Chapter 16

Slide 16.
Chapter 16:
The Effects of Environmental
Uncertainty, Organizational
Strategy, and Multinationality on
Management Control Systems
Merchant, Management Control Systems PowerPoints on the Web, 3rd edition, Pearson Education Limited 2012
Slide 16.2
Contingency/situational factors
There are no universally best control systems

that apply in every situation for all organizations
Contingency factors
Organizational factors
Technological factors
Strategic factors, etc.
MCS variables
Outcome variables
Type + tightness of controls used

Design of the budgeting system
Performance measures emphasized
Objectivity of performance evaluations
Design of reward systems, etc.
Degree of control
Dysfunctional side-effects
Control costs
Slide 16.3
Strategy typologies
Corporate diversification strategy

Refers to what businesses the firm should invest in
and how these businesses should be coordinated
Defines where to compete

Single business related/unrelated diversified
Business unit competitive strategy

Determines how to compete in each of the businesses
Low cost differentiation
Slide 16.4
Degree of Relatedness
High
Corporate diversification strategy
low
Single
Business
Firms
One line of business

Operational synergies
Related
Diversifiers
based on a common set

of core competencies
Connection between
Unrelated
Diversifiers
Number of Businesses
businesses is mainly
financial (holdings)
High
Slide 16.5
Implications for MCS design
Incentives
Budgets
Single/Related
Business
Unrelated
Diversified
Control of SBU-manager
over budget formulation
Low (?)
High
Importance attached to
meeting the budget
Low (?)
High
Bonus criteria
Bonus determination
Bonus basis
financial and
nonfinancial criteria
primarily financial criteria
primarily subjective
or discretionary (?)
primarily formula-based
SBU + corporate
primarily SBU-performance
performance
Slide 16.6
Business unit competitive strategy

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

Slide 16.7
Implications on MCS design

BUDGETING
Low Cost Differentiation
Control of SBU-manager
over budget formulation
relatively low
relatively high
Budget revisions
during the year
relatively difficult
relatively easy
Tolerance towards
budget deviations
relatively low
relatively high
relatively high
relatively low
Importance attached to
meeting the budget
Slide 16.8
Implications on MCS design (continued)

Low Cost Differentiation
INCENTIVES
Bonus criteria
primarily
financial criteria
more emphasis on
nonfinancial criteria
Bonus determination
primarily
formula-based
more subjective
or discretionary (?)
Slide 16.9
Differences across countries
Factors that affect MCSs across countries

National culture
Peoples tastes, norms, values, social attitudes, religions,
personal priorities, and responses to interpersonal stimuli
Local Institutions
Government agencies, banking systems, labor unions,
financial markets, accounting rules, regulations, etc.
Local business environments
Stage of economic development, political risk, inflation,
labor availability, labor quality, labor mobility, etc.
Slide 16.10
National culture differences
National culture has a direct effect on MCS because

control problems are behavioral problems
Individualism potentially affects
Incentives based on individual vs. group performance
Propensity of engaging in myopic, self-centered behavior
Power distance potentially affects

Degree of centralization of decision-making
Degree of participation in setting performance targets
Uncertainty avoidance potentially affects

Degree of subjectivity in performance evaluations
Degree of formality of planning and budgeting processes
Masculinity potentially affects

Degree of performance-based rewards
Slide 16.11
Local institutions
Labor unions
Use of performance-based rewards
(merit-based vs. seniority-based)
Financial markets and stock market valuations

Frequency of profit measurement
Use of short-term incentives
Likelihood of myopic behavior
Threat of hostile takeovers

Use of reward schemes to get common stock
in managers and employees hands
Accounting regulations
Slide 16.12
Local business environments
Risk and uncertainty-related factors

Business risk
Military conflicts, terrorism, corporate espionage, etc.
Political risk
Adverse: forced production, prohibition of layoffs, price controls
Protective: tariff barriers, subsidies, research support, etc.
Stage of economic development
Age and size of corporations, degree of computerization, degree
of development of accounting, information, and control systems
Inflation
Financial risk (e.g., use of flexible budgeting)
Labor availability, quality, and mobility

Use of action controls, personnel controls, and long-term incentives
Slide 16.13
Foreign currency translation
Local managers bear foreign currency translation

risk if their performance in measured in homecountry currency
Can subsidiary managers control this risk?
Authority to make cross-border investment, product
sourcing, or marketing decisions
Authority to write purchase or sales contracts in one
currency or another
Authority to make foreign exchange transactions (hedging,
swaps, arbitrage)
If not,
Evaluate manager in local currency
Treat foreign exchange losses and gains below the line
Calculate foreign exchange variance and treat it as
uncontrollable
Flex the budget to end-of-year currency rates

Chapter 16

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Slide 16.

There are no universally best control systems

Type + tightness of controls used

Corporate diversification strategy

Defines where to compete

Business unit competitive strategy

Low cost differentiation

Corporate diversification strategy

One line of business

based on a common set

Implications for MCS design

primarily financial criteria

Business unit competitive strategy

tight cost control

different business unit strategies require different MCS ...

Implications on MCS design

Low Cost Differentiation

Implications on MCS design (continued)

Differences across countries

Factors that affect MCSs across countries

National culture differences

National culture has a direct effect on MCS because

Power distance potentially affects

Uncertainty avoidance potentially affects

Masculinity potentially affects

Financial markets and stock market valuations

Threat of hostile takeovers

Local business environments

Risk and uncertainty-related factors

Labor availability, quality, and mobility

Foreign currency translation

Local managers bear foreign currency translation

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