2011
Public
Student:
Marjolein Peen
Supervisors:
Dr. M.P. van der Steen
Dr. R.B.H. Hooghiemstra
Risk behaviour of salespersons
Risk behaviour of salespersons
Controllable or not?
by
Marjolein Peen
University of Groningen
Faculty of Economics and Business
Master of Science in Business Administration
Specialization Organizational and Management Control
Public
August, 2011
Vierde Drift Noorderhaven 74
9712 AK Groningen
A.M.Peen@student.rug.nl
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Acknowledgements
The final part to complete the master degree in Business Administration (specialization: Organizational and Management Control) at the faculty of Economics and Business of the University of Groningen was writing this thesis. The research was conducted during an internship within the regional branch of XX (due to privacy reasons) over a five months period from February to June 2011. During these five months relevant scientific articles and books are examined, employees are interviewed and the sections of this thesis are written and rewritten.
However, this thesis could not been written without the help of several people. Therefore, I would like to thank all the people who were willing to help me. First, I would like to thank my first supervisor of the University of Groningen, Dr. M.P. van der Steen, for giving me comments and guidance during the past five months. His comments were very helpful and contributed to this thesis, because he encouraged me to look critically towards it. In addition, I would like to thank Dr. R.B.H. Hooghiemstra, the co-supervisor, of the University of Groningen for his effort and time. Third, I would like to thank the regional director of XX who gave me the opportunity to fulfil an internship within the regional branch of XX. Fourth, I would like to thank my supervisor within the organization. He gave me helpful advice and direction during the internship. Furthermore, I would like to thank all the employees of XX for their cooperation during my research. Thanks to them, I was able to gather a lot of information, as a result of which the processes within the organization could be understood and the empirical part could be written. Finally, I would like to thank my family and friends for their support during the entire period.
I am proud of this final product and hope that you will enjoy reading it.
Marjolein Peen
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Abstract
The literature review showed that some scholars (e.g. Simons, 1995; Merchant and Van der Stede, 2007) have recognized that the behaviour of employees can be controlled by the use of a management control system (MCS). Nevertheless, Ballou and Heitger (2005) and Scimia (2010) stated that controlling the risk behaviour of employees is still underexposed. Salespersons need to deal with both controllable and uncontrollable types of risk, as a result of which they must be able to identify these types of risk. Therefore, a MCS must be developed which enable organizations to control the risk behaviour of their employees, especially salespersons. Consequently, this thesis studies the risk behaviour of salespersons by conducting a case study within XX.
Overall, it can be concluded that the basic forms of output control, behaviour control and clan control, which are mentioned in the theoretical framework, can indeed be used to control the risk behaviour of the salespersons.
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Table of content
1. Introduction 7 2. Methodology 9 2.1 Case description2.2 Research and sub-questions
2.3 Research method 10 2.4 Data collection 11 2.5 Data analysis 12 3. Risk 13 3.1 Definition of risk 3.2 Types of risk 14
3.3 Risk behaviour of employees 15
3.4 Characteristics of salespersons 17
4. Management Control Systems 18
4.1 Control within an organization
4.2 Definition Management Control System
4.3 Types of management control 19
4.3.1 Ouchi‟s types of control
4.3.2 Simons‟ levers of control 20
4.3.3 Merchant and Van der Stede‟s types of control 21
4.3.4 Malmi and Brown‟s types of control 22
4.3.5 Management control in this research 23
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6. Case study: XX 27
6.1 Interview guide
6.2 Characteristics of the salesperson
6.3 Characteristics of the organizational context of XX 30
6.4 Characteristics of the problem 6.5 Output control 6.6 Behaviour control 31 6.7 Clan control 32 6.8 Conclusion 7. Discussion 33 7.1 Practical discussion 7.2 Theoretical discussion 8. Conclusion 37 8.1 Conclusion
8.2 Limitations of the research
8.3 Future research 38
References to the literature 39
Appendices
Appendix 1: Interview overview 43
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1. Introduction
Despite the business failures and financial reporting scandals in the previous years, the importance of managing risk, which is an essential element for running an organization, is sometimes overlooked (Ballou & Heitger, 2005). According to Holton (2004), risk requires two essential components: exposure and uncertainty. This is in line with Roszkowski and Davey (2010), who state “risk is the uncertainty that exists as to what the eventual outcome will be. Risk arises in any decision where there is some doubt about at least one of the possible outcomes”. In short, risk will depend on the possible outcomes and the likelihood and value of these particular outcomes. However, in a competitive business environment, the question is not whether to take risks but how to take reasonable risks (Harwood et al., 2009).
