Accounting Organizations and Society, Vol. 10, No. 1, pp. 67-85, 1985.

Printed in Great Britain

0361-3682/85 $3.00+.00
~ 1985 Pergamon Press Ltd.

ORGANIZATIONAL CONTROLS AND DISCRETIONARY PROGRAM

DECISION MAKING: A FIELD STUDY*

K E N N E T H A. M E R C H A N T

Graduate School o f Business Administration, Harvard University

Abstract
This paper reports the results of a field study aimed at exploring how one important class of decisions - discretionary program decisions - - are controlled in decentralized firms. Data were collected from profit
centre managers using unstructured interviews and a questionnaire survey. The data show that decisions
are affected by many devices that can be called controls, including net income targets, expense targets,
headcount constraints, requirements for approvals, and directives given by higher management. They also
show that the effects of the controls can vary with certain characteristics of the profit centers' situation (e.g.
strategy, recent performance), the management style of the company chairman, and the accounting treatment for the expenditure (i.e. whether capitalized or expensed).

Accounting information systems (MS) are an

important part of most organizational control
s y s t e m s , t h e p u r p o s e o f w h i c h is t o e n s u r e t h e
proper behaviors of the people on whom the
organization must rely (e.g. Lawler & Rhode,
1 9 7 6 ; F l a m h o l t z , 1 9 7 9 ; E u s k e , 1 9 8 4 ) . 1 AIS a r e
useful for control purposes because they prov i d e i n f o r m a t i o n t h a t is u s e f u l f o r m o t i v a t i n g ,
monitoring, and decision making.
B u t t h e r e a r e many d e v i c e s o t h e r t h a n M S t h a t
can be used in certain situations to accomplish
good control. This was a major point that was
discussed in the control literature in the early
s c i e n t i f i c m a n a g e m e n t e r a (e.g. s e e a r e v i e w b y
Giglioni & Bedeian, 1974), and the advancem e n t o f t h i s l i n e o f t h i n k i n g is e v i d e n t i n a
number
of recent, more complex
control

f r a m e w o r k s (e.g. N e w m a n , 1 9 7 5 ; O u c h i , 1 9 7 9 ;
Kerr & Slocum, 1980; Hofstede, 1981; Merchant,
1982, 1985; Simons, 1982). Among the many
control devices mentioned in these works, in
addition to the provision of rewards for performance, are direct supervision, enforcement of
standardized policies and procedures, reviews
and approvals of plans, and the building of a
strong organizational culture
with shared
norms. These devices can often be substituted
for each other, and among the important decisions that must be made in designing what can
b e c a l l e d a " c o n t r o l s t r a t e g y " are: ( 1 ) w h i c h o f
t h e s e t o o l s t o use, a n d ( 2 ) h o w t o w e i g h t t h e
controls that are used in importance. Very little
research has focused on this issue of choice of
controls, and this paper reports the results of a

t This function of AIS is sometimes referred to by two other terms which are very close in meaning to control: stewardship
(e.g., Chen, 1975; Pannell, 1979; Gjesdal, 1981 ) and accountability (e.g., Ijiri, 1981, 1983). Those terms are usually used by
those who are referring to control of managers (or other individuals) by persons outside the firm (e.g., owners, society),
while the terms control and management control are in more common use by those who discuss problems of control within
a firm, although there is no inherent reason for this usage.
* This research was supported by the Division of Research, Harvard Business School. The author wishes to acknowledge the
many helpful suggestions of participants in research workshops at Columbia, Harvard, MIT and Ohio State and, especially,
Robert S. Kaplan, Srinivasan Umapathy and Richard F. Vancil.
67

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KENNETHA, MERCHANT

s t u d y a i m e d at filling this void.

To limit the s c o p e of the study, the focus was
p l a c e d o n c o n t r o l of d e c i s i o n s for e x p e n d i t u r e s
o n d i s c r e t i o n a r y p r o g r a m s 2 m a d e at the p r o f i t
center level in decentralized firms. This particular area was c h o s e n for an initial e x p l o r a t i o n
b e c a u s e it was felt that it was the m o s t p o t e n tially fruitful: the d e c e n t r a l i z e d form of organization, w i t h m u l t i p l e profit centres, p r e d o m i n a t e s
a m o n g firms of any significant size (e.g. see surveys b y Reece & Cool, 1978 a n d Vancil, 1979);
w i t h i n these firms, the profit c e n t e r m a n a g e r is
p r o b a b l y the m o s t i m p o r t a n t role o v e r w h i c h
g o o d c o n t r o l m u s t b e e x e r c i s e d (e.g. Solomons,
1965; Vancil, 1979); a n d c o n t r o l b y u s i n g AIS has
b e e n s u b j e c t e d to c o n s i d e r a b l e r e c e n t criticism
in the w a y it affects m a n a g e r s ' decisions a b o u t
d i s c r e t i o n a r y p r o g r a m e x p e n d i t u r e s in particular (e,g. Hayes & Abernathy, 1980; T h u r o w ,
1981).
W h i l e this study focused o n a single set of
d e c i s i o n s to b e c o n t r o l l e d a n d was therefore
n a r r o w e r in s c o p e t h a n m o s t of the o t h e r c o n t r o l
studies that have b e e n d e s c r i b e d in the a c c o u n t ing literature, in a n o t h e r s e n s e it was a b r o a d e r
s t u d y b e c a u s e it l o o k e d n o t o n l y at AIS b u t also
o t h e r types of c o n t r o l alternatives. Most p r i o r
studies have f o c u s e d o n s o m e c o n t r o l system
part, such as p e r f o r m a n c e e v a l u a t i o n (e.g. Hopw o o d , 1974; Otley, 1978; A n d e r s o n & O'Reilly,
1981), i n c e n t i v e c o m p e n s a t i o n (e.g. Govindarajan & Gupta, 1985; Larcker, 1983), b u d g e t part i c i p a t i o n (e.g. Brownell, 1981, 1983 ), o r overall
b u d g e t i n g systems (e.g. Bruns & W a t e r h o u s e ,
1975; Merchant, 1981).
T h e following are the m a j o r r e s e a r c h questions e x p l o r e d in this study:
1. What organizationalcontrols are used to influence profit center (PC) manager decision making for expenditures on discretionary programs? In particular, are AISan
important influence?
2. Does the use of controls differ between PCs?If so, what
causes the difference?
T h e e x p l o r a t i o n of these q u e s t i o n s was d o n e

in t h r e e phases. T h e first phase, a i m e d at generating n e w hypotheses, i n v o l v e d a series of u n s t r u c tured interviews with general and functional
m a n a g e r s in t w o d e c e n t r a l i z e d firms a n d a conc u r r e n t r e v i e w of r e l e v a n t research literature.
The s e c o n d phase i n v o l v e d a q u e s t i o n n a i r e survey of profit c e n t e r m a n a g e r s in o n e of the firms
to e x p l o r e further the h y p o t h e s e s g e n e r a t e d
earlier. T h e final phase i n v o l v e d p r e s e n t i n g a
p r e l i m i n a r y analysis of the data to m a n a g e r s in
the firm in w h i c h the s u r v e y was c o n d u c t e d a n d
n o t i n g their reactions. This was d o n e in o r d e r to
gain a b e t t e r a p p r e c i a t i o n of the findings.

HYPOTHESIS GENERATION AND LITERATURE

SEARCH
The research began by seeking and obtaining
access to m a n a g e r s at a p i l o t test firm a n d t h e n a
firm w h i c h was targeted for a m o r e i n t e n s i v e
s t u d y b e c a u s e it is w i d e l y r e n o w n e d for its management excellence. The managers interviewed
in the t w o sites w e r e s e l e c t e d from t h r e e differ e n t levels in the organization:
high-level PC managers; i.e. those who had PC managers
reporting to them;
low-level PC managers; i.e. those who had functional
managers reporting to them; and
functional managers; e.g. responsible for marketing,
R&D, or personnel.
T h e m a n a g e r s w e r e s e l e c t e d to m a x i m i z e the
diversity of the sample in t e r m s o f the t w o variables that w e r e c o n s i d e r e d m o s t likely to cause
differences in the a p p l i c a t i o n of c o n t r o l s w i t h i n
the firm: b u s i n e s s strategy a n d o p e r a t i n g interd e p e n d e n c i e s w i t h o t h e r parts of the c o m p a n y
(Vancil, 1979). I n all, i n t e r v i e w s w e r e cond u c t e d w i t h m a n a g e r s in s e v e n t e e n different
PCs i n the t w o firms.
I n a d d i t i o n to the interviews, r e l e v a n t
r e s e a r c h literature was r e v i e w e d p r i o r to, during, a n d after the interviews. I n f o r m a t i o n

2Discretionary program expenditures are nonoperating expenditures, made for such purposes as new product development,
manufacturing processing engineering, and advertising and sales promotion.

ORGANIZATIONALCONTROLSAND DISCRETIONARYPROGRAMDECISIONMAKING
g a t h e r e d from the literature h e l p e d g u i d e the
i n t e r v i e w i n g processes a n d suggested the m o s t
fl"uitful areas for f u r t h e r exploration.
T h e findings from the i n t e r v i e w s and the literattire search c a n b e divided into t h r e e areas: ( 1 )
the roles of PC managers, ( 2 ) the c o n t r o l s b e i n g
used, a n d ( 3 ) the factors that s e e m e d to affect
the use of the controls. T h e s e are discussed in
the following sections.

