambidextrous model collect information about the adoption and
The ambidextrous model is based on the dis implementation of innovations in cost manage-
tinctions between the initiation and imple- ment systems, strategy posture and organiza-
mentation stages of innovations (Duncan, tional structure. Mail survey was chosen
1976). The initiation stage is quite similar to the because it enables researchers to survey a large

random sample of a population at a relatively complexity are important. According to the

low cost. Unlike interviews, mail survey focuses ABC literature, product diversity and produc-
on facts rather than on personal opinions. It tion process complexity have shown to be
also places less pressure on an immediate important determinants of the need for reexa-
response and provides the respondents with a mining cost allocation procedures. The list of
feeling of anonymity. Two potential problems firms was screened to ensure that it would be
must be anticipated when using mail surveys adequate. Firms listed in more than one of the
to collect data: low response rate and non- previously mentioned Industry categories were,
response bias. To insure that the response rate of course, only considered once. All firms with
would be high enough, the Total Design sales below 20 million Canadian dollars were
Method was used (Dillman, 1978). This also discarded. This was done to avoid small
approach has proven to be very effective in organizations for which structural and business
providing higher response rates and collecting strategy variables would not apply (Miller,
quality data. Specific analyses were conducted 1987). Highly diversified firms were also exclu-
to assess nonresponse bias. ded because the focus in this study is on SBUs
rather than on corporations. Several firms clas-
Questionnaire andpopulation surveyed sified as manufacturers were discarded because
The questionnaire employed in this study con- they were actually only distributing subsidiaries
sisted of eight pages including the front and for foreign firms. Obviously, firms that were
back cover. The questionnaire was pre-tested to defunct were also rejected. The remaining firms
insure the appropriateness of the questions and were individually analyzed to identify theirs
eliminate ambiguities. All organizations located SBUs and the name of their controllers. The
in the province of Quebec received a French mailing sample included 415 SBUs. In some
and an English version of the questionnaire. cases, it was not possible to identify the SBUs
The questionnaire was sent with a cover letter controller. In such cases, the questionnaire was
and a pre-addressed, postage-paid envelope. sent to the firms controller or the vice-presi-
The cover letter was addressed to the controller dent of finance. The names and addresses of the
or the vice-president of the organization. A controllers and vice-presidents were extracted
postcard reminder was forwarded to each from the CanCorp data base. This information
respondent three weeks after the first mailout. was crosschecked with other available lists and
A third follow-up was mailed five weeks after data bases3.
the first mailout. A replacement questionnaire
and a return envelope were included in the Measures
third mailout. Three categorical variables were employed to
The population surveyed consisted of Cana- classify SBUs to test the three hypotheses. First,
dian manufacturing firms listed in the Financial organizations were classified into two groups
Post CanCorps CD-ROM. The population was according to whether they had adopted an AM
limited to the 1555 firms with SIC codes 30, 34, approach. This first variable was named AM
35, 36, 37, 38 listed in CanCorp. These codes adopters, coded AMADO. A value of 1 was
represent manufacturing industries in which attached to organizations that adopted any AM
product diversity and production process level and a value of 0 to organizations that had

a 30: Rubber and miscellaneous plastics products, 34: Fabricated metal products, 35: Industrial machinery and equipment,
36: Electronic and other electric equipment, 37: Transportation equipment, 38: Instruments and related products.

s The Scotts Directories 1993-1994 for Ontario, Quebec, Western Canada and Atlantic Canada; The Roster of Members of
the Society of Management Accountants of Canada; The Blue Book of Canadian Business; The Directory of Directors, pub
lished by Financial Post; The Whos Who in Canadian Business; The Guide to Canadian Manufacturers, published by Dunn
and Bradstreet; Compustat CD-ROM for Canadian firms, published by Standard and Poor.

