Organization design : execution of strategic themes : control systems and business unit

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Masterthesis Sander Migchelbrink 10475524

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Master Thesis

O r g a n i z a t i o n D e s i g n

Execution of strategic themes: control systems and business unit manager’’’’s + middle managers’ contribution to strategic themes in a multi-business-unit health care organization in the Netherlands.

Sander Migchelbrink Student number 10475524 Supervisor: Prof. Dr. J. Strikwerda

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Masterthesis Sander Migchelbrink 10475524 2 Preface...4 Management summary ...6 1. Introduction...7

2.Theory and hypotheses... 17

2.1 Organization design... 17

2.2 Strategy: from structure follows strategy to process follows customer value proposition 17 2.2.1 The 1980’s: Structure follows strategy and strategy follows structure ...17

2.2.2 21th century: towards process follows customer value proposition ...19

2.3 Management Control systems and organization design... 20

2.3.1 Management control beyond (tight) financial control: four levers of organization design ...23

2.3.2 Span of attention...26

2.3.3 Span of control over resources and span of accountability: the entrepreneurial gap..27

2.3.4 Customer value proposition and span of attention: an example from IBM ...29

2.3.5 The IBM case: Management control systems and the evolution of the multidivisional organization...32

2.4 Kaplan and Norton: from balanced score card to the execution premium... 32

2.4.1 Strategy maps and balanced scorecard...34

2.4.2 Strategy maps and strategic themes...37

2.4.3 Strategic initiatives ...42

2.4.4 Question’s emerging from Kaplan and Norton’s methods ...45

2.5 Research model ... 46

2.6 Some information about ’s Heeren Loo... 47

2.6.1 The changing environment for health care organisations. ...47

2.6.2 Society and regulation...47

2.6.3 Consequences of changing regulation ...50

3.Methods ... 51

3.1 Research setting... 51

3.2 Document study and interview with the chairman of the board of directors... 51

3.3 online questionnaire... 52

3.4 Sample for and distribution of the questionnaires for business-unit managers... 53

3.5 Sample for and distribution of the questionnaires for middle managers... 55

3.6 Measurement and reliability of constructs... 56

3.6.1 Strategic themes...56

3.6.2 Execution of strategic themes ...56

3.6.3 Entrepreneurial gap ...57

3.6.4 Control variables...59

3.6.5 External validity...59

4. Results... 60

4.1 Towards an answer to Question 1... 60

4.1.1 Dominant management control system...61

4.2 Towards an answer to hypothesis 1... 64

4.3 Towards an answer to question 2... 65

4.3.1 Mission, vision and strategy of ‘s Heeren Loo...66

4.3.2 Strategic themes...67

4.3.3 Strategic themes and unit’s boundaries: the Structure of ‘s Heeren Loo ...69

4.3.4 Control parameters for the strategic themes...72

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4.3.6 Conclusion: answer to question 2...76

5.Discussion... 84

5.1 Limitations and future research... 90

5.2 Conclusion ... 91

5.3 Some final reflection ... 91

References... 92

Appendix 1 Mission, vision and strategy (in Dutch) ... 97

Appendix 2 organization chart ... 98

Appendix 3 descriptive statistics and correlations for business unit managers and middle managers ... 99

Appendix 4 hierarchical regression model of DV mppgoaltot and IV mppentgaptotmin1en5en2 ...100

Appendix 5 hierarchical regression model of DV rdcrosstot and IV rdgoaltot ...101

Appendix 6 hierarchical regression model of DV mppcrosstot and IV mppgoaltot ...102

Appendix 7 hierarchical regression model of DV rdbudgtot and IV rdcrosstot....103

Appendix. 8 coefficient model of DV rdbudgtot and IV rdcrosstot ...104

Appendix 9 hierarchical regression model of DV mppbudgtot and IV mppcrosstot ...105

Appendix 10 coefficient model of DV mppbudgtot and IV mppcrosstot...106

Appendix 11 Invitation letter for the business unit manager ...107

Appendix 12 Invitation letter for the middle manager...108

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Preface

This thesis is the final result of a two-and-half year journey that I have been going through. A

journey that has been fun. Fun because the study Bedrijfskunde (MSc) has broadened my

view on how organizations operate in their environment. Fun because working together with

other students with completely different personal and working backgrounds has resulted in

interesting discussions. Not only about the content of the study, but also about other things

important in live. Fun because some of these contacts have turned into friendships. On the

other hand having a fulltime study and combine this with a fulltime job sometimes has not

been that funny. Having to prioritize studying over hanging out with friends, or enjoying a

beer in the pub at Saturday night has not always been easy. There have been times that friends

because of this have been neglected.

But I have made this journey till the end, something of which I am very proud. This is the

place for me to thank some of the people who have been crucial for me in reaching my final

goal. First and absolutely most important is my girlfriend Chantal. She has been supporting

me throughout the whole study period. Not only by giving me time and space to study, but

also by sometimes telling me to stop studying and enjoy other things. Chantal, thank you for

that! My boss Frans van Dommele, who has been enthusiastic about my research from the

start and gave me time and space to make this thesis a success. Hans Strikwerda, my thesis

supervisor for guiding me through the intensive thesis journey. Els Koot, for convincing me to

choose this study, for her feedback and for helping me to get an interview with the chairman

of the board of directors. Kirsten for being my `thesis buddy`, thanks for keeping me on track.

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This brings me to my biggest proud, my little boy Julian, who was born on the third of

October 2013. He is the one who will go my attention to the next few months. I am looking

forward to go and bike with him and have a lot of father and son quality time.

Sander Migchelbrink

HR advisor at ‘s Heeren Loo

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Management summary

Organization design, the formal system of accountability that defines key positions in an

organization and legitimates rights to set goals, receive information and influence the work of

others has been subject of research for many years. From a theoretical point of view and also

from an empirical point of view the challenge to optimally design the organization is a

constant struggle. In designing the organization, what is your starting point? Is it the market,

your current structure or strategy? Or should the customer value proposition be the starting

point for organization design? In this thesis taking the customer value proposition as a starting

point is supported. In translating the customer value into an organization design, the tools

provided by Kaplan and Norton are useful. Having strategic themes with strategic initiatives,

and using the balanced score card helps organizations towards being an economically

integrated firm, instead of a portfolio of self-contained investment projects. Using the tools of

Kaplan and Norton requires a change in the budgeting and management control systems of the

organization. Processes are becoming more important than structure, so budgeting and

controlling processes should also become more important than budgeting and controlling

hierarchical structures. In this thesis ‘s Heeren Loo as a case is investigated. It is found that ‘s

Heeren Loo has got strategic themes, but they do not fully fit the theoretical definition.