Roles o f PC managers
O n e early o b s e r v a t i o n m a d e i n the i n t e r v i e w s
was that the roles of the profit c e n t e r ( P C ) managers w e r e q u i t e different, n o t just b e t w e e n the
t w o firms, b u t also w i t h i n each firm. T h e PC
m a n a g e r s had different levels of a u t h o r i t y over
the various f u n c t i o n a l areas that w e r e r e q u i r e d
for the o p e r a t i o n of their PCs. Some m a n a g e r s
had to c o p e w i t h c o n s i d e r a b l e i n t e r d e p e n d e n c e
w i t h o t h e r parts of the o r g a n i z a t i o n in o r d e r to
a c c o m p l i s h their objectives, having to cooperate, for example, w i t h a shared service activity,
s u c h as a c e n t r a l sales force or a c e n t r a l research
staff. O t h e r m a n a g e r s had little or e v e n n o conc e r n w i t h a particular function, e v e n t h o u g h
they had responsibility for a " b o t t o m - l i n e "
n u m b e r . For example, s o m e PC m a n a g e r s
d e r i v e d the b u l k of their r e v e n u e s from transfers
w i t h i n the c o m p a n y , so marketing/sales was of
little c o n c e r n to them.
T h e s e o b s e r v a t i o n s a b o u t the role of profit
c e n t e r managers, w h i c h are c o n s i s t e n t w i t h the
findings of Vancil ( 1 9 7 9 ) a n d H a m e r m e s h &
W h i t e ( 1 9 8 3 ) , w e r e i m p o r t a n t b e c a u s e it
b e c a m e clear that n o t all of the q u e s t i o n s w h i c h
w e r e asked in the i n t e r v i e w s w e r e r e l e v a n t to all
the PC managers. Thus, in s u b s e q u e n t phases of
the s t u d y c o n s i d e r a b l e care had to b e taken in
the s e l e c t i o n of the sample a n d in the q u e s t i o n s
that w e r e asked.

69

Controls affecting discretionary p r o g r a m decisions

A s e c o n d o b s e r v a t i o n was that the PC managers' decisions a b o u t e x p e n d i t u r e s o n disc r e t i o n a r y p r o g r a m s w e r e affected by m u l t i p l e
forms of controls. The following five types of
c o n t r o l s s e e m e d to have the m o s t significant
effects:
1. Net income targets. As was expected, m a n y
of the m a n a g e r s o b s e r v e d that the p r i m a r y limitation in their ability to make c e r t a i n decisions
was their n e t i n c o m e target. 3 The following w e r e
typical c o m m e n t s of this type:
We manage as businessmen and not by arbitrary numbers. We must meet income budgets, but we have freedom in all other areas.
Net income is the name of the game. It's all I'm after.

2. Expense targets. Some m a n a g e r s n o t e d that

e v e n if they w e r e safely over their n e t i n c o m e
target, they w e r e s o m e t i m e s u n a b l e to make certain e x p e n d i t u r e s b e c a u s e t h e y w e r e l i m i t e d i n
the a m o u n t of m o n e y they c o u l d s p e n d o n
specific
discretionary
programs
or
on
d i s c r e t i o n a r y p r o g r a m s in total.
3. H e a d c o u n t targets. Some m a n a g e r s stated
that they w e r e n o t seriously c o n s t r a i n e d b y n e t
i n c o m e targets n o r e x p e n s e targets, yet they
w e r e u n a b l e to a c c o m p l i s h w h a t they w a n t e d
b e c a u s e of h e a d c o u n t constraints. T h e y w e r e
either u n a b l e to hire the p e o p l e they n e e d e d
b e c a u s e of strict h e a d c o u n t targets or, in a few
cases, they w e r e u n a b l e to hire a n y o n e at all (i.e.
h i r i n g freeze ).4
4. Procedural controls. Some m a n a g e r s
o b s e r v e d that they s o m e t i m e s had t r o u b l e getting approvals to d o c e r t a i n things, such as s p e n d
m o n e y to hire people, e v e n w h e n they w e r e
m e e t i n g their q u a n t i t a t i v e targets. 5

3In the control frameworks referred to earlier, this type ofcontrol is referred to variouslyas "post-action control" (Newman,
1975), "output control" (Ouchi, 1979), and "results control" (Merchant, 1982, 1985).
4 Expense and headcount controls are forms of what have been called "input controls" (Simons, 1982), or indirect controls
over "specific actions" (Merchant, 1982, 1985)or "behaviors" (Ouchi, 1979).
Procedural controls have been called "yes-no controls" (Newman, 1975), "go-no-gocontrols" (Mitchell, 1979), and "preaction reviews" (Merchant, 1982, 1985).

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KENNETHA. MERCHANT

5. Meetings at w h i c h directives are given.

Some m a n a g e r s n o t e d that h i g h e r m a n a g e m e n t
s o m e t i m e s s i m p l y told t h e m to do, o r n o t to do,
c e r t a i n things. T h e s e directives t e n d e d to c o m e
in face-to-face meetings, i n c l u d i n g formal perf o r m a n c e reviews, formal c o m m i t t e e m e e t i n g s
a n d informal meetings. 6
I n s u m m a r y , then, the s e c o n d basic observat i o n was that the five types of c o n t r o l s d e s c r i b e d
a b o v e affected d i s c r e t i o n a r y p r o g r a m decisions
m a d e i n at least s o m e o f the PCs. Each form of
c o n t r o l did n o t o c c u r i n the PCs to the e x c l u s i o n
of the o t h e r forms of control, b u t it did appear
that their relative e m p h a s e s w e r e different.

Influences on the effect o f the controls

A final o b s e r v a t i o n was that the relative
emphasis o n the c o n t r o l s s e e m e d to vary systematically w i t h characteristics that c o u l d b e
o b s e r v e d to vary b e t w e e n the PCs. T h e following characteristics w e r e n o t e d as having p o t e n tially significant effects o n the use o f the controls:

1. Relationship w i t h i m m e d i a t e superior.
Some of the PC m a n a g e r s ' i m m e d i a t e s u p e r i o r s
s e e m e d to i n v o l v e t h e m s e l v e s relatively heavily
i n the PCs' d i s c r e t i o n a r y p r o g r a m d e c i s i o n processes. A p r i m a r y factor that d e t e r m i n e d the
e x t e n t o f the s u p e r i o r ' s i n v o l v e m e n t s e e m e d to
b e r e l a t e d to p e r s o n a l style, as s o m e s u p e r i o r s
w e r e d e s c r i b e d as b e i n g "detail-oriented," o r a
" h a n d s - o n manager". Such c o m m e n t s c o u l d
m e a n that the s u p e r i o r o f t e n suggested ( o r e v e n
r e q u i r e d ) c e r t a i n actions, or at least that he/she
m a d e m o r e t h a n c u r s o r y r e v i e w s of p r o p o s e d
expenditures.
Several p r i o r e m p i r i c a l studies, b y D e C o s t e r
a n d Fertakis ( 1 9 6 8 ) , H o p w o o d ( 1 9 7 4 ) , a n d Merc h a n t ( 1 9 8 3 ) , p r o v i d e e v i d e n c e that c a n b e cons i d e r e d d i r e c t l y r e l e v a n t to the o b s e r v a t i o n s
m a d e here. T h e s e studies e x p l o r e d the relationships b e t w e e n leadership styles a n d the uses
m a d e o f a c c o u n t i n g data i n evaluating perfor-

mance. I n all t h r e e studies, leadership style was

c h a r a c t e r i z e d in t e r m s of t w o of the traits meas u r e d b y the Leadership Behavior D e s c r i p t i o n
Q u e s t i o n n a i r e (Stogdill, 1963): ( 1 ) i n i t i a t i n g
s t r u c t u r e , w h i c h reflects the e x t e n t to w h i c h
m a n a g e r s define their s u b o r d i n a t e s ' roles, a n d
( 2 ) c o n s i d e r a t i o n , w h i c h reflects the e x t e n t to
w h i c h m a n a g e r s care a b o u t their s u b o r d i n a t e s '
ideas a n d feelings. These studies all s h o w e d that
m a n a g e r s rated high in initiating s t r u c t u r e
t e n d e d to make greater use of b u d g e t data in
e v a l u a t i n g p e r f o r m a n c e . T h e findings w e r e n o t
as c o n s i s t e n t for the c o n s i d e r a t i o n d i m e n s i o n ,
h o w e v e r . D e C o s t e r a n d Fertakis f o u n d consideration to b e positively associated w i t h b u d g e t
pressure. H o p w o o d f o u n d that s u p e r i o r s rated
high in c o n s i d e r a t i o n w e r e m o r e likely to
evaluate p e r f o r m a n c e based o n factors that had
n o t h i n g to do w i t h a c h i e v e m e n t of b u d g e t
targets. And M e r c h a n t f o u n d n o significant
relationships b e t w e e n c o n s i d e r a t i o n a n d any
i m p o r t a n t b u d g e t - p r o c e s s or style-of-evaluation
variables.
A n o t h e r o b s e r v a t i o n m a d e i n the i n t e r v i e w s
was that the s u p e r i o r ' s use of c o n t r o l s also
d e p e n d e d o n s o m e c o n t e x t u a l variables, particularly the geographical d i s t a n c e b e t w e e n the
offices of the PC m a n a g e r a n d the superior. This
factor was m e n t i o n e d several times. For example, o n e m a n a g e r observed:
My present boss is very detail oriented, very numbers
oriented. But he is in [a city about 500 miles away], so he
can't be as involved in my business as he could if he were
next door. As it is, on average, I see him only once a
month, and we talk on the phone once a week, although
those frequencies have been a little higher during the
recessionary period. 7

Such o b s e r v a t i o n s are c o n s i s t e n t w i t h p r i o r findings of r e s e a r c h o n leadership. For example,

Kerr & J e r m i e r ( 1 9 7 8 ) , w h o p r e s e n t e d an overv i e w of m u c h of the research, n o t e d that "spacial
distance b e t w e e n superior and subordinates"
t e n d s to n e u t r a l i z e a s t r u c t u r i n g , task-oriented
leadership style.

