Who Uses Them, and How Effective Are They?
C. Chen and Keith T. Jones
- The concept of “continuous improvement” first took
root in the business world in the early 1990s. Companies that
once were leaders in their industries now must fight to maintain
growth and viability. Even nonprofit organizations and educational
institutions must adapt to new forms of competition.
have introduced a number of relatively new tools to aid in delivering
products and services faster, better, and cheaper. These include
total quality management (TQM), benchmarking, activity-based costing
(ABC), and balanced scorecard. Few studies, however, have been
undertaken to show those that are actually in use. Fewer still
have compared which management tools appear to be most popular
at various types and sizes of organizations, and the effectiveness
perceived by those using them or affected by them. The authors
surveyed MBA students also working at a variety of enterprises
to learn which management tools are in place at their organizations.
results indicate that, on average, both public and private companies
use multiple management tools. Among public and private companies,
benchmarking, TQM, and strategic planning are the most commonly
cited management tools adopted, although a surprising number did
not indicate that their organization is involved in strategic
planning. Supply chain management is quite common as well, particularly
among public companies, as is ABC. Survey participants regard
most of the management tools as fairly effective. Balanced scorecard
received among the lowest ratings for effectiveness, perhaps indicating
that the participants haven’t yet “bought into”
the performance measurement system or that they do not view it
as fairly representing performance.
Tools at a Glance
costing (ABC). Generally used as a supplemental
costing method in addition to GAAP, this is a procedure that attempts
to more-accurately assign costs to cost objects compared with
traditional methods. Indirect costs are first assigned to activities,
such as machine setup or purchase order processing, then to cost
objects based on the relative use of those activities. This costing
method often involves significant departures from tradition in
terms of defining and allocating overhead costs.
management (ABM). Used in conjunction with ABC,
this tool is aimed at identifying and eliminating non–value-added
activities, and finding ways to perform activities more efficiently.
Balanced scorecard. This is a set of performance measures intended
to line up with an organization’s specific strategy. Although
long-term financial performance is the primary concern, it focuses
on measuring certain root causes of ultimate financial performance,
such as employee motivation and training, and customer satisfaction.
This is the process of identifying other organizations that excel
in certain business processes (e.g., order processing) and adopting
the other organization’s methods to achieve greater effectiveness
and efficiency. The other organization may or may not be in the
reengineering. Often driven from the top down, this
technique is generally described as a radical rethinking of business
processes for the purpose of dramatically improving these processes
in terms of cost and quality.
quality management (TQM). This tool can be contrasted
with process reengineering in that it typically seeks incremental
improvements and is generally less radical. A careful attempt
is made to identify the primary internal and external “customers,”
what they need, and how best to provide for those needs. While
led by management, this tool is often associated with the involvement
and input of front-line workers, thereby creating more buy-in
on the part of those affected.
planning, supply chain management, and shareholder value management.
These terms are somewhat generic and may not necessarily be thought
of as specific tools. The authors included them in this study
because they are issues of current focus at many organizations,
and they receive considerable attention in some management accounting
textbooks. The authors will define “strategic planning”
simply as the attempt to articulate the organization’s specific
strategy and to align long-, intermediate-, and short-term plans
with this strategy.
to Charles T. Horngren, Srikant M. Datar, and George M. Foster
(Cost Accounting: A Managerial Emphasis, 11th Ed., Prentice
Hall, 2003), the supply chain is “the flow of goods, services,
and information from the initial sources of materials and services
to the delivery of products to consumers, regardless of whether
those activities occur in the same organization or in other organizations.”
Companies try to reduce costs and create value by integrating
and coordinating the activities along the supply chain. In fact,
a number of companies’ primary reason for existence is to
assist other companies in leveraging technology to manage their
the authors include “shareholder value management”
to obtain a sense of the extent to which the survey participants
viewed their companies as focusing intently on creating value
for shareholders by using certain measures (e.g. economic value
added and residual income).
received surveys from 101 MBA students at two universities, one
located in the Southeast, and one in the Midwest. Students ranged
from those with little or no management experience to those with
more than 25 years of experience in management. Their ages ranged
from 24 to 60. Approximately 70% of the participants were managers
and 30% were not currently working in management when they completed
the survey. Sixty-one participants were male and 40 were female.
