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The Coffee Pot: A management control exercise

Article  in  Journal of Accounting Education · December 2007

DOI: 10.1016/j.jaccedu.2007.08.002

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 Available online at www.sciencedirect.com
Journal of
Accounting
Education
J. of Acc. Ed. 25 (2007) 193–206
www.elsevier.com/locate/jaccedu

Teaching and educational note

The Coffee Pot: A management control exercise

Norman T. Sheehan *

Department of Accounting, Edwards School of Business, University of Saskatchewan,

25 Campus Drive, Saskatoon, SK S7N 5A7, Canada

Abstract

Managers use management control systems to actively steer their organizations towards strategic
success. The Coffee Pot is a short, in-class exercise that provides a hands-on opportunity for students
to diagnose and solve an organization’s management control issues using Simons’ Levers of Control
Framework. The exercise features a chain of coffee shops, a business most students should be famil-
iar with, and asks students to discuss why the new CEO is having trouble improving her firm’s per-
formance, even after she has introduced a winning strategy.
Ó 2007 Elsevier Ltd. All rights reserved.

Keywords: Management control; Competitive analysis; Levers of control

While sipping her morning coffee, Brooke takes stock of all that has happened since her
dad died eight months ago. Giving into her family’s wishes, Brooke quit her job as a bio-
chemical engineer and moved back to Springfield to take over as President of The Coffee
Pot. Sadly, things have not gone well. The Coffee Pot was still losing money and Brooke
missed her father more than ever. He had been a charismatic guy, who used to spend his
days visiting and playfully joking with The Coffee Pot staff while conveying his vision of
how the perfect coffee shop should be run. In essence, he wanted all Coffee Pots to be the
same – each would have the same friendly service, quality coffee, and inviting atmosphere.
Today, Brooke thought, this was definitely not the case. In fact, due to high staff turnover,
it was rare to even be served by the same person on successive visits.

*
Tel.: +1 306 966 4801; fax: +1 306 966 2514.
E-mail address: Sheehan@Edwards.usask.ca

0748-5751/$ - see front matter Ó 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jaccedu.2007.08.002
194 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206

Brooke’s father founded The Coffee Pot in the early 1980s and had grown it to eight loca-
tions, starting in Springfield before expanding to Peoria. The Coffee Pot flourished during
the 1980s and 1990s, but had lost money in recent years. Despite losing money, Brooke’s
father had not altered its strategy, which was based on being located in shopping mall food
courts and relying on walk-by traffic. Realizing this, Brooke’s first priority as Company
President was to develop a new strategy. Strategic analysis quickly confirmed that The Cof-
fee Pot could not compete with Starbucks. The company therefore needed to find another
way to compete if it were to be successful. Fortunately, Brooke’s father had diagrammed
a new brewing technology that would significantly reduce cost. Using her bio-chemical engi-
neering knowledge, Brooke built a prototype of his brewing machine, which she called the
cold mesamosis brewing system. After extensive taste-testing, the new brewing machine was
declared a success; it brewed seven to eight times the amount of coffee from the same coffee
grinds without affecting the taste. In fact, the taste was as good in the eighth brewing as the
first. Spurred by the success of the prototype, Brooke borrowed money from the bank to
construct eight machines, and quickly installed them in all The Coffee Pots. With lower costs
assured, Brooke embarked on a strategy of targeting price-sensitive coffee drinkers.
In the months that followed, Brooke worked part-time, spending the rest of her days
with her children and widowed mother. Still, Brooke was shocked when two weeks ago
she received the quarterly financial report and saw that The Coffee Pot, Inc. was still losing
money. Worse yet, there were not enough funds in the bank to meet the monthly loan pay-
ment. Looking for answers, Brooke called Auntie Susan, her bookkeeper, who had been
with The Coffee Pot since finishing high school in 1982. All Auntie Susan could do was
send over previous quarterly financial reports. Brooke noticed that the quarterly reports
lacked detail and there was a pattern of decreasing earnings despite her father’s handwrit-
ten notes indicating that shop managers had promised each quarter to improve.
After reviewing the quarterly reports, Brooke realized she needed help. She decided to
call an old schoolmate, Jane, who was a partner in a small accounting firm. While Brooke
searched for Jane’s phone number, Jack, the manager responsible for Administration, Pur-
chasing, and Human Resources (HR), dropped by to show off his newest golf club, which
one of the Coffee Pot’s suppliers had just sent him. Brooke had grown to like Jack whom
her dad, due to his failing health, had hired a couple of years ago. Jack frequently pro-
vided her with free tickets to concerts, hockey games, etc., which he received from suppli-
ers. Before Jack left her office, Brooke congratulated him on beating his previous quarter’s
numbers and, thus, earning his quarterly bonus. Jack often changed suppliers as he chased
the lowest prices; his purchasing strategy appeared to be working as purchasing costs were
lower than last year. His training expenses were also down, even though staff turnover was
significantly higher than last year.
Still sipping her morning coffee, Brooke begins to read the report Jane had just sent
over. Jane writes that she strongly supports Brooke’s strategy, but has three areas of
concern:

 The Coffee Pot had overpaid lease rentals in some malls.