6This form of control is really a recentralization of authority for the purpose ofwhat Merchant ( 1982, 1985) calls "avoidance"
of certain possible control problems.
7The interviews were conducted over the period 1980-83.

ORGANIZATIONALCONTROLSAND DISCRETIONARYPROGRAMDECISIONMAKING
Thus, t w o t e n t a t i v e c o n c l u s i o n s w e r e d r a w n
a b o u t the i m p a c t of the PC m a n a g e r ' s relationship w i t h his/her i m m e d i a t e s u p e r i o r a n d the use
of controls. O n e was that the c o n t r o l s vary w i t h
the leadership style of the PC m a n a g e r ' s
i m m e d i a t e superior. In particular, the higher the
d e g r e e of the s u p e r i o r ' s p r o p e n s i t y to get
i n v o l v e d in detail, w h i c h s h o u l d b e related to
w h a t r e s e a r c h e r s have called s t r u c t u r e initiation, the greater the i m p a c t of the controls. T h e
s e c o n d c o n c l u s i o n was that the greater the dist a n c e b e t w e e n offices, the m o r e i n f r e q u e n t a n d
formal are the c o m m u n i c a t i o n s .

2. E c o n o m i c performance. A n o t h e r factor
that s e e m e d to affect the application of the controis was the PC's r e c e n t e c o n o m i c performance. I n particular, the m a n a g e r s of the PCs
w h i c h had b e e n m o r e profitable t h a n o t h e r PCs
in the c o m p a n y s e e m e d to have m o r e flexibility
i n the e x p e n d i t u r e s they made. T h e y w e r e
affected less b y the controls, particularly the
financial a n d h e a d c o u n t constraints.
Prior r e s e a r c h p r o v i d e s s o m e s u p p o r t for this
finding. It is c o n s i s t e n t w i t h Khandwalia's
( 1 9 7 2 ) o b s e r v a t i o n that the i n t e n s i t y of use of an
a c c o u n t i n g a n d c o n t r o l system in a c o m p a n y
varies directly w i t h the felt i n t e n s i t y of the external c o m p e t i t i o n . It is also c o n s i s t e n t w i t h Otley's
( 1 9 7 8 ) f i n d i n g that in a t o u g h e n v i r o n m e n t (i.e.
w h e r e p e r f o r m a n c e was low), p e r f o r m a n c e
evaluations of PC m a n a g e r s w e r e m o r e heavily
b a s e d o n their ability to stay w i t h i n b u d g e t e d
e x p e n s e limitations t h a n o n m o r e s u b j e c t i v e
criteria, or e v e n o n m e e t i n g profit targets, s
3. Business strategy. T h e r e are m a n y ways to
characterize the strategy of a business. 9 T h e disc u s s i o n p r e s e n t e d h e r e will e m p l o y the classific a t i o n s c h e m e u s e d b y the c o m p a n y ; it divides

71

strategies into four categories d e p e n d i n g o n the

p l a n n e d rapidity of growth. T h e following labels
are used: rapid growth, selective growth, maint a i n / g e n e r a t e cash flow, harvest.
Some of the m a n a g e r s i n t e r v i e w e d t h o u g h t
that strategy was o n e of the factors that inf l u e n c e d the application of the controls. Most
m a n a g e r s felt that their d e c i s i o n s a b o u t disc r e t i o n a r y p r o g r a m e x p e n d i t u r e s w e r e seriously c o n s t r a i n e d , a n d they m e n t i o n e d financial
a n d / o r h e a d c o u n t c o n s t r a i n t s m o s t often. But
s o m e managers b e l i e v e d that s o m e areas of the
c o m p a n y that had b e e n targeted as "businesses
of the future" w e r e n o t feeling s u c h constraints,
or at least n o t feeling t h e m as significantly,
despite the r e c e s s i o n that had affected the comp a n y as a whole.
T h e beliefs c o u l d n o t b e s u p p o r t e d or refuted
in the interviews, however. T h e c o n t r o l s
d e s c r i b e d b y the m a n a g e r s w h o said they ran a
"growth" b u s i n e s s w e r e n o t n o t i c e a b l y different
from those w h o said t h e y r a n a " m a i n t a i n " business, a n d n o "ultra-high g r o w t h " b u s i n e s s e s
w e r e i n c l u d e d in the i n t e r v i e w sample, so this
aspect of the q u e s t i o n c o u l d n o t b e e x p l o r e d in
depth.
Prior r e s e a r c h does n o t p r o v i d e c o n c l u s i v e
e v i d e n c e o n this issue either. O n l y t h r e e
r e s e a r c h studies that dealt w i t h this issue c o u l d
b e found. O n e was c o n d u c t e d b y Simons
( 1 9 8 4 ) . He s t u d i e d 91 firms i n Canada a n d classifted t h e m into categories that he called "proactive" a n d "traditional." Proactive firms t e n d to
o p e r a t e in a b r o a d p r o d u c t d o m a i n , a n d they
r e s p o n d rapidly to early signals a b o u t i n d u s t r y
trends. Traditional firms a t t e m p t to locate a n d
s e c u r e p o s i t i o n s in relatively stable p r o d u c t
areas and t e n d to disregard i n d u s t r y c h a n g e s that
do n o t d i r e c t l y affect them. His m a j o r finding
was that c o m p a r e d to the traditional firms, the

a It is interesting to note that most control-related studies have used performance as a dependent variable in attempts to test
the contingency notion of"fit" between certain characteristics and the situation. These results have been mixed at best. Ofley
( 1978) concluded that the use of performance as a dependent variable is invalid in studying styles of budget use because performance is probably an important independent variable. Otley's conclusion is probably correct for all control-related
studies.
9 Hofer (1975) and Snow and Hambrick ( 1980) are among those wh~ have summarized a number of the strategy schema that
have been developed and the propositions that were developed from them. A more recent, and very popular, scheme was
developed by Porter (1980).

72

KENNETH A. MERCHANT

p r o a c t i v e firms m a d e m o r e i n t e n s i v e use o f t h e i r
p l a n n i n g a n d c o n t r o l system, p l a c e d g r e a t e r
p r e s s u r e o n t h e i r m a n a g e r s to m e e t b u d g e t
targets, a n d i n c l u d e d softer data in t h e informat i o n systems.
Govindarajan & Gupta (1985) and Gupta &
G o v i n d a r a j a n ( 1 9 8 4 ) ( G & G ) r e a c h e d a similar
conclusion. G&G studied profit center managers
in 20 firms. T h e y classified strategies in a v e r y
similar w a y to that d o n e h e r e - - build, hold, harvest - - a n d s t u d i e d t h e r e l a t i o n s h i p s b e t w e e n
these strategies and methods of evaluating per
formance and providing incentive compensation. T h e y f o u n d that t h e e v a l u a t i o n s o f perform a n c e and t h e c o m p e n s a t i o n o f m a n a g e r s o f
units w i t h h a r v e s t s t r a t e g i e s w e r e b a s e d m o r e o n
a c h i e v e m e n t o f s h o r t - t e r m targets, o f t e n d e f i n e d
in t e r m s o f a c c o u n t i n g n u m b e r s (e.g. o p e r a t i n g
profits, r e t u r n o n i n v e s t m e n t ) . Evaluations o f
m a n a g e r s o f units w i t h b u i l d strategies w e r e
b a s e d significantly m o r e o n a c c o m p l i s h m e n t o f
l o n g - t e r m , n o n a c c o u n t i n g c r i t e r i a (e.g. m a r k e t
share, p e r s o n n e l d e v e l o p m e n t ) a n d w e r e m o r e
likely to b e d o n e s u b j e c t i v e l y .
A conclusion from Hamermesh & White
(1983) (H&W), reporting on a study by White
( 1981 ), conflicts w i t h t h e findings o f t h e p r i o r
t w o studies, h o w e v e r . H & W s t u d i e d c o n t r o l
c o n s i d e r a t i o n s s u c h as d e g r e e o f a u t o n o m y ,
s t r u c t u r e o f line r e s p o n s i b i l i t y , a n d i n c e n t i v e
c o m p e n s a t i o n in 69 b u s i n e s s units in 12 firms
a n d c o n c l u d e d that t h e b u i l d - h o l d - h a r v e s t w a y
o f l o o k i n g at s t r a t e g i e s was s i m p l y n o t useful in
explaining how corporate managers structure
r e l a t i o n s h i p s w i t h b u s i n e s s units. Thus, it s e e m s
n e c e s s a r y to c o n c l u d e that t h e e v i d e n c e availa b l e at this p o i n t is n o t s t r o n g e n o u g h to suggest
definite, s i m p l e r e l a t i o n s h i p s a m o n g s t r a t e g i e s
a n d t h e uses o f c o n t r o l s , b u t t h e a r e a s e e m s
w o r t h y o f f u t h e r study.