Furthermore it is found that ‘s Heeren Loo has not changed its budgeting and control systems.

Key words: Organization design, strategic themes, entrepreneurial gap, management control,

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1. Introduction

A fundamental problem facing top managers that arised in the 1990s is how to exercise

adequate management control in organizations that demand for flexibility, innovation and

creativity (Simons, 1995). In these organizations, due to the emergence of intangible assets,

especially human capital, and with that the emergence of personal, uncodifiable knowledge,

management control in an institutional sense no longer can be based on the right of

alienability of assets (Furubotn, 2005). Since the 1990s and the crises in 2001 and 2008

institutional contexts have changed and stricter requirements are set for reporting, risk

management, corporate governance (for example national codes for corporate governance)

and so on. These stricter requirements tend to implicate tight financial control in the design of

the organisation. On the other hand the RBV of the firm implies that an organisation, if it is to

survive in a dynamic complex, changing environment, needs to display a certain level of

complexity as defined by Herbert Simon (Simon, 1962) and there needs to be a loose

programming between the hierarchal levels to facilitate employees on the workfloor to adapt

the organization to the local environmental changes. The question however is what these two

different ways of looking at control, the audit/accounting view, or the cybernetic view on

control, imply for the design of the organization of the firm (Strikwerda, 2012). Which

control systems need to be in place and how to correctly use different concepts of being in

control? Control in the narrow accounting definition, which is about the reliability of financial

statements, is quite different from control in a more economic-entrepreneurial definition as

implied by the RBV and the concept of dynamic capabilities, whose theoretical basis is

cybernetics. The ultimate challenge is to combine the requirements set for reporting and the

requirement for loose programming in such a way that the organization facilitates employees

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coupling should allow a firm to be able to identify and acquire new resources to provide the

firm possibilities to adapt to changes in the environment and thus in the customer value

proposition.

Which management control systems should be used and are being used in a changing

environment? And when this environment is changing in a fast way, the customer value

proposition and thus the strategy of the organization will be changing as well. But do the

traditional management control systems fit the changing environment and changing customer

value proposition?

The role of the management is to organize, plan, integrate and interrelate organizational

activities to achieve organizational objectives. The achievement of these activities is

facilitated by management control systems. A management control system is designed to

assist managers in planning and controlling the activities of the organization. A management

control system is the means by which senior managers ensure that subordinate managers,

efficiently and effectively, strive to attain the company's objectives. According to Anthony

(Anthony, 2007), management control is “the process by which managers ensure that

resources are used effectively and efficiently in the accomplishment of the organization's

objectives”. Kaplan and Norton define a management control system as the set of processes

and practices used to align and control an organization (Kaplan & Norton, 2006). After the

seventies, with the rise of the capital markets and the field of corporate finance (the control

revolution) most companies have relied entirely on financial control (Goold & Campbell,

1987), usually narrowed down to the budget, for these various processes and practices. Large

multidivisional companies have seen control only in the narrow definition of accounting

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of countries and within the countries the business units. From this narrow definition one could

easily argue that (tight) financial control conflicts with empowerment of workers (Strikwerda,

2012). In the accounting view of control being in control top management is controlling and

sanctioning lower management when the financial results negatively deviate from what is

determined. But this type of control most likely will not be effective in an environment that is

dynamic, complex and instable, according to Herbert Simon. When an organization needs

flexibility to operate excellent in a changing environment this calls for employees having

more freedom to make decisions in their day to day work, especially to adapt, by

experimentation to local changes in the environment (Strikwerda, 2012, (Simon, 1962).

Employees need discretion to experiment, innovate and come up with new ideas in order to

respond to new requirements from the environment. In this changing environment the

traditional business-unit orientated organization designs may no longer fit, and in the

academic literature more attention arises for new organization forms, e.g. multidimensional

organization. The significance of the multidimensional organization is best understood against

the backdrop of the evolution from a resource-centric industrial economy that was focused on

exploiting tangible physical resources, to a customer-centric service economy that is focused

on exploiting intangible knowledge resources (Strikwerda & Stoelhorst, 2009).

Exploring new ideas cannot take place without a strategic direction, a purpose. New strategic

ideas have to fit within the identity, values and strategy of the organization. To make this fit

with the strategy actually happen it is crucial to deploy a broader, comprehensive concept of

control compared to the narrow accounting view of control. The formal study of control is

cybernetic control. Cybernetics explains how living systems, biological, the individual, social

system, are organized different from inorganic physical systems. The function of the

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the flows that matter and energy in order that the living system remains alive and whenever

necessary adapts itself to changes in its environment to survive (Beniger, 1986),page 40). In

cybernetics information, management information is at the lowest level of the cybernetic

hierarchy of types of information, the level of pragmatic or choice information. The

cybernetic control implies that organizations need to be designed and controlled for

adaptation and transformation, as complex adaptive systems (CAS). This also implies that it is

about more than just the limited accounting definition of control. Control from this cybernetic

point of view implies that front-line employees sense and seize opportunities in the

environment (Strikwerda, 2012). The emphasis on the accounting definition of control, with a

bias towards tight control and risk aversion, may impair a firm to be in control as defined in

the economic entrepreneurial definition of being in control (Teece, 2007).

In the 1980s under the influence of the capital market the financial control, financial

performance management has displaced the combination of financial and non-financial

performance management as defined by Fayol in 1918 in his Tableaux. In the 1980s and

1990s many companies introduced total quality management as a new management system,

separated from the financial performance management systems. It enabled firms to focus

more effectively on process improvements, the ability to implement strategy across

organizational units remained elusive.