Several types of risk can be distinguished, which can be classified into controllable and uncontrollable risks (Gibbs et al., 2009). Due to the focus of this thesis, risk can be subdivided into several types. According to Roszkowski & Davey (2010), the possible outcomes in games of chance are very well defined and therefore controllable. However, in most cases, the outcomes are not as clear-cut. One of these risks, which is less well defined, is the risk behaviour of employees (Scimia, 2010).
Simons (1995) and Merchant and Van der Stede (2007) have already recognized the fact that the behaviour of employees can be controlled by the use of a MCS. Nevertheless, Ballou and Heitger (2005) and Scimia (2010) stated that controlling the risk behaviour of employees is still underexposed. In contrast to other types of risk “behavioural risk is a challenge because it is not always logical, concrete or rational” (Scimia, 2010). Hence, MCSs are able to cover some types of risk, but there is still a lack of MCSs, which are able to cover every type of risk.
Therefore, it can be concluded that the existing MCSs currently cannot control some types of risk. Consequently, a MCS should be developed which enables organizations to control the risks that are less logical, concrete or rational. An organization that is dealing with a similar issue is XX.
A new business strategy came in place. Although the objective is still to create value for the clients, XX uses a different strategy to achieve this. Therefore, the salespersons need to have more in-depth conversations with their customers.
Accordingly, the question has arisen within the management of XX whether the current risk behaviour of the salespersons is sufficiently adapted to the new requirements. Because of this, the management of XX takes steps to ensure that the risk behaviour of the salespersons is aligned with the new business policy. Therefore, the purpose of this research is to examine the characteristics needed for a MCS to control the risk behaviour of the salespersons of XX.
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Therefore, this thesis will be based on a case study that will be conducted within XX. Consequently, the case study can contribute to fulfil the gap in the literature and give recommendations for the current question of the management of XX.
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2. Methodology
In this chapter an overview is given of the research design in the first three paragraphs. The data collection will be discussed in the fourth paragraph and data analysis of the research will be presented in the fifth paragraph. The outline of this chapter is based on scientific articles of Lambert and Pezet (2010) and Kraus and Lind (2010).
2.1 Case description
The purpose of XX is to serve the interests of customers, the organization and the society in a professional manner.
Despite the new strategy, the objective is still to create value for the clients. However, XX uses a different strategy to achieve this. Accordingly, the question has arisen within the management of XX whether the current risk behaviour of the salespersons is sufficiently adapted to the new requirements. As a result of this, the management of XX takes steps to ensure that the risk behaviour of the salespersons is aligned with the new business policy.
2.2 Research and sub-questions
Due to the prior case description, the purpose of this research is to examine the characteristics needed for a MCS to better cover the risk behaviour of the salespersons of XX.Consequently, the following research question can be formulated:
Which characteristics should a MCS comprehend to control the risk behaviour of the salespersons of XX?
This research question will be answered by the following sub-questions:
1. What is risk and what is risk behaviour? (Theoretical)
The main concept of this thesis is the risk behaviour of salespersons. Therefore, this sub-question is used to get a clear view of the concept of risk, and risk behaviour in particular. Risk behaviour is influenced by different determinants, which will be used as a base for the theoretical framework.
2. What is a management control system (MCS)? (Theoretical)
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3. What is the relation between risk behaviour and management control systems? (Theoretical)
The theory gathered by answering the first two sub-questions will be used to develop a theoretical framework. This framework will describe the relation between the two main concepts. Eventually, this will be used as a base for the empirical research.
4. Which risk behaviour is shown by the salespersons of XX and which risk behaviour is desired? (Empirical)
During the empirical research an overview will be given of the current risk behaviour of the salespersons of XX. Furthermore, the desired risk behaviour will be illustrated. Consequently, the lack between the current behaviour and the desired behaviour will be described.
5. Which management control system is used within XX and which characteristics of management control systems are desired? (Empirical)
The current MCSs within XX will be described. However, these will only be the MCSs that have to do with the risk behaviour of the salesperson. Data of the existing MCSs will be gathered during the empirical research.
6. In which way can the characteristics of the management control system be combined with the desired risk behaviour? (Empirical)
The data gathered in the empirical research about the current and desired risk behaviour of the salespersons and the characteristics of the current MCSs will be used to give recommendations to the management of XX. These recommendations will be based on the characteristics that a MCS must contain to better cover the risk behaviour of the salespersons of XX.
