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

Topics: Control system, Control engineering, Capital Pages: 5 (1560 words) Published: August 15, 2010

For implementation of the management control system (MCS) of the organisation in a dynamic and ambiguous environment, it is necessary to analyse and assess the external and internal factors, as well as predicting how they will change over time, given the unpredictability of certain factors of the environment: tight competition, accelerating changes in the environment, dynamic changes in consumer demands, the sudden appearance of new business opportunities (Chenhall 2003). The objective of designing MCS in such a situation is to help the organisation to achieve its goal. Thus, according to Danneels (2002, cited in Asel 2009), management need to continuously renew control system for the company to survive and prosper. The contingency-based theories developed from a functionalist perspective (Chenhall 2003) highlight six factors affecting the design of MCS: external environment, technology, organisational structure, organisational size, organisational strategy, and national culture. Widener (2004) investigates how strategic human capital is associated with the design of MCS. According to Asel (2009) in the light of the 2008/2009 financial crisis uncertainty and risk rose enormously for many organisations and hence forced many companies to adapt MCS to the changing environment. To cope with uncertain conditions, Simons (1995, cited in Fauzi & Hussain 2008) suggest using a model of interactive control system, whose role is to encourage organisational learning and the process of developing of new ideas and strategies. It is expected that the MCS will be effective because of using that model. Chenhall (2003) is followed with some propositions regarding environment–MCS relationship. In his view, ‘the more uncertain the external environment the more open and externally focused the MCS’ (2003, p. 138) and even when MCS are tightly controlled in an uncertain environment, flexibility and interpersonal interactions also exist (2003). However, Bedford (2005, cited in Fauzi & Hussain 2008) found the contras finding, that is, no correlation exist between environment and control system. Chenhall (2003) defines technology as hardware, materials, people, software and knowledge. The author defined three dimensions: task uncertainty, complexity and interdependence. Fry and Slocum (1984, cited in Fauzi & Hussain 2008) added manageability of raw material as fourth dimension. Task uncertainty is considered as a factor associated with functional departments (Chenhall 2003). Marketing department, for example, has more task uncertainty than production department and because of that requires the system which includes a broad scope of information. Using interdependence as dimension of technology, Chenhall concludes that the more independent the technologies, the less formal and traditional MCS will be (2003). According to Pugh, Hickson, Hinings and Turner (1969, cited in Fauzi & Hussain 2008) organisational structure includes some of the following dimension: formalisation, integrations, specialisation and decentralisation. Halma and Laat (2000, cited in Fauzi & Hussain 2008) had used Finland decentralised organisations in their study and approved the existence of organisational structure-MCS design relationship. However, Abernethy (2002, cited in Fauzi & Hussain 2008), in his study in the public hospital setting, found the opposite, that is, there is no relationship between organisational structure and MCS. Chenhall (2003) in his contingency-based research summarised some propositions concerning organisational structure and MCS leading to conclude that structure remains an important factor in understanding MCS design. Size has been studied as contextual variable; however, many studies are limited because they only examine large firms and do not consider size variation within the organisation (Chenhall 2003). As firms grow larger, MCS tend to become...
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