Management Control Systems

Chapter 16:
The Influence of Situational Factors on MCSs

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003
Contingency / situational factors
There are no universally best control systems
that apply to every situation in all organizations ...

Contingency factors
- Organizational factors;
- Technological factors;
- Strategic factors; etc.

MCS variables Outcome variables

- Type + tightness of controls used; - Degree of control;
- Design of the budgeting system; - Dysfunctional side-effects;
- Performance measures emphasized; - Control costs.
- Objectivity of performance evaluations;
- Design of reward systems; etc.

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Strategy typologies ...
Corporate diversification strategy
Refers to what businesses the firm should invest in
and how these businesses should be coordinated.
Defines where to compete;
Single business related / unrelated diversified.
Business unit competitive mission
Defines the mission for each of the businesses;
Build hold harvest divest.
Business unit competitive position
Determines how to compete in each of the businesses;
Low cost differentiation
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Corporate diversification strategy ...
Single
High

Business
Firms One line of business.
Degree of Relatedness

Operational synergies
Related based on a common set
Diversifiers of core competencies.

Connection between
businesses is purely
Unrelated financial (holdings).
Diversifiers

Number of Businesses High

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 -4-
 Implications on MCS design ...
Single / Related Unrelated
Business Diversified
Budgets

Control of SBU-manager
Low (?) high
over budget formulation

Importance attached to Low (?) high

meeting the budget

financial and
Bonus criteria primarily financial criteria
Incentives

non-financial criteria
primarily subjective
Bonus determination primarily formula-based
or discretionary (?)

Bonus basis SBU + corporate primarily SBU-performance

performance

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Business unit competitive mission ...
Has to do with the resource allocation
decisions from the corporate office ... HQ

cf., internal capital markets;

Cash generated in one business can S
be used to finance growth in another B
business. U

Depends also on the industry attractiveness,

market opportunities and SBU-competitive ability ...

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 -6-
Portfolio models ...
H Cash source L
H H
?
Market growth rate

Hold Build

Cash use
$$$ Dog
Harvest Divest
L L

H Relative market share L

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The four missions ...

Build Hold Harvest Divest

Maximize
Invest in MS even
ST-earnings / CFs
at the expense of
even at the
ST-earnings / CFs
expense of MS

Protect MS and Outright sale -

competitive position Slow liquidation

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 -8-
Implications on MCS design ( 1)
BUDGETS Build . Harvest
Control of SBU-manager
over budget formulation relatively high relatively low
Budget revisions relatively easy relatively difficult
during the year
Budget reporting rather interactive rather diagnostic
Tolerance towards
budget deviations relatively high relatively low
Importance attached to relatively low relatively high
meeting the budget
Subjective Objective
Interpersonal Administrative
Strategic Financial

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Implications on MCS design ( 2)
Build . Harvest

INCENTIVES more emphasis on primarily

Bonus criteria non-financial criteria financial criteria

Bonus determination primarily subjective primarily

or discretionary (?) formula-based

CAPITAL more emphasis on more emphasis on

BUDGETING non-financial criteria financial criteria
Evaluation of
capital investments more subjective more objective
and qualitative and quantitative

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 - 10 -
Business unit competitive strategy ...

Industrys competitive structure

Threat of new entry;

Threat of substitutes;
Power of suppliers;
Firms competitive advantage
Power of buyers;
Direct rivalry.
Cost leadership ...
Achieve low cost relative to competitors
Differentiation
Create something which is perceived unique by the customer

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 - 11 -
Low cost differentiation
Cost leadership Differentiation
economies of scale brand loyalty
tight cost control superior customer
service
standard products
product features
cost minimization
product design
standardized tasks and
production processes technology

different business unit strategies require different MCS ...

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 Implications on MCS design ( 1)

BUDGETS Low Cost Differentiation

Control of SBU-manager
over budget formulation relatively low relatively high

Budget revisions relatively difficult relatively easy

during the year
Tolerance towards
budget deviations relatively low relatively high

Importance attached to relatively high relatively low

meeting the budget

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 - 13 -
Implications on MCS design ( 2)
Low Cost Differentiation

INCENTIVES primarily more emphasis on

Bonus criteria financial criteria non-financial criteria

Bonus determination primarily more subjective

formula-based or discretionary (?)

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 - 14 -
Differences across countries ...
Behavioral similarities
Self-interest is probably a universal behavioral trait.

Factors that affect MCSs across countries

National culture
Peoples tastes, norms, values, social attitudes, religions,
personal priorities, and responses to interpersonal stimuli.
Local Institutions
Government agencies, banking systems, labor unions,
financial markets, accounting rules, regulations, etc..
Local business environments
Stage of economic development, political risk, inflation,
labor availability, labor quality, labor mobility, etc.
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Cultural differences ...
National culture has a direct effect on MCS because
control problems are behavioral problems.
Individualism
Incentives based on individual vs. group performance;
Degree of engaging in myopic, self-centered behavior.
Power distance
Degree of centralization of decision-making;
Degree of participation in setting performance targets.
Uncertainty avoidance
Degree of subjectivity in performance evaluations;
Degree of formality of planning / budgeting processes.
Masculinity
Degree of performance-based rewards.
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Local institutions ...
Labor unions
Use of performance-based rewards
(>< seniority-based).
Financial markets and stock market valuations
Frequency of profit measurement;
Use of short-term incentives;
Likelihood of myopic behavior.
Threat of hostile takeovers
Use of reward schemes to get common stock
in managers and employees hands.
Accounting regulations
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Local business environments ...
Risk and uncertainty-related factors
Business risk
Military conflicts, bombings, corporate espionage, etc.
Political risk
Negative: forced production, prohibition of layoffs, price controls;
Positive: tariff barriers, subsidies, research support, etc.
Stage of economic development
Age and size of corporations, degree of computerization, degree
of development of accounting, information, and control systems.

Inflation
Financial risk (e.g., use of flexible budgeting).

Labor Availability, Quality, and Mobility

Use of action controls, personnel controls, and long-term incentives.

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Foreign currency translation ...
Local managers bear foreign currency translation risk if
their performance in measured in home-country currency.
Can subsidiary managers control this risk?
Authority to make cross-border investment, product sourcing,
or marketing decisions;
Authority to write purchase or sales contracts in one currency
or another;
Authority to make foreign exchange transactions (hedging,
swaps, or arbitrage).
If not,
Evaluate manager in local currency;
Treat foreign exchange losses and gains below the line;
Calculate foreign exchange variance and treat is as uncontrollable;
Flex the budget to end-of-year currency rates.

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