MANAGEMENT ACCOUNTING

FINAL PROJECT REPORT

Muhammad Yasir

Haddiqua Amjad

Fatima tuz Zehra

Muhammad Arsal

Zain Khan

BBA-5D
Bahria University (Karachi Campus)
 ACKNOWLEDGEMENT

We would like to express our deepest appreciation to all those who provided all the support and
helped us in completion of this report. The success and final outcome required a lot of guidance
and assistance from several people and we are extremely fortunate to get this all along in order to
complete our report “Factors influencing Company’s Performance, Innovativeness and
Management Accounting in the manufacturing sector”. We wish to express our sincere gratitude
to our respected lecturer Sir. Danish Iqbal for providing us the opportunity and giving us all
support and guidance regarding this report. We are also thankful to all the manufacturing
companies who took out time from their busy schedule to provide their responses which made
the completion of this report possible. Furthermore, this assignment could not have been
successful without the cooperation and hard work of our group members.
Table of Contents
Abstract ....................................................................................................................................... 4
Introduction ................................................................................................................................ 4
Problem Statement ..................................................................................................................... 5
Research Objective ..................................................................................................................... 5
Research Significance.................................................................................................................. 6
Research Questions .................................................................................................................... 6
Literature Review ........................................................................................................................ 7
Age of Company ...................................................................................................................... 7
Environmental Uncertainity .................................................................................................... 8
Open-mindedness ................................................................................................................... 9
Structure ............................................................................................................................... 10
Shared vision ......................................................................................................................... 11
Intra-organizational knowledge transfer: the role of individuals ......................................... 12
CEO characteristic relation to company’s performance ....................................................... 14
Employee Commitment and Company Performance ........................................................... 17
Research Methodology ............................................................................................................. 20
Research Design .................................................................................................................... 20
Data Collection ...................................................................................................................... 20
Scope of Research ................................................................................................................. 20
Population ............................................................................................................................. 21
Sample................................................................................................................................... 21

Conceptual Framework ............. 22

Hypothesis................................................................................................................................. 22
Analysis ..................................................................................................................................... 25
Company performance analysis............................................................................................ 25
Interpretation ....................................................................................................................... 25
 Innovativeness Analysis ........................................................................................................ 27
Interpretation ....................................................................................................................... 27
Management Accounting Analysis........................................................................................ 29
Interpretation ....................................................................................................................... 29
Recommendations .................................................................................................................... 31
References ................................................................................................................................ 32
Abstract

We all live in a very fast-moving world which doesn’t stops for anyone. To be competitive in this
21st century it is very important for the companies/organizations to adapt change and be
innovative. Competition is increasing day by day, getting more tougher then it was ever before.
Now tasks are done by effective teams having people from different department for efficient
results. Research and Development has become the major task for the organizations while
producing and launching products. The framework shows the major decisions took by different
Pakistani organizations and how they affect the performance of the company and also the
structures of the organizations and how their affect.

Keywords: Knowledge sharing, organizational learning, vision sharing, organization structure,

costing methods, competitive area.

Introduction
The essential purpose of managerial accounting is to provide relevant information to managers
who deal with the company’s operations and are responsible for its oversight and
management. Managerial accounting is far different from financial accounting, it focuses on
delivering information to stockholders, creditors and stakeholders. (Garrison &, Noreen, 1999).

According to the Institute of Management Accountants (IMA): "Management accounting is a

profession that involves partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial reporting and control
to assist management in the formulation and implementation of an organization's strategy".

Management accountants look at the events that happen in and around a business while
considering the needs of the business. From this information, make data and estimates emerge.
Cost accounting is the process of translating these estimates and data into knowledge that will
ultimately be used to guide decision-making.

As Management accounting is an ultimate source of data, it is important for management to

plan their role accordingly. Management accounting mainly focuses on long term goals, by
planning strategies in order to achieve the goals. Converting that strategy in detailed data with
the purpose to save time and consuming less resources is made possible through budgetary
control and standard costing which is yet a fundamental and compelling factor of management
accounting. (Covaleski and Dirsmith, 1983; D. T. Flamholtz, 1983; Hayes, 1983; Spicer and
Ballew, 1983; Meyer, 1986).
Accounting is an essential field of any organization’s information system, with a major key role
in decision making. For an accountant, reporting is one of the important objectives due to its
major impact in observing and featuring the financial information of an organization. (Etzioni,
1961; Ouchi, 1979; Covaleski and Dirsmith, 1983; Meyer, 1986;). Some of the unique features of
managerial accounting is the precision of its details. Managers of most organizations continually
plan for the future by making strategic decisions and planning accordingly, and after the plan is
implemented, managers assess whether they have achieved their goal or not.

When it comes to sharing the knowledge and past experiences, it is very useful for the
organization to share the information and past experiences with all the employees and
managers to keep them aware and motivated. According to Exide, companies learn from their
past experiences whether good or bad. Good experiences lead to efficiency and bad
experiences lead to learning. According to BASF which is a chemical company, states that
research and development is the key to success in this competitive world because newer
effective and efficient ways are introduced in the market so to remain competitive in the
market, we have to be one step ahead our competitors in our research and development.
Mitchell’s consider itself to be more quality oriented, stick to the vision is priority and using
different costing methods to work more on a cost leading strategy. Samsung considers
innovation as a top most priority to remain competitive in this fast-moving world of technology.

This report is aimed at investigating various factors such as uncertainty of environment, intra-
organizational knowledge sharing, age of company, top leadership, commitment to learning,
vision sharing, structure of the company and their impact on managerial accounting,
innovativeness of the company and performance of the company.

Problem Statement
The purpose of conducting this research is to determine in manufacturing sector what are the
impacts of different practices on the performance of the company, its innovativeness and the
management accounting processes. To know what are the best options to choose and that
which managerial accounting policies, strategies and practices should firm in manufacturing
industry adopt in order to enhance their performance and profitability.

Research Objective
The main objective of this research is to analyze the integration of managerial accounting and
its implications in the service industry, through the impact of independent variables on
performance and managerial accounting systems within a firm. Hence, the overall objective of
this research is to determine factors influencing management accounting in the service sector.