(Porter & Wayland, 1992) argued for improvement of the information used in

decision-making to improve the competitiveness of the US economy. The quality of information used

to allocate capital throughout the system will affect investment choices. This means greater

access to information that better reflects true corporate performance and more use of

qualitative assessments of a company's performance and capabilities. (Porter & Wayland,

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process information quickly enough to react on opportunities because in the traditional

multi-business unit organization with financial control there is tightly programming instead of

loosely programming used to be in control. Furthermore in the traditional multi business unit

organization information is fragmented and therefore not used in the most optimal way.

Loosely coupled programming means that the programming is not complete, not foreseeing

every contingency but allowing front-line workers discretion how to interpret an actual

situation and act accordingly (Strikwerda 2012, page 66). Tight control on the other hand does

not allow for variation, experimenting with new requirements for customer and therefore

obstructs any idea of adaptability.

figure 1: “the edge-organization”

Organizations need to transform from “command and control” (lower left bottom in figure 1)

to “edge”-organization (Upper right in figure 1). A tight command and control system is one

of the characteristics of the traditional Modern Business Enterprise (MBE). Because of the

seperation of capital and labor no co-location exists between decision rights with the rights to

their capital value. To compensate for this, various types of control are needed in the internal

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employees at the workfloor have significant decision rights, are free to interact with others

irrespective of structure and hierarchy and thus have access to all necessary information.

Furthermore they can work together without the restrictions of the formal hierarchy of the

organization. In allowing this employees are to be facilitated to constantly keep track of the

effects of their decisions on the overall performance of the organization (Strikwerda, 2012).

Allowing front-line workers discretion how to interpret a situation and act on it also implies

involving middle managers in the planning and execution of strategic themes. Even though it

is important to empower the members of the organization it has long been an undervalued

topic within the strategy research. For decades the process of strategy formulation has been

seen as reserved for top management, even though Bower’s bottom-up resource allocation

process for the execution of strategy finds its origin in the 1970s. Middle manager’s roles

have been seen as executing the strategy as formulated by top management. Strategy

formulation has been tended to be treated as an analytic process for establishing long-range

goals and action plans for an organization. Formulation by top management is followed by

execution by middle managers. Despite this well-known discussion that strategy is a course of

action consciously deliberated by top-management or an analytical exercise undertaken by

staff strategists, descriptive analysis of the complexity of real organizational phenomena

challenges such simplified conceptualization (Noda & Bower, 1996). So this “traditional

view” has been changing. Different authors emphasize the role of others than top management

in planning and execution of strategic themes. Planning and execution of strategic themes

needs to be viewed from a broader perspective so that the variety of ways in which strategies

actually take shape can be considered (Mintzberg & Waters, 1985). Bower (1970) found that,

in large diversified, strategic planning was spread across corporate divisions, business and

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supporting initiatives from operating levels, combining these with firm strengths and

conceptualizing new strategies. It becomes clear from this that middle managers from the

1980s on have started to play a more active role in the process of strategy. The question

however is whether the roles middle managers have in the planning and execution of strategy

actually are in line with the demands of the changing environment and the requirement that

the board is in-control of the firm. One of the big risks of the classic bottom-up resource

allocation process, is that it results in budget gaming, self-serving decisions, escalating

commitment, which in turn results in failing strategies. (Christensen & Bower, 2005).

Because this budget system is based on the M-form it fails to produce synergies when

necessary.

So an important question is how to design an organization in such a way that it is able to be in

control in the narrow accounting definition and simultaneously be in control in the RBV,

more cybernetic definition. Furthermore in designing the organization it is important to take

into account the role of the different hierarchical levels (topmanagement, business-unit

management and middle management is important). Research has not addressed whether or

not the design of an organization and the different ways managers allocate resources to

employees and units as a result of that structure makes a difference in the ability of managers

to use control systems as tools to stimulate innovation and entrepreneurial activity.

Organization design refers to the formal system of accountability that defines key positions in

an organization and legitimates rights to set goals, receive information and influence the work

of others (Simons, 2005) page 17). Simons furthermore argues that managers must design

organizations that can adapt over time and are not controlled only exclusively in a financial

way(Simons, 2005) (page 7). To explain the relationship between value proposition on the

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concepts that together form the span of attention. (1) Span of control, what resources do I

control to get my job done? (Simons, 2005): p39), (2) span of accountability, what measures

are used to evaluate my performance? (3) span of influence, Who do I need to interact with

and influence to achieve the goals for which I’m accountable? and (4) span of support, How

much support can I expect when I reach out to others for help?

Kaplan and Norton introduced the balanced score card, the strategy map, strategic themes and

strategic initiatives. “The Kaplan and Norton’ tools” gives practical substance to the model

defined by Simons. Kaplan and Norton’s tools provide the organization the opportunity to

exploit synergies across unit boundaries through strategic themes. A strategic theme consists

of a distinct set of related strategic objectives with measurable targets and with budgets not

for separate business units, but a budget built up from the contributions of multiple business

units, shared service centers and staff departments. When a certain strategic theme asks for

cross-unit collaboration, the unit manager must have a span of control, span of accountability,

span of influence and span of support that will match the strategic theme to be executed. What

will happen when on purpose alignment between authority over resources (span of control)

and performance (span of accountability) is broken through? How will this influence the

execution of an organization’s strategic themes? Simons argues that an entrepreneurial gap

will emerge when span of accountability is bigger than span of control (Simons 2013). Top

management can influence the execution of a strategic theme by constructing the

entrepreneurial gap by allocating resources in such a way that it supports the execution of the

strategic theme. A larger entrepreneurial gap implies a more loosely type of programming.

For top management it will become more difficult to control the different business unit

managers in a narrow financial way, because it will become more difficult to define the

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the results the manager is accountable for, he needs to bridge the gap between the few

resources he controls and the accountability measures. This asks for entrepreneurial activity

and sufficient influence (span of influence) and support (span of support) to balance the total

span of attention.