4. Management style o f the company chairman. In t h e t a r g e t firm, a n e w c h a i r m a n h a d

a s s u m e d d u t i e s in t h e y e a r b e f o r e m o s t o f t h e
interviews were conducted, and many of the
m a n a g e r s in this firm o b s e r v e d that s i n c e h e h a d
t a k e n over, t h e r e l a t i v e i m p a c t o n t h e v a r i o u s
t y p e s o f c o n t r o l s h a d c h a n g e d . In p a r t i c u l a r , t h e y

n o t e d that t h e n e w c h a i r m a n h a d e n d e a v o r e d to
i n d u c e g r e a t e r a u t o n o m y at l o w e r m a n a g e r i a l
levels b y r e d u c i n g s o m e o f t h e f o r m a l m i d d l e level r e v i e w s a n d a p p r o v a l s a n d to tailor evaluation targets to t h e e n t i t i e s ' strategies.
P r o b a b l y few w o u l d d o u b t t h e fact that a
c h a i r m a n c a n have a significant effect o n t h e
c o n t r o l s in use in an organization, b u t little
o r g a n i z e d e v i d e n c e exists to s u p p o r t this contention. For e x a m p l e , Vancil ( 1 9 7 9 ) i n c l u d e d
" c o r p o r a t e m a n a g e r s ' p h i l o s o p h y a n d style" as
o n e o f t h e m a j o r e l e m e n t s in his t h e o r y o f d e c e n tralization, b u t h e m a d e t h e f o l l o w i n g observation (p.72):
The philosophy of corporate managers about decentralization, and the way they act out that philosophy in deal.
ing with their profit center managers, must.surely be a
major influence [on the choice of how muCh autonomy
to allow each profit centre manager] even though we
cannot measure it.
S o m e a n e c d o t a l e v i d e n c e in s u p p o r t o f this
c o n t e n t i o n d o e s exist, h o w e v e r . A r e c e n t e x a m p l e t o o k p l a c e at Nestl6, t h e giant Swiss f o o d
c o m p a n y . W h e n H e l m u t M a u c h e r b e c a m e Nestl6's c h i e f e x e c u t i v e , o n e o f his first a c t i o n s was
to c h a n g e w h a t h e c a l l e d a " h e a v y " administrative system. H e d i d this b y p r o v i d i n g m o r e
o p e r a t i n g a u t h o r i t y for line m a n a g e r s a n d trimm i n g r e p o r t i n g r e q u i r e m e n t s (Ball, 1982). Similar c h a n g e s a p p a r e n t l y t o o k p l a c e in t h e t a r g e t
firm s t u d i e d as p a r t o f this p r o j e c t .

5. Accounting treatment of the expenditure.

A final f a c t o r that affected t h e c o n t r o l s was t h e
a c c o u n t i n g t r e a t m e n t for t h e e x p e n d i t u r e , or,
m o r e specifically, w h e t h e r t h e e x p e n d i t u r e
would be capitalized or expensed. Money
s e e m e d to b e e a s i e r to g e t (i.e. t h e c o n t r o l s
s e e m e d to b e l o o s e r ) for e x p e n d i t u r e s o n i t e m s
that c o u l d b e capitalized. If this is true, this finding is c o n s i s t e n t w i t h t h e o b s e r v a t i o n s m a d e b y
m a n y in r e c e n t y e a r s (e.g. Hayes & A b e r n a t h y ,
1980; T h u r o w , 1981; Norris, 1 9 8 3 ) that U.S.
m a n a g e r s a r e h i g h l y ( p e r h a p s t o o h i g h l y ) conc e r n e d w i t h s h o r t - t e r m p e r f o r m a n c e . E x c e p t for
t h e f o c u s o n s h o r t - t e r m profits a n d t h e fact that
e x p e n s i n g has a g r e a t e r a d v e r s e effect o n short-

ORGANIZATIONALCONTROLSAND DISCRETIONARYPROGRAMDECISIONMAKING
t e r m profitability, t h e r e is n o r e a s o n w h y e x p e n d i t u r e s w h i c h are e x p e n s e d s h o u l d b e c o n t r o l led m o r e tightly t h a n t h o s e w h i c h are
capitalized.
It was a b o u t t h e s e five e x p l a n a t o r y variables
r e l a t i o n s h i p w i t h s u p e r io r , e c o n o m i c perf o r m a n c e , business strategy, m a n a g e m e n t style
o f ch ai r m an , and a c c o u n t i n g t r e a t m e n t o f exp e n d i t u r e - - that e x p e c t a t i o n s w e r e f o r m e d for
t es t i n g in a q u e s t i o n n a i r e survey.l

PROPOSITIONS
The propositions derived from the interviews
and l i t e r a t u r e s e a r c h c a n b e stated in t h e i r null
f o r m as follows:
1. The effects of the various types of controls on decisions
made for expenditures on discretionary program decisions are not significantly different from one another.
(The controls to be studied include net income targets,
budgeted expense targets, headcount, required approvals, and directives from higher management given at formal or informal meetings.)
2. There is no significant relationship between the uses
of controls on discretionary program decisions and:
(a) the relationship between the PC manager and
his/her immediate superior;
(b) the PC's recent economic performance;
(c) the PC's business strategy;
(d) the management style of the company chairman:
(e) the type of expenditure (i.e. whether it has to
be capitalized or expensed).

QUESTIONNAIRE SURVEY
T o g a t h e r a larger b o d y o f e v i d e n c e a b o u t t h e
o b s e r v a t i o n s m a d e in t h e i n t e r v i e w and literat u r e r e v i e w phases o f t h e study, a q u e s t i o n n a i r e
s u r v e y was c o n d u c t e d w i t h a s a m p l e o f managers in t h e target c o m p a n y . This is t h e c o m p a n y
w h i c h p r o v i d e d access to t h e s e c o n d set o f man-

73

agers w h o w e r e i n t e r v i e w e d and w h i c h w as
originally t a r g e t e d for m o r e i n t e n s i v e st u d y b o t h
b e c a u s e o f t h e g r eat d i v er si t y o f its business segm e n t s and b e c a u s e it is w i d e l y r e g a r d e d as a
w e l l - m a n a g e d firm.
After h i g h e r - l e v e l a p p r o v a l w as s e c u r e d , a
c o n t a c t in t h e c o r p o r a t e e x e c u t i v e e d u c a t i o n
f u n c t i o n was asked to p r o v i d e a r a n d o m s a m p l e
o f PC m a n a g e r s to b e su r v ey ed . T h e d e s i r e d
o r g a n i z a t i o n l ev el w as d e f i n e d as b e i n g at t h e
l o w e s t l e v e l in t h e o r g a n i z a t i o n w i t h profit
c e n t e r responsibility; i.e. t h e s e m a n a g e r s had
f u n c t i o n a l m a n a g e r s r e p o r t i n g to them. In addition, it w as d e c i d e d to limit t h e s a m p l e to manu f a c t u r i n g areas o f t h e c o m p a n y o n l y b e c a u s e
m a n a g e m e n t o f s e r v i c e business can i n v o l v e
q u i t e different critical variables and managem e n t p r o c e s s e s , and to r e q u i r e that t h e managers h a v e at least s o m e d i r e c t a u t h o r i t y o v e r
m a n u f a c t u r i n g a n d sales (i.e. that t h e y n o t b e
m a n a g e r s o f " p s e u d o " profit c e n t e r s ) . T h e s e
limitations w e r e d o n e to e n s u r e that t h e managers w o u l d b o t h u n d e r s t a n d and b e c o n c e r n e d
w i t h t h e issues a b o u t w h i c h q u e s t i o n s w e r e
b e i n g asked.
T h e c o r p o r a t e c o n t a c t p r o v i d e d a list o f t h e
n a m e s and office addresses o f 62 PC managers,
and h e also f u r n i s h e d a c o v e r l e t t e r o n c o m p a n y
s t a t i o n e r y to attach to t h e q u e s t i o n n a i r e w h i c h
i n d i c a t e d c o r p o r a t e a p p r o v a l o f t h e study. T h e n
e a c h o f t h e m a n a g e r s o n t h e list was sent t h e foll o w i n g materials: a l e t t e r o n u n i v e r s i t y stationer y e x p l a i n i n g t h e p u r p o s e o f t h e study, t h e
c o m p a n y c o v e r letter, t h e q u e s t i o n n a i r e , a selfaddressed, s t a m p e d r e t u r n e n v e l o p e , and a postcard o n w h i c h to i n d i c a t e that t h e q u e s t i o n n a i r e
had b e e n r e t u r n e d . As s o m e o f t h e q u e s t i o n s
t o u c h e d sen si t i v e issues, it w as c o n s i d e r e d
i m p o r t a n t to p r o m i s e t h e m a n a g e r s a n o n y m i t y ,
and in fact after t h e q u e s t i o n n a i r e s had b e e n
r e t u r n e d , t h e r e w as no w a y to link r e s p o n s e s
w i t h r e s p o n d e n t s ' names.

~0A number of studies have cited technology, or task uncertainty, as a potentially important influence on control systems
(e.g. Reeves & Woodward, 1970; Ouchi & Maguire, 1975; Ouchi, 1977; Hirst, 1981; Rockness & Shields, 1984). In the interviews conducted as part of this study, these variables did not appear as significant factors, perhaps because the PCs were at
a relatively high level in the organization. Most included multiple technologies, such as those used for making some standard
and some custom-made products.

74

KENNETHA. MERCHANT

Measures
W h e r e appropriate, the questions w e r e
w o r d e d using t e r m i n o l o g y in c o m m o n use in the
company. The following measures w e r e
i n c l u d e d in the questionnaire.