Research Significance
This research will be help manufacturing firms in decision making and it will provide insight to
top management and other stakeholders in the manufacturing sector, regarding how various
independent variables like environment stability, vision sharing, top management, structure
and age of the company etc. can be used in benefit of the company, its performance,
innovativeness and especially in effectively implementing management accounting techniques.

Research Questions
1) Impact of environmental uncertainty in management accounting practices, innovativeness
and performance of the company?

2) Does age of company have any impact on company’s performance, its innovativeness and
management accounting practices?

3) Does top management have any impact on variables like company’s performance, its
innovativeness and management accounting practices?

4) Does intra Organizational Knowledge sharing has any relation with the performance of the
company its innovativeness and its management accounting practices?

5) How does open-mindedness affect the perfomance of the company and its innovation?

6) What possible impact does a company’s structure has on performance, innovativeness and
managerial accounting practices?

7) Is commitment to learning an important factor affecting in company performance and its

innovation?

8) What is the impact of shared vision on the performance of the company, its innovation and
accounting techniques usage?
Literature Review
According to the research conducted in the manufacturing sector the results

Age of Company
According to the research we get to know that increasing age of the company signifies the
strength and weakness of the firm in order to adapt efficient processes to continue success,
however increasing age of the company decreases the performance. In the early phase of
establishment of the firm, the efficiency and effectiveness is closely monitored and measured
and remains updated about the development and opportunities. (Usman 2010; Leepsa and
Mishra, 2012). When the firm’s age is increased the risk of failure is also increased. Older and
large firms are prominent in the market place but on the other hand they slowly dissolve from
the market if they do not respond to the changes and opportunities in the marketplace. (Hall,
1987 and Evans 1987). Many studies shows that old firms have knowledge about their
marketplace opportunities and competencies and there is less certainty of failure, however the
studies by (Leonard and Barton 1992) & (Hannan and Freeman 1984) highlighted the companies
intransigence and organizational dullness because of which the companies are unable to cope
up with the opportunities.

Many firms use a strict code of conduct, rules and guidelines which provides benefits only in
the early stages in order to maintain competitive advantage but as the company gets old it gets
less flexible and its rules and regulations became more difficult to cope up with the new
changes. (Halil & Hasan, (2010); Papadogonas, (2007); Akinomi & Olagunja, (2012); Coad,
Segarra and Teruel, (2007); Hui, Radzi, Jenatabadi, Kasim and Radu, (2013) and Balik and Gort,
1993). The firms loses its position in the marketplace as it depend upon its old practices. Some
firms give more importance to their old and senior staff and most of the decisions are taken by
them which do not go the latest market trends, as they rely on the previous information and
experiences. This decreases the opportunities for the young and fresh talent as their ideas are
more innovative and they grow and develop new systemic strategies for the company. The
studies shows that as company’s age is increased the significance of equipment, skills and
original banking gets obsolete and they might be not preferable according to ongoing demands,
so the chances of investing in new and innovative projects decreases. (Moeller and Brady,
2007; Petitt and Ferris, 2013).

Aged firms have low expected growth and profit and at the same time a study has found that
the aged firms who improves with the increasing age have low debts , they are large in size and
have high profitability and equity ratios. Study shows that new firms have high profitability of
innovation and high productivity while comparing to old firms. (Bruderl And Schussler, 1990).
When the surviving companies converge with normal rates and the application of instant
innovation then there are high chances of persistence and profitability. (Aldrich & Anster,
1986). The aged firms have extensive knowledge and information about the market place, so
the chances are high that innovation can grow through internal sources of the company i.e.;
customers and suppliers, employees. And the new firms requires a lot of time and plenty of
information to build itself successful and profitable. (Owolabi & Alu, (2012); Babalola, (2003);
Doodann, Tavakoli & Ivuson, (2005); Oladele & Olagunju, (2013); Halil & Jasan, (2012) and
Dogan, 2013). As the firm gets old, a lot of pressure is build to generate more profit as there is a
high competition the in marketplace, improvements are imposed on the practices of
management of management accounting to enhance the efficiency and effectiveness of the
performance. The efficiency and effectiveness of the performance, profitability highly depends
upon the age of the company. Goddard, Tavakoli and Wilson (2005).

Environmental Uncertainity
Environmental uncertainty is basically the degree of unawareness (of factual information) an
organization suffers from related to the events occurring around them and their surroundings,
and this lack of information can essentially be claimed to be related to the company’s internal
and external operations. Environmental Uncertainty can also be held responsible for innovation
among organizations as it is believed to significantly influence it. Another factor that influences
variation in environmental uncertainty is the nature of work of an organization. This means that
an increasing extent of environmental uncertainty can be attributed to the difficult and
complex practices and procedures being used in an organizations operations. According to
various researches the relationship between contextual variables (uncertain events that may
occur) and management accounting systems is a contingency relationship (Gordon and
Narayanan, 1984; Chenhall and Morris, 1986).

Studies have also shown that those managerial decisions based on information obtained from
managerial accounting and its related systems, are highly influenced by environmental
uncertainty and that a positive relation exists between the two. It is stated by Gordon and
Narayan (1984) Gul (1991) Mia (1993) Gul and Chia (1994), that when an organization is
exposed to high perceived uncertainty in its operations and business, their managers rely on
information from managerial accounting reports to mitigate risk and enhance the accuracy of
their decision. It is in these periods of high environmental uncertainty that managerial
accounting information helps evaluate market trends and shifts, resulting in a decrease of
perceived uncertainty. Furthermore it also aids management in adapting themselves and their
decisions to the changing need of the environment.