But how about all of this not from a theoretical point of view, but when really looking into the

execution of strategic themes of an organization for which the environment is complex and

changing and there is a need for changing the concept of strategy (Burgelman, 1983a)? Do

these organizations really empower their middle managers and other employees by more

loosely programming in the execution of strategic themes? And do organizations provide

information and excess to all the information? And how about management control systems

really used by organizations? Is cybernetic control becoming increasingly important over tight

financial control? And does changing the entrepreneurial gap influence the execution of

strategic themes? As stated before, the focus in management control systems has for a long

time been in controlling for the financial execution of strategy as set by top management.

(Goold & Campbell, 1987) talk about this as financial control, But is non-financial

management control becoming more important management control within organizations?

In this research ‘s Heeren Loo an organization within the Dutch health care for disabled

people is analysed with the following research question:

Within ‘s Heeren Loo: What is the type of control system, how does this influence the entrepreneurial gap and the execution of strategic themes for business unit managers and middle managers?

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‘s Heeren Loo is one of the larger organizations in health care for disabled people in the

Netherlands. It is an organization which operates in a quick and constantly changing

environment. Furthermore the market in which ‘s Heeren Loo operates is historically a budget

driven market with a focus on financial control. This seems quite contrasting with the “Raison

d'être” for organizations in the health care sector, because the focus in this is on delivering

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2.Theory and hypotheses

2.1 Organization design

Organization design refers to the formal system of accountability that defines key positions in

an organization and legitimates rights to set goals, receive information and influence the work

of others (Simons, 2005) page 17). An important rule in organization design used to be fit: the

design of the organization needs to lead to a “fit-to-market” and “fit-to-strategy “ (Strikwerda

2012, page 86). Following from this is, that what is most important for the success of the firm

in the market, should get the most power in the internal organization. The increasing role of

synergies forces firms towards being an economically integrated firm, instead of a portfolio of

self-contained investment projects. The need for synergies was felt for a long time in business,

but the combination of the dominance of the unit-organization and the high costs of

information made the achievement of synergies difficult to achieve (Strikwerda 2012, page

118). In the next paragraphs it is explained how thinking about strategy execution has evolved

from structure follows strategy, to process follows customer value proposition. This

explanation is an important first building block for coming to the questions that are relevant

for answering the central question.

2.2 Strategy: from structure follows strategy to process follows customer value proposition

2.2.1 The 1980’s: Structure follows strategy and strategy follows structure

In the 1980s the study of the relationship between strategy and structure in large established

firms was of central concern to scholars in the field of strategic management and macro

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firm’s current concept of strategy as set by top management. This current concept of strategy

leads to the establishment of a structural context aimed at keeping strategic behavior at lower

levels in line with the concept of corporate strategy. The structural context is a broad concept

used to denote the various administrative mechanisms in the organizational design that top

management can manipulate to change the perceived interest of strategic actors in the

organization (Burgelman, 1983a), see figure 2. The strategic context reflects the efforts of

corporate management to fine-tune the selective effects of the administrative arrangements so

as to keep the strategic proposal generating process in line with the current concept of strategy.

This 1980s view is in line with the ideas of Chandler (Chandler, 1962) about structure follows

strategy.

In the long run the structural context that arises intervenes in the relationship between induced

strategic behavior and concept of strategy. The structural context operates as a selection

mechanism on the stream of induced behavior. The induced strategic behavior will be limited

by the structural context and the concept of strategy will start to follow the structure. Thus,

the structure follows strategy following Chandler (Chandler, 1962) is “threatened” by strategy

follows structure as described by Bower and Mintzberg, but this fact is at least with Bower

(Bower, 1970), not the norm. Because of this over a longer period time structural context

reduces the variation in induced strategic behavior and may thereby prevent strategic learning.

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In Burgelman’s view (Burgelman, 1983a) simultaneously with induced strategic activities

autonomous strategic activities are emerging. Autonomous strategic activities are activities

that fall outside the scope of the current concept of strategy and also do not originate from the

current structural context. This so called autonomous strategic behavior origins in employees

looking for opportunities in the environment, or within the boundaries of the organization, in

search for new strategic initiatives. Through the activation of the process of strategic context

determination, autonomous strategic behavior can become integrated in the concept of

strategy. The strategic context reflects the efforts of middle level managers to link

autonomous strategic behavior at the product/market level into the corporation’s concept of

strategy (Burgelman, 1983a). This aspect of the process underlies the proposition that that

strategy follows autonomous strategic behaviour. The degree to which middle management is

successful in activating the process of strategic context determination provides guidance for

further entrepreneurial initiatives at the operational level. The levels of induced and strategic

behavior will differ between organizations and business units within organizations and will

influence the strategic influence by middle managers. One of the drivers for these differences

is the top manager’s need to financially control strategic initiatives in a tight accounting type

of way. When topmanagement wants to give their subordinates `space`to come up with new

strategic ideas, usually tight financial control will not be the nature of management control

and there will be loose coupling between hierarchic layers within the organization.

2.2.2 21th century: towards process follows customer value proposition

In the twenty-first century it is questioned whether or not it is necessary to find the perfect

structure for execution the organization’s strategy? Or in other words do strategy and

structure really influence each other as argued in the 1980s? Due to the changing institutional

context for the firm, the way of looking at organization design has changed. Strikwerda (2012

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combination with the increased speed of digital communication, processes now are prioritized

over structure, with the customer value proposition as a starting point. This makes the earlier

views including Burgelman’s view on the connection between strategy and structure obsolete.

(Kaplan & Norton, 2006) state that the lesson they have learned drawn from their work with

hundreds of organizations on strategy maps and balanced scorecards is that companies do not

need to find the perfect structure for their strategy. Recently we have been hearing about

virtual or network organizations operating across traditional boundaries. The continual search

for new organizational forms is driven by basic changes in the nature of competition and the

economy. First of all advantage is derived less from management of physical assets and more

from intangible assets like knowledge, IT and R&D. Secondly globalization is forcing

companies to revisit many assumptions about the control and management of both their

physical and intangible assets. Given the costs and difficulties involved in finding structural

ways to unlock value, it is fair to raise the question: is structural change the right thing to do

to meet the changing challenges for the organization in a changing environment?