not adopted an AM approach. The second vari- of organizational structure and because they
able was called ABCADO, for ABC adopters. have been widely used in the innovation litera-
Organizations that adopted an AM approach ture (Hage & A&en, 1967; Aiken & Hage, 1971;
were divided into two groups. The first group A&en et al, 1980; Kimberly & Evanisko, 1981;
included those that adopted ABC and the sec- Hull & Hage, 1982; Ettlie et al., 1984; Daman-
ond group those that adopted AA or ACA. A pour, 1987, 1991). Furthermore, since we may
value of 1 was assigned for membership in the expect that SBUs may be more organic or more
first group and a value of 0 for the second. The mechanistic on some dimension, the use of the
third variable was labeled ABCIM, ABC imple- three determinants listed above enabled the
menters. Organizations that had adopted ABC researcher to capture with more precision the
were again divided into two groups. The first organic-mechanistic continuum.
group comprised all organizations that irnple- Centralization (CENT) represents the con-
mented ABC and the second group those that centration of decision-making authority at a
implemented AA or ACA or did not implement specific level in the hierarchy. Mechanistic
ABC. ABCIM was set equal to 1 for SBUs that organization are more centralized while organic
implemented ABC, and to 0 otherwise. organizations are less centralized (Burns &
Multiple methods were used to classify orga- Stalker, 1961). Damanpour (1991) found a
nizations according to their strategy types. First, negative relationship between centralization
respondents classified their own organizations and innovation. The instrument employed in
as prospectors, defenders and analyzers. The this study to measure centralization was taken
instrument developed by Snow and Hrebiniak from Pugh et al. (1968) Kandwhalla (1972)
(1980) was used to make this classification. Gordon and Narayanan (1984) and Hull and
Respondents were asked to select the descrip- Hage (1982) and adapted to the specifics of the
tion that most closely fit their organizations in study. It measured centralization using a series
comparison to other firms in their industry. of twelve standard decisions and identifying on
This method yielded a nominal scale. Second, a five-point scale, ranging from line supervisor
the validity of the classification was cross- to head office manager, the level at which
checked. The latest annual report available on decisions are made. As a check on the internal
the CanCorp data base of each respondent was consistency, Cronbach alpha was computed for
examined and SBUs were classified according the centralization scores. The alpha value was
to that information. The correlation coefficient well above the generally accepted minimum
between the classification by the respondents criterion level of 0.5 and 0.6 (Nurmally, 1978).
and by the investigator was 0.83.4 Two dummy A factor analysis was conducted to accurately
variables were used for strategy. The first vari- scale the variable. It produced one factor with
able, called PRO, was set equal to 1 if the SBU an eigen value greater than one which explained
was a prospector, and to 0 if the SBU was an 78% of the total variance (Cureton & DAgostino,
analyzer or a defender. The second variable, 1983). Therefore, the mean for the twelve deci-
ANA, was assigned a value of 1 when the SBU sion items was used to measure centralization.
was an analyzer and a value of 0 when the SBU Vertical differentiation (VERT) refers to the
was a prospector or a defender. depth of the structure. It reflects the number of
Centralization, vertical differentiation and hierarchical levels below the chief executive
formalization were used to operationalize officer. Vertical differentiation is lower in
organic and mechanistic structures. These three organic organizations than in mechanistic orga-
organizational determinants were selected nizations. Hull and Hage (1982) have shown
because they represent three major dimensions that vertical differentiation inhibits the diffusion

* The analyses described further in this study were conducted with both sets of classification. There were no significant
differences in their results.

of innovation in manufacturing organizations. This rate is considered to be satisfactory for a