Uncertainty in the external environment of the organization is known to directly impact the
decision making process and innovation as well. Organizational innovations such as
restructuring organizations and their strategies, have a positive relationship with environmental
uncertainty. The external environmental uncertainty has a direct impact on decision making
and innovation. Researches have also established a positive relationship between
environmental uncertainty and organizational innovations such as changes in organizational
structure, its strategy, and outcomes Russell and Russell (1992). In order to rationalize this
positive relationship, it is to be understood that when managers are faced with a high level of
innovation they are prone to have a perception of increased uncertainty. In consequence to an
increase in uncertainty firms are more likely to adopt proactive decision making approach with
aggressive strategies (O¨ zsomer et al., 1997)

Environmental uncertainty and its impact on company performance and decision making of
management can thus be controlled and lowered by using the help of technical details and
factual information provided by various management accounting reports and systems, which
provide an insight to the companies’ operations. Furthermore, the right leadership skills, like
education and experience come into place over here as a better manager with more knowledge
and experience can help overcome any sort of lack of information and uncertainty while making
the right decision in favor of the firm. In cases of prevalence of increased complexity and
uncertainty in the environment the capacity of the top management/leadership influences long
term success (Carpenter and Sanders 2004). The composition of top management is diversity
which refers to the difference of each member from one another with respect to characteristics
such as experience, age and tenure (Bunderson 2003).

Open-mindedness
Open-mindedness is one of the most sought-after employee traits, according to University of
California Davis Internship and Career Center Program Coordinator Ken Barnes. Being open-
minded means you have a willingness to listen to other ideas and opinions and consider the
possibility that you are wrong or may change your own perspective. This can be an important
quality in the workplace.

Open-mindedness is critical to job success. Supervisors want to know that you have a
willingness to learn new things and consider alternative approaches to problem-solving. In an
interview, showing you are open-minded instills confidence in the hiring manager that you are
teachable and coachable. Someone who projects a know-it-all attitude is often a turn off. Also,
the hiring manager wants to know that you have a cooperative attitude and listen well to
others when they share their opinions.

Being open-minded typically makes you more adaptable to a unique work environment and job.
Employers usually want to hire someone they can mold into the type of employee who fits well
in their organizational culture. Open-minded employees are usually better equipped to cope
with jobs and co-workers who are different than what they are used to. This is especially
important in the early 21st century, as workplaces become more diverse. Showing acceptance
of different cultures, genders, races, ethnicity and ages makes it easier for the hiring manager
to take a chance on you.

An attitude of open-mindedness is also strongly correlated to workplace flexibility. A hiring

manager may see you as more capable of taking on a job that requires multi-tasking. You may
also get opportunities to participate in a wide array of work projects and tasks because of your
willingness to learn and try new things. If you find that your current job is not the best fit for
your passions and talents, your employer will more likely consider job changes based on your
open-minded approach.

Increased emphasis on work teams has made open-minded employees even more valuable.
Without a spirit of listening and cooperation, it is hard for groups to complete projects and
optimize quality. Stephen Covey discusses the importance of open-mindedness in his chapter
on "Synergize" in his book "The 7 Habits of Highly Effective People." He indicates that open-
minded team members learn things they wouldn't on their own and participate in greater
solutions than they could come up with alone. Being open-minded helps you work through
interpersonal or intra-team conflicts that arise when people work in close quarters.

Structure
Organizational structure is important in leveraging technological architecture. Al-
though intended to rationalize individual functions or units within an organization,
structural elements have often had the unintended consequence of inhibiting collabo-
ration and sharing of knowledge across internal organizational boundaries. For ex-
ample, structures that promote individualistic behavior in which locations, divisions,
and functions are rewarded for “hoarding” information can inhibit effective knowl-
edge management across the organization [89]. In fact, the optimization of knowl-
edge sharing within a functional area can many times suboptimize the sharing of
knowledge across the firm. Taken to a larger level, the optimization of knowledge
sharing within the firm can suboptimize sharing across a supply chain. In essence, it
is important that organizational structures be designed for flexibility (as opposed to
rigidity) so that they encourage sharing and collaboration across boundaries within
the organization and across the supply chain.
Whereas the objective of this discussion is not to promote a specific organizational
structure, two distinct structures have received favorable discussion with respect to
effective knowledge management. In their systems-based approach, Sanchez and
Mahoney [94] suggest that a modular organizational design combined with a modular product
design can reduce the costs of coordination and adaptation, thereby increasing strategic
flexibility. Nonaka and Takeuchi [87] develop a new organizational structure, the hypertext
organization, that enables their five-stage process of knowledge creation to occur efficiently
within the organization. In general, this is a combination of a formal organizational structure
and a non-hierarchical, self-organizing organizational structure. However, a similar effect can be
achieved through maintaining the formal hierarchical structure and adding the dimension of
flexibility. Along with policy and process, an organization’s system of rewards and incentives
can determine the channels from which knowledge is accessed and how it flows [73].
These systems can also create barriers to effective knowledge management activities.
Incentive systems should be structured so that workers are motivated and rewarded,
for taking the time to generate new knowledge (i.e., learn), share their knowledge,
and help others outside their own divisions or functions [5, 89]. It is the combination
of these KM structural dimensions, an organization’s formal organizational structure, and
incentive systems that make up an organization’s overall knowledge management structure.