 Although Jane suspected no problems, The Coffee Pot, Inc. has never been audited.
 Brooke’s biggest shock was reading that a recently hired manager in Peoria had dou-
bled the size of the shop by taking over the lease of the adjacent space and was serving
pizza and beer. The manager justified this to Jane by saying that due to the coffee bean
quality he needed to expand the shop’s product offerings.
 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206 195

Still unsure what to do, Brooke gets ready to leave for The Coffee Pot’s quarterly man-
agement meeting. She is confident that her new strategy of offering quality, low-cost coffee
to mall shoppers is the right one, but is uncertain how to make it pay off.

1. Requirements

1. Analyze The Coffee Pot’s competitive environment using Porter’s Five Forces. When
completed, propose key success factors for The Coffee Pot given its competitive
situation.
2. Discuss the management control issues that may be hindering Brooke from increasing
The Coffee Pot’s profitability.
3. Use Simons’ Management Control Framework to derive recommendations that
address the issues raised above.

2. Teaching notes

There is anecdotal evidence that many well-formulated strategies fail due to poor imple-
mentation (Bossidy & Charan, 2002). Management control frameworks enhance organiza-
tional performance by ensuring the implementation of the organization’s stated strategy
(Merchant & Van der Stede, 2003; Simons, 2000). The primary aim of the Coffee Pot exer-
cise is for students to apply Simons’ Levers of Control Framework to diagnose and gen-
erate recommendations that improve The Coffee Pot’s performance.1 The exercise is
purposely brief so that it may be used without advance student preparation, but is still rich
enough to provide a meaningful discussion of key management control problems and
solutions.

3. Instructional guidance

The exercise is intended for use by undergraduate and graduate students who are study-
ing the design and use of management control systems as part of a cost or management
accounting course. The exercise provides an excellent background prior to covering a
number of Simons’ Harvard Business School cases, including ‘‘Nordstrom: Dissension
in the Ranks (A),’’ ‘‘J Boats, Inc.,’’ ‘‘ATH Technologies, Inc.: Making the Numbers,’’
‘‘Automation Consulting Services,’’ and ‘‘Guidant Corporation: Shaping Culture
Through Systems.’’ If the instructor is not using Simons’ (2000) textbook, recommended
preparatory reading is either Simons (1995) ‘‘Control in the Age of Empowerment’’ or
Sheehan (2006) ‘‘Want to Improve Strategic Execution? Simons Says Levers.’’
The exercise can be taught in at least two different ways. If the instructor wants to
discuss The Coffee Pot’s competitive environment and key success factors as well as the
management control issues, all three questions should be assigned; in this case, the exercise
will take approximately 80 min. If the instructor wants to focus solely on the management

1
See endnote 3 for recommendations using Merchant’s (Merchant & Van der Stede, 2003) Results, Action and
Personnel/Culture Controls.
196 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206

control issues, then only Questions 2 and 3 should be assigned, which can be covered in
50 min.

4. Question 1 – Analyzing The Coffee Pot’s competitive environment (25–30 min)

The analysis of The Coffee Pot’s competitive environment is taught in three steps. Step I
provides students time to read the exercise. Step II analyzes The Coffee Pot’s competi-
tive environment using Porter’s (1980) Five Forces Framework, while Step III asks stu-
dents to outline key success factors for The Coffee Pot given the competitive pressures
it faces.

4.1. Step I – Individual reading (8 min)

Provide students the exercise to read and ask them to focus on The Coffee Pot’s com-
petitive environment and management control issues. Inform students they have 8 min
noting that if they are finished early they may take notes, which allows for the fact that
some students read faster than others.

4.2. Step II – Analysis of The Coffee Pot’s competitive environment (15–20 min)

Start the class discussion by asking students if The Coffee Pot is in an attractive indus-
try. After fielding a number of comments, propose that students need a tool to help struc-
ture their analysis. Porter’s (1980) Five Forces Framework provides users with a set of
comprehensive questions to help assess who captures the value created in the industry.