On the other hand, A&en et al. (1980) found a mail survey (Emory, 1985; Wallace & MeIlor,
positive relationship between vertical differ- 1988). To ensure that the inferences from
entiation and innovation in not-for-profit and responses to this survey were not biased by
service organizations. Vertical differentiation nonrespondents, the two following procedures
was measured as the total number of hier- were conducted. First, a comparison of the
archical levels between the strategic business profile of respondents against known char-
units CEO or equivalent and the front line acteristics (Ianguage, industry, and size) of SBUs
supervisors. This type of measurement has in the mailing sample was made. This compar-
been used in various studies in the organiza- ison shows that respondents are similar to SBUs
tional literature (Hull & Hage, 1982; Robbins, included in the mailing sample for at least these
1983; Damanpour, 1991). three dimensions. Second, a comparative analy-
Formalization represents the degree to which sis of responses by date of receipt was also
jobs within an organization are standardized. performed. Such a comparison is based on the
The literature on innovation suggests that there presumption that late respondents may be sur-
is a negative relationship between formalization rogates of nonrespondents (Wallace & MeIlor,
and innovation (Bums 8z Stalker, 1961; Aiken & 1988; Wallace & Cooke, 1990; Oppenheim,
Hage, 1971). Damanpour (1991) in his meta- 1992). The responses of the first twenty
analysis of organizational determinants of inno- respondents and the last twenty respondents
vation, did not find a significant association for the adopted AM approach, the implemented
between innovation and formalization. How- AM approach, organizational structure variables
ever, the results were significant for innova- and strategy types were compared. The results
tions in manufacturing organizations. Four from this analysis show that there are no sig-
statements about the extent to which rules, nifrcant differences between the two groups of
procedures and policies are standardized pro- respondents. Given the high response rate and
vided a measurement of the level of formaliza- the results from the procedures used for testing
tion. This instrument was adapted Erom for nonresponse bias, it appears unlikely that
Robbins (1983). A factor analysis of the four there is a nonresponse bias in this study.
factors was conducted. It produced one factor Adopted and implemented AM approaches.
which accounted for 98.4% of the variation. Figure 2 summarizes the categorization of SBUs
Therefore a single scale was constructed by that responded to the survey according to the
averaging the scores of the four statements type of AM approach they adopted and the type
pertaining to formalization. of AM approach they finally implemented.
The majority of respondents adopted an AM
approach. These 122 SBUs represent 75.8% of
RESULTS the respondents. Eighteen SBUs (6 had adopted
ABC and 12 had decided to pursue AA or ACA)
General information and descrzptive statistics that decided to pursue an AM approach did not
The initial mailing was made to 415 SBUs loca- implement it. As indicated in Fig. 2, of the 122
ted in Canada. 162 SBUs returned ques- SBUs that adopted an AM approach, 45 adopted
tionnaires of which 161 were complete and AA or ACA and 77 adopted ABC. Thus, the ABC
usable. This yielded a response rate of 39.0%. adoption rate is 47.8%.5 In the second section

5 This percentage is fairly high in comparison to other surveys (NAA, 1991; IMA, 1993; Arm&age & Nicholson, 1993; Innes
& Mitchell, 1991). One feature of this study is the distinction between the adoption and implementation stages in the dif
fusion of a management accounting innovation. Figure 2 shows that only 49 SBUs, out of the 77 that adopted ABC, imple-
mented ABC. Therefore, the rate of implementation is only 30.4% which is much closer to the results from the latest survey
conducted in the United States by the Institute of Management Accountants fIMA, 1993). In that study, 36% of the respon-
dents mentioned that they had implemented ABC.

of the questionnaire, respondents were asked and the 47 defenders 29%. This is consistent
to indicate the type of AM approach they finally with Miles and Snow (1978) who predicted that
implemented. The 45 SBUs that adopted AA prospectors, defenders and analyzers would be
and ACA did not necessarily implement the equally distributed in each industry. For each
selected level. The majority of SBUs, 24, imple- strategy type, organizations were classified
mented AA or ACA. Surprisingly, 9 SBUs imple- according to the type of AM approach, if any,
mented ABC even though they had decided to they adopted. A Cm-Square analysis contirmed
adopt an earlier level in the AM approach. that prospectors adopt AM approaches more
There were also 12 SBUs that did not imple- frequently than analyzers and defenders (Chi-
ment any AM approach. Figure 2 shows that of Square = 4.43 with a p-value = 0.03). The 122
the 77 SBUs that adopted ABC, onIy 49 imple- prospectors, analyzers and defenders that
mented ABC. 22 SBUs decided not to imple- adopted AA, ACA or ABC were classified
ment ABC and stop at the AA or ACA level. This according to the type of AM approach they
behavior is consistent with observations made finally adopted. Thirty-five prospectors adopted
by Horngren (1990) Innes and Mitchell (1991), ABC while only 27 analyzers and 15 defenders
Nanni et al. (1992) and Madison and Power did. A C&i-Square analysis confirms that pro
(1993). There were also 6 SBUs that adopted specters adopted ABC more frequently than
ABC, but decided not to implement any AM analyzers and defenders (Cm-Square = 4.23
approach. This contirms the need to make a with ap-value = 0.04).
distinction in ABC surveys between the adop- The fourth section of the questionnaire
tion and the implementation stages. included the instruments employed to measure
Strategy and organizational determinants. centralization, vertical differentiation and
In the third section of the questionnaire, formalization.
respondents were asked to select the strategic
profile, from the three created by Snow and Hypotheses testing
Hrebiniak (1980) that best described their SBU. In this article, logistic regressions are employed
The 60 SBUs classified as prospectors represent to test the hypotheses. Logistic regression was
37% of the respondents, the 54 analyzers 34% chosen because it is a much stronger test than

