Management Control Systems

Chapter 16: The Influence of Situational Factors on MCSs

Wim Van der Stede

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Control costs.Strategic factors.Type + tightness of controls used.Objectivity of performance evaluations.Technological factors. .Organizational factors. Contingency factors . . .Degree of control.Dysfunctional side-effects. . .Performance measures emphasized.Design of the budgeting system.Design of reward systems. . .  MCS variables Outcome variables . etc. Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -2- . . etc..Contingency / situational factors …  There are no universally best control systems that apply to every situation in all organizations .. .

. » Single business – related / unrelated diversified. » Build – hold – harvest – divest.  Corporate diversification strategy » Refers to what businesses the firm should invest in and how these businesses should be coordinated.Strategy typologies . » Low cost – differentiation Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -3- .  Business unit competitive position » Determines how to compete in each of the businesses.  Business unit competitive mission » Defines the mission for each of the businesses.. » Defines where to compete.

 Connection between Unrelated Diversifiers businesses is purely financial (holdings).. Single Business Firms High  One line of business..Corporate diversification strategy . Number of Businesses High Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -4- .  Operational synergies based on a common set Degree of Relatedness Related Diversifiers of core competencies.

Single / Related Business Unrelated Diversified high high Budgets Control of SBU-manager over budget formulation Importance attached to meeting the budget Low (?) Low (?) Incentives Bonus criteria Bonus determination Bonus basis financial and non-financial criteria primarily subjective or discretionary (?) SBU + corporate primarily financial criteria primarily formula-based primarily SBU-performance performance Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -5- ...Implications on MCS design .

Business unit competitive mission ... » Cash generated in one business can be used to finance growth in another business.. » cf.. Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -6- . HQ S B U  Depends also on the industry attractiveness.. market opportunities and SBU-competitive ability .  Has to do with the resource allocation decisions from the corporate office .. internal capital markets..

Portfolio models .. H H Cash source L H Market growth rate  ? Build Cash use Hold $$$ Dog Divest Harvest L H L Relative market share L -7- Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 ..

Build Hold Harvest Maximize ST-earnings / CFs even at the expense of MS Divest Invest in MS even at the expense of ST-earnings / CFs Protect MS and competitive position Outright sale Slow liquidation Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -8- ...The four missions .

Harvest relatively low relatively difficult rather diagnostic relatively low relatively high Objective Administrative Financial -9- Control of SBU-manager over budget formulation Budget revisions during the year Budget reporting Tolerance towards budget deviations Importance attached to meeting the budget Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 .Implications on MCS design … BUDGETS (1) Build relatively high relatively easy rather interactive relatively high relatively low Subjective Interpersonal Strategic ….

10 - . Harvest primarily financial criteria primarily formula-based more emphasis on financial criteria more objective and quantitative more emphasis on non-financial criteria primarily subjective or discretionary (?) more emphasis on non-financial criteria more subjective and qualitative Evaluation of capital investments Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 .Implications on MCS design … Build INCENTIVES Bonus criteria Bonus determination CAPITAL BUDGETING (2 ) ….

.  Power of buyers.  Direct rivalry.Business unit competitive strategy ... Firm’s competitive advantage  Cost leadership ..  Power of suppliers.11 - .  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 . Industry’s competitive structure  Threat of new entry.  Threat of substitutes.

12 - ..Low cost – differentiation … Cost leadership • economies of scale • tight cost control Differentiation • brand loyalty • superior customer service • product features • product design • technology • standard products • cost minimization • standardized tasks and production processes … different business unit strategies require different MCS .. Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 .

Implications on MCS design … BUDGETS (1 ) Low Cost … Differentiation relatively low relatively difficult relatively low Control of SBU-manager over budget formulation Budget revisions during the year Tolerance towards budget deviations Importance attached to meeting the budget relatively high relatively easy relatively high relatively high relatively low Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 .13 - .

Implications on MCS design … (2 ) Low Cost … Differentiation INCENTIVES Bonus criteria Bonus determination primarily financial criteria primarily formula-based more emphasis on non-financial criteria more subjective or discretionary (?) Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 .14 - .

– Local Institutions » Government agencies. regulations. labor unions.  Factors that affect MCSs across countries – National culture » People’s tastes. banking systems. personal priorities. social attitudes. etc. values. religions.15 - . labor mobility. and responses to interpersonal stimuli. – Local business environments » Stage of economic development. financial markets.. inflation. Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 . labor availability.. political risk..  Behavioral similarities – Self-interest is probably a universal behavioral trait. norms. etc. accounting rules. labor quality.Differences across countries .

. – Uncertainty avoidance » Degree of subjectivity in performance evaluations.16 - .  National culture has a direct effect on MCS because control problems are behavioral problems.. – Masculinity » Degree of performance-based rewards. » Degree of participation in setting performance targets. » Degree of formality of planning / budgeting processes. – Power distance » Degree of centralization of decision-making. – Individualism » Incentives based on individual vs. Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 . » Degree of engaging in myopic.Cultural differences . self-centered behavior. group performance.

 Accounting regulations .  Financial markets and stock market valuations » Frequency of profit measurement..  Threat of hostile takeovers » Use of reward schemes to get common stock in managers’ and employees’ hands.  Labor unions » Use of performance-based rewards (>< seniority-based)..Local institutions . » Likelihood of myopic behavior. » Use of short-term incentives.17 - Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 .

..18 - . Quality. – Stage of economic development » Age and size of corporations. and control systems.. use of flexible budgeting). price controls.Local business environments .  Risk and uncertainty-related factors – Business risk » Military conflicts. prohibition of layoffs. – Political risk » Negative: forced production. research support. etc.g. personnel controls. degree of computerization. corporate espionage.   Inflation – Financial risk (e. information. » Positive: tariff barriers. subsidies. bombings. and Mobility – Use of action controls. Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 . degree of development of accounting. Labor Availability. and long-term incentives. etc.

19 - Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 . » Authority to write purchase or sales contracts in one currency or another. swaps. or marketing decisions. » » » » Evaluate manager in local currency.  Local managers bear foreign currency translation risk if their performance in measured in home-country currency. Calculate foreign exchange variance and treat is as uncontrollable. – Can subsidiary managers control this risk? » Authority to make cross-border investment..Foreign currency translation . Treat foreign exchange losses and gains “below” the line. . Flex the budget to end-of-year currency rates. product sourcing.. – If not. » Authority to make foreign exchange transactions (hedging. or arbitrage).