I m p a c t o f controls. The p r i m a r y measure of

the i m p a c t of the various type of controls on disc r e t i o n a r y p r o g r a m decision making is shown in
A p p e n d i x A. This question included the five
types of controls m e n t i o n e d by the managers in
the interviews. Control scales w e r e built by summing the responses to the questions in each of
the major parts of this question. The five resulting scales and the C r o n b a c h alpha measure of
inter-item reliability w e r e as follows:
Type of c o n t r o l
Net i n c o m e targets
Budget e x p e n s e targets
Headcount controls
P r o c e d u r a l controls
Meetings

Cronbach's alpha
0.80
0.62
O.53
O.53
0.77

All of these scales w e r e c o n s i d e r e d usable in the

analysis, as the l o w e r limit of acceptability for
the Cronbach's alpha measure is generally
assumed to be a r o u n d 0.50 to 0.60 (Nunnally,
1967).

Relationship w i t h i m m e d i a t e superior. The

superior's leadership style was m e a s u r e d by
using the revised Leadership Behavior Description Questionnaire (LBDQ), Form XII (Stogdill,
1963). This instrument uses 20 items to measure
the subordinates' p e r c e p t i o n of their superiors'
behaviors along t w o dimensions: ( 1 ) Initiating
Structure ( t h e e x t e n t to w h i c h the s u p e r i o r
defines the subordinates' roles), and Consideration ( o f subordinates' ideas and feelings). A samp l e Initiating Structure item is: "He d e c i d e s what
shall be d o n e and h o w it shall be done." A sample
Consideration item is: "He looks out for the personal welfare of his subordinates."
Each item was scaled from 1 ( N e v e r ) to 5 (Always), and the scales are c o m p u t e d by summing
the responses for the 10 items w h i c h r e p r e s e n t

it. Thus the theoretical range for each d i m e n s i o n

is 10-50. Cronbach's alpha for the Initiating
Structure scale was 0.64, and for the Consideration scale 0.87.
In addition, the c o n t e x t variable m e n t i o n e d
by several managers - - distance b e t w e e n the
offices of the PC manager and his/her immediate
superior - - was measured on a scale from 1
(Very close, same b u i l d i n g ) to 5 ( M o r e than 50
miles away).

E c o n o m i c performance. The managers w e r e

asked to indicate the e c o n o m i c p e r f o r m a n c e of
their PC in the past year on a scale from 1 (Losing
m o n e y ) to 4 ( M o r e profitable ( h i g h e r ROI) than
most [name of company] profit centers).
Strategy. Strategy was assessed using the corp o r a t i o n ' s o w n terminology: harvest, maintain/
generate cash flow, selective growth, and rapid
growth. These categories w e r e c o d e d from 1 to
4 according to the planned rapidity of growth.
O n e c o m p l i c a t i n g factor was that while all of
the PC managers w e r e aware of their PC's
strategy, most of the PCs w e r e b e l o w the organization level of strategic business unit (SBU)
w h e r e a formal designation of strategy was
made. To test for the possibility that controls
w e r e applied m o r e or less consistently across all
PCs in a given SBU d e p e n d i n g on the SBU
strategy, b o t h the strategy of the PC and that of
the SBU w e r e assessed if the PC was not an SBU.
Effect o f the chairman. The effect of the chairman on the use of controls at the PC level was
assessed by asking: "Since [name of chairman]
took over, have these categories of controls
b e c o m e m o r e or less restrictive?" Four control
categories w e r e listed: h e a d c o u n t controls,
financial controls, p r o c e d u r a l controls, and
meetings. Scoring was on a scale from 1 (Much
less restrictive) to 5 (Much m o r e restrictive).
A c c o u n t i n g treatment o f expenditure. The
assessment of w h e t h e r the controls affected capital- and e x p e n s e - t y p e e x p e n d i t u r e s differently
was d o n e in two ways. First, the managers w e r e
asked to indicate the e x t e n t of their a g r e e m e n t

ORGANIZATIONAL CONTROLS AND DISCRETIONARY PROGRAM DECISION MAKING

w i t h the following question: "Approvals are

easier to get for capital m o n e y than for e x p e n s e
money" on a scale from 1 (Strongly disagree) to
5 (Strongly agree).
Second, the question shown in Appendix B
was used. Of the nine types of e x p e n d i t u r e s
listed in this question, seven had to be e x p e n s e d
(e.g. p r o d u c t engineering, advertising and sales
p r o m o t i o n ) , while the other two ( c a p a c i t y
expansion, manufacturing process improvements - - capital) had to be capitalized. So, from
the responses to the items in this question, two
"lack of autonomy" scores w e r e calculated, one
for the e x p e n s e items and o n e for the capital
items, by c o m p u t i n g the mean of the absolute
values of the deviations from the m i d d l e
response ( A b o u t the s a m e ) for the items in question (i.e. capital or expense).

RESULTS
The response from the managers in the sample
was excellent. An initial request of the 62 managers in the sample y i e l d e d 50 responses, and a
follow-up y i e l d e d 9 more, for a total of 59
responses ( 9 5 % ) . But five managers indicated
they had no d i r e c t authority over manufacturing, and as that c o n d i t i o n has b e e n set as necessary for inclusion in the sample, those five sets of
responses w e r e eliminated from the data base.
That left a sample of 54 responses which w e r e
analyzed.
On average, the 54 r e s p o n d e n t s in the sample
w e r e 48 yr old; they had w o r k e d for the company for 22 yr, and had w o r k e d in their p r e s e n t

75

position for 4 yr. Their PCs, on average, generated annual revenues of $201 million and
included 2314 people.

Relative importance of controls (proposition

1)
The first p r o p o s i t i o n related to the relative
i m p o r t a n c e of the various types of controls in
affecting discretionary p r o g r a m decisions at the
PC level. The data relating to this p r o p o s i t i o n - the distributions of scores for the c o n t r o l scales
- - are shown in Table 1. They show that the net
i n c o m e targets have the most significant impact
on e x p e n d i t u r e s on discretionary programs
(highest mean item score). The highest single
item score was for the annual net i n c o m e
target; the mean for this item was 4.2, and the
n e x t highest single item score was 3.7 (for
b u d g e t e d e x p e n s e targets for total p r o g r a m
expenditures).
These data, and the c o m m e n t s of the managers w h o r e a c t e d to the data, are consistent with
the generally a c c e p t e d view that c o n t r o l in
decentralized organizations involves allowing
PC managers high a u t o n o m y b u t holding t h e m
accountable for results which are defined to a
considerable e x t e n t in accounting terms. The
data are also consistent with Otley's ( 1 9 7 8 ) data
w h i c h s h o w e d that accounting data w e r e a very
important part of the c o n t r o l system at the profit
c e n t e r level of the firm he studied.
While the net i n c o m e targets w e r e the single
most important form of control, all of the o t h e r
types of controls had some effect on discretionary program decisions, at least in some PCs.
The single item rated lowest in effect ( m e a n --

TABLE 1. Distribution of control variables

Type of control
Net income targets

Expense targets
Headcount controls
Procedural controls
Meetings

Possible
range

Actual
range

Mean
scale
score

Scale
standard
deviation

Mean
item

3-15
2-10
2-10
4-20
3--15

3-15
2-10
2-10
9--16
3-15

10.6
6.5
5.9
10.5
9.1

3.2
1.9
2.3
2.8
2.7

3.5
3.2
3.0
2.6
3.0

score

76

KENNETHA. MERCHANT

2.1) was "Approvals r e q u i r e d for s p e n d i n g

m o n e y already i n the budget".
A n o t h e r c o n c l u s i o n that c a n b e d r a w n fTom
the data i n Table 1 is that t h e r e is a significant
v a r i a n c e i n t h e i m p a c t o f each o f t h e types o f
controls; t h e s t a n d a r d d e v i a t i o n s are high. Propo s i t i o n t w o was d e s i g n e d to e x p l o r e for the factors that m i g h t e x p l a i n s o m e o f this variance.

Correlations between control scales

Table 2 p r e s e n t s the S p e a r m a n rank o r d e r correlations b e t w e e n the c o n t r o l scales. T h e s e correlations are i n t e r e s t i n g b e c a u s e t h e c o n t r o l s are
g e n e r a l l y all p o s i t i v e l y c o r r e l a t e d w i t h each
other. This suggests that i n g e n e r a l the c o n t r o l s
are u s e d to r e i n f o r c e each other, rather t h a n
b e i n g u s e d p r i m a r i l y as substitutes. This result is
i m p o r t a n t b e c a u s e it suggests that a c o m b i n a t i o n of effect-on-behavior scores of a list of controis like the o n e u s e d h e r e c o u l d b e u s e d as a n
i n d i c a t o r o f a n o t h e r i m p o r t a n t c o n t r o l system
characteristic: t h e d e g r e e of "tightness" or
"looseness".