No implementation.
No No 12
39 21 ImplementedABC
AA or ACA Implemented
161 Adopted Ah4 45 AA or ACA

Yes Adopted AA
122 ACA or ABC AA or ACA
ABC Implemented
Yes 1

Fig. 2. Classification tree.


correlation analysis and Chi-Square. In the Since the sign of the coefficient is positive,
innovation literature, correlation analysis has prospectors tend to be larger organizations.
been the most frequently used approach to test The following model was employed to test
hypotheses (Damanpour, 1991). In this section, hypothesis 1:
Spearman correlation coefficients between the
AM adoption and implementation variables AhIADO=a+bl PRO+bzANA
(AMADO, ABCADO and ABCIM), strategy (I)
+ b3 SIZE + e
dummy variables (PRO and ANA) and structural
variables (CENT, VERT and FORM) are exam- Table 2 reports the results of the logistic
ined to better understand the relationship regression. Partial Chi-Square coefficients for
between the variables. strategy dummy variables and size were exam-
Adoption of activity management ap- ined. They show that a prospector strategy is
proaches (AM). Hypothesis 1 stated that a significantly associated with a managers
prospector strategy is positively associated with
the decision to adopt an AM approach. The TABLE 2. Adoption of activity management approaches
Spearman correlation coefficients between (AM) and strategy: Logistic regression results
AMADO (the categorical variable for AM adop-
Expected Sign Coefficient (Std. Error)
ters) and strategy were examined and included
in Table 1. The correlation coefficient between Intercept -0.4156
AMADO and PRO is positive and significant. (0.9555)
PRO + 1.2420
Prospectors tend to adopt AA, ACA or AEK
more frequentIy than analyzers and defenders. ANA + 0.9954
SIZE6 and PRO are also significantly associated. (0.4520)
SIZE 0.1400
TABLE 1. Correlation matrix: Adoption of AM, strategy and (0.1586)
Model X2=10.33, p=O.O160
PRO ANA SIZE Somers D=0.323
l* p<o.o5
AMADO 0.17 (0.04) 0.06 (0.42) 0.10 (0.21) l** p40.01

aThis table shows Spearman correlation coefficients for the The model is AMADO = a+b,PRO + b*ANA + b,SIZE + e.
161 SBUs that responded to the survey. Probabilities are Variables: AMADO indicates whether the respondents
given in parentheses. Variables: AMADO = AM approach adopted (=l) or did not adopt (=O) an AM approach; PRO
adopters (=l) or non AM approach adopters (=O); PRO = = Prospectors (=l) or Defenders and Analyzers (=O); ANA
Prospectors (=l) or Defenders and Analyzers (=O); ANA = = Analyzers (=l) or Prospectors and Defenders (=O); Size
Analyzers (=l) or Prospectors and Defenders (=O); = the log of the number of employees. The results were
SIZE = The log of the number of employees. Significance similar when size was measured in terms of total sales.
levels are determined using twetailed tests. Significance levels are determined using twetailed X2 tests.

6 Even though hypotheses about the relationship between organizational size (SIZE) and the adoption and implementation
of AM approaches are not developed in this article, this factor was measured in order to control for its potential effect.
Studies that have considered the relationship between size and innovation have produced mixed results (Damanpour,
1992). Blau and McKinley (1979) and Dewar and Dutton (1986) found a positive relationship between size and innovation.
Hage (1980) reported a negative relationship while Aiken et al. (1980) a non-significant relationship. The number of
employees in the SBU was used to measure SIZE. This measure was transformed logarithmically to adjust for expected non-
linearity. This type of measure has been employed in several studies of innovation (Aiken et al., 1980; Ettlie et al., 1984;
Zmud, 1982; Dewar & Dutton, 1986).