So due to these technological developments the question is whether Chandler’s design rule

structure follows strategy is still applicable in today’s environment (Strikwerda, 2012, page

88). Basic assumptions underlying Chandler’s ideas are questioned. Markets these days can

often not be segmented on the basis of one dimension. Furthermore the costs of information

and therefore the costs of coordination have decreased. This opens the possibilities for

exploiting synergies in a planned and controlled way.

2.3 Management Control systems and organization design

In paragraph 2.4 it will be made clear that Kaplan and Norton’s balanced score cards, strategy

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the cause-and effect relationship that deliver their unit’s value proposition and the balanced

scorecard is a powerful tool for implementing and monitoring corporate strategy as well as the

unit’s strategy. Kaplan and Norton’s tools provide the organization the opportunity to exploit

synergies across unit boundaries through strategic themes. Furthermore Kaplan and Norton’s

tools provide top management the ability to monitor the different strategic themes as an

integrated set of themes. Furthermore using the tools adequately prevents that budgets are

dedicated for long-term strategy and do not disappear in the short-term goals. Kaplan and

Noton’s tools also assure that in the control and monitoring process strategic initiatives that

are necessary to achieve future strategic goals, are initiated well-timed.

“The Kaplan and Norton’ method” gives practical substance to a model defined by Simons.

(Simons, 1991) defines management control systems as formalized routines and procedures

that use information to maintain or alter patterns in organizational activity. The relationship

between strategy and management control systems has been depicted consistently in literature

on management control but not in the literature on strategic management for many years. In

the 1990s it was already recognized that a problem facing top managers is how to exercise

adequate control over middle managers, in organizations that demand for flexibility,

innovation and creativity because of a changing environment (Simons, 1995). In the 1990s

management control systems were described to be used as systems to implement strategies

developed by top managers (Simons, 1991), with a top-down translation of objectives into

decentralized tasks. They were usually seen as information feedback systems. In this view

strategies are approved (if not developed) by top managers. Strategies are communicated

downward through the organization, and formal, most of the times financial systems are used

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Management control systems were seen in the 1990s as management-by exception tools for

implementing intended strategy (Simons, 1991).

As we begin the twenty-first century the forces affecting organizations have changed

significantly from those of earlier generations. New technologies have increased productive

capacity, markets have become global, the pace of competition has quickened, work has

undergone a number of transformations (Blok, 2013), and the capabilities of workers have

been enhanced. Furthermore, information technology, outsourcing and alliances have changed

the traditional boundaries of the firm (Simons, 2005) (page 1). This also changes they way

management control systems are looked at. (Simons, 2005) (page 7) argues that managers

must design organizations that can adapt over time and are not controlled only exclusively in

a financial way. As argued before during the 1980s and 1990s there has been a focus on

financial control (Useem, 1993), with a bias towards tight programming. The twenty-first

century asks for organizations to be designed for adaptation and the capability of

transformation. This comes with a cybernetic type of control, and not with a narrow audit type

of internal control (Strikwerda 2012, page 177). Furthermore this comes with more loose

programming, giving employees the space to come up with new ideas. The interesting

question is whether or not organizations that have long been focussing on financial control,

have transformed to organizations focussing on financial and non-financial control. This leads

to the first question that is important for answering the central question:

Question 1: To what extent is tight financial control the nature of management control systems within ‘s Heeren Loo?

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(Simon, 1962) refers to an important building block for organizations that succeed to realize

competitive advantage in a changing environment. In a hierarchic organization there is a

degree of programming between the different layers of the organization. This programming

consists of different factors such as, mission, values, strategic goals, operational goals,

budgets, processes of socialization. This programming can be tight or loose (Strikwerda,2012).

In tight programming there is little space for initiatives by employees. When there is tight

control by the management, there is extensive involvement of the management in the

day-to-day operations of the business unit. The budget is considered a binding constraint with a

strong emphasis on meeting the budgeted targets. Deviations from the budget are generally

not considered acceptable (Anthony, 2007).On the other hand the programming can be loosely coupled. Loosely coupling implies that employees get “space” from their bosses to

experiment to reach the strategic goals. Furthermore employees are facilitated to react on

changes in the environment. Loose control is characterized by limited involvement by the

management in day-to-day operations. Under loose control, the budget is regarded more as a

tool for planning and communication than as a binding commitment (Anthony, 2007).

Strikwerda (2012) argues that it seems paradoxically that organizations with a loosely coupled

control system are more in control than organizations with a tight control system. But this

paradox only exists in the narrow definition of financial control and not in control from a

cybernetic point of view. Also this is supported by the difference between organic

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In the academic literature there are some models for organization design that go beyond

financial control. One of these models is a model by Simons and describes four levers of

organization design. The model is useful to analyze to what extent there is loosely coupling in

the execution of strategy.

Simons (Simons, 2005) argues that there are 4 c’s of organization design. First there is the

Customer definition, which is about defining a primary customer and focuses on strategy as

position. This is all about defining a value proposition (Simons, 2005). Kaplan and Norton

and Osterwalder also use value proposition in their models, but they use customer value

proposition. A detailed value proposition provides the needed insights to design the first lever

of organization design, the unit structure. The unit structure will reconcile the tension

between structure and strategy. An organization design should reflect its business strategy.

Managers must design their organization to implement strategy and also foster the flow of

new ideas that will stimulate the formation of tomorrow’s strategies. This is a two-way

strategy and goes back to the 1980s view on organization design. One the one hand structure

follows strategy. On the other hand the structure influences future strategies. But the most

important thing is that the structure should follow the customer value proposition as argued

before.

The second C is Critical performance variables. After the unit structure is chosen the next step

is to determine the critical performance variables that underpin successful implementation of

strategy. This function is often described as strategic planning: the formal tools and systems

used to formulate objectives, analyze strategic options, and communicate action plans to

ensure the achievement of important organizational goals. This leads to the second lever of

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tension between accountability and adaptability. Nowadays rather than control in a tight way

with standard procedures, managers put more emphasis on accountability for results leaving

the actual decisions about how to achieve the results to the initiatives of the workers involved.