Shared vision
According to the results of the research we got to know that the shared vision has direct
relation with the performance of the company. Average research results show that if the vision
is shared clearly to the employees and the managers of the company then it will be easy for
them to help the company achieve the goals and the objectives. They will work with more
involvement and loyalty. If vision will not be clear to all the employees then this will reflect in
the performance of the company because they will have no clear path to work on. They will not
be aware of their role in the company and what business they are in. when employees are told
about the vision and the objectives of the company then they feel importance in accomplish
that objective and more committed towards the organization.
The notion of shared vision was used extensively in the organizational field. Shared
vision is related to the traditional concept of goal-oriented implementation and
consensus-building in strategy and leadership literatures (Thompson and Tuden, 1959).
Recent literature on organizational learning has reinvigorated the concept of consensus-
building, and calls for better understanding of shared vision as a transformational
mechanism of a learning organization (Senge, 1990; Sinkula et al., 1997). In this
context, shared vision is defined as the organizational values that promote the overall
active involvement of organizational (network) members in the development,
communication, dissemination, and implementation of organizational goals, contrary to
the traditional top-down approach (Wang and Rafiq, 2009).
As Tsai and Ghoshal (1998) suggested, shared vision and other elements such as shared
goals, culture or shared values are expressions of cognitive social capital that favor
trusting relationships in the strong ties. On the other hand, social interactions play a
critical role in shaping goals and values among the members of the network. Shared
vision represents the degree to which the members of the network share an
understanding of and perspective on the achievement of the network’s activities and
results.
Sharing goals and vision means that network actors have similar perceptions of how to
act with others. In this context, the exchange of ideas and resources may be fostered
(Inkpen and Tsang 2005). On the other hand, common culture refers to the set of
institutionalized rules and norms that govern behavior in the network (Inkpen and Tsang
2005). In this respect, sharing the same entrepreneurial culture implies sharing concepts
such as objectives, concerns, processes, routines, etc. (Rowley 1997). In consequence,
common culture includes many different aspects, such as codes, language, histories,
visions or goals. All these elements permit and improve the understanding between
parties involved in the relationship, thereby facilitating knowledge transmission.
In our case we extended the notion of shared vision to the external interorganizational
relationships. In fact, we assume that to some extent the organization in a network
reproduces single organization conditions. In clusters organizational proximity,
similarity founded in shared vision leads the actors to be connected by sharing the same
reference space and knowledge so that they perceive, interpret and evaluate the world in
a similar way (Presutti et al., 2011). Proximity and interaction intensity, characteristic of
districts, play a key role in sharing goals and building common values between network
members. In this way, actors adopt common codes, values and practices through social
interactions (Tsai and Ghoshal 1998). In conclusion, clusters can be described as groups
of firms embedded in a strong local network and sharing a relatively homogenous
system of values and ideas (Barabel et al., 2007; Becattini 1990). In this respect, some
studies observe greater shared culture and values in firms belonging to clusters as
compared with external firms (Parra-Requena et al., 2010). In conclusion, shared vision
can be viewed as a relational mechanism that helps network members to integrate,
exchange resources and obtain relevant knowledge.

Intra-organizational knowledge transfer

The results of the research which we conducted showed us that the share of Intra-
Organizational knowledge has direct relation with the performance of the company. Average
research results of all the companies selected show that if the share of knowledge along the
company is good and clear then it will be easy for the employees and the managers of the
company to work because they will have all the data and the information to work on, and there
will be no barriers related to the lack of information related to the project. Share of information
along the different departments make the employees more connected. If there will be no share
of information along the company then the company performance will decrease due to the lack
of information required to complete the project.
We build our individual focus on the argument that a deeper understanding of intra-
organizational
knowledge processes “cannot be reached in lieu of a starting point in individuals” (Foss 2007:
43).
Accordingly, explanations of organizational-level phenomena should be grounded in
explanatory mechanisms that are located on the individual level (Felin and Hesterly 2007; Foss
2007). As far as our paper is concerned this means that if intra-organizational knowledge
transfer is to be explained, we need to consider not only the organizational level antecedents
(such as the employment of human resource management (HRM) practices), but also, crucially,
its individual level micro-foundations To illustrate this argument, we consider a diagram by
Coleman (1990), which depicts two levels of analysis: the macro and the micro. This diagram
explains a macro-level phenomenon (arrow 4) through the micro-level as denoted by arrows 1,
2 and 3. In the figure, arrows represent causal mechanisms - the “cogs and
wheels” (Elster, 1989: 3) - that produce the observed associations between phenomena
(referred to as Type-1, Type-2 and Type-3 relations). In the beginning of each arrow is the
explanans (the class of those sentences which are adduced to account for the phenomenon),
and in the end the explanandum (the sentence describing the phenomenon to be explained).
So, a macro-level phenomenon, located in the upper-right-hand corner of Figure 1, is explained
through an aggregation (allowing for emergence) of the actions of the individual actors (Type-3
relations). These actions, in turn, are taken under the impact of specific individual level
circumstances or ‘conditions of individual action’ (Type-2 relations), while the individual level
circumstances are influenced by macro-level factors (Type-1 relations).
There are various organizational-level antecedents that can be deployed to foster
knowledge transfer and direct it in desired directions at desired levels. The link between
organizational antecedents and knowledge transfer represents the Type-4 relations shown in
which according to Abell et al. (2008: 6) “may be taken as no more than a representation of a
correlation between macro variables”. Instead, by adjusting the nature and application of the
organizational antecedents, organizations can influence the ‘conditions of individual actions’
(macro-to-micro), thereby affecting the corresponding ‘individual actions’ (micro-to-micro).
When these are aggregated they are expected to produce firm-level outcomes, which in our
case concern the degree of intra-organizational knowledge transfer (micro-to-macro).
We use Coleman’s diagram as a starting point, and having pointed to the interrelationship
between the organizational and the individual levels (to which we will return to in ‘Discussion
and Implications’), we concentrate our attention on the individual level, namely on the micro-
to-micro relationship (Type-2 relations). We focus on the ‘conditions of individual actions’ and
examine whether these explain variation in ‘individual actions’. Specifically, the ‘individual
actions’ in the context of intra-organizational knowledge transfer refer to the extent to which
individuals acquire and use new knowledge (Bresman et al. 1999; Minbaeva et al. 2003). We
consider knowledge acquisition and use at the individual-level as a behavioral concept, i.e. “an
overt act of the person that can be observed and measured” (Tosi, Mero and Rizzo 2003: 32).
Like any behavior, knowledge acquisition and use by an individual could be further
deconstructed into internal processes and “explained by opportunities and desires – by what
people can do and by what they want to do” (Elster 1989: 14). We see these internal processes
as consisting of individual abilities and motivation on the one hand, and their use of interaction
opportunities provided by the organization on the other. Individuals are heterogeneous and
hence differ in their degree of knowledge acquisition and use due to the individual differences
manifested in their abilities, motivation and use of interaction opportunities provided by the
organization.
Our conceptualization of the ‘conditions of individual actions’ is rooted in the literature on
information processing. In particular, we are inspired by the Motivation-Opportunity-Ability
(MOA) framework developed by MacInnis, Jaworski and Moorman (MacInnis and Jaworski
1989; MacInnis et al. 1991), which has been widely used in marketing and advertising research.
The MOA framework was originally used to explain how consumers process external
information, linking individual behavior with that processing. This approach seems particularly
appropriate for examining the individual-level antecedents of knowledge transfer as it moves
away from the structure/content assumption characterizing previous research and adopts a
more process-driven view (Lane et al 2006).
Literature in the field of psychology has also hosted a significant debate between the
behaviorist and cognitive approaches to learning, differentiating between ‘can do’ (ability) and
‘will do’ (motivation) factors (Dunette 1976). Indeed, this distinction has been a subject of
research among industrial and educational psychologists for over a half century. The
ability/‘can do’ factor denotes “a potential for performing some task which may or may not be
utilized” (Vroom 1995: 198), while the motivation/‘will do’ factor refers to a willingness to
perform a particular task. In KBV-inspired research, the distinction between ability and
motivation was explored by Minbaeva et al. (2003), who discussed the ability and
motivation of employees to acquire knowledge as key components of the absorptive capacity.
Moreover, Argote et al. (2003) were among the first to bring together individual motivation,
ability and opportunity in relation to knowledge transfer, arguing that the consideration of
these three individual level variables is vital in explaining organizational-level knowledge
processes. Building on these studies, we will now consider how ability, motivation and
opportunity may affect knowledge acquisition and use by individuals.