4.2.1. Bargaining power of buyers

If buyers have significant bargaining power they can force The Coffee Pot to either
accept lower prices, which decreases their sales revenues, or to improve quality, which
increases their cost. Inquire if any students have successfully negotiated a lower price
for a cup of coffee. Have students been able to force the coffee shop to accept a lower sales
price? The answer is most likely no. The bargaining power of buyers is very low as indi-
vidual retail consumers typically have little ability to negotiate lower purchase prices.

4.2.2. Substitutes
If substitutes are attractively priced and widely available, then these substitutes may
reduce sales volumes, limit the price, or force The Coffee Pot to incur additional costs,
all of which will negatively affect profitability. Ask students what other beverages may
be substituted for coffee. Answers may include sport drinks, energy juice, soda pop, bot-
tled water, and even alcoholic beverages – if one includes the social aspect provided by cof-
fee shops. Making your own coffee is another robust substitute for buying coffee in coffee
shops. While Mr. Coffee and other traditional filter coffee machines may not be perceived
as strong substitutes in terms of taste, note that the competitive landscape is changing.
Manufacturers, such as Kraft, Procter & Gamble, and Braun, have introduced new sin-
gle-serving, premium coffee machines that successfully mimic the taste of coffee bought
 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206 197

at a coffee shop at one-fifth to one-tenth of the cost per serving.2 If this type of substitute
catches on, it will reduce quantity sold and may limit the price consumers would be willing
to pay at coffee shops. Overall, coffee substitutes are a strong threat as they are equally
appealing, widely available, and cost competitive.

4.2.3. Rivalry
If rivals are plentiful and offer similar products at similar prices, then this will reduce
The Coffee Pot’s sales volume, force it to reduce its prices, or cause The Coffee Pot to
enhance its quality, which will increase its costs. Ask students if there are many coffee
shops near campus or where they live. Do students have a significant amount of choice
as to where they can buy coffee? Point out that Starbucks often has locations within
blocks, if not across the street from each other in many cities. Ask students how do the
coffee shops compete? Are there significant differences in prices or offerings? Suggest that
rivalry among coffee shops is intense; coffee shops are ubiquitous and it is difficult to dif-
ferentiate on the basis of taste and service. Typically successful coffee shops, like Star-
bucks, differentiate themselves based on their milieu and brand name.

4.2.4. Threat of new entrants

If it is easy for new entrants to enter the industry, then The Coffee Pot’s sales revenues
will decrease over the longer term. Ask students if it is easy to establish a new coffee shop.
Is there anything to prevent an entrepreneur from opening a coffee shop across the street
from an existing coffee shop? Is it difficult to access space, coffee supplies, equipment, and
employees? Typically, the answer is no. The fact that it is easy to enter this industry will
mean that once any coffee shop begins to make abnormal profits, others will enter, imitate
the incumbent’s offering, and ultimately drive its profits down.

4.2.5. Bargaining power of suppliers

If suppliers have significant bargaining power, then they can charge higher prices for
their goods, which increases The Coffee Pot’s costs. Ask students who the major suppli-
ers to coffee shops are. Instructors can paraphrase this to ‘‘what would be the major
expense items on the income statement of a typical coffee shop?’’ Students may list cof-
fee bean producers, employees, and mall management who supply retail space. Ask if
any of these suppliers has the power to increase a coffee shop’s cost. Instructors can
note that coffee beans are a commodity and, thus, individual growers have little power
to raise prices. While the price of coffee beans goes up and down, price is determined by
aggregate supply and demand conditions in the market. Note that, as opposed to movie
stars or star football players, employees of coffee shops have little power to unilaterally
increase their wages. Mall management may have some power to increase the lease ren-
tal, especially if the location is an attractive one. Overall, however, the bargaining

2
For example, Braun’s Tassimo TA 1400 is a hot beverage system that, the company claims, makes ‘‘the perfect
cup.’’ Consumers insert the appropriate ‘‘T DISC’’ into the Tassimo, choose the strength, and then press the
button to make a cup of cappuccino, latte, espresso, tea, or hot chocolate. The system retails from US$ 120 to 160
and the individual ‘‘T DISCs’’ cost between US $0.25 and $1.00 each depending on the beverage type.
198 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206

power of suppliers is low as suppliers have a little leverage to increase The Coffee Pot’s
costs.
Have a student summarize the findings from the Five Forces analysis by again asking if
The Coffee Pot is in an attractive industry. The message should be that even though the
suppliers and buyers have low bargaining power, the industry is unattractive as coffee buy-
ers have many equally appealing, cost competitive alternatives both inside and outside the
industry.

