The Effect of Contextual Factors on the Design of Management Control Systems

Only available on StudyMode
  • Download(s) : 488
  • Published : August 14, 2010
Open Document
Text Preview
This paper determines the effects contextual factors have on the design of Management Control Systems. The paper firstly discusses what is meant by “Management Control Systems” and what is expected of “Management Control Systems”. Contingency-based research is outlined and five key contextual variables are identified for discussion. The five factors (external environment, technology, structure and size, strategy and national culture) are assessed to determine their impact on design and implementation of management control systems. Management Control Systems and Contingency-Based Research

Management Control Systems are systems that are put into place within organisations to help ensure that managers within organisation’s act in the best interest of the organisation and not self interest. Contingency theory is a theory that states that “the design and use of control systems is contingent upon the context of the organisational setting in which these controls operate” (Fisher, 1998). The idea of contingency theory is that the selection and use of a management control system is contingent on a variety of internal and external factors. Chenhall has identified five factors which impact Management Control Systems. They are external environment, technology, structure and size, strategy and national culture. A further study from Cadez and Guilding (2008) has identified a revised list of four factors (some of which are already considered in Chenhall’s previous work). They are business strategy, degree to which adopted strategy is deliberately formulated, market orientation and firm size. Other authors have identified different terms of contingency factors such as; uncertainty, technology and interdependence, industry, firm and unit variables, competitive strategy and mission and observability factors (Fisher 1998). There are many more variations provided by further works from a range of researchers, however from the above group the following categories of contextual factors have been drawn out for discussion; Strategy, Technology, External Environment, Organisational Structure and Size, and Culture (encapsulating both organisational culture and national culture). Contextual Factors

Strategy may be a choice in the way the organisation chooses to compete such as low cost, differentiation, quality service or some other competitive strategy. (Fisher 1998) It may also include choice in strategic direction such as moving into new products, markets or expansion plans. Chenhall discusses that different strategic directions have an effect on whether tight or loose controls are used. “MCS has the potential to aid managers in this [strategic] process by assisting them in forming strategy... MCS can then be implicated in the implementation and monitoring of strategies... [and] be used interactively to formulate strategy” (Chenhall 2003, p151). Bruggerman and Van der Stede suggest “each type of differentiation requires specific elements for the control systems in place...requiring different degrees of short term flexibility imply a different degree of uncertainty and might therefore require appropriately designed control systems.” (Fisher 1998). Chenhall and Morris (1995) found that control strategies which were more suited to conservative strategies were actually being used (or misused) in entrepreneurial style situations. They concluded that there seems to be a balancing act between encouraging innovation and controlling excessive amounts of innovation. The strategy that the organisation is working within will affect the management control systems as to whether it is formal or informal, loose or tight, focused on financial or non-financial indicators and whether it is the best fit between strategy and the control system to ensure optimal organisational performance. (Fisher 1998) Technology

Chenhall has identified three components of technology which affect the management control system; complexity, task uncertainty...