CEO characteristic relation to company’s performance

CEOs are at the core of many academic and policy debates. The conventional wisdom, backed
bya growing body of empirical evidence (Bertrand and Schoar 2003, Bennedsen et al. 2007,
Kaplanet al. 2012), is that the identity of the CEO matters for firm performance. What is less
known is what different CEOs do differently, and whether and how differences in CEO behavior
have significant economic implications.

Scholars have approached this question in two ways. At one end of the spectrum, an influential
cluster of studies starting with Mintzberg (1973) have focused on the measurement of the
actual behavior of executives. They do so by “shadowing” CEOs in real time through personal
observation.

While shadowing exercises have revealed a wealth of information on the nature of the
managerial job, they are based on small and selected samples and, as such, are di behavior
differs considerably along all five features. In particular, while the majority of CEOs spend most
of their time in meetings, they differ in the extent to which their focus is on firms’ employees
vs. outsiders, and within the former, whether they mostly interact with high-level executives vs.
production employees. CEOs also differ in how they organize these interactions in terms of
duration, number of people involved, number of functions these people represent and planning
horizon. We also show that these dimensions of time use are correlated so that, for instance,
CEOs who focus on production also tend to have short, one-to-one meetings. CEO diaries yield
a wealth of information that is too high-dimensional to be easily compared across CEOs or
correlated with other outcomes of interest, such as CEO and firm characteristics.

To address this second challenge, we use a machine learning algorithm that projects the many
dimensions of observed CEO behavior onto two pure behaviors, and generates a one
dimensional behavior index that represents a CEO as a convex combination of the two pure
behaviors. The algorithm finds the combination of features that best differentiates between the
sample CEOs. The first of the two pure behaviors is associated with more time spent with
employees involved with production activities, and one-on-one meetings with firm employees
or suppliers. The second pure behavior is associated with more time spent with C-suite
executives, and in interactions involving several participants and multiple functions from both
inside and outside the firm together. To fix ideas, we label the first type of pure behavior
“manager” and the second “leader”, following the behavioral distinctions described in Kotter
(1999). In Kotter’s work, management comprises primarily of monitoring and implementation
tasks. In contrast, leadership aims primarily at the creation of organizational alignment, and
involves significant investments in interpersonal communication across a broad variety of
constituencies.

The scalar behavior index can be used to investigate a range of questions about the causes and
consequences of CEO behavior. A natural starting point is to study the correlation between CEO
behavior and firm performance, which we do by merging the behavior index with firm balance
sheet data. We find that leader CEOs are more likely to be found in larger and more productive
firms.

The correlation is economically and statistically significant: increasing the CEO behavior index
by one standard deviation is associated with an increase of 7% in sales controlling for labor,
capital, and other standard firm-level variables.

The correlation between CEO behavior and firm performance can be interpreted in three ways:
(i) CEO behavior simply reflects firm heterogeneity correlated with performance; (ii) CEO
behavior affects performance and CEOs are vertically differentiated, i.e. leader CEOs improve
performance regardless of the type of firms they work for, but they are scarce; (iii) CEO
behavior affects performance and CEOs are horizontally differentiated, i.e. firm performance is
a function of the correct firm-CEO match, but there are CEO-firm matching frictions and some
firms are run by CEOs with a firm-inappropriate behavior, thus causing a performance loss.

We use the subset of firms for which we have productivity data before and after the
appointment of the current CEO to investigate the first alternative, i.e. performance
differentials across CEOs simply being driven by firm heterogeneity. This exercise reveals two
results. First, firm performance pre-appointment is not correlated with CEO type: firms that hire
leader CEOs have the same productivity growth as firms that hire manager CEOs before the CEO
appointment. Second, the hire of a leader CEO is associated with a significant change in firm
productivity relative to the pre-appointment period, which emerges gradually and increases
over time. Overall, these results are in contrast with the idea that CEO behavior is merely a
reflection of differential pre-appointment trends or firm-level, time-invariant differences in
performance.

We then turn to the second class of alternatives–that is, that CEO behavior affects firm
performance, either via vertical or horizontal differentiation in CEO behavior. In the absence of
exogenous variation that would allow us to tell these alternatives apart, we develop a simple
model of CEO-firm assignment that encompasses both possibilities, and estimate it to test
which is a better fit for the data. In the model, CEOs and firms have heterogeneous types and a
correct firm-CEO assignment results in better firm performance. The model incorporates pure
vertical differentiation–where all firms need leaders but leaders are scarce, and hence firms
that end up with leaders perform better–and horizontal differentiation–where some firms need
managers and others leaders, but matching frictions imply that some of the firms that need
leaders end up with managers.