4.3. Step III – Discuss key success factors (5 min)

Given that this is an unattractive industry, what are the key success factors for smaller
coffee shops, like The Coffee Pot? Instructors may prod students by asking them why they
remain loyal to their coffee shop. What are students’ key buying criteria? This should
encourage debate, but students’ answers typically will converge on the following key suc-
cess factors: quality coffee, a service experience that is consistently polite, fast, and accu-
rate, and for those who remain in the shop, a comfortable environment in which to enjoy
the coffee. Because the discussion here will likely focus on their own buying experience,
students may overlook the need to control cost. Make the point that given The Coffee
Pot’s competitive environment, cost management will be critical to its survival. At this
point, instructors may finalize the discussion by stating that because Brooke is targeting
the price-sensitive segment, she must keep her costs down – while still offering great service
and quality coffee in a comfortable environment.

5. Question 2 – Discussion of the management control issues hindering Brooke from

increasing the coffee pot’s profitability

The discussion of Question 2 involves four steps. Step I introduces students to the role
of management control systems. If the students have not read the exercise as part of the
discussion of Question 1, then Step II provides time for students to read and reflect on
the exercise individually. Step III allows the students to share their thoughts with others
in small groups. In Step IV, students are asked to share their thoughts with the rest of
the class. If the students have already read the exercise as part of the discussion of Ques-
tion 1, then the identification and discussion of management control issues in Question 2
may take 25 min. However, if the instructor skipped Question 1, then the discussion of
Question 2 may take 35 min as students will need the time provided in Step II to read
and reflect on the exercise.

5.1. Step I – Introduction to role of management control (5 min)

As a way of linking management control to the strategy discussion in Question 1 and

framing the discussion that follows in Questions 2 and 3, have students suggest what is the
role of management control systems. Prompt them by asking why organizations invest sig-
nificant resources in budgets, internal controls, and balanced scorecards. After soliciting
their ideas, explain that for various reasons employees may not always act in the organi-
zation’s best interest. The role of management control systems is to help align employee
actions with the organization’s strategy.
 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206 199

5.2. Step II – Individual reading (8 min)

After outlining the role of management control systems, provide students the exercise to
read, telling them they have 8 min and noting that if they are finished early they may take
notes, which allows for the fact that some students read faster than others.

5.3. Step III – Small group discussion (10 min)

After the 8 min reading period is up, ask students to split into groups of three. Before
they start the small-group discussion ask them to focus on the management control issues.
If this is not done, there is the chance that students, especially those who have recently
completed a strategy/business policy class, will view the exercise through a strategy formu-
lation lens. Give each group 10 min to discuss issues that may be preventing Brooke from
increasing the profitability of The Coffee Pot. During this time, the instructor may wander
from group to group asking students if they require assistance.

5.4. Step IV – Class discussion of management control issues (10–15 min)

Call ‘‘time’’ and ask for factors that appear to be hampering Brooke from increasing
the profitability of The Coffee Pot. Have students share their group’s brainstorming ideas
and write them on the blackboard in the order given by students:

 The service and feel of each Coffee Pot is different, which may be due to high turnover
and lack of employee training.
 A reduction in employee training exists, which may also lead to poor customer service
and lower service standardization across shops.
 The Peoria manager has leased additional space without Brooke’s knowledge or
approval, and is selling pizza and beer, which is a clear deviation from The Coffee Pot’s
new strategy.
 The Admin/Purchasing/HR manager is accepting gifts from suppliers, which may influ-
ence his purchasing decisions.
 Bonuses are based on beating last quarter’s numbers, which may be why the Admin/
Purchasing/HR manager chases the lowest cost coffee beans (which in turn may nega-
tively impact the quality of the coffee beans purchased).
 Financial statements are not detailed and are prepared only on a quarterly basis.
 A further symptom of weak financial reporting is the overpayment of leases.
 The profitability of each shop is down and managers have not been held accountable
for their results.
 Budgets have not been prepared.
 The Coffee Pot failed to meet its quarterly bank loan repayment, which may be related
to a lack of cash forecasting.
 The Coffee Pot has never been externally audited, which may mean there are other
problems.
 There may be no segregation of duties, which could be related to The Coffee Pot’s size.
 Auntie Susan joined The Coffee Pot just out of high school and may not be fully trained
as an accountant.
200 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206

 The strategy has not been revised since its initial formulation in the 1980s, which indi-
cates that Brooke’s father lacked a system to monitor changes in the environment and
respond accordingly.

