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Abstract The aim of this paper is to point out how certain market strategies adopted by susbidiaries influence the design of corporate performance management systems. It is based on contingency theory which argues that there is no best way of structuring organisations. Instead, organisational controls should be tailored to the specific internal and external context of the organisation. The paper is structured as follows: In a first step, a brief overview on performance management systems is given. Moreover, the historical development of contingency theory and its application to subsidiary controlling is discussed. Subsequently, different strategy typologies that can be found in literature are reviewed and re-classified according to their influence on management control system design. Finally, these categories are analysed in terms of their influence on the choice of performance measures, the design of incentives and the planning process. It is argued that strategic business units (SBUs) that follow more innovative or expansive strategies should be controlled with the help of more non-financial performance measures compared to rather conservative SBUs. Furthermore, topmanagement remuneration in such SBUs should consist of variable parts to a greater extent. Also it is argued that the planning process in innovative SBUs should be less formal. Key words: Performance measurement, contingency, subsidiary controlling, management control system For figures please contact the authors direct Email: mail@dennis-schlegel.de
Tel: +49 163 2017191 Email: bernd.britzelmaier@hs-pforzheim.de Tel: +49 7231 286639
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objectives can be ensured on all organisational levels (Horvth 2006, p 10). The relationship between the central corporate management and its subsidiaries can be described as a principal agent problem which is a concept from New institutional economics (Schmidbauer, 1998, p 45; jensen & Meckling, 1976, p 308). a principal agent relationship is primarily characterised by the following two aspects: First, the principals and the agents interests are divergent and the agent acts opportunistically, i.e. is likely to misuse the delegated authority for his own benefit. Second, the agent is able to enforce his own interests, since there is information asymmetry in favour of the agent (Weber & Schffer 2006, p 25). Performance management systems (PMS) are a key instrument of subsidiary controlling. The correct use of performance measures combined with incentives can help overcome the two problematic characteristics of the principal agent relationship: on the one hand, they can help reduce information asymmetry between the corporate centre and subsidiaries. At the same time, they ensure an orientation toward corporate objectives on all levels of the organisational hierarchy. According to contingency theory, there is no best way of structuring an organisation and its management systems (Morgan 1998, p 44; jackson 2000, p 110). Instead, the optimal design depends on situational factors (drury 2004, pp 695-696; jackson 2000, p 110). Contingency approaches argue that also PMS design should be made contingent on certain situational factors. For this paper, business strategy of subsidiaries has been chosen as an example for a situational factor. Literature provides companies with recommendations for the design of PMS depending on certain strategies. one goal of this paper is to provide a theoretical basis for the discussion about the design of PMS in company groups. At the same time, it is intended to point out strengths and limitations of contingency theory and to show how theoretical contingency approaches could be tested against reality. Last but not least, the authors intention is to provide theoretically and empirically well-grounded guidelines for corporate managers in practice. In terms of methodology, this paper belongs to the theoretical strand of contingency research. That means that hypotheses are developed by analysing, synthesising and critically discussing existing literature. This literature review is
complemented by the authors own thoughts, ideas and assumptions. However, in this paper, no empirical research will be presented. The structure of the paper is as follows: First of all, the conceptual background of this paper is established by presenting a framework for the discussion of PMS which will be used as a structure for the discussion in the last chapter. Moreover, issues of performance management in a company group context will be discussed. Next, a discussion of the methodological and research background will follow, before the actual topic how PMS can be tailored to strategy will be addressed and hypotheses will be formulated in the last chapter.
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sure that in each decision that is made in daily business, the goal of value creation is considered (koller, Goedhart & Wessels 2005, p 405). Effective performance management thus requires a thorough understanding of the underlying factors that influence value creation and a consideration of all the three components of PMS which will be discussed more in detail below.
measures is justified and if there are possibilities to remedy the weaknesses by improving design or usage of the measures or other parts of the control systems. A thorough analysis of dysfunctions and biases in financial performance measures has recently been presented by britzelmaier & Schlegel (2010) with the result that many of the problems associated with financial performance measures are a consequence of an incorrect application rather than inherent failures of the measures. on the other hand, in certain contexts non-financial measures are indeed more suitable which will be discussed below.