The model estimation is consistent with horizontal differentiation of CEOs with matching
frictions.
More specifically, while most firms with managers are as productive as those with leaders,
overall the supply of managers outstrips demand, such that 17% of the firms end up with the
“wrong” type of CEO. These line between CEO behavior and firm performance that we uncover
is of the same order of magnitude as the correlation with management practices but, as we
show in using a subsample of firms for which we have both CEO time use and management
practices data, management practices and CEO behavior are independently correlated with firm
performance. More recently, the availability of rich longitudinal data on managerial transitions
within firms has led to the quantification of heterogeneity in managerial quality, and its effect
on performance. Lazear et al. (2015) and Hoffman and Tadelis (2017), for example, report
evidence of significant manager fixed effects within firms, with magnitudes similar to the ones
reported in this paper. Differently from these studies, we focus on CEOs rather than middle
managers. We share the objective of Lippi and Schivardi (2014) to quantify the output
reduction caused by distortions in the allocation of managerial talent.

Finally, the paper is related to the literature that studies CEO traits such as skills and personality
(Kaplan et al. (2012), Kaplan and Sorensen (2016) Malmendier and Tate (2005) and Malmendier
and Tate (2009)) or self-reported management styles Mullins and Schoar (2013). We differ from
this literature in the object of measure (behavior vs. traits) and in terms of methodology:
behavior can be measured using actual diary data, while typically the assessment of personality
measures needs to rely on third party evaluations, self reports or indirect proxies for individual
preferences.

The paper is organized as follows. Section 2 describes the data and the machine learning
algorithm. Section 3 presents the analysis of the relationship between CEO behavior and firm
performance looking, among other things, at whether firm past productivity leads to di↵erent
types of CEOs being appointed. Section 4 interprets the correlation between CEO behavior and
firm performance by estimating a simple CEO-firm assignment model.

Employee Commitment and Company Performance

Definition of Employee Commitment: According to Akintayo (2010) employee commitment can
be defined as the degree to which the employee feels devoted to their organization. Ongori
(2007) described employee commitment as an effective response to the whole organization
and the degree of attachment or loyalty employees feel towards the organization.

Employee commitment seems to be a crucial factor in achieving organizational success.

Individuals with low levels of commitment will do only enough to work by. They do not put
their hearts into the work and mission of the organization. They seem to be more concerned
with personal success than with the success of the organization as a whole. People who are less
committed are also more likely to look at themselves as outsiders and not as long – term
members of the organization. An attractive job offer elsewhere is very likely to result in their
departure. By contrast, employees with high commitment to an organization see themselves as
an integral part of the organization. Anything that threatens the organization is an imminent
danger to them as well. Such employees become creatively involved in the organizations
mission and values, and constantly think about ways to do their jobs better. In essence,
committed employees work for the organization as if the organization belongs to them.

The relationship between employee commitment and workers’ performance has been studied
under various disguise. Khan, (2010) investigated the impact of employee commitment
(Affective commitment, Continuance commitment and Normative commitment) on employee
job performance from a sample of 153 public and private and public sector employees of oil
and gas sector in Pakistan. The results revealed a positive relationship between employee
commitment and employees’ job performance. Therefore, job performance emerged as a
determinant of employee commitment. Thus, Khan, (2010) advised managers to pay special
attention to antecedents of employee commitment and all the factors which foster employee
commitment so as to increased employee performance and subsequently increase
organizational productivity. Habib (2010) investigated the interdependency of job satisfaction
and job performance, effect of employee commitment and attitude towards work on
performance using a survey data collected from 310 employees of 15 advertising agencies of
Islamabad (Pakistan). They found that employees having greater employee commitment
perform well and employees having good attitude towards work are highly satisfied as
compared to employees who are less inclined towards their work.

Ali, (2010) found that there is positive relationship between corporate social responsibility and
employee commitment as well as between employee commitment and organizational
performance. They therefore concluded that organizations can improve their performance
through employees’ commitment by engaging in social activities since such activities also
include the welfare of employees and their families.

Determinants Of Employee Commitment: Numerous factors have been found to inspire

commitment. For instance, Ongori (2007) opines that the degree to which employees are
committed or loyal to their organization depends largely on job enrichment, employee
empowerment and compensation. Camilleri (2002) investigated some of the major antecedents
that contribute in making employees committed to an organisation using regression method
and analysis of variance and found that education level, personality and position are
significance that determine an individual’s level of employee commitment. His findings further
revealed that education level and position are significantly stronger for the continuance and
normative dimensions of employee commitment while personality is significantly stronger for
the continuance and effective dimensions.

Dex and Smith (2001) applied OLS regression of the log commitment scale, a range of covariates
using data from the 1998 Workplace Employee Relations Survey (WERS) conducted in British
establishments from October 1997 to June 1998 to model the determinants of the extent of
employees’ normative or affective commitment to their employer and found that access to
some family – friendly policies such as child care and working at home, improved employees’
commitment in the private sector but not in the public sector. Their findings also showed that
where employees, but not the employer, thought the organization had a caring ethos is an
important determinant of increased employee commitment. This implies that employees’
commitment is largely determined by the organizational culture, especially towards their family
welfare, of the company which they work for and not by the attitude of their employer or
supervisor towards them.

Lo (2009) examined the relationship between leadership styles (focusing mainly on

transformational and transactional leadership styles) and employees’ employee commitment in
Malaysia using regression analysis and found that transformational leaders are more able to
bring in commitment in employees than transactional leaders. Their finding indicates that
transformational leaders have a more significant and stronger relationship with employee
commitment. This implies that the leaders who give advices, supports, and pay attention to the
individual needs of followers will enhance the level of employee commitment of the
employees.

Avolio, (2004) examined the linkage between transformational leadership and employee
commitment by focusing on psychological empowerment and structural distance using a
sample of 520 staffs nurses employed by a large public hospital in Singapore. Their findings
showed that there is a positive association between transformational leadership and employee
commitment revealing that psychological empowerment medicated the relationship between
transformational leadership and employee commitment.