In order to assist students in proposing recommendations that addresses the prob-

lems raised above, instructors should outline Simons’ (2000) Levers of Control
Framework.3

6. Question 3 – Addressing Brooke’s issues using Simons’ levers of control framework (25–
30 min)

Begin the discussion of Question 3 by congratulating the students for identifying The
Coffee Pot’s problems and then suggest that students need an organizing framework to
help them come up with robust recommendations which address these problems. Propose
and draw Simons’ (1995; 2000) Levers of Controls Framework on the board while briefly
explaining each of the levers and its role (note: a one-page introduction to Simons’ Levers
is provided in the Appendix). Start your explanation with business strategy, since an orga-
nization’s control system should relate back to what the organization is trying to
accomplish.

6.1. Business strategy

This outlines how The Coffee Pot competes in terms of the unique value proposition it
offers potential customers. The Coffee Pot’s new strategy is to offer low-cost, quality coffee
to mall shoppers.

3
The following are recommendations using Merchant’s Results, Action and Personnel/Culture Controls
framework:
Results controls. Brooke should base the incentive system on budgeted results instead of just beating last quarter’s
numbers. Brooke should also base a portion of the Admin/Purchasing/HR manager’s (Jack) bonus on the
corporation’s profit before taxes rather than just on reducing coffee and training costs. At present, Jack is
encouraged to reduce these costs without concern for how this may negatively affect the customer experience, and
ultimately sales revenues. Second, Brooke needs to upgrade the financial reporting system.
Action controls. Because Brooke is less involved in the business than her father was, she needs to outline which
activities are off limits for employees. First, she should make it clear it is not acceptable to take gifts from
suppliers. Second, Brooke needs to develop and clearly communicate a strategic mission statement for The Coffee
Pot which outlines what it will sell, who it will sell to, and how it will do it. This should hinder actions such as the
Peoria manager selling pizza and beer. Lastly, Brooke should investigate adopting additional internal controls,
such as segregating some duties.
Personnel/culture controls. The culture and values, which Brooke’s father worked hard to instil, have largely fallen
by the wayside as each Coffee Pot now has a different atmosphere and level of service. Brooke needs to define
what The Coffee Pot will stand for and infuse these values into its’ employees. One way to do this is to write a
formal value statement. Reinforce the point that it is necessary for Brooke to live these values, otherwise they may
be viewed by employees as just nice, vague words. New employees should be hired for their fit with these values
and should be given adequate orientation to the firm’s value system during training. Lastly, Brooke should
consider upgrading the competence level of the accounting function as Auntie Susan does not appear up to the
challenges Brooke is facing.
 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206 201

6.2. Belief systems

These outline the core values of the organization; that is, what the grand purpose of the
organization is and how the organization will treat its key stakeholders. Vision statements
and core value statements are examples of belief systems.

6.3. Boundary systems

These outline the areas that employees are allowed to act within. Organizations have
two levels of boundary systems. At the strategic level boundary systems delineate where
and how the organization will compete. For example, Microsoft has said it is a software
company and will never enter the hardware industry. Examples of strategic boundaries are
often found in an organization’s mission statement. At the personal level, boundary sys-
tems outline which employee activities are off limits. For example, many organizations
have codes of conduct, which state that it is unacceptable to accept from suppliers any gift
whose value exceeds $20.

6.4. Diagnostic control systems

Diagnostic controls communicate the organization’s strategic plan and provide feed-
back on whether the organization has been successful in achieving its plan. This control
system involves developing systems, such as budgets, cash forecasts, and balanced score-
cards, which track the organization’s actual performance against plan, and then following
up any large deviations.

6.5. Interactive control systems

Interactive controls monitor the ongoing validity of the organization’s strategy in real
time. Senior managers continually gather information about and debate how changes in
the organization’s key strategic uncertainties may impact the ability to achieve its strategy,
and then make adjustments to the strategy, as needed.

6.6. Internal controls

These systems safeguard assets from theft or misuse and ensure the accuracy of finan-
cial reports. Examples of internal controls are segregation of duties, physical security of
assets, and password protected systems.
Once instructors have drawn and briefly explained each of Simons’ Levers, use this
framework to analyze the issues that Brooke is facing. Accomplish this by having students
suggest which issues should be allocated to each lever. Once completed, the blackboard
may look like this (see Fig. 1). The next step is to have students use their knowledge of
each lever to generate recommendations for Brooke.