2.3 Research method
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Although a lot of literature exists about MCS within organizations, hardly any literature is known about MCS within organizations. Furthermore, literature exists of risk and risk behaviour, but is lacking when it is about the risk behaviour of salespersons within an organization. Due to this an exploratory study has been chosen, more specific an exploratory case study. The definition by Yin of an exploratory study is “used to explore those situations in which the intervention being evaluated has no clear, single set of outcomes” (2003, p.15). Second, a short period of time was available in which the research could be conducted. Based on this limitation, the research could just be conducted within one organization, as a result of which a single case study was chosen (Blumberg et al., 2008). Yin (2003) distinguishes one more reason of conducting a case study; the researcher has little control over the actual behavioural events. The risk behaviour of salespersons is influenced by a lot of external variables, as a result of which the control on these events is limited. Therefore, conducting a case study is the type of research that can be used within the empirical research.
When conducting a case study it is preferred to examine contemporary events, but only if the relevant behaviours cannot be influenced during the research (Yin, 2003). The question of the management of XX is exactly such a situation. Therefore, data will be gathered, which will provide a combination of different sources of evidence, e.g. direct observation, interviews and documents (Yin, 2003; Blumberg et al., 2008).
2.4 Data collection
During the first month of the research conversations and observations already have taken place to be sure about the management issue of XX. During the empirical study observations will take place as well. In that case, especially the different salespersons will be observed to acquire the necessary information.
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2.5 Data analysis
During the interviews notes will be made to optimize the results of the interviews. These notes will be sent to the respondent to indicate the correctness of the interview transcripts. The respondent will have to verify whether the gathered data has been interpreted well.
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3. Risk
Despite the business failures and financial reporting scandals in the previous years, the importance of managing risk, which is essential for running an organization, is sometimes overlooked (Ballou & Heitger, 2005). Therefore, this chapter will define the concept of risk in the first paragraph. Subsequently, an overview will be given of the different types of risk that exist. Moreover, the third paragraph will discuss the risk behaviour of employees. Finally, the characteristics of salespersons are described.
3.1 Definition of risk
Holton (2004) aims to define the concept of risk, because of the lack of definitions in the financial literature. Discussions exist because risk can occur in several forms, like military adventures, asking for a pay raise and skydiving. All these situations have two components in common: exposure and uncertainty (Holton, 2004). The first component, exposure, can be described as the personal interest of a person in what happens. The second component, uncertainty, will arise when people do not know what will happen. In these situations, the outcomes are uncertain (Horton, 2004).
The definition of Holton (2004) is in line with the one of Roszkowski and Davey (2010). They state: “risk is really the uncertainty that exists as to what the eventual outcome will be. Risk arises in any decision where there is some doubt about at least one of the possible outcomes” (2010, p.43). In short, risk depends on the possible outcomes and the likelihood and value of these particular outcomes (Roszkowski and Davey, 2010).
Another, rather recent definition of risk is the definition of Zwikael and Ahn (2011). According to them, risk can be defined as a “measure of the probability and consequence of not achieving a defined goal” (2011, p.26). However, not all risks can be managed to the same degree due to their nature or the amount of influence of external factors (Bowling & Rieger, 2005). Therefore, it is critical that these risks are managed to the fullest extent (Bowling and Rieger). Harwood et al. (2009) agree with this statement, especially in a competitive business environment. In such an environment, the question is not whether to take risks but how to take reasonable risks (Harwood et al., 2009).
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3.2 Types of risk
Risk is not only difficult to define, but several types of risk can also be distinguished. Overall these types of risk can be classified into controllable and uncontrollable risks (Gibbs et al., 2009). Controllable risks are the risks to which the employee can react to and uncontrollable risks are the risks to which the employee cannot react to, like economic and competitive factors and acts of nature (Merchant & Van der Stede, 2007). For example, the possible outcomes in games of chance are very well defined and therefore controllable (Roszkowski & Davey, 2010). However, in most cases, the outcomes are not as clear-cut. One of these risks, which are less well defined, is the risk behaviour of employees (Scimia, 2010).
Managers have to deal with several types of risk, like technological risk, financial risk, insurance-related risk, environmental safety, and regulatory risk (Zwikael & Ahn, 2011). These risks can influence many business areas, as a result of which they can have an effect on the efficiency, sustainability and profitability of an organization (Zwikael & Ahn, 2011).