Shastri, (2010) examined the relationship between charismatic leadership and employee
commitment in Indian organization with a sample of 147 employees from Eastern and Northern
India and found that the two major antecedents (Charismatic leadership and job satisfaction)
exert strong effect on employee commitment of the employees of Indian organization in the
study sample. This finding indicates that people tend to be more satisfied if their leader displays
charismatic behaviour which makes them to be more committed to their organization. Since it
was found that leader’s sensitivity to member’s needs is related to employee commitment,
then managers need to be clear about the goals and values of the organization so as to align
them with the needs of the workers. This will help to reduce the high turnover rates being
experienced in today’s Industrial World.

Akintayo (2010) investigated the impact of work-family role conflict on employee commitment
of Industrial Workers in Nigeria using linear regression analysis and t-test and found that there
was a significant but negative contribution of work-family role conflict to employee
commitment. Based on this finding, Akintayo (2010) recommended that organizational support
programme needs to be introduced and provided for all levels of workers in order to reduce the
burden of work-family role conflict interface and virtually induced commitment to their jobs. He
further stated that the level of family responsibilities of the workers needs to be considered
during recruitment, in assigning responsibilities and placement process in order to foster
employee.

Research Methodology
Research Design
The purpose of this research was to highlight those factors which affect the performance of the
company, through this research manufacturing companies can identify what independent
variables impact management decisions and the overall performance. and find ways to enhance
their performance. This research is qualitative in nature. The data was acquired from
manufacturing companies by close ended questions with the help of written questionnaires.
The approach of our research is inductive as it will generate generalized results from specific
observations after analysis. The objective of our research to identify the effects of eight
independent variables on three dependent variables to analyze the changes incurred by
independent variables.

Data Collection
The primary data for analysis was collected through online questionnaires consisting of close
ended questions. Whereas, secondary data for literature review was gathered from internet,
research papers and articles.

Scope of Research
Since the scope of our research has been limited to the manufacturing sector, so information of
this research will greatly support them to identify their strengths and weaknesses. Further this
research will provide them vast amount of knowledge for effective problem solving and
decision making in various circumstances like how to increase performance, be innovative and
where and how to effectively use management accounting techniques.
Population
The population that we considered in our project to conduct a research on were manufacturing
companies working in Pakistan.

Sample
we took data from 7 different manufacturing companies all over Pakistan. The name and the
production sectors of the seven companies are as follows:

1. Barret & Hodgson – Pharmaceutical Company

2. Exide Pakistan - Automobile Batteries
3. Mitchell’s Fruit farms limited – Fruits Jams, Ketchups and Fruit related products
4. BASF chemicals Pakistan PVT limited – Chemical Company
5. National Refinery Limited Pakistan – Oil Refinery
6. Qurshi Industries Limited – Health Care Products
7. Pharma Tech - Pharmaceutical Company
Conceptual Framework

Environmental
Uncertainty
Shared Vision

Intra-Organizational
Company Performance
Knowledge Sharing

Head Characteristics

Management Accounting

Commitment to Learning

Open Mindedness Innovation

Age of Company

Structure of Company

Hypothesis
Environmental Uncertainty is inversely related to the performance of the company, the greater
the environmental stability will be the greater will be the performance of the company.

Commitment to learning has a very important role in making organization innovative. To be

innovative we first have to be ready to learn and change.

Vision sharing has direct/positive relation with the performance of the company. If the vison of
the company is shared along with the employees of the company then the goals and the
objectives will be clear to every single employee of the company and this will lead to the
greater performance and efficiency.
Open mindedness is positively related to the performance of the company and innovation. In
today’s competitive market companies should have their mind open to the feedback from the
environment and work on the flaws highlighted by the customers to make the functions work
perfectly and satisfy what is to be demanded according to the need.

Intra-organizational knowledge sharing also has a positive relation with the performance of the
company because if there will be a perfect exchange of information inside the organization
then it will be easy for project managers and cross functional teams to work on new projects
which require information from all the departments concerned.

CEO/Head/Manager Characteristics have a great role in the performance of the company. If the
manager is efficient worker and is capable of making the effective and efficient decision then
ultimately it will lead to the positive relation with the performance of the company.

On the other hand, if the manager is not capable of making the efficient decisions and considers
work as a load then it will lead to the negative relation of the manager characteristics to the
performance of the company.

CEO/Head/Manager Characteristics also affect innovation in both the ways (positively and
Negatively)
If the manager/head is reluctant to change and is afraid to make new decision just because they
are risky and require more hard work then it will have a negative relation with the
innovativeness of the firm.

On the other side if the manager of the company is enthusiastic to make new decisions and
take risks then it will have a positive relation with the company.

Age of Company has no relation with the innovativeness of the company.

Age of company has positive relation with the management accounting techniques usage
because older companies strictly follow the rules of the accounting to have a formal way of
working, but it is not hard and fast rule that all the older companies are following management
accounting rules, its just about most of them.

Structure of company has positive relation with the performance of the company because if
there will be a perfectly defined structure then performance of the company will increase
because who report to whom will be defined and clear, there will be no vagueness in decision
making.

Structure of Company has negative relation with the innovativeness because in a perfectly
defined structure there will be no exchange of new ideas across the different posts/positions
and departments. Information will only move with the defined structure.
Structure is positively related to the management accounting. If companies are following a
defined structure then it is more likely to be said that they will be using management
accounting techniques.
Analysis
Company performance analysis

Company Performance
6

0
Mitchell's Exide BASF Barret & Pharma Tech National Oil Qurshi
Hodgson Refinery

Company Performance

Interpretation
The above chart shows the statistics of the performance of the seven different manufacturing
companies which we have selected as our sample for the research from which we have
concluded the results that the performances of each of the company depends upon their
independent variables.

The performance of the Mitchell’s company is below average because it has no commitment to
learn from its competitors like National about new products and promotional strategies. Its
CEO is reluctant to change and doesn’t wants to change the way of working rather he prefers to
work in stable and traditional way.

The Performance of Exide is Greater then Mitchell’s because of its formal structure of work.
However, it can be better then this if the company will work on its advertisements and
promotions like its competitors VOLTA and OSAKA who are working allot on advertisements
and innovation.