6.7. Belief systems

Brooke faces a key challenge. The culture and beliefs that her father worked hard to
instil have largely fallen by the wayside as each Coffee Pot store now has a different look
202 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206

Simons’ Levers of Control Framework - Diagnosis

No Belief Boundary Jack
common accepting
vision since
Systems Systems gifts
dad died
Peoria
Little Perspective Position manager not
training of following
new staff new strategy
– it sells
Business Lower cost
pizza and
coffee for beer
Strategy shoppers

Her dad did No budgets

No audit
not track key Pattern Plan Weak financial
changes in No segregation
environment reporting
of duties?
and missed
Interactive Diagnostic No
Starbucks’ Auntie Susan accountability
revolution Control not a qualified Control for results
Systems accountant? Systems
No cash
Internal Controls forecasting

Fig. 1. Issues decreasing The Coffee Pot’s profitability.

and feel. Brooke needs to define what The Coffee Pot will stand for and infuse these values
into her employees; instructors can elicit comments from students on what these may be.
Reinforce the point to students that it is necessary for Brooke to ‘‘walk the walk’’ (i.e., her
actions need to mesh with her words), otherwise the beliefs may be viewed by employees as
just nice, vague words. Part of the employee orientation and training should be used to
review and discuss these beliefs. Currently, there is high turnover and the training budget
is below last year, which may indicate that this type of training is not being provided to
new employees.

6.8. Boundary systems

The Coffee Pot does not have a code of employee conduct, a situation that is typical for
smaller firms with an active owner/manager. However, given that Brooke is less involved
in the business than her father was, she needs to outline at each of two levels which activ-
ities are off limits for employees. First, at the personal level she should make it clear it is
not acceptable to take gifts from suppliers. One can argue that one reason for the poor
results is that, Jack, the Admin/Purchasing/HR manager is making purchasing decisions
based on lowest cost (which increases his bonus) or the best gifts (i.e., concert tickets or
golf clubs), rather than procuring the highest quality coffee supplies per dollar spent.
Brooke also needs to outline boundaries at the strategic level. The Coffee Pot’s current
strategy is to sell low-cost, quality coffee to mall shoppers. The manager in Peoria, who
expanded his shop and is selling pizza and beer, has clearly overstepped this boundary.
The best way to delineate the strategic boundaries is to develop and clearly communicate
a mission statement for The Coffee Pot, a statement that outlines what the business will
sell, who it will sell to, and how it will accomplish this.
 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206 203

6.9. Diagnostic control systems

The Coffee Pot’s financial reporting system is very weak, which is typical of a smaller
firm where the owner/manager is actively running the business. Brooke’s father probably
did not need monthly reports because he had a good feel for what was going on. However,
Brooke needs to improve the financial reporting system. One area that requires immediate
attention is the timeliness of financial reports. Instructors can ask students how often
Brooke should receive financial updates: daily, weekly, or monthly? Brooke should also
increase the level of detail provided by the financial reports. Instructors may want to iden-
tify the key performance metrics for a coffee shop. If there is time, instructors may want to
introduce the concept of a balanced scorecard at this point and explore what a rudimen-
tary scorecard for The Coffee Pot might look like.
Another important area is the incentive system. Brooke may want to base the incentive
system on budgeted results instead of just beating last quarter’s numbers. Brooke should
look at basing a portion of Jack’s bonus on the corporation’s profit before taxes rather
than just on coffee and training costs. At present, Jack is being encouraged to reduce these
costs without concern for how this may negatively affect the customer experience, and ulti-
mately The Coffee Pot’s sales revenues.

6.10. Interactive control systems

One can argue that The Coffee Pot lacked an interactive control system to monitor envi-
ronmental changes and on the basis of such monitoring update its strategy as required.
Brooke’s father clearly missed the Starbucks’ revolution as evidenced by the fact that
The Coffee Pot has not altered its strategy since its start-up in the early 1980s. If The Cof-
fee Pot is to survive, Brooke will need to scan its environment for opportunities and
threats. Instructors can press the students here by asking what Brooke should be monitor-
ing – which key strategic uncertainties may nullify her current strategy? Students should
note one threat to The Coffee Pot is the movement from shopping in malls to shopping
at big box stores located in a larger version of strip malls (which some label ‘‘power cen-
tres’’). If mall traffic continues to fall, Brooke may want to consider adjusting her strategy
by opening a coffee shop near big box outlets. On a related note, it is becoming increas-
ingly popular to pick up a coffee via the drive-thru on the way to work, to a meeting, chil-
dren’s soccer, etc. If this trend continues, it could hurt Brooke’s strategy as Coffee Pots are
located inside malls. Further, students may argue that coffee’s popularity plays a large
role. If for some reason coffee were to be perceived as unhealthy, it may be supplanted
by energy juice, sports drinks, vitamin-enriched water, or even plain bottled water.