Distributions o f the i n d e p e n d e n t variables

T a b l e 3 p r e s e n t s s u m m a r y data a b o u t the dist r i b u t i o n s of s o m e o f the i n d e p e n d e n t variables:
r e l a t i o n s h i p w i t h superior, e c o n o m i c perform a n c e , a n d b u s i n e s s strategy. T h e results are as
e x p e c t e d . T h e initiating s t r u c t u r e a n d consider-

ation scores are well w i t h i n the r a n g e o f those

scores f o u n d in p r i o r studies despite the fact that
the m a n a g e r s w h o s e leadership styles w e r e
b e i n g evaluated in this style w e r e at o n e of the
highest o r g a n i z a t i o n levels at w h i c h these measures have ever b e e n used. ~1 T h e i n d i c a t o r of
e c o n o m i c p e r f o r m a n c e s h o w s q u i t e satisfactory
results, as 28 m a n a g e r s r e p o r t e d that their PC
was m o r e profitable than the average PC in the
c o m p a n y , a n d 26 r e p o r t e d their PC as b e i n g less
profitable than average. T h e classifications of
strategies also s h o w e d good diversity a m o n g the
PCs, a l t h o u g h o n l y o n e PC was p u t in the harvest
category; h e n c e , in s u b s e q u e n t analyses, the harvest category was c o m b i n e d w i t h the m a i n t a i n
category.
T h e c o r r e l a t i o n s b e t w e e n the i n d e p e n d e n t
variables, s h o w n in Table 4, w e r e also as
expected. The t w o leadership d i m e n s i o n s w e r e
positively c o r r e l a t e d as they almost always are
u s i n g the p a r t i c u l a r i n s t r u m e n t u s e d h e r e
( S c h r e i s h e i m et al., 1976), a n d the c o n t e x t variable, d i s t a n c e b e t w e e n offices, was significantly
n e g a t i v e l y c o r r e l a t e d w i t h the initiating struct u r e d i m e n s i o n o f leadership, as expected.
A n o t h e r i n t e r e s t i n g c o r r e l a t i o n in this table is
b e t w e e n the strategy of the PC a n d that of the
SBU. This c o r r e l a t i o n is positive b u t is less than
1.0. This is b e c a u s e m o s t of the SBUs in this comp a n y are very large a n d c o n t a i n b u s i n e s s segm e n t s w i t h different g r o w t h prospects.

TABLE2. Spearman rank order correlations among control variables (n --- 54)

Type of control
1. Net income targets
2. Expense targets
3. Headcount targets
4. Procedural controls
5. Meetings

Net
income

Expense

Headcount

Procedural

0.37*
0.33*
0.07
0.26t

--0.01
0.27
--0.04

0.21,
0.25t

0.11

Meetings

Two.tailed significance
*p < 0.01
t P < 0.05
*p < 0.10
H Some were vice president/general manager in charge of business units with annual revenues well in excess of $1 billion.

ORGANIZATIONAL CONTROLS AND DISCRETIONARY PROGRAM DECISION MAKING

77

TABLE 3. Distributions of independent variables

Relationship with superior

Initiating structure
Consideration
Geographical distance
between offices

Possible
range

Actual
range

Mean

Standard
deviation

10-50
10 - 5 0

17-44
18-46

32.8
32.8

4.7
6.6

1-5

1-5

3.4

1.7

Economic performance
Losing money
About break-even
Profitable. but less so than most
(name of company) profit centers
More profitable than most ( name of
company) profit centers

N
8
2
16
28

Total

54

Nfor strategy of:

Profit center
Strategy
Rapid growth
Selective growth
Maintain/generate cash flow
Harvest

SBU

13
27
13

7
26
17

54

5O

TABLE 4. Spearman rank order correlations between independent variables ( n = 54)

Initiating
structure
Relationship with superior
Initiating structure
Consideration
Geographical distance
between offices
Economic performance
Strategy (planned rapidity
of growth )
Profit center
SBU
Two-tailed significance
* p < 0.01
t P < 0.05
, p < 0.10

Consideration

Distance

-0.42*
0.09

-0.10
0.00

-0.24,

0.00
0.08

-0.05
- 0.13

-0.14
-0.02

Performance

PC
strategy

0.05
-0.20

0.43*

0.30t

SBU
strategy

78

K E N N E T H A. M E R C H A N T

Systematic differences in the effects o f controls

(proposition 2)
P r o p o s i t i o n 2 w a s d e s i g n e d to p r o v i d e t h e
s t r u c t u r e for t h e statistical analyses o f relationships a m o n g t h e uses o f c o n t r o l s and t h e v a r i o u s
situational factors.

Relationship with superior. The test for

r e l a t i o n s h i p s b e t w e e n t h e l e a d e r s h i p style a n d
d i s t a n c e - b e t w e e n - o f f i c e s v a r i a b l e and t h e
impact of the controls was done by computing
r a n k o r d e r c o r r e l a t i o n s . T h e y a r e s h o w n in T a b l e
5.
T h e r e a r e s e v e r a l significant c o r r e l a t i o n s in
T a b l e 5, b u t t h e findings a r e in s o m e w a y s n o t
c o n s i s t e n t w i t h e x p e c t a t i o n s . O n e significant
r e l a t i o n s h i p is that t h e s u b o r d i n a t e s w i t h
s u p e r i o r s r a t e d h i g h in I n i t i a t i n g S t r u c t u r e ( I S )
t e n d e d to b e affected less b y t h e h e a d c o u n t controls a n d m e e t i n g s . T h e r e s u l t f o u n d in p r i o r
r e s e a r c h o f a r e l a t i o n s h i p b e t w e e n IS a n d t h e
e x t e n t o f use o f financial i n f o r m a t i o n for evaluat i o n p u r p o s e s ( D e C o s t e r & Fertalds, 1968; Hopw o o d , 1974; M e r c h a n t , 1 9 8 3 ) is n o t in e v i d e n c e .
O n e p o s s i b l e e x p l a n a t i o n o f t h e s e results is that
t h e IS m e a s u r e d o e s n o t c a p t u r e t h e qualities o f
o r i e n t a t i o n to d e t a i l s o r n u m b e r s that s o m e managers r e f e r r e d to in t h e i n t e r v i e w s as b e i n g
a s s o c i a t e d w i t h a h i g h e r s u p e r i o r i n v o l v e m e n t in
PC d i s c r e t i o n a r y p r o g r a m e x p e n d i t u r e decisions. High IS s u p e r i o r s m i g h t d o a m o r e c o m plete job of defining subordinates' roles and
t h e r e b y o b v i a t e t h e n e e d for t h e s e o t h e r f o r m s
of control. Or the difference between these

results and those of the prior studies may simply

b e d u e to t h e fact that t h e m a n a g e r s s t u d i e d h e r e
had profit center responsibility, while those
s t u d i e d in t h e t h r e e s t u d i e s c i t e d a b o v e h a d c o s t
c e n t e r r e s p o n s i b i l i t y . F u r t h e r e x p l o r a t i o n is
n e e d e d in this area.
S u p e r i o r c o n s i d e r a t i o n is a s s o c i a t e d o n l y w i t h
a l o w e r effect o f h e a d c o u n t c o n t r o l s . T h e b e s t
i n t e r p r e t a t i o n o f this r e s u l t is that m a n a g e r s w h o
u s e t h e s e c o n s t r a i n t s are s i m p l y r a t e d as b e i n g
less c o n s i d e r a t e . This f o r m o f c o n t r o l was part i c u l a r l y d i s l i k e d b y m o s t o f t h e managers. For
e x a m p l e , t h e f o l l o w i n g c o m m e n t s w e r e typical
o f t h o s e m a d e b y s e v e r a l managers:
I think that headcount controls have been and continue
to be very damaging, particularly to businesses whose
objectives include growth.
We are able to work creatively within the dollar constraints, but there's not much you can do with the headcount constraints.

The context variable -- distance between

offices - - w a s n o t significantly a s s o c i a t e d w i t h
t h e effect o f t h e controls. Since s e v e r a l o f t h e
m a n a g e r s i n t e r v i e w e d i d e n t i f i e d this f a c t o r as
b e i n g i m p o r t a n t , it is likely that d i s t a n c e betw e e n offices c a n h a v e an effect in c e r t a i n situations, b u t it d o e s n o t h a v e an effect that a p p e a r s
as statistically significant a c r o s s t h e e n t i r e sample.

Economic performance. T a b l e 6 p r e s e n t s t h e
c o r r e l a t i o n s b e t w e e n t h e e c o n o m i c perform a n c e variable a n d t h e c o n t r o l variables. It w a s

TABLE 5. S p e a r m a n r a n k o r d e r c o r r e l a t i o n s b e t w e e n r e l a t i o n s h i p - w i t h - s u p e r i o r v a r i a b l e s a n d t y p e o f c o n t r o l ( n = 5 4 )

Type of control
Net income targets
Expense targets
Headcount controls
Procedural controls
Meetings

One-tailed significance
p < 0.05
tp<0.10

Initiating
structure

Consideration

Georgrapbical distance
b e t w e e n offices

--0.08
0.15
- 0.21 t
- 0.04
-- 0 . 2 5 *

-0.06
0.05
- 0.26 *
0.03
0.11

0.03
--0.15
-- O. 10
- 0.18
0.06

ORGANIZATIONALCONTROLS AND DISCRETIONARYPROGRAM DECISION MAKING

e x p e c t e d t h a t PCs p e r f o r m i n g w e l l w o u l d b e
less a f f e c t e d b y t h e c o n t r o l s , a n d t h e o n e c o r r e l a t i o n t h a t is s t a t i s t i c a l l y s i g n i f i c a n t - - b e t w e e n
p e r f o r m a n c e a n d e f f e c t o f m e e t i n g s - - is n e g a tive, as e x p e c t e d . B u t as t h e o t h e r c o r r e l a t i o n s
d o n o t s h o w t h e s a m e result, this f i n d i n g has t o
b e i n t e r p r e t e d as b e i n g v e r y w e a k .

Strategy. T a b l e 7 s h o w s t h e m e a n i t e m s c o r e s
f o r t h e c o n t r o l s c a l e s b r o k e n o u t b y P C a n d SBU
TABLE 6. Spearman rank order correlations between
economic performance and type of control (n = 54)

Correlation with
economic performance

Type of control
Net income targets
Expense targets
Headcount controls
Procedural controls
Meetings

--0.06
0.20t
--0.20t
0.00
-0.27*

79

strategy. T h e s i g n i f i c a n c e o f t h e d i f f e r e n c e s bet w e e n m e a n s w a s c a l c u l a t e d u s i n g t-tests.