Due to the focus of this thesis, a risk classification specific to the banking industry is used. According to Santomero (1997), risks can be divided into six basic types for the whole organizationing sector: market risk, credit risk, counterparty
risk, liquidity risk, operational risk and legal risk. These risks are in line with the main
risks within organizations that are
distinguished by Bessis (2003). Bessis (2003) mentions interest rate risk and foreign exchange risk as additional risks, which are part of Santomero‟s (1997) market risk category. Bowling and Rieger (2005) developed a model (figure 3.1) for financial institutions, which comprises the same types of risk as Santomero (1997) and Bessis (2003).
Market risk, also known as systematic risk, is the risk of adverse deviations within the trading portfolio due to changes in the market (Bessis, 2003). Despite the impossibility of completely diversifying systematic risk, one can try to hedge this risk by buying different kinds of securities or by buying in different markets (Santomero, 1997).
Credit risk, also known as default risk, arises from either inability or unwillingness of the borrower to meet the obligations of the organization (Santomero, 1997; Bessis, 2003). Consequently, the financial situation of the borrower as well as the value of underlying collateral is of interest to the organization (Santomero, 1997).
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Along with credit risk, interest rate risk is one of the crucial risks organizations face. Interest rate risk is the risk of reducing earnings due to changes of interest rates (Bessis, 2003). Everyone who is lending or borrowing is subject to this kind of risk. Despite the fact that interest rate changes are risky, interest rate exposure can generate chances of gains as well (Bessis, 2003).
According to Santomero (1997), “liquidity risk can best be described as the risk of a funding crisis” (1997, p.89). This is in line with Bessis (2003), who states that liquidity risk is the risk that at some point the organization is no longer able to finance its losses with the capital available.
The Basel Committee (2001) defines operational risk as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events” (2001, p.2). This definition corresponds to Bessis (2003), because according to him operational risk appears at various levels: people, processes, technical, and information technology. The definition of Jobst (2007) is similar to the definition of the New Basel Capital Accord (in short: Basel II) as well. Furthermore, Jobst (2007) makes a distinction between internal operational risk (modifiable factors such as people, systems and processes) and external operational risk (factors beyond the control of the organization such as disasters and terrorism).
The Basel II makes the concept of operational risk operational by using seven event types: (i) internal fraud, (ii) external fraud, (iii) employment practices and workplace safety, (iv) clients, products and business practices, (v) damage to physical assets, (vi) business disruption and system failures, and (vii) execution, delivery and process management (Jobst, 2007). These event types show that operational risk is typically the result of human activity and not controlling processes. Therefore, to manage operational risk management control is very important (see chapter 4).
3.3 Risk behaviour of employees
Robbins and Coulter (2007) define behaviour as “how people act” (2007, p.388). Furthermore, they describe the way people act at work as the concept of organizational behaviour. Additionally, according to Merchant and Van der Stede (2007) the people in the organization are making things happen, which can be called human activity. However, due to innate perceptual and cognitive biases, people do not always act in the organization‟s best interest (Merchant, 1982). Therefore, the behaviour of people can be seen as a risk, which must be controlled.
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Individual characteristics. Three individual characteristics can be distinguished. First, risk preferences
are about the challenge of risk. People who enjoy the challenge of risk will be more likely to undertake risky actions than those who do not (Sitkin & Pablo, 1992). The second characteristic is risk perception, which is about the interpretation of the situation. This interpretation is shaped by the knowledge, emotion and experience of an individual (Roszkowski & Davey, 2010). Third, risk propensity refers to the willingness of an individual to take or avoid risk (Cho & Lee, 2006) which is driven by underlying personality traits and behavioural tendencies (Lampenius & Zickar, 2005; Cho & Lee, 2006; Roszkowski and Davey, 2010; Harwood et al., 2009).
Organizational characteristics. In addition to the individual characteristics, four
organizational characteristics exist. First, the group composition influences the context in which the individual takes risk-related decisions. Second, the cultural risk values decide which organizational tendencies are preferred, like risk avoidance or risk seeking. These cultural risk values can be influenced by the third characteristic, specifically leader risk orientation. Leaders can have an important role in the modelling of risk behaviour in their organization. Fourth, organizational control systems (OCS) can be used to monitor, evaluate and reward the outcomes when risks are involved (Sitkin & Pablo, 1992). OCS consists of three types of control: strategic control, management control and operational control, which is similar to the classification of Anthony (1965) (see next chapter).