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and plans top-down to lower levels (Simons 2000, p 4; langfield-Smith, Thorne & Hilton 2009, p 691). Additionally, they help managers to compare their own performance to previously set targets and to take corrective actions in time (Hoque 2003, p 142; otley 1, p 3). This enables well-founded management decisions (bititci, carrie & Mcdevitt 1997, p 524). due to the information function, they help resolve the principal agent problem since they reduce the information asymmetry between the principal and the agent.
Incentive System
The third component of PMS is important for another purpose: The behaviour control function (ewert & Wagenhofer 2008, p 521; Schumann 2008, pp 87-88). PMS can be used to control behaviour of managers by monitoring their performance and using it as a basis for compensation (Hoque 2003, pp 142-143). also, benchmarking between several subsidiaries or with external parties can be done (burger & Ulbrich 2005, pp 349-353). This way, the second characteristic of the principal agent conflict can be resolved: Interests of the principal and the agent are aligned.
But also from an economic point of view there are several ways to subdivide a company group It is conceivable to use two existing concepts for the demarcation: First, the concept of a cash generating unit (CGU) from the International Financial Reporting Standards (IFRS) which is used for impairment tests could be applied. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets (IAS 3.). Second, the concept of a strategic business unit (SBU) as defined in strategic marketing could be used. A SBU is a product-market combination which is strategically independent from other SBUs (Huch, behme & ohlendorf 2004, p 445).
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emphasised though that a PMS must be designed in the context of an overall organisational control system which has also implications on models and empirical tests (see the problem of model underspecification discussed below). In a company-group context, contingency approach can mean two different things: A company group-specific approach or a subsidiaryspecific approach. The first possibility means that the general design of subsidiary controlling is made contingent on context factors of the company group as for instance Maier (2001) does in his doctoral thesis. The second possibility is also discussed under the keyword standardisation vs. differentiation. By differentiation, it is meant that the characteristics of subsidiary performance management should not be universal across the company group but designed individually for each subsidiary depending on the respective situational factors (borchers 2006, p 238). In this paper, business strategy of subsidiaries is presented as a subsidiary-specific context factor. It is argued that the components of the subsidiary PMS should be designed differently depending on the individual strategy of the subsidiary.
Empirical studies involve lots of difficulties. A major problem in empirically testing a model of PMS is that PMS are only one component of management control. Thus the effects of the PMS have to be isolated from other organisational controls. Thus there is the danger of model underspecification, i.e. several controls influence the behaviour of employees but the result is only blamed to part of the control system (Chenhall 2003, p 131). Further problems are the enormous number of possible factors, as well as the definition and measurement of abstract variables. This measurement problem not only occurs for the contingent factors but also for the outcome (performance). Additionally, there is a potential of drawing wrong conclusions from observed correlations since they might be merely statistical correlations instead of economic causalities (Chenhall 2003, pp 135-13; Drury 2004, p 697). Empirical approaches differ in terms of their dependent and independent variable. Arising from the difficulties in measuring performance, there are so-called selection studies which only examine the relationship between contextual factors and the control system of companies without addressing the question whether a certain combination leads to a better performance (Chenhall 2003, p 155). That means they only examine the relationship between the first two boxes in the figure above. Critics claim that studies should include performance as the dependent variable (Chenhall 2003, p 135). Proponents of such studies, however, argue that rational managers will not employ systems which do not enhance performance so that insights about the adoption of systems in practice do provide helpful insights (drury 2004, p 698; chenhall 2003, p 135). They use simple correlations or linear regression without taking into account the relationship between various contextual factors (Chenhall 2003, p 155). Interaction approaches use situational factors as moderating variable in order to see how it influences the relationship between control system elements and performance. Moderating variables can also be combined with intervening models in order to separate direct and indirect effects on the outcome by specifying causal paths between different variables (Chenhall 2003, p 155). System approaches test multiple fits between variables simultaneously and how performance varies with different combinations. The statistical models used (e.g. Euclidean distance or cluster
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analysis) require large sample sizes (Chenhall 2003, pp 155-15). This paper can be classified as belonging to the theoretical strand. In the following chapter, hypotheses will be generated which provide input for possible empirical studies.