These results are very interesting. They show
t h a t t h e d e c i s i o n s o f t h e r a p i d g r o w t h u n i t s (i.e.
PCs o r SBUs) a r e m o r e h i g h l y a f f e c t e d b y t h e n e t
i n c o m e t a r g e t s ( p a r t i c u l a r l y m o n t h l y targets, as
s h o w n at t h e b o t t o m o f T a b l e 7), t h e h e a d c o u n t
controls (particularly hiring freezes), and meetings. T h e s e r e s u l t s a r e r e a s o n a b l y s t r o n g , a n d
they are consistent with Simons' (1984) finding
t h a t b u d g e t p r e s s u r e w a s g r e a t e r in " p r o a c t i v e "
firms. B u t t h e y a r e n o t c o n s i s t e n t w i t h t h e findi n g s o f e i t h e r G o v i n d a r a j an & G u p t a ( 198 5 ) w h o
c o n c l u d e d t h a t a c c o u n t i n g n u m b e r s w e r e less
i m p o r t a n t for g r o w t h b u s i n e s s e s , o r H a m e r m e s h
& White (1984) who would have expected to
find n o s i g n i f i c a n t r e l a t i o n s h i p s .
The reactions of the managers who were
s h o w n t h e d a t a w e r e p a r t i c u l a r l y h e l p f u l in
i n t e r p r e t i n g t h e s e results. T w o m a n a g e r s ' c o m ments were the following:
I wouldn't have expected the survey to show that the use
of controls varies according to the strategy of the profit
center.
I don't think the answer is necessarily to loosen up the

One-tailed significance
*p < 0.05
tp<0.10

TABLE 7. Mean control item scores for different profit center and SBU strategies

Type of control

(n=54)
Overall
sample

Profit center strategy

(n--13) (n=27) (n=14)
(n---7)
Rapid Selective
Significant Rapid
growth growth Maintain contrast growth

Net income targets

Expense targets
Headcount controls

3.5
3.2
3.0

3.9
3.2
3.7

3.4
3.2
2.8

3.3
3.4
2.7

Procedural controls
Meetings

2.6
3.0

2.8
3.4

2.5
2.8

2.6
3.1

3.8

2.9

2.6

3.4

2.1

1.7

Selected individual items:

Monthly net income
targets
Hiring freezes

Two-tailed significance
*p < 0.01
t P < 0.05
,p<0A0

SBUstrategy
(n=26) (n=17)
Selective
Significant
growth Maintain contrasts

--RGvs SGt
RGvsMt
-RG vs SG,

4.0
3.1
3.8

3.6
3.3
3.0

3.2
3.3
2.6

RGvsM,
-RVvs Mt

2.9
3.4

2.7
3.0

2.5
3.0

---

RG vs SG
RG vs Mt
RGvsSGt
RGvsM*

3.6

3.2

2.4

--

3.6

2.4

1.5

RGvsSG,
RGvsM*
SGvsMt

80

KENNETH A. MERCHANT
controls over the g r o w t h businesses. I think these
businesses just n eed shorter planning cycles so the
targets stay realistic.

This r e s u l t w a s also d i s c u s s e d w i t h a s e n i o r v i c e
p r e s i d e n t in a line p o s i t i o n in t h e firm, and h e
r e s p o n d e d as follows:
We certainly adjust our controls according to the
strategy of the profit center. But it's possible, even likely,
that the gro wth businesses will feel a tighter squeeze
because w e ' r e following their progress m o r e closely and
because they have greater needs. We can't let them grow
at, say, 80%. They'd never assimilate all the people.

T h e results s h o w n in T a b l e 7, then, m a y b e
d u e to t h e w a y t h e q u e s t i o n w a s asked. T h e
effects o f t h e c o n t r o l s w e r e n o t assessed b y asking u p p e r - l e v e l m a n a g e r s h o w m u c h e m p h a s i s
they placed on the particular types of controls;
t h e y w e r e assessed b y asking t h e PC m a n a g e r s
a b o u t t h e i m p a c t s t h e y felt. Thus, if o n e can
a s s u m e that this w e l l - r u n firm uses its c o n t r o l s
c o r r e c t l y , it a p p e a r s that it is g e n e r a l l y n o t desira b l e to r e l a x t h e c o n t r o l s o n t h e g r o w t h businesses so m u c h that t h e felt effect o n d e c i s i o n making is less than, o r e v e n e q u a l to, that in t h e m o r e
stable businesses.

Style of chairman. The s c o r e s o f t h e q u e s t i o n

as to h o w t h e m a j o r t y p e s o f c o n t r o l s had
c h a n g e d s i n c e t h e n e w c h a i r m a n t o o k over, o n a
scale f r o m 1 ( M u c h less r e s t r i c t i v e ) to 5 ( M u c h
m o r e r e s t r i c t i v e ) , w e r e as follows:
Type of control

Mean

Headcount controls
Financial c o n t r o l s
Procedural controls
Meetings

3.7
3.2
2.5
2.6

T h e s e results s u p p o r t t h e n o t i o n that t h e chairm a n can h a v e an effect o n t h e c o n t r o l s in u s e ( o r

at least an effect o n p e r c e p t i o n s ) . T h e c o n t r o l
shift is c l e a r l y t o w a r d g r e a t e r u s e o f h e a d c o u n t
a n d financial c o n t r o l s a n d t o w a r d less u s e o f p r o c e d u r a l c o n t r o l s and m e e t i n g s ( p < 0.01 ).

Accounting

treatment

of

expenditure.

W h e t h e r t h e effect o f t h e c o n t r o l s v a r i e d a c c o r d ing to t h e a c c o u n t i n g t r e a t m e n t o f t h e disc r e t i o n a r y p r o g r a m e x p e n d i t u r e w a s assessed in

t w o ways. O n e was s i m p l y to d e t e r m i n e if
a p p r o v a l s w e r e easier to g e t for capital m o n e y
t h a n for e x p e n s e m o n e y . T h e s e r e s p o n s e s to this
q u e s t i o n s u g g e s t that capital m o n e y is easier to
g e t than e x p e n s e m o n e y , as 36 o f t h e 54 manag e r s a g r e e d o r a g r e e d s t r o n g l y w i t h t h e statem e n t ( m e a n = 3.7).
T h e s e c o n d test of this q u e s t i o n w a s to c o m p a r e t h e s c o r e s f r o m t h e q u e s t i o n w h i c h asked
a b o u t the PC m a n a g e r s ' a u t o n o m y to m a k e decisions in c e r t a i n areas. T h e l a c k - o f - a u t o n o m y
s c o r e for t h e i t e m s o f e x p e n d i t u r e w h i c h have to
b e c a p i t a l i z e d was 0.4, w h i l e that for e x p e n s e
i t e m s was 0.7, and t h e d i f f e r e n c e b e t w e e n t h e s e
s c o r e s is significant a t p < 0 . 0 1 ( t w o - t a i l e d ) . This
r e s u l t also suggests that t i g h t e r c o n t r o l is e x e r c i s e d o v e r e x p e n d i t u r e s that have to b e
expensed.

SUMMARY AND CONCLUSIONS

This s t u d y f o c u s e d o n t h e i m p o r t a n t q u e s t i o n
o f h o w o n e i m p o r t a n t class o f d e c i s i o n s - - disc r e t i o n a r y p r o g r a m d e c i s i o n s - - are c o n t r o l l e d
in d e c e n t r a l i z e d firms. T h e i n t e n t was b o t h to
g e n e r a t e n e w findings and to g e n e r a t e e n o u g h
data so that s o m e o f t h e findings c o u l d b e
e x p l o r e d w i t h formal statistical analyses. Struct u r e d data c o l l e c t i o n t e c h n i q u e s w e r e u s e d in
the second phase of the study because they make
it easier for o t h e r r e s e a r c h e r s to r e p l i c a t e a n d
b u i l d o n this study.
A n u m b e r o f i n t e r e s t i n g findings are a p p a r e n t .
First, m a n y m a n a g e r i a l devices, all o f w h i c h can
b e given t h e label " c o n t r o l s " , i n f l u e n c e PC mana g e r d e c i s i o n s o n d i s c r e t i o n a r y p r o g r a m s . Net
i n c o m e targets a p p e a r e d to b e t h e single m o s t
i m p o r t a n t t y p e o f c o n t r o l , b u t several o t h e r
types of controls, including headcount and
e x p e n s e constraints, p r o c e d u r e s , a n d d i r e c t i v e s
g i v e n b y u p p e r m a n a g e m e n t in meetings, also
h a d i m p o r t a n t effects o n d e c i s i o n making. This
e v i d e n c e s u p p o r t s t h e n o t i o n that t h e s e o t h e r
t y p e s o f c o n t r o l s are u s e d to s u p p l e m e n t t h e net-