6.11. Internal controls

There are a number of internal control measures that Brooke should evaluate for adop-
tion. Firstly, although a yearly financial audit may be desirable, it is probably not afford-
able. Perhaps Brooke could hire an auditor to do a review engagement, which offers a
lower level of assurance, but at a reduced fee. A second issue is the segregation of duties.
Resource constraints may mean this option is not feasible; however, Brooke should deter-
mine whether some cash-related duties could be performed by another senior manager. At
the very least, she needs to improve the payables system to ensure that all payments,
204 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206

including leases, are for the right amount to the correct vendor. Lastly, given the inade-
quate reporting, lack of financial advice provided, and the overpayment of leases, Brooke
should consider upgrading the accounting function. As a part-time bookkeeper, Auntie
Susan does not appear up to the challenges Brooke is facing. Brooke needs proactive
financial advice to properly manage The Coffee Pot going forward.
After completing the class discussion surrounding the suggested improvements to The
Coffee Pot’s control system, the blackboard may look like this (see Fig. 2). Congratulate
the students for applying their existing knowledge along with Simons’ Levers of Control
tool to come up with a concrete set of recommendations that should allow Brooke to enjoy
greater success. Conclude the discussion by noting that the majority of strategies fail not
due to poor formulation, but rather due to poor implementation (e.g., Bossidy & Charan,
2002). The main benefit of Simons’ Levers of Control Framework is that it provides man-
agers with tools which help to tilt these odds in their favor.

6.12. Experiential use

The exercise has been used with eight sections of undergraduate accounting students
taking a senior-level course in Management Planning and Control. I collected sum-
mary-level data on the exercise’s usefulness as an introduction to management control
using Simons’ Levers of Control as the framework. After completing the in-class exercise,
students were asked to anonymously rate their perceived level of learning using a 1–10
scale where a 1 indicated that ‘‘I have learned nothing from the exercise’’ and a 10 indi-
cated, ‘‘I have an excellent understanding of the concepts employed in the exercise.’’
The Coffee Pot received an overall rating of 7.55/10 (n = 210), which indicates that the

Simons’ Levers of Control Framework - Recommendations

Infuse her Belief Boundary At employee
values into level –
firm with a
Systems Systems introduce a
vision code of
statement Perspective Position conduct

Train staff At strategy

to offer level – define
consistent strategic
Business Lower cost
service mission
coffee for
Strategy shoppers

What should Have a review Improve

be monitored: Pattern engagement? Plan financial
reporting
# of Mall Is it feasible to system
shoppers? separate
Interactive duties? Diagnostic Change
Way people bonus system
consume
Control Hire a qualified
Control
coffee? Systems accountant? Systems Budgets

Coffee’s Internal Controls Balanced

popularity? Scorecard?

Fig. 2. Recommendations to enhance The Coffee Pot’s profitability.

 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206 205

exercise met the learning objective of introducing students to the role of management con-
trol, and in particular, to Simons’ Levers of Control Framework. The exercise has also
been used as an introductory management control exercise by two other instructors. Both
instructors reported that relative to their experience with other in-class cases, the exercise
was effective in reviewing Simons’ Levers of Control.
The exercise has also been the focus of six management training sessions. The Coffee
Pot exercise was used to illustrate how Simons’ Levers of Control can be applied to diag-
nose and improve organization performance. Managers’ written feedback was very posi-
tive: ‘‘Liked how The Coffee Pot example was used through various parts – kept continuity
and built on the principles.’’; ‘‘Interesting content and excellent case study. This informa-
tion is not something normally given as part of any courses/training.’’; and ‘‘Case studies
contributed to presentation’’.

Acknowledgements

I wish to thank Ganesh Vaidyanathan, Fred Phillips, Murray Lindsay, James Rebele
(editor), David Stout (associate editor), anonymous reviewers, and participants at the
2005 MAS Mid-Year Conference for their comments on earlier drafts.