A test for the joint significance of the two strategy dummy variables was also conducted by deleting the two variables
from the full model. The results of the comparison show that the difference between the two logs is 8.342 (2 degrees of
freedom) which is significant with a p value below the 0.05 level. This implies that both strategy variables, PRO and ANA,
have a significant impact on whether SBUs adopt an AM approach.

decision to adopt an Ah4 approach. Analyzers Only the coefficient for vertical differentiation
also tend to implement AM approaches more is significant with a p-value below 0.01. Thus,
than defenders. Size does not inlluence the adop SBUs with a higher number of hierarchical
tion of an AM approach. These results are con- levels are more likely to adopt ABC. All other
sistent with Hl . Competitive strategy infhtences variables do not have a significant impact on
managers decisions to adopt an AM approach. ABCADO. The results of these tests show that
Hypothesis about the type of adopted AM H2 is confirmed.*
approach. To test hypothesis 2, the 122 SBUs Only one organizational determinant, vertical
that adopted an AM approach were divided into differentiation, proved to have a significant
two groups. The first group consisted of the 45 impact on the decision to adopt ABC. Vertical
organizations that decided to pursue AA or differentiation is a critical determinant in the
ACA. The second group comprised the 77 SBUs mechanistic/organic model since it captures
that adopted ABC. The two following proce- how bureaucratic the decision process is in the
dures were conducted. First, the significance of organization. The selection of an administrative
the Spearman correlation coefficients between innovation like ABC is facilitated in SBUs that
ABCADO and centralization, vertical differ- have a higher level of vertical differentiation
entiation and formalization among SBUs that because this type of innovation is much more
adopted an Ah3 approach were examined. formal. These results are consistent with the
Table 3 includes these coefficients. The ABC dual-core model (Daft, 1978). When a mechan-
adopter variable, ABCADO, is significantly cor- istic organization decides to innovate in the
related with vertical differentiation while it is cost management area, it prefers to select an
not with centralization, formalization and size. administrative innovation like ABC.
Second, the following logistic regression was Implementation of AA and ACA or ABC
also employed to test H2: among SBUs that bad adopted ABC. H3
attempts to provide some insight into why
ABCADO = a + bl CENT + b2 VERT firms that adopt ABC are not necessarily imple-
(2) menting it. To test H3, the 77 organizations that
+ b3 FORM + b4 SIZE + e
adopted ABC were divided into two groups.
The results of this logistic regression are The first group included the 28 organizations
shown in Table 4. Partial Chi-Square tests were that had decided to pursue ABC but that finally
used to test the significance of each variable. implemented only AA or ACA or did not

TABLE 3. Correlation matrix: Organizations that adopted an AM approach


ABCADO 0.08 (0.38) 0.33 (0.00) 0.09 (0.30) 0.15 (0.11)

CENT 1.00 0.12 (0.20) 0.24 (0.01) -0.18 (0.05)
VERT 1.00 0.15 (0.11) 0.29 (0.00)
FORM 1.00 0.03 (0.72)

This table shows Spearman correlation coefficients for the 122 SBU respondents that adopted an AM approach. Prob-
abilities are given in parentheses. Variables: ABCADO ABC adopters (=l) or non ABC adopters (=O); CENT = Centralization;
VERT = Vertical differentiation; FORM = Formalization; SIZE = The log of the number of employees. Significance levels are
determined using twetailed tests.

8 Vertical differentiation and size are significantly correlated with one another as it is shown in Table 3. To better under-
stand the impact of this correlation on the decision to adopt ABC, the following reduced model was also employed. This
model is similar to the fulJ model except that size was omitted.