ORGANIZATIONALCONTROLSAND DISCRETIONARYPROGRAMDECISION MAKING

i n c o m e - t a r g e t c o n t r o l s in h e l p i n g t o p managem e n t e n s u r e that g o o d d e c i s i o n s are b e i n g m a d e
at l o w e r o r g a n i z a t i o n a l levels.
Second, c o n t r a r y to s o m e beliefs, t h e c o n t r o l s
a p p e a r n o t to b e r e l a x e d significantly for
b u s i n e s s e s w i t h g r o w t h strategies. In fact, t h e
c o n t r o l s h a d s t r o n g e r effects on, o r at least w e r e
p e r c e i v e d to have s t r o n g e r effects on, disc r e t i o n a r y p r o g r a m d e c i s i o n m a k i n g in t h e PCs
that w e r e p l a n n i n g to g r o w m o r e rapidly.
Third, it is a p p a r e n t that t h e n e w c h a i r m a n of
t h e firm s t u d i e d h e r e h a d a significant effect o n
t h e c o n t r o l s felt m a n y levels d o w n in t h e organization. This s t u d y w a s d e s i g n e d o n l y to test for
t h e e x i s t e n c e o f a shift in c o n t r o l strategy, n o t to
e x p l o r e t h e r a t i o n a l e b e h i n d it, a l t h o u g h this latt e r q u e s t i o n is also v e r y w o r t h y o f study.
Fourth, PC managers, in t h e firm s t u d i e d h e r e
at least, have g r e a t e r autonomy to m a k e decisions a b o u t e x p e n d i t u r e s w h i c h a r e c a p i t a l i z e d
t h a n t h o s e w h i c h are e x p e n s e d . This s u p p o r t s
t h e c o n t e n t i o n m a d e b y m a n y that m a n a g e r s are
h i g h l y m o t i v a t e d b y s h o r t - t e r m profit c o n s i d e r a tions.
T h e o t h e r findings w e r e inconclusive. T h e
effect o f t h e c o n t r o l s d i d n o t vary as e x p e c t e d
w i t h t h e m e a s u r e d traits o f l e a d e r s h i p style o f
t h e PC m a n a g e r s ' i m m e d i a t e s u p e r i o r s o r t h e
d i s t a n c e b e t w e e n t h e s u p e r i o r ' s and s u b o r d i nate's oftices. A n d t h e r e l a t i o n s h i p s b e t w e e n t h e
effect o f t h e c o n t r o l s a n d t h e r e c e n t e c o n o m i c
p e r f o r m a n c e o f t h e PC w e r e v e r y weak. It is
likely that t h e r e l a t i o n s h i p s o b s e r v e d in t h e
i n t e r v i e w s d o exist b u t that t h e y w e r e o b s c u r e d
b y l i m i t a t i o n s o f t h e s u r v e y p o r t i o n o f the study,
o f w h i c h several d e s e r v e highlighting.
O n e l i m i t a t i o n is o b v i o u s l y m e a s u r e m e n t . T h e
m e a s u r e s u s e d h e r e are c r u d e , as is to b e
e x p e c t e d in early stages o f r e s e a r c h . In t h e case
o f l e a d e r s h i p style, t h e c h o i c e o f a w e l l - t e s t e d
m e a s u r e m e n t i n s t r u m e n t w a s p r o b a b l y unfortun a t e in that t h e m e a s u r e o f initiating s t r u c t u r e
d i d n o t s e e m to test t h e p a r t i c u l a r c h a r a c t e r i s t i c
o f i n t e r e s t (i.e. o r i e n t a t i o n to detail).
A n o t h e r factor that h i n d e r s t h e display o f
statistically significant results is an i n c o m p l e t e
understanding
of the phenomena
being
examined. The review of literature and the

81

intensive, u n s t r u c t u r e d i n t e r v i e w i n g p h a s e s of
t h e s t u d y w e r e d e s i g n e d to i m p r o v e u n d e r s t a n d ing o f t h e terrain, b u t s o m e i m p o r t a n t factors
s u r e l y w e n t u n c o v e r e d . O n e s u c h factor b e c a m e
a p p a r e n t w h e n t h e results w e r e p r e s e n t e d to t h e
m a n a g e r s in t h e firm; it w a s d i s c o v e r e d that t h e
PCs b u i l d i n g p r o d u c t s for t h e m i l i t a r y w e r e n o t
affected b y t h e h e a d c o u n t controls. If this, and
o t h e r s u c h information, h a d b e e n k n o w n earlier,
s a m p l e - s e l e c t i o n o r statistical c o n t r o l s c o u l d
have b e e n set up, a n d m o r e v a r i a n c e in the
effects o f t h e c o n t r o l s c o u l d have b e e n
explained.
Better specified and more certain models of
t h e t e r r a i n w o u l d also a l l o w m o r e s o p h i s t i c a t e d
statistical tests. T h e tests d o n e h e r e w e r e o f v e r y
s i m p l e b i v a r i a t e relationships, y e t it is likely that
s o m e o f t h e variables s t u d i e d h e r e i n t e r a c t to
p r o d u c e c e r t a i n i m p o r t a n t c o n t r o l s y s t e m outc o m e s (e.g. d e g r e e o f c o n t r o l , m a n a g e r motivation). Still, m u l t i v a r i a t e statistical analyses w i t h
i n c l u s i o n o f i n t e r a c t i o n factors will have to await
better knowledge of how control systems work
in c o m p l e x organizations. Sorting o u t t h e s e
r e l a t i o n s h i p s t h r o u g h statistical g r o u p i n g will
n o t b e p o s s i b l e b e c a u s e careful c o l l e c t i o n o f
large data bases from field sites is p r o h i b i t i v e l y
expensive.
A n o t h e r l i m i t a t i o n to t h e findings p r e s e n t e d
h e r e is that t h e y are d e r i v e d f r o m data c o l l e c t e d
f r o m o n l y o n e firm. This s c o p e l i m i t a t i o n was
n e c e s s a r y to a l l o w for an i n t e n s i v e s t u d y o f t h e
r e s e a r c h site. But, g e n e r a l i z i n g to o t h e r firms is
risky, as e a c h firm has m a n a g e m e n t s y s t e m s a n d
p h i l o s o p h i e s that are unique, a n d t h e s e factors
c a n affect t h e o p e r a t i o n o f t h e c o n t r o l s y s t e m
a n d / o r its o u t c o m e s .
A final limitation is that t h e d a t a p r e s e n t e d
h e r e p r o v i d e v e r y little e v i d e n c e a b o u t h o w
firms o u g h t to d e s i g n a n d o p e r a t e a c o n t r o l system. P e r f o r m a n c e w a s t r e a t e d as an i n d e p e n d e n t
variable, n o t as a d e p e n d e n t variable as w o u l d b e
n e c e s s a r y for e x p l o r i n g c o n t i n g e n c y - t h e o r y
n o t i o n s o f "fit", for r e a s o n s d i s c u s s e d earlier. 7
T h e s t r o n g e s t s t a t e m e n t that c a n b e m a d e is that
t h e s e data d e s c r i b e t h e a n a t o m y o f a well-mana g e d firm. But it is likely that this firm is wellm a n a g e d o n l y in a r e l a t i v e sense (i.e., c o m p a r e d

82

KENNETH A. MERCHANT

t o o t h e r f i r m s ) , a n d t h e r e is n o g u a r a n t e e t h a t
the relationships observed here are close to
what could be called "optimal".
These limitations notwithstanding, some of
the findings were found both in the interviewing
and the questionnaire phases in the study and
statistical significance was demonstrated,
so
progress can be said to have been made. But cert a i n l y m u c h m o r e s t u d y is n e e d e d a b o u t t h i s

very complex, but important, function of mana g e m e n t w h i c h r e l i e s h e a v i l y o n u s e o f AIS. A n d ,

as h a s b e e n p o i n t e d o u t i n i n c r e a s i n g f r e q u e n c y
in recent years in the accounting literature (e.g.
K a p l a n , 1 9 8 3 ; H o p w o o d , 1 9 8 3 ) , f i e l d r e s e a r c h is
the most fruitful path toward gaining first-hand
k n o w l e d g e o f h o w a c c o u n t i n g a n d c o n t r o l systems work in the actual contexts in which they
operate.

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83

84

KENNETH A. MERCHANT
A P P E N D I X A. M E A S U R E O F I M P A C T O F C O N T R O L T Y P E S

A number of control devices are listed below. Please indicate the extent to which each has affected the decisions made in the
past year for expenditures on discretionary programs in your profit center. (Circle one n u m b e r in each row. )
No
effect

A. Headcount controls
Hiring freezes
Strict headcount targets
B. Financial controls
Net income targets:
(a) annual
( b ) quarterly
( c ) monthly
Budgeted targets for:
(a) total program expenditures
( b ) individual program expenditures
C. Procedural controls
Approvals required for:
(a) hiring new employees
( b ) spending discretionary program money
already in the budget
( c ) spending discretionary program money
in excess of budgeted levels
( d ) making capital expenditures
D. Meetings
(a) formal reviews of your profit center's
performance
( b ) formal [higher level] committee
meetings
( c ) informal contacts with higher level
managers

Some
effect

Great
effect

1
1

2
2

3
3

4
4

5
5

1
1
1

2
2
2

3
3
3

4
4
4

5
5
5

1
1

2
2

3
3

4
4

5
5

1
1

2
2

3
3

4
4

5
5

ORGANIZATIONAL CONTROLS AND DISCRETIONARY PROGRAM DECISION MAKING

A P P E N D I X B. M E A S U R E O F E F F E C T O F C O N T R O L S

85

ON DIFFERENT TYPES OF DECISIONS

Assume that in the past year you had b e e n given complete freedom to operate your profit center in whatever m a n n e r you
thought best served the long-term interests of [name of company]. Would you have spent more or less m o n e y in your profit
center in each of the following areas? (Circle one n u m b e r in each row.)
Would have spent

(a) Capacity expansion

( b ) New product development
( c ) Product engineering ( i m p r o v e m e n t of
existing p r o d u c t s )
( d ) Manufacturing process i m p r o v e m e n t s (cost
reductions )
(i) e q u i p m e n t (capital)
( ii ) engineering ( expense )
( e ) Basic research
( f ) Advertising and sales promotion
( g ) Training and development of e x e m p t
employees
( h ) Information systems

Much
less

A
little
less

About
same

A
little
more

Much
more

1
1

2
2

3
3

4
4

5
5

1
1
1

2
2
2

3
3
3

4
4
4

5
5
5