The organizations they represented included various types of nonprofit
organizations in addition to small and large private and publicly
is using these tools? The authors provided participants
with a list of management tools and asked them to indicate which
ones were currently in use at their companies. For those tools
that had been implemented, participants were also asked to rate
the effectiveness at their organization. Finally, participants
also indicated whether they perceived certain factors as impeding
the adoption of new management approaches at their organizations.
1 shows the management tools listed in the survey, along with
the number of participants indicating that their organization
currently uses the approach. The bottom row shows the mean number
of management tools/
approaches in use.
in Exhibit 1, all three types of organizations in the sample used
an average of more than one management tool. Respondents working
at public companies indicated an average of more than five of
these tools currently in place at their organizations, and privately
owned companies have implemented nearly as many. Nonprofit organizations
have implemented an average of nearly three management tools.
These numbers suggest that managers are increasingly willing to
use any means at their disposal to create value and simultaneously
control or reduce costs.
also shows that approximately three-fourths of the survey participants
indicated that their organization uses strategic planning. While
this percentage is high, whether it is good or bad depends on
one’s perspective. As stated by Horngren, Datar, and Foster,
a 1999 survey of management accountants indicated that strategic
planning is the most critical work performed by management accountants.
and his coauthors define strategy as “how an organization
matches its own capabilities with the opportunities in the marketplace
to accomplish its objectives.” They further clarify by stating
that strategy describes “how a company will compete and
the opportunities its employees should seek and pursue.”
Therefore, having a strategy and making plans in accordance with
that strategy are critical in providing direction for employees.
that potentially 25% of the organizations represented in the sample
make plans without a well-articulated strategy in mind casts new
light on the numbers. One caveat is that, because approximately
30% of the respondents are not currently in management, some may
simply not be aware that the company is involved continuously
in strategic planning. If this is the case, this shortcoming might
be somewhat overstated.
in the Exhibit is the fact that 35 out of 101 respondents indicated
that their company plans to implement new management tools in
the future. Many tools listed in the survey are complementary.
For instance, TQM and benchmarking are often used in conjunction
as organizations seek to make incremental improvements in internal
TQM and benchmarking
are widely used at the companies represented in this survey. TQM
is currently in use at three-fourths of the public companies,
and slightly more use benchmarking. More than half of respondents
working for private companies indicated that their companies use
one or both of these approaches. Nearly half of the public companies
and nearly one-third of the private companies are using ABC. Roughly
half of the subjects indicated that their companies are using
process reengineering. This is significant, because process reengineering
is generally considered more radical and involves more sweeping
changes than TQM, which focuses on small, incremental improvements.
In addition, nearly half of the participants working at public
companies indicated that their companies currently use balanced
scorecard in measuring performance of employees.
indicates somewhat less involvement by nonprofit organizations
in the use of these management approaches. This is not surprising
when one considers that the institutions represented in this sample
range from churches to universities to hospitals. What is interesting
considering this diversity is the extent to which these organizations
do use the management tools. Although the number of respondents
from nonprofits was relatively small, 75% of those who did respond
indicated involvement in strategic planning. This suggests that,
even in the absence of a profit motive, managers see a need to
have a clear strategy to guide in decision-making. In addition,
benchmarking is in use at nearly half of these organizations.
One-fourth of these participants also indicated that ABC is in
use at their organizations. Although the percentage is not large,
two respondents even indicated that their organization is involved
in supply chain management. Together, these results indicate that
even organizations that are not profit-motivated find it necessary
to continuously improve and to control costs by using tools more
often associated with for-profit organizations.
tools under the “other” category included IS0 9000–based
initiatives, lean manufacturing, and Six Sigma initiatives, designed
to help companies improve their quality and business processes.