So this implicates more loosely programming. Diagnostic control systems are used to

determine if the firm’s strategy implementation processes are flourishing. If you want

employees to implement strategies, you need to measure the actions that lead to its

implementation (Kaplan & Norton, 2007). In Kaplan and Norton’s and also in Simon’s view

this goes beyond tight financial control based on lagging financial parameters, control should

be a about financial and non-financial parameters.

The third C is Creative tension: The former 2 (position and plans) emphasize formal analysis

based on market position and strategic goals. However managers must also consider the

extent to which their designs foster the development of new ideas that can become

tomorrow’s strategy. Organizations must support the capacity to learn. This is about the

tensions between ladders (vertical hierarchy) and rings (horizontal collaboration) which is

about whether horizontal self-coordination is serving the overall interests of the organization

or is serving parochial interests of departments, and leads to the third lever of organization

design : interactive networks. Most often, workflows must be coordinated not only up and

down but also across the structure of departments. To coordinate complex workflows,

information ad resources must be shared across units. Successful organization designs must

take into account not only the vertical hierarchy (ladders) but also the horizontal networks

(rings). Information technology greatly enhanced the ability of managers to create horizontal

networks. This creates possibilities for employees to communicate across the formal hierarchy

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The fourth and last C is Commitment to others: an important part of strategy is to shape how

individuals behave in their day-to-day work . In some circumstances, strong commitment to

others will be essential for the successful implementation of strategy. This leads to the fourth

lever of organization design: share responsibilities. There is a tension between Self-interest

and mission success.

Figure 3: Levers of organization design (Simons, 2005) 2.3.2 Span of attention

To explain the relationship between value proposition on the one hand and strategy, structure

and systems on the other hand and to solve the tensions as described above (Simons, 2005)

uses four concepts that together form the span of attention. (1) Span of control, what

resources do I control to get my job done? (Simons, 2005): p39), (2) span of accountability,

what measures are used to evaluate my performance? (3) Span of influence, who do I need to

interact with and influence to achieve the goals for which I’m accountable? And (4) span of

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In paragraph 2.4.2 it is argued that according to Kaplan and Norton a strategic theme consists

of a distinct set of related strategic objectives with measurable targets and with budgets not

for separate business units, but a budget built up from the contributions of multiple business

units, shared service centers and staff departments.

When the organization is designed following the logic of figure 3then the unit structure,

diagnostic control systems, interactive networks and shared responsibilities will all be

organized in a way to support the realization of the business strategy. In line with this the four

building blocks of span of attention will also be consistent with the business strategy and

strategic themes. When a strategic theme asks for cross-unit collaboration, the unit manager

should logically have a span of control, span of accountability, span of influence and span of

support that will match the strategic theme to be executed.

2.3.3 Span of control over resources and span of accountability: the entrepreneurial gap

Little has been written on how management control systems and organization design can be

utilized to motivate individuals in complex business enterprises to take on the task (and risk)

of attempting to transform opportunities into profitable initiatives (Simons, 2013). Research

has not addressed, whether the structure of an organization and the different ways managers

allocate resources to employees and units as a result of that structure makes a difference in the

ability of managers to use control systems as tools to stimulate innovation and entrepreneurial

activity. One of the few agreed-upon organization design principles in the accounting

literature is the controllability principle, which is about the idea that authority for resources

should equal, or align with, responsibility for performance (Arrow, 1964). The controllability

principle is the underpinning of the accounting-based design concept of revenue centers, cost

centers and profit centers. But this old principle, being the parity principle of the unit

organization is being left, because of the declining costs of information and the subsequent

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Figure 4: the entrepreneurial gap (source: http://blog.hbs.edu/hbsinov8/?p=1734)

The interesting question becomes: what will happen when on purpose alignment between

authority of resources (span of control) and performance (span of accountability) is broken

through? How will this influence the execution of an organization’s strategy? Simons 2013

argues that an entrepreneurial gap will emerge when span of accountability is bigger than

span of control. So when a certain strategic theme requires intense collaboration, the business

unit manager and middle manager should have a span of control that is smaller than his span

of accountability. Top management can influence the execution of a strategic theme by

constructing the entrepreneurial gap by allocating resources in such a way that it supports the

execution of the strategic theme. Top management can, by widening or closing the

entrepreneurial gap influence, the way strategic themes will be executed by business unit

managers and middle managers. Through widening the entrepreneurial gap, more business

unit managers will have a share in reaching a certain strategic theme. At the same time by

widening the entrepreneurial gap, for top management it will become more difficult to control

the different business unit managers in a narrow financial way, because it will become more

difficult to define the attribution of the different business unit managers in the execution of a

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To reach the results the manager is accountable for, he needs to bridge the gap between the

few resources he controls and the accountability measures. This asks for entrepreneurial

activity across unit boundaries and sufficient influence (span of influence) and support (span

of support) to balance the total span of attention. Span of influence and span of support are the

third and fourth building block of span of attention. As argued before entrepreneurial activity

comes with loose control and fits well in an edge-organization. In “the edge-organization”,

with loose programming and not strictly financial control employees at the workfloor have

significant decision rights, are free to interact with others outside the hierarchy and have

access to all necessary information. Furthermore they can work together without the

restrictions of the formal hierarchy of the organization. In doing this employees are facilitated

to constantly keep track of the effects of their decisions on the overall performance of the

organization (Strikwerda, 2012).

From this the hypotheses 1a and 1b emerge.

H1a: the more the nature of the control system for strategic themes for business unit managers is financial control the smaller the entrepreneurial gap.

H1b: the more the nature of control system for strategic themes for middle managers is financial control the smaller the entrepreneurial gap.

In the next paragraph a good example of how the full span of attention construct in practice

works is to be found.

2.3.4 Customer value proposition and span of attention: an example from IBM

Strikwerda (2008: page 186) based on (Simons, 2005) describes the profile of span of

attention in the case of IBM. The IBM case is a good example of how the change in the focus

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attention helps an organization’s to execute its strategy. Therefore the example is supportive

and illustrative for the former paragraphs in this chapter.