Appendix. Introduction to Simons’ Levers of Control

Year after year Southwest Airlines and Starbucks outperform their rivals. A key differ-
ence between Southwest Airlines and Starbucks and the many organizations trying to imi-
tate their success is their superior execution capabilities. The majority of business
strategies fail to reach their potential, not due to poor strategy formulation, but rather
due to poor strategy implementation. Simons (2000) outlines four levers managers can
use to put their strategic implementation back on track. The centre piece of Simons Levers
of Control Framework is a performance measurement system, which he labels ‘‘diagnostic
controls.’’
Diagnostic controls. Diagnostic controls provide feedback on whether the organization
is achieving its stated plan. Measuring and monitoring the activities that lead to strategic
success, ensures they are done. Examples include budgets, cash forecasts, key performance
indicators, and balanced scorecards. This is managing by the numbers; management sets
targets, monitors if they are achieved, and then rewards staff if they are. Dell is famous for
its focus and follow-up on all factors that affect its ‘‘Return on Capital Employed.’’ Dell
continually looks for ways to improve its asset turnover and margin and rewards its
employees handsomely when this occurs (i.e., they become ‘‘Dellionaires’’). Unfortunately,
diagnostic controls are not enough on their own to ensure successful strategy execution.
Enron provides an example of how setting stretch targets and rewarding managers when
achieved encouraged undesirable behaviors. Because of this, managers need to employ a
second lever.
Boundary systems. Boundary systems identify employee behaviors that may place the
organization in jeopardy and then declares these behaviors ‘‘off limits.’’ Like the Ten Com-
mandants it states the ‘‘thou shall nots’’ (e.g., rules on dealings with customer and suppli-
ers, providing bribes and accepting gifts, etc.). For example, Starbucks’ code of conduct
states it will only buy fair-trade coffee beans. However, while boundary systems such as
206 N.T. Sheehan / J. of Acc. Ed. 25 (2007) 193–206

codes of conduct or statements of ethical principles make it clear which employee actions
are acceptable and eliminate ignorance as a defence, they still do not provide a 100% guar-
antee against employee misconduct. The best defence against this is Simons’ third lever,
belief systems. Getting employees to have an emotional stake in what the organization
is trying to accomplish mitigates this type of risk.
Belief systems. While performance targets and boundaries appeal to the employee’s
rational side, beliefs appeal to the employee’s emotional side. Beliefs explain what the
organization stands for and serve to inspire and motivate employees to make a difference.
Employees who have bought into the organization’s beliefs are excited to come to work
and find new ways to enhance the organization’s value proposition. For example, South-
west’s employees have bought into core corporate values of fun, and customer service,
which keeps everyone ‘‘on message’’ when dealing with passengers and other stakeholders.
On the other hand, Enron appeared to have had a culture of deceit and complicity, which
manifested itself in dealings with investors, creditors, and auditors. While the three levers
are extremely effective in getting a strategy executed, what happens if the organization’s
external environment changes after the strategy is drawn up and handed down?
Interactive controls. Interactive controls monitor the ongoing validity of the organiza-
tion’s strategy as the external environment changes. Of the Fortune 100 firms listed in
1978, only one-third still existed in 2003. The main reason for extinction is the failure
of organizations to recognize and adapt to large changes in its environment. For example,
Sony failed to adapt to changes in the portable music player industry. The Sony Cassette
Walkman and, to a lesser extent, the Sony CD Discman dominated the portable music
player industry for almost two decades. Given its previous successes, one may have antic-
ipated that Sony would dominate the digital generation of the portable music player indus-
try as well. Currently, however, this industry is dominated by Apple’s iPod, while Sony’s
portable mp3 players are struggling to achieve a 5% market share. In hindsight, it appears
Sony underestimated the acceptance and impact of the mp3 technology as well as the
importance of iTunes. If organizations are to prosper in the longer term, they need a sys-
tem that monitors environmental changes and then motivates organizations to update
their strategies in real-time.
While not easy, when managers get the levers to work in concert they begin to realize
the full potential of their organization’s strategy in terms of achieving higher profitability
and overall stakeholder satisfaction. However, the penalty for failure is equally large –
managers who ignore one or more of the levers may suffer from underperformance, a loss
of reputation in the case of gross employee misconduct, or even extinction.

References

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Merchant, K. A., & Van der Stede, W. A. (2003). Management control systems: Performance measurement,
evaluation and incentives. London: Prentice-Hall FT.
Porter, M. E. (1980). Competitive strategy. New York: Free Press.
Sheehan, N. T. (2006). Want to improve strategic execution? Simons says levers. Journal of Business Strategy,
27(6), 56–64.
Simons, R. (1995). Control in the age of empowerment. Harvard Business Review(March–April), 80–88.
Simons, R. (2000). Performance measurement and control systems for implementing strategy. Upper Saddle River,
NJ: Prentice-Hall.

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