AEKADO = a + b, CENT + bz VERT + b3 FORM

The results of this logistic regression are essentially similar to those of the full model.

implement any AM approach. The second Table 5 comprises a correlation matrix for
group was made up of the 49 SBUs that had organizations that adopted ABC.
both adopted and implemented ABC. This third An examination of the correlation matrix
variable pertaining to AM approaches was shows that the correlation coefficients for cen-
called ABCIM. tralization and formalization are significantly
correlated with the implementation of ABC
TABLE 4. Type of adopted activity management approach among organizations that adopted ABC. Cen-
(AM), strategy and organizationaI structure: Logistic regres- tralized and formal SBUs that adopted ABC ten-
sion resultsa ded to implement ABC while decentralized and
Expected Sign Coefficient
informal organizations tended to stop at the AA
(Std. Error) or ACA level or finally decided not to imple-
ment an AM approach. The following logistic
Intercept -2.9377
regression was also employed to test H3:
Centralization + 0.0115
(0.0248) ABCIM ; 6 ;zg.; +S;hy; (3)
Vertical differentiation + 0.4470***
(0.1672) 3 4
Formalization + 0.0717
The results of this regression are shown in
Size 0.1534 Table 6. The G&Square for the overall model
(0.1600) was 15.98 with four degrees of freedom and a
p-value of 0.003. The coefficients for formaliza-
Model X2=13.99 p=O.O073
tion and centralization are positive and in the
Somers D=O.419
l**p<o.o1 expected direction. The coefficient for vertical

*The model is AIKADO = a+b,CENT + b,VERT + b3

FORM + b&IZE + e. Variables: AIlCAD indicates whether TABLE 6. Implementation of ABC and organizational struc-
the respondents adopted (=l) or did not adopt (=O) AK; ture: Logistic regression resultsa
CENT = Centralization; VERT = Vertical differentiation;
FORM = Formalization; Size = The log of the number of Expected Sign Coefficient
employees. The results were similar when size was mea- (Std. Error)
sured in terms of total sales. Signiftcance levels are deter-
Intercept -4.5333
mined using two-tailed X2 tests.
Centralization + 0.0713
TABLE 5. Correlation matrix: Organizations that adopted (0.0331)
AK= Vertical differentiation + -0.2596
CENT VERT FORM SIZE Formalization + 0.2925
AEKIM 0.31 -0.13 0.34 -0.14 Size -0.0902
(0.00) (0.26) (0.00) (0.41) (0.1882)
CENT 1.00 0.20 0.30 -0.20
(0.08) (0.00) (0.08) Model X2=15.98, p=O.O030
VERT 1.00 0.13 0.13 Somers D=0.536
(0.26) (0.25) ** p<o.o5
FORM 1.00 0.01
(0.99) The model is AEKIM = a + b,CENT + b*VERT + &,FORM
+ b4SIZE + e. Variables: ABCIM indicates whether the
?tis table shows Pearson correlation coefficients for the 77 respondents implemented (=l) or did not Implement (=O)
respondents that adopted ABC. Probabilities are given in ABC; CENT = Centrahzation; VERT = Vertical ditferentia-
parentheses. Category and variables: AEKIM = Implementa- tion; FORM = Formalization; Size = The log of the number
tion of ABC; CENT = Centralization; VERT = Vertical differ- of employees. The results were simiIar when size was mea-
entiation; FORM = Formalization; SIZE = The log of the sured in terms of total sales. Significance levels are deter-
number of employees. mined using twotailed X2 tests.