Figure 5: example of a span of attention profile (Simons, 2005)

In 1993 IBM assigned a new CEO, Gerstner. Before Gerstner became CEO, IBM was

organized in a geographical structure (Strikwerda, 2008: page 67). Gerstner changed the

strategy to a network-centric computing strategy. In order to execute the strategy, Gerstner

has integrated services, instead of divesting the former autonomous units. A

multidimensional organization emerged with responsibilities simultaneously for four axes

(product, channels, accounts and geographic). Gerstner changed the main profit center. The

main profit center has become the customer and the primary task of all of the unit managers is

to optimize IBM’s position with its customers. IBM put the customer value proposition

central in its organization design. The traditional vertically and functional integrated division,

the hall mark of the twentieth century, thus gave way to an organization from which even

lacks a label, but can be described as a multidimensional organization (Strikwerda 2012, page

70). To operate as an integrated enterprise, IBM simultaneously holds different managers

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(Strikwerda & Stoelhorst, 2009). Product managers are accountable for turnover, margin,

market share, and market penetration of specific products or solutions. Account managers are

accountable for client satisfaction (which is measured twice a year by an independent agency),

Region managers are accountable for turnover, margin, and market penetration for specific

products. Distribution channel managers are accountable for turnover, return on sales, and

customer satisfaction for their channel.

A very important step in the creation of the new organization has been the transformation of

the finance function. Worldwide financial definitions were formulated and one

information-warehouse was built. This information-information-warehouse became a trusted-source for

management-information over all the four axes. IBM’s management management-information systems are the basis of a

management process that is designed to facilitate cooperation between the managers who are

accountable for results on each of the different dimensions. Looking at the span of attention

(see figure 5) it becomes clear that span of control in this “new” organization has become

smaller, while the span of accountability has at least remained the same. An entrepreneurial

gap as visualized in figure 4has been created. Managers no longer posses all the resources

needed to achieve their results. Because of the trusted-source of management information

collaboration is focussed on opportunities for the total organization. In the IBM example the

whole is more than the sum of the parts, which also asks for individuals to contribute no

longer only to the own business unit, but also to the total IBM organization. The most

important issue for IBM is getting clients, then optimizing the total result of IBM and then

optimizing the result of the own business unit. IBM has managed to optimally align its

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32 2.3.5 The IBM case: Management control systems and the evolution of the multidivisional organization

The IBM case and also the increased IT-technology is useful in understanding the

development in the literature about multidivisional organizations. The multidivisional

organization is widely acknowledged as the most successful organization form of the

twentieth century (Strikwerda & Stoelhorst, 2009). Firms organize their activities in separate

business units and delegate control over the resources needed to create economic value to the

managers of these units. But the quest for synergies that emerged in the 1980s has resulted in

the adoption of corporate account management, shared service centers and matrix

organizations. This results in the fact that business units depend at least in part on the

resources out of their control. Looking back at figure 5 the span of control of the business

units decreases, while their span of accountability remains the same. (Strikwerda & Stoelhorst,

2009) state that a number of firms have evolved to an organizational form that signals a new

way of resolving this tension. These firms are organized around multiple dimensions (for

example, region, product and account) and hold different managers accountable for

performance on these dimensions. This multidimensional organization differs from a matrix

organization, not only because each employee does not have two bosses. The main difference

is the way of organizing information and by a planning and control process in which the

customer and not one of the dimensions is seen as the main profit center. This is exactly what

Gerstner realized at IBM.

2.4 Kaplan and Norton: from balanced score card to the execution premium

As argued in the former paragraphs the span of attention model by Simons is a model for

organization design that goes beyond tight financial control. In the next paragraphs the

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score card and expanding this throughout the years with strategy maps, strategic themes and

strategic initiatives Kaplan and Norton have developed a framework for strategy planning and

execution which also goes beyond tight financial control. Kaplan and Norton’s method has

got the balanced scorecard as its foundation, describing strategies for creating value from

intangible and tangible assets. By also focussing on intangible assets there is not a single

focus on short-term financial performance of the firm. Their method in fact gives a very

practical content for cybernetic control, which is in line with the Simon’s model. In figure 6

the 6 stages of the Kaplan and Norton model are enclosed.

Figure 6: 6 stages of the strategy execution process

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In the next paragraphs there will be attention for stage 1, developing the strategy using the

balanced scorecard and strategy map. Furthermore there will be a paragraph on strategic

themes, which is about stage 2, translating the strategy. The last paragraph is about strategic

initiatives (the how of strategy execution), which is about the “execute” orange box in figure

6 Stages 3,4,5 and 6 are disregarded because they are not crucial for this research.

2.4.1 Strategy maps and balanced scorecard

An effective approach for organization design that does not focus solely on financial control,

is to choose an organizational structure and then design a customized strategic system to align

that structure with the strategy. The management system as elaborated in Kaplan and Norton’s

books strategy maps and the execution premium is an alternative for the system of executing a

strategy as originally published by Anthony respectively Bower, to answer the challenge of

intangible assets and the need to exploit strategies. Kaplan and Norton’s tools provide an

alternative to Bower’s bottom-up resource allocation process, solving Bower’s problem of

how to deal with intangible assets (Strikwerda 2014). (Kaplan & Norton, 2006) argue that a

management system based on the balanced score card framework is the best way to align

strategy and structure. The balanced score card, introduced about two decades ago as a

performance measuring system to quantify intangible assets, offers a framework for

describing strategies for creating value from both tangible and intangible assets (Kaplan &

Norton, 2004). This focus on tangible and intangible assets breaks with the pre-assumption of

tight financial control that comes with a focus on only tangible assets. The balanced scorecard

is based on a cause-and-effect scheme, as expressed in the concept of the strategy map. With

that strategy execution is primarily based on processes as cause-and-effect relations, having

priority over configuration of resources via structure. The balanced score card is build up out

of four perspectives (see figure 7): (1) financial perspective, which is about the fact that the

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(2) Customer perspective, which is about creating value by satisfying the customer value

proposition. (3) Internal process which is about creating and delivering the value that satisfies

customers, and also contributes to the financial perspective’s productivity objectives. (4)

learning and growth, which is about the intangible assets (people, technology and culture) that

are critical to delivering value (Kaplan & Norton, 2008a).

