Professional Documents
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~ 1985 Pergamon Press Ltd.
K E N N E T H A. M E R C H A N T
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).
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
68
KENNETHA, MERCHANT
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.
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
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).
70
KENNETHA. MERCHANT
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-
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
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.
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 .
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.
Cronbach's alpha
0.80
0.62
O.53
O.53
0.77
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.
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 --
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
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.
77
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
SBU
13
27
13
7
26
17
54
5O
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
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
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
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
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
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.
Mean
Headcount controls
Financial c o n t r o l s
Procedural controls
Meetings
3.7
3.2
2.5
2.6
Accounting
treatment
of
expenditure.
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
BIBLIOGRAPHY
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Bruns, W. J. Jr. & Waterhouse, J. H., Budgetary Control and Organization Structure,Journal o f Accounting
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Chen, IZ S., Social and Financial Stewardship, The Accounting Review (July 1975) pp. 533-543.
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Euske, K. J., Management Control: Planning~ Contro~ Measurement and Evaluation (Reading, MA:
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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
85
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
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