Qurshi has the best performance among all the companies due to its effective decision making.
It is very old company working in Pakistan manufacturing health care products and it has a very
good word of mouth. This company has a great Intra-Organizational information sharing among
its departments. Qurshi is very much committed to learn from its competitors.
BASF has low performance related to its competitors in Pakistan because it is unable to work on
its structure. There is no room for vision sharing in this company, management thinks that it is
just a waste of time to spend time and money in keeping the employees aware about the firm’s
goals, their production manager said “They are being paid for what they do!”

Barret & Hodgson is competitive company in pharma world. It is constantly learning from its
environment and changing its structure to meet the needs of the environment and to be
competitive enough to retain its performance in both long and short term. This company has a
very good performance as compared to others.

Pharma Tech has an average performance in the pharma industry. It is competitive but not
enough to be the lead in pharma. Company although has a good structure but it needs to work
on its top management.

National Oil Refinery of Pakistan is working at its best as it has no competitors in Pakistan. It has
good structure but not the best one. They should work on their structure and make it more of
formal.
Innovativeness Analysis

Company Innovativeness
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Mitchell's Exide BASF Barret & Pharma Tech National Oil Qurshi
Hodgson Refinery

Company Innovativeness

Interpretation
The above chart shows the statistics of the innovativeness of the seven different manufacturing
companies which we have selected as our sample for the research from which we have
concluded the results that the innovativeness of each of the company depends upon their
independent variables.

The innovation in Mitchell’s company is near to none because it doesn’t believe in changing the
structure and the methods of work rather this company considers itself to be much of
monopoly which unfortunately it is not. It has no commitment to learn from its competitors like
National about new products and promotional strategies. Its CEO is reluctant to change and
doesn’t wants to change the way of working rather he prefers to work in stable and traditional
way.

The innovation in Exide is Greater than Mitchell’s because of its formal structure of work. This
company needs to work more on innovating new products like its competitors who are
introducing dry batteries, solar panels etc. However, its can be better in innovation if it will
work on making innovative advertisements and promotions like its competitors VOLTA and
OSAKA who are working allot on innovative advertisements and innovative products also.

BASF has low innovation related to its competitors in Pakistan because it is unable to work on
its structure. There is no room for innovation hence it is pharmaceutical company and change is
much of risk and creates huge problems sometimes. Innovative ideas are not much
appreciated because, management thinks that it is just a waste of time to spend time and
money in keeping the employees aware about the firm’s goals.

Barret & Hodgson is more of leading companies in pharma world. The reason we found with the
help of our research is that It is constantly learning from its environment and changing its
structure to meet the needs of the environment and to be competitive enough to retain its
performance in both long and short term. This company has a very good innovation ranking as
compared to others in pharma.

Pharma Tech has an average innovation ranking in the pharma industry. In our research we saw
that It is competitive but not enough to be the lead in pharma. Company although has a good
structure but it needs to work on its top management.

National Oil Refinery of Pakistan is working at monopoly sort of environment as it has no

competitors in Pakistan. It has good structure but not the best one. They should work on their
structure and make it more of formal.

Qurshi has the best rate of innovation among all the companies due to the use of independent
variables in an effective and efficient way. This company has a huge consumer loyalty for which
it works hard. This company has a great Intra-Organizational information sharing among its
departments. Qurshi is very much committed to learn from its competitors.
Management Accounting Analysis

Usage of Management Accounting

6

0
Mitchell's Exide BASF Barret & Pharma Tech National Oil Qurshi
Hodgson Refinery

Usage of Management Accounting

Interpretation
The above chart shows the statistics of the usage of management accounting in the seven
different manufacturing companies which we have selected as our sample for the research
from which we have concluded the results that the innovativeness of each of the company
depends upon their independent variables.

In Mitchell’s management accounting techniques and rules are followed in every decision-
making process because it is a very old company working in Pakistan so it has more of formal
structure that’s why is compulsory for its accounts department to work according to accounting
rules and forecast accordingly.

Exide also has more of formal structure, it is must for accountants to work according to the
management accounting techniques.

BASF also works in structured and formal way so it also works according to management
accounting techniques.

Barret & Hodgson is more of leading companies in pharma world. The reason we found with the
help of our research is that It works in a balance between formal and informal working. Is is
must to work according to the management accounting rules.
Pharma Tech has an average ranking in the pharma industry. In our research we saw that It is
competitive but not enough to be the lead in pharma. Company although has a good structure
but it should be more of formal.

National Oil Refinery of Pakistan is working at monopoly sort of environment as it has no

competitors in Pakistan. It has good structure but not the best one. Use of management
accounting is just by name. They make decisions by using their gut feelings. They do not need
any costing patterns to show their results because the regulatory authorities do not bother to
check them. They should work on their structure and make it more of formal.

Qurshi has the good rate of management accounting usage. It is at best position as due to the
use of independent variables in an effective and efficient way.
Recommendations
We Recommend all the companies of manufacturing sector to increase their commitment to
learning because this is 21st century, the world is more like global village, competition is
becoming tougher and tougher day by day. To remain competitive in the current environment
firms must learn from its environment and change accordingly where needed. Those who will
stop nothing will stop for them. Time doesn’t stop for anyone.

Companies should have shared vision, so that the goals and objectives of the company will be
clear to the employees. And they will work with more commitment and consideration to help
company achieve them.

Companies should have good intra-organizational knowledge sharing because nowadays most
of the work is done by cross functional teams in which members from different departments
work in team together to achieve some objective. If there will be perfect share of information
between them then there will be a great uplift in the performance bar.

Along with the success in this competitive market companies should not forget to concentrate
on the customer feedback. They should have their minds open for the critics and the unsatisfied
customers to work on their flaws to keep loyalty.

The one of the most important factors is the head of the company or top management.
Because they have the power for every good or bad decisions so company should carefully
select its head/CEO. One wrong decision of the top management can make the company bank
corrupt and loose its consumer loyalty/ Brand name and also one good decision can make the
company lead the industry. So top management has a huge role in the performance of the
company.

Structure of the company should be more of formal, but along with that their should be a room
for the innovation which needs a small flexibility in the structure so that if anybody wants to
raise his/her Idea their should be no hurdles/barriers in reaching the decision making authority.
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