1. Management Control Systems
Chapter 16: The Influence of Situational Factors on MCSs
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

2. 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
- Type + tightness of controls used;
- Design of the budgeting system;
- Performance measures emphasized;
- Objectivity of performance evaluations;
- Design of reward systems; etc.
Outcome variables
- Degree of control;
- Dysfunctional side-effects;
- Control costs.

3. 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

4. Corporate diversification strategy ...
Number of Businesses
Degree of Relatedness
High
low
Related
Diversifiers
Unrelated
Single
Business
Firms
One line of business.
Operational synergies
based on a common set
of core competencies.
Connection between
businesses is purely
financial (holdings).

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

6. Business unit competitive mission ...
Has to do with the resource allocation decisions from the corporate office ...
cf., internal capital markets;
Cash generated in one business can be used to finance growth in another business.
Depends also on the industry attractiveness, market opportunities and SBU-competitive ability ... HQ S B U

7. Portfolio models ... ? Cash source Build Hold Market growth rate
Relative market share
Cash source
Cash use
Market growth rate L H
Hold
Dog
Divest
$$$
Harvest ?
Build

8. The four missions ... Build Hold Harvest Divest Maximize
Invest in MS even
at the expense of
ST-earnings / CFs
Maximize
even at the
expense of MS
Outright sale -
Slow liquidation
Protect MS and
competitive position

9. Implications on MCS design … (1)
BUDGETS
Control of SBU-manager
over budget formulation
Importance attached to
meeting the budget
Build …. Harvest
relatively high
relatively low
Budget revisions
during the year
relatively easy
relatively difficult
Budget reporting
rather interactive
rather diagnostic
Tolerance towards
budget deviations
Objective
Administrative
Financial
Subjective
Interpersonal
Strategic

10. Implications on MCS design … (2)
INCENTIVES
Build …. Harvest
Bonus criteria
Bonus determination
more emphasis on
non-financial criteria
primarily
financial criteria
primarily subjective
or discretionary (?)
formula-based
CAPITAL
BUDGETING
Evaluation of capital investments
more subjective
and qualitative
more objective
and quantitative

11. Business unit competitive strategy ...
Industry’s competitive structure
Firm’s competitive advantage
Threat of new entry;
Threat of substitutes;
Power of suppliers;
Power of buyers;
Direct rivalry.
Cost leadership ...
Achieve low cost relative to competitors
Differentiation …
Create something which is perceived unique by the customer

12. Low cost – differentiation …
economies of scale
tight cost control
standard products
cost minimization
standardized tasks and production processes
brand loyalty
superior customer service
product features
product design
technology
Cost leadership
Differentiation
… different business unit strategies require different MCS ...

13. Implications on MCS design … (1)
BUDGETS
Control of SBU-manager
over budget formulation
Importance attached to
meeting the budget
Low Cost … Differentiation
relatively high
relatively low
Budget revisions
during the year
relatively easy
relatively difficult
Tolerance towards
budget deviations

14. non-financial criteria
Implications on MCS design … (2)
INCENTIVES
Bonus criteria
Bonus determination
more emphasis on
non-financial criteria
primarily
financial criteria
more subjective
or discretionary (?)
formula-based
Low Cost … Differentiation

15. Differences across countries ...
Behavioral similarities
Self-interest is probably a universal behavioral trait.
Factors that affect MCSs across countries
National culture
People’s 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.

16. 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.

17. 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

18. 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.

19. 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.