The Effect of Business Strategy and External Environment on Management Control Systems

Only available on StudyMode
  • Download(s): 363
  • Published: October 9, 2012
Read full document
Text Preview
International Journal of Business and Social Science

Vol. 2 No. 13 [Special Issue - July 2011]

THE EFFECT OF BUSINESS STRATEGY AND EXTERNAL ENVIRONMENT ON MANAGEMENT CONTROL SYSTEMS: A STUDY OF MALAYSIAN HOTELS Sofiah Md Auzair Senior Lecturer School of Accounting Faculty of Economics and Management Universiti Kebangsaan Malaysia, Malaysia E-mail:, phone: 03-89213745 Abstract This study was undertaken to investigate the use of Management Control Systems (MCS) in Malaysian hotels. MCS was conceptualized as Action/Results controls, Formal/Informal, Tight/Loose controls, Restricted/Flexible, Impersonal/Interpersonal controls and Financial/Non Financial information to represent management control bureaucracy. The framework also recognizes business strategy and external environment (perceived environmental uncertainty - PEU) as factors associated with organizations choice of MCS. A survey methodology was employed. Questionnaires were administered to the top management of the hotels in Malaysia. The findings indicate that hotels pursuing cost leadership strategy was positively associated with a more bureaucratic MCS while hotels pursuing differentiation strategy was associated with less bureaucratic MCS. PEU is negatively associated with less bureaucratic MCS which indicates tighter control when environment is perceived as unpredictable. Overall, the data demonstrates that type of MCS utilized by hotels is associated with the business strategy pursuit and the PEU.

Key words: Management Control Systems, Differentiation Strategy, Cost Leadership Strategy, External Environment

1. Background
The Malaysian government has been introducing and aggressively implementing many policies to boost the service industry in general, and the tourism industry in particular. Through the Malaysian Tourism Development Corporation (MTDC), many local and foreign promotions has been undertaken to encourage tourists to visit Malaysia. Despite the global economic downturn, the number of tourist arriving in Malaysia has been increasing from 10.6 million people in 2003 to over 20 million people in 2008. Although vulnerable to economic uncertainty, it can be seen that tourism does not stop. Instead, people continue to travel may be, in a different way. Thus, Malaysia is still at an advantage considering the low foreign exchange rate compared to other countries such as the United States or Brittain. A key component to the tourism industry is the hotels. Data has shown that the hotels occupancy rate has been rather stable, at more than 60 percent for the past five years. Nevertheless, judging from the number of hotels operating in Malaysia, the business environment is no doubt highly competitive. As of February 2009, 1,735 hotels are registered under the Ministry of Tourism.. To sustain their competitive positions and to be able to offer high quality of service packages to customers, it is important that hotels maintain an effective information and control systems. Although numerous study has found the relationship between organizations‟ MCS and organizational effectiveness, prior works have revealed the lack of research in management accounting and control systems in the hotel industry (Collier and Gregory, 1995; Sharma, 2002). Considering service sector liberalization in general, and the importance of the hotel industry to the Malaysian economy, the issue needs to be enlightened. Motivated by this development and the lack of research in the MCS literature, this study aimed to investigate the practice of management accounting and control in the hotel industries in Malaysia. Findings from this study are expected to reveal practices that shall assist managers of hotels to uncover their potentials and weaknesses. Specifically, the research question will be directed towards ascertaining the importance of business strategy and external environment in influencing the design of organizations‟ MCS. This paper is organized as follows....
tracking img