The specific needs in terms of control systems for build, prospector and differentiation strategies are similar. The same is true for harvest, defender and low cost strategies. This is especially because they face a comparable level of uncertainty (Shank & Govindarajan 12, pp 1, 21). Furthermore, they have the same implications for short-term versus long-term profit trade-offs. Build, prospector and differentiation strategies for instance tend to include large r&d expenses which decrease shortterm profit (Shank & Govindarajan 1992, pp 16, 21). In order to ensure the long-term focus of such strategies, particular attention has to be paid to the solutions against short-termism of managers. Consequently, for the further proceeding of this chapter, the strategies are classified into two new categories according to their implications for PMS design as shown in the figure below.
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There is empirical evidence that companies with high-uncertainty strategies indeed do use more non-financial measures, for instance from a study among 52 New Zealand manufacturing firms by Hoque (2003, p 496) and a study among dutch organisations by Verbeeten (2005, p 5). However, Verbeeten does not find support for the hypothesis that companies which better align their PMS with their strategy outperform their peers. H1: Subsidiaries with high-uncertainty strategies are managed with the help of more non-financial measures H2: Company groups that manage their highuncertainty subsidiaries with the help of more nonfinancial measures outperform their peers
market share. Moreover, more reliance should be placed on subjective judgments by superiors since it is hard to measure objectively the longterm effects of effort put into the development of critical success factors. However, this might be inappropriate in a subsidiary controlling context due to the information asymmetry involved. H5: The performance of managers of subsidiaries with high-uncertainty strategies is measured over longer time periods . H: Company groups that measure the performance of their high-uncertainty subsidiaries over longer periods outperform their peers. H7: Managers of subsidiaries with high-uncertainty strategies are compensated with a higher proportion of variable bonuses. H8: company groups that compensate managers of subsidiaries with high-uncertainty strategies with a higher proportion of variable bonuses outperform their peers.
Incentives design
Concerning the design of the incentives, the following suggestions are made for companies with high-uncertainty strategies: First, the measurement horizon should be extended in order to give long-term incentives for managers to pursue innovative strategies and not only focus on short-term gains. Shank & Govindarajan (12, pp 1-20) furthermore propose to define a relatively high proportion of total compensation as variable bonus in order to encourage managers to take greater risks which is necessary to increase
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definition of performance depends on the individual purpose of each study. Therefore, a further operationalisation is renounced by purpose.
conference readings book Proceedings, 187198. broadbent, j. & laughlin, r. (2009). Performance management systems: a conceptual model. Management accounting research , 20, 283-295. burger, a. & Ulbrich, P Beteiligungscontrolling. Mnchen. r. (2005).
Chenhall, R. H. (2003). Management control systems design within its organizational context: findings from contingency-based reseach and directions for the future. Accounting, organizations and Society , 28, 127-168. chow, c. W. & van der Stede, W. a. (2006). The Use and Usefulness of Nonfinancial Performance Measures. Management Accounting quarterly , 7 (3), 1-8. dittmar, c. (2004). knowledge warehouse. Ein integrativer Ansatz des organisationsgedchtnisses und die computergesttzte Umsetzung auf Basis des Data warehouse-Konzepts, wiesbaden drury, c. (2004). Management and cost accounting (th ed.). London. easterby-Smith, M., Thorpe, r. & jackson, P. (2008). Management research (3rd edition). London. ewert, r. & Wagenhofer, a. (2008). interne Unternehmensrechnung (7th ed.). Heidelberg. Faul, k. (2004). Wertorientiertes controlling. Ein Ansatz zur Unternehmensund Verhaltenssteuerung in dezentralen organisationen. Hamburg. Fischer, B. (2001). Performanceanalyse in der Praxis (2nd ed.). Mnchen. Gladen, W. (2008). Performance Measurement (4th ed.). Wiesbaden. Hoque, z. (2004). a contingency model of the association between strategy, environmental uncertainty and performance measurement. international business review , 13, 485-502. Hoque, Z. (2003). Strategic Management Accounting: Concepts, Processes and Issues. Frenchs Forest.
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