ISO 9000 standards are international standards for application
in all types of organizations. They are among the most widely
used quality standards in the world. Thirteen respondents indicated
that Six Sigma, which sets customer-specified tolerances for acceptable
output at six standard deviations—sigma—from the mean,
is in use at their organizations. This management tool is likely
to show up more significantly in future surveys. Having been successfully
implemented in the 1980s at Motorola, Six Sigma attempts to link
strategy to quality improvement and improved financial results.
It is now being used aggressively at large organizations, from
banks to manufacturers.
also considered whether there was different use of these tools
based on whether the organization was relatively small or large.
The median size was 1,500 employees. The authors divided the sample
at the median, resulting in two roughly equal groups of “small”
and “large” organizations. The small group included
40 organizations with fewer than 1,000 employees, with over half
of that subset having 100 or fewer employees. The large companies
ranged from 1,800 to 500,000 employees. Interestingly, the smaller
organizations appear nearly as likely to adopt the management
initiatives as their larger counterparts (mean of 4.2 versus 5.2
for larger organizations). TQM appears to be the most popular
among smaller companies, with nearly 70% of respondents indicating
that it had been adopted. TQM was followed closely by benchmarking,
with nearly 63% adopting it. Also popular among smaller organizations
were supply chain management (51%), ABC (33%), ABM (30%), process
reengineering (37%), and balanced scorecard (33%). Over 75% of
both small and large organizations are active in strategic planning.
These Tools Work?
employees may indicate whether or not management has implemented
a particular management tool, their perception of its effectiveness
may be an entirely different matter. Therefore, participants also
rated the effectiveness of the tools currently in use on a five-point
scale from 1 (very ineffective) to 5 (very effective). Exhibit
2 shows the mean responses on this scale, by type of organization.
overall viewed the management tools currently in use as at least
moderately effective, particularly strategic planning and ABC.
The latter bodes well for proponents of ABC because this costing
method continues to be implemented at organizations of all types
and sizes to fine-tune the costs assigned to products and services.
The perceived effectiveness of strategic planning is consistent
with the results from another question that asked the participants
to rank tools in order of effectiveness.
who indicated more than one tool in use at their organizations,
strategic planning received the most favorable response, with
18 participants ranking this approach first. Interestingly, benchmarking
was next, with 15 indicating it was the most effective tool. Perhaps
most interesting was that TQM received only three first-place
votes despite being one of the most commonly implemented tools.
Because TQM is often linked with benchmarking, it is possible
that the participants associated most of the effectiveness with
the benchmarking aspect rather than with TQM itself. Process reengineering
received a surprisingly high rating, considering the radical nature
often associated with this complete overhaul of business processes.
surprising is that managers’ and nonmanagers’ responses
did not differ significantly on the effectiveness ratings for
any of the management tools indicated, including process reengineering.
might expect that nonmanagers would view these tools as far less
desirable than managers would, because nonmanagers often must
cope daily with frustrating changes in their jobs. Yet nonmanagers
effectiveness higher than managers on nearly all of the tools
named, although the differences were not statistically significant.
tools with the least impressive effectiveness ratings included
balanced scorecard, especially for private companies. Despite
its increasing popularity, it is quite likely in some cases that
managers and their employees alike do not perceive added value
in the additional measurements involved. Indeed, cost/management
accounting textbooks even warn about the use of too many measures
whose usefulness or added value may be dubious at best.
as previously noted, the number of respondents at nonprofits was
quite small, they looked favorably upon the management tools that
their organizations have implemented. As also previously noted,
most participants from nonprofit organizations indicated that
they have implemented strategic planning. These results indicate
that they believe the use of strategic planning has been reasonably
also examined these results broken down into small and large organizations
as defined previously. Using conventional measures of statistical
significance, none of the differences between small and large
companies was significant.
also asked participants about factors that limit their organization’s
ability to implement new management tools. Exhibit 3 shows the
mean responses to a number of conditions that may inhibit an organization’s
ability to implement new tools. Participants responded on a five-point
scale from 1 (strongly disagree) to 5 (strongly agree).