differentiation is of the opposite sign from that managers to improve processes and informa-
expected. Partial Chi-Square tests show that tion. This would explain why, in this study, a
centralization and formalization are significantly prospector strategy is associated with the
associated with the implementation of ABC, adoption of AM approaches. Prospectors are
supporting H3. Centralized and formal organi- usually more flexible organizations. Thus, we
zations that adopt ABC are more likely to may expect that they would prefer AA and ACA
implement ABC than decentralized and infor- since these two levels require less time and
mal organizations. These results also suggest effort and are less constraining than formal
that decentralized and less formal organizations ABC. However, the results in this study show
may have greater flexibility to stop the ABC that, among SBUs that adopt an AM approach,
implementation process at the AA or ACA level the type of AM approach is not significantly
if they feel it would be relevant to do so. There different for prospectors, defenders and analy-
is no significant evidence of an association zers. This would suggest that competitive strat-
between vertical differentiation and the prob- egy influences the adoption of the innovation
ability of implementing AA or ACA instead of but not the nature of the adopted innovation.
ABC. Vertical differentiation may have more Organizational structure is also an important
impact on the adoption decision than on the determinant in the diffusion of innovation pro
implementation process. cess. It influences the type of AM approach a
These results provide some support for the SBU selects. Mechanistic organizations give
application of the ambidextrous model in a greater importance to formal systems while
managerial accounting context. Although ver- organic organizations favor informal systems.
tical differentiation does not have an impact on AA and ACA consist essentially of analyses of
SBUs decision to implement ABC, the fact that activities and their related costs. They are not
centralization and formalization do is an impor- formal accounting systems. ABC is much more
tant finding. Centralization has frequently been formal. Therefore, mechanistic organizations
used in management accounting research as were expected to select ABC while organic
a surrogate for organizational structure and organizations would tend to select AA or ACA.
the mechanistic/organic continuum (Gordon & The results of this study provide some support
Narayanan, 1984; Chenhall & Morris, 1986; Gul for this reasoning. The degree of vertical differ-
& Chia, 1994). The results of the analysis con- entiation is positively related to the adoption of
ducted in this section show that when ABC in the SBU sample used here. Higher levels
mechanistic SBUs make the decision to adopt of vertical differentiation are characteristically
an innovation such as ABC, they carry through associated with a mechanistic organizational
with the overall process without stopping at an structure. Thus, mechanistic organizations tend
earlier level of AM like AA or ACA. Thus, we to adopt ABC while organic organizations tend
may suggest that ABC is adopted and imple- to adopt AA or ACA.
mented in bureaucracies. Organizational structure also appears to
influence the implementation process. An
Discussion administrative innovation like ABC would be
The results from the analyses described in this easier to implement in mechanistic organiza-
section allow us to infer that strategy and orga- tions. The implementation of technical innova-
nizational structure do influence, to a certain tions such as AA and ACA may be facilitated in
extent, decisions to adopt and implement AM organic organizations. These statements are
approaches. Competitive strategy sets the need consistent with the ambidextrous model (Dun-
for cost management information. Organiza- can, 1976). According to the innovation theory,
tions that compete through innovation and in mechanistic organizations, when top man-
product and market development tend to be agers have decided to commit themselves to a
more open to new techniques that enable their new system, they put forth all the resources

available to ensure that the implementation will The results of this study also show that organi-
be a success and exert control on the imple- zational structure plays an important role in the
mentation process. The results in this study selection of the type of AM approach. It was
confirm this interpretation. They show that, found that organizations with a higher level of
among SBUs that adopted ABC, more cen- vertical differentiation tend to adopt ABC more
tralized and more formal SBUs tend to imple- than organizations with a lower level of vertical
ment ABC while the others prefer the AA and differentiation. Thus, mechanistic organizations
ACA levels. prefer to adopt ABC which is a more formal and
more administrative innovation than AA and
ACA. These results are consistent with the dual-
CONCLUSION core model.
Centralization and formalization were sig-
This study attempted to provide some insight nificantly associated with the implementation
into the ABC paradox. Despite the fact that of ABC among organizations that adopt ABC.
academics and management accountants have Horngren (1990) Nanni et al. (1992) Innes and
demonstrated a great deal of interest for ABC Mitchell (199 1) and Madison and Power (1993)
during the last ten years, surveys have shown have discussed the fact that some organizations
that the diffusion process for ABC has not been that adopt ABC prefer to stop the implementa-
intense. It is the role of management account- tion process at the AA or ACA level. However,
ing researchers to investigate the factors that there was no empirical evidence of this beha-
might infhtence managers decisions to adopt vior. In this study, among organizations that
and implement activity management approa- adopt ABC, it was found that more centralized
ches like ABC. and more formal organizations are more asso
The findings suggest that the adoption and ciated with the implementation of ABC in
implementation of an AM approach depends comparison to decentralized and less formal
upon several contextual factors. The type of organizations. This study is one of the first
strategy an organization selects establishes the empirical study that provides some explana-
need for innovation in the activity management tions for the behavior of organizations with
area. Organizational structure intluences the respect to the implementation of ABC.
capability of an organization to implement As with any research, this study has many
innovations. Organic organizations are more limitations. The following limitations are the
likely to implement AA and ACA while most pertinent. First, even though the response
mechanistic organizations are likely to be more rate was fairly high at a level of 39%, there is a
successful in the implementation of ABC. Orga- potential nonresponse bias. Several tests were
nizational structure and the mechanistic and performed to try to prevent this threat. How-
organic continuum have been operationalized ever, we cannot conclude that respondents are
in the management accounting literature mainly adequate surrogates for the whole population
by the use of the level of centralization (Gordon of manufacturing SBUs. Second, the oper-
& Narayanan, 1984; Chenhall & Morris, 1986; ationalization of competitive strategy and orga-
Gul & Chia, 1994). In this study, the three nizational structure may have caused some
components of organizational structure, cen- problems. Even though, the use of self-typing to
tralization, formalization and differentiation, identify strategic groups is an accepted practice
were considered. in strategy research (Ginsberg, 1984, Hambrick,
The results show that a prospector strategy is 1989, Snow & Hambrick, 1980) respondents
associated with managers decision to adopt an may misunderstand the character of the strat-
AM approach. Since prospectors are innovative egy being studied. For instance, managers may
organizations, they tend to adopt innovations in classify their SBUs on the basis of the intended
accounting as well as in operation management. strategy, the realized strategy or the emergent