Figure 7: the balanced score card (source http://1.bp.blogspot.com/_ui_m6TyZenk/RuX-PZg8DMI/AAAAAAAAAEM/HHjyzChc000/s1600-h/balanced_scorecard.gif)

The four perspectives are basics, dependent on the specific situation, more or less

perspectives may be chosen. Kaplan and Norton explain that strategy is translated into a

customer value proposition. Based on this, processes are defined to realize this customer

value proposition. These processes often will not follow the organization structure, but may

be business unit boundary-spanning. This implies that processes are becoming more important

than organization structure in the allocation of resources. It also implies that a certain degree

of loosely coupling is needed in the execution of strategy. Employees must be facilitated to

cross the traditional boundaries of the business unit.

A second tool Kaplan and Norton developed is the strategy map. Strategy maps are useful to

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perspectives (Kaplan & Norton, 2004). Strategy maps enable managers to define and

communicate the cause-and effect relationship that deliver their unit’s value proposition and

the scorecard is a powerful tool for implementing and monitoring the unit’s strategy. The

difference between traditional approaches for organization design and the strategy map is that

the former focus on structure and the latter focus on processes and on investments in

intangible capital (Strikwerda, 2012, p. 125). The starting point in the strategy map as a

method for organization design is the customer value proposition. This is similar with the

starting point of the levers of organization design (Simons, 2005), even though Simons does

not use customer value proposition but value proposition. So not the market is the starting

point for organization design, as in Chandler’s view, but the customer value proposition.

Another difference between the traditional methods for strategy execution, which are based

on budgets, and the strategy map is that in the strategy map the processes that are needed to

deliver the customer value proposition determine the way the resources are allocated

(Strikwerda 2012, page 125). In fact the strategy map balances contra dictionary forces in

strategy. Investing in intangible assets for long-term revenue growth usually conflicts with

cutting costs for short-term financial performance (Kaplan & Norton, 2004). Furthermore the

strategy map describes how internal processes and learning and growth drive the strategy.

Effective and aligned internal processes will determine whether or not value is created and

sustained.

Historically most companies have relied entirely on financial systems, usually centered on the

budget, for these various processes and practices (Kaplan & Norton, 2006). In the 1980s and

1990s many companies introduced total quality management systems as a new management

system. It enabled firms to focus more effectively on process improvements, the ability to

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argue that a management system based on the balanced score card framework is the best way

to align strategy and structure. Strikwerda (Strikwerda, 2014), argues that basically the

balanced score card is an element in an alternative resource allocation process compared to

Bower’s bottom-up resource allocation process to avoid underinvestment in intangible assets.

But Strikwerda also argues that within the dominance of management accounting and its

related financial performance management (financial control) in Europe the Balanced Score

Card is a tool within this system of performance management, and thereby not correcting for

investing in intangible assets. In the US this is different. In the US there is a national agenda

for economic growth, in which investment in intangible assets is acknowledged as being

material to the competitiveness of the US economy. .

2.4.2 Strategy maps and strategic themes

Kaplan & Norton (Kaplan & Norton, 2008b) introduce the concept of strategic theme as a

design element in the organization to execute a strategy. The introduction of strategic themes

is an extension of the balanced score card and strategy map as explained in the former

paragraph. A strategic theme in relation to a strategy to be executed is like a process in the

strategy map for the customer value proposition to be executed (Strikwerda, 2012). The

strategy map is a visual representation of an organization’s strategy (Kaplan & Norton, 2004).

The strategy map provides architecture for integrating the strategies and operations of diverse

units throughout the organization and describes the process of value creation through a series

of cause-and effect-linkages among objectives in the four balanced scorecard perspectives

(Kaplan & Norton, 2008a). Furthermore the strategy map is based on 5 principles: (1) strategy

balances contra dictionary forces, (2) strategy is based on a differentiated customer value

proposition, (3) value is created through internal business processes, (4) strategy consists of

simultaneous, complementary themes and (5) strategic alignment determines the value

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business model. Basically it is about translating the customer value proposition and strategic

themes into a required organization design. A strategic theme is organized as an accountable

entity, based on a process to deliver a specific dimension of the customer value proposition, it

has non-financial and financial time-phased targets, a business case, funding, it is an element

in the management control system (resource allocation process) and a high level responsible

manager, it usually does not have it own resources as these are provided by the departments

and the budget of the strategic theme is crossed with the budgets of departments through

STRATEX. A strategic theme is typically a vertical slice within a strategy map, consists of a

distinct set of related strategic objectives. For an example of a strategy map with vertical

strategic themes see figure 8.Having strategic themes will result in the fact that a single

manager will not have a span of control over resources that is sufficient to reach a strategic

theme without making trade-offs and looking for collaboration with other managers (Simons,

2005). Relating strategic themes to the entrepreneurial gap it is hypothesized that when top

management has enlarged the entrepreneurial gap, this will logically come with strategic

themes crossing unit boundaries. From this hypothesis 2a, 2b, 3a and 3b emerge:

H2a: the smaller the entrepreneurial gap for business unit managers, the more the goal of the business unit will be in line with the goal of the strategic theme.

H2b: the smaller the entrepreneurial gap for middle managers, the more the goal of the department will be in line with the goal of the strategic theme.

H3a: the smaller the entrepreneurial gap for business unit managers, the less strategic themes will cross unit boundaries.

H3b: the smaller the entrepreneurial gap for middle managers, the less strategic themes will cross department boundaries.

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39 Figure 8: example of strategic themes (Kaplan & Norton, 2008b).

The strategy map is built up out of horizontal dimensions, which are the balanced score card

dimensions: financial, customer, process and learning and growth. The strategic themes are

the green, pink and orange vertical blocks. Strategic themes can be defined across a balance

scorecard perspective. For example, often companies define a strategic theme that

encompasses learning and growth objectives for developing the employee capabilities, culture

and values to drive improvements in customer-focussed processes(Kaplan & Norton, 2008a).

Strategic themes offer several advantages. At the business unit level, the strategic themes

allow unit managers to customize each theme to their local conditions and priorities, creating

focus for their competitive situation while still keeping their objectives integrated with the

overall strategy. Secondly, the vertical strategic themes typically deliver their benefits over

different time periods, helping companies simultaneously manage short-, intermediate-, and