shown in Exhibit
3 indicate that the factors listed are not impediments to
adoption of new management tools. Of the factors listed, lack
of communication has the highest mean response for both publicly
owned and privately owned companies; yet it does not clearly outdistance
the others. Overall, these results are consistent with Exhibit
2, which indicates that participants think that the tools are
at least reasonably effective.
at nonprofit organizations were somewhat less inclined to believe
that lack of management or staff support is an impediment. They
were more likely to see cost constraints as impeding the adoption
of new management techniques. Statistical tests indicate that
the type of institution makes a significant difference only with
respect to cost constraints. Because any of these management tools
are likely to involve a substantial cost, it is no surprise that
nonprofit organizations find cost constraints to be a hindrance
to adopting new techniques. Their lower tendency to view lack
of management and staff support as an impediment, however, is
intriguing. Are such differences due to a tendency for nonprofits
to be smaller? Are there individual personality differences between
those who tend to prefer working for nonprofit organizations as
opposed to for-profit organizations? One might expect managers
and nonmanagers to differ on these factors, and that one group
would tend to blame the other more. Statistical tests indicate,
however, that these two groups do not differ significantly in
their views toward staff or management support.
Roads—and Obstacles—to Continuous Improvement
results indicate that both profit-seeking and nonprofit organizations
have made wide use of some of the management tools discussed above.
The participants also find these tools to be fairly effective
on average. Small and large organizations alike are adopting popular
management initiatives, and employees at smaller organizations
generally appear no less likely to view them as achieving their
majority of the participants who work at public companies indicated
that their companies are currently using TQM or benchmarking.
Supply chain management is also quite common, as also evidenced
by the increasing use of service providers by large companies.
To a lesser extent, although still impressive, public companies
are pursuing the bold changes associated with process reengineering.
Presumably, companies would spend the resources and undergo dramatic
changes in their processes only when sufficient pressures exist
to do so. The fact that balanced scorecard is in use at a number
of companies further underscores organizations’ realization
that a holistic performance evaluation approach is often more
desirable than looking only at the bottom line.
that even nonprofit organizations find it necessary to implement
changes leading to greater efficiency and cost management further
demonstrates that virtually no one is excluded from the need to
continuously improve. Even federal and state governments—not
generally associated with efficiency—have implemented such
tools as TQM in an attempt to better serve “customers”
and control costs. For example, the State of Texas has even implemented
ABC or ABM in order to more effectively identify cost drivers,
reduce non–value-added time, and streamline processes. (For
more information, see www.window.state.tx.us/specialrpt/abc/.)
to adoption of the tools considered necessary for continuous improvement
could hinder an organization’s ability to adapt to changing
circumstances and maintain or improve upon its current position.
The fact that participants do not perceive a lack of management
or staff support bodes well for the organizations represented
here. Ultimately, support from the top is critical for any change
to achieve its intended purpose. Likewise, for optimum effectiveness,
employees must buy in to the changes. For this to occur, particularly
in an age when a “facilitative” management style is
in vogue, employees must be convinced that management is trustworthy
and there will be mutural benefits from this change. Otherwise,
change may come about at the expense of employee motivation, and
undesired employee turnover could result.
number of the organizations represented here appear not to have
implemented strategic planning. To the extent that organizations
do not incorporate organizational strategy into their planning
processes, there appears to be room for improvement by linking
their short- and long-term goals to an overall strategy. In a
time when organizations of all types must fine-tune themselves,
such organizations may be well served to decide where to focus
their resources. A carefully formulated strategy is arguably the
best starting point.
As is true
of virtually any survey, these results must be interpreted in
light of certain limitations. The sample is not random and, therefore,
may not be generalizable. Still, the sample includes MBA students
who vary dramatically in age and experience and who work at a
wide range of organizations. Furthermore, the participants are
students at two different schools in different regions of the
country. Given the above caveats, the sample is likely a reasonable
cross-section representing a variety of management attitudes,
approaches, and perspectives.
C. Chen, PhD, CPA, is an associate professor of accounting
in the school of management at the University of Michigan–Flint.
Keith T. Jones, PhD, CPA, is an assistant professor
of accounting in the department of accounting at Illinois State
University, Normal, Ill.