strategy (Mintzberg, 1978). To attempt to This study contributes to our understanding

reduce the potential effect of this limitation, of the diffusion process for management
strategy types were also inferred by the investi- accounting innovations such as ABC. An
gator. important finding of this study is the association
The operationalization of the organic and of competitive strategy with the propensity
mechanistic continuum through centralization, to innovate in the managerial accounting
vertical differentiation and formalization may area. Innovators such as prospectors appear
also be, in some cases, inadequate. Since some- to be more inclined to adopt AM approaches
times the three variables are not highly corre- than defenders. Another contribution of this
lated, it may be argued that they do not proxy study is the association between organizational
for organic and mechanistic organizations. For determinants and the adoption and implemen-
instance, some organizations had high scores tation of ABC. Vertical differentiation,
for centralization but low scores for formaliza- centralization and formalization may be surro-
tion. In such case, centralization and formaliza- gates for organizational structure. Mechanistic
tion scores do not enable the researcher to organizations are more prone to adopt and
classify the organization as organic or mechan- implement ABC because they rely on formal
istic. Thus, the operationalization of the organic systems.
and mechanistic continuum may occasionally This study also enriches the literature on ABC
be deficient. which has been limited to success stories on
Third, the scores for centralization, vertical ABC implementation. Much of the research on
differentiation and formalization may be closely ABC has focused on explaining why and how
linked to each SBUs industry. For example, organizations should adopt and implement
SBUs in manufacturer of transportation equip- ABC. This study provides some explanations on
ment (two-digit SIC code 37) may be more the contextual factors that influence the diffu-
centralized than manufacturer of rubber pro sion of a management accounting innovation
ducts (two-digit SIC code 30). Thus, the scores like ABC. This study also contributes to the
for centralization, vertical differentiation and innovation literature. While the diffusion of
formalization may be affected by the SBU innovation literature has mainly focused on
industry. Dummy variables were employed to technical innovations and not-for-profit settings,
capture the effect of the industry. All the this study examines the diffusion process for an
models described in Section Six were run with innovation, activity management, that com-
the dummy variables. These tests showed that bines characteristics from both technical and
industry did not have a significant effect on the administrative innovations. Furthermore, the
adoption of AM approaches, the adoption of data was collected only in manufacturing orga-
ABC and the implementation of ABC. Four, nizations. Very few studies on the diffusion
even though all the models had significant Chi- process for innovation have been conducted in
Square, the highest Somers D was 0.54 which the manufacturing environment.
is considered to be moderately low according As with any research, this study has raised
to Agresti (1990). Five, even though the SBUs more questions than it has answered. During
were carefully identified, in a few cases, the the last decade, management accountants have
questionnaires were sent to the head office shown a great deal of Interest for innovations in
controller or vice-president. The responses managerial accounting. The diffusion process
from those managers may differ from those of for such Innovations is far more complex than
SBU managers because their perception of the most academicians and practitioners expected.
cost management system may be different. This article was an exploratory study on the
Despite these limitations, this study makes a inlluence of contextual factors on the adoption
significant contribution to the management and Implementation of AM approaches. It is
accounting research. the first piece of a research program on the

diffusion of management accounting innovation may better understand how management

in todays organizations. It may be possible to accounting innovations spread within organiza-
conceive that during the next few years, we tions.


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