Problem characteristics. Finally, two problem-related characteristics can be determined. First,
problem familiarity is presented. When individuals are more experienced, they may be willing to take risks which less experienced individuals would avoid. Second, problem framing can influence the risk behaviour of the individual. A situation can be presented in a positive or a negative manner, as an opportunity or a problem, and in terms of gains or losses (Sitkin & Pablo, 1992). According to Kahneman and Tversky (1979), positively framed situations lead to risk avoidance, whereas negatively framed situations lead to risk seeking.
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3.4 Characteristics of salespersons
In recent years, the focus changed from short-term (transactional exchanges) to long-term (relational exchanges). Furthermore, it has been accepted that customer demand is not homogeneous but heterogeneous (Richard & Jones, 2009). Due to this change, key account management also has changed. Although the link between key account management and relational exchanges has been researched, little is known about the behaviours of employees in their role of salesperson (Guenzi et al., 2007).
Key accounts can be defined “as customers in a business-to-business market, identified by the selling company as the most important customers” (Workman et al., 2003, p.7; Richard & Jones, 2009, p.306). According to Sengupta et al. (2000) “a salesperson is responsible for maintaining and developing direct relationships with a few customer accounts” (2000, p.253).
The performance of a salesperson is the result of several factors, which can be grouped into five basic factors: role, aptitude, skill level, motivation, and personal, organizational and environmental variables (Churchill et al., 1985; Hutt & Walker, 2006). First, role refers to the salesperson‟s perception of activities and behaviours that need to be performed. Second, aptitude involves the intrinsic personal characteristics of the salesperson. The third factor, skill level, is the proficiency of a salesperson to perform tasks. Different selling tasks require various types of skills. Through learning and experience these skills can be developed (Hutt & Walker, 2006). Fourth, motivation can be defined “as the amount of effort the salesperson desires to expend on each activity or task associated with the job” (Hutt & Walker, 2006, p.467). Finally, personal, organizational and environmental variables can directly or indirectly influence the performance of the salesperson (Churchill et al., 1985). These five basic factors are in line with the determinants of risk behaviour as described in the previous paragraph.
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4. Management Control Systems
The first paragraph will give a short overview of management control within an organization. The second paragraph will define the concept of MCSs, and the third paragraph will give an overview of different types of control of several well-known scholars.
4.1 Control within an organization
According to both Anthony (1965) and Birnberg (1998), control can be divided into strategic planning, management control and operational control. This classification is in line with the different management levels in an organization, which is
shown in figure 4.1. Because Birnberg (1998) used the theory of Anthony as a base, Anthony‟s (1965) definitions are used. First, at the level of strategic planning it is about the process of deciding on organizations‟ objectives and changing them. Furthermore, decisions are made about the resources that can be used to attain these objectives. Second, management control can be defined as “the process by which managers
assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization‟s objectives” (1965, p.17). Third, operational control is used by the organization to assure that specific tasks are carried out in an effective and efficient way. In the classic view of Anthony (1965) these three levels of control are independent from one another. However, Ferreira and Otley (2009) stated that this classic approach could not be used in the current business environment. Due to a changing environment, tasks are no longer routinized, as a result of which more integrated control systems are needed (Birnberg, 1998). Therefore, after explaining the place of management control within the wider context, the remainder of this chapter will examine these more integrated control systems, in particular MCSs.
4.2 Definition Management Control System
During the last hundred years a debate about the concept of management control systems exists within the management literature. One of the reasons is that no single definition of the concept exists. Malmi and Brown (2008) confirm that it is difficult to define a MCS. Consequently, MCS can be defined in different ways.
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In one way or another, the management control definition of Merchant (1982) is reflected in all MCS definitions. According to Merchant (1982), the primary control function of management is to ensure that other people do what should be done. The definition of Chendall (2003) is broader, which includes both management accounting systems and other controls, like personal en clan controls. According to Merchant and Van der Stede (2007), the definition of MCS is more limited. They define MCSs as dealing with the behaviour of employees. This definition is in line with Abernethy and Chua (1996), who state that MCSs are “a combination of control mechanisms designed and implemented by management to increase the probability that organisational actors will behave in ways consistent with the objectives of the dominant organisational coalition” (1996, p.573). Malmi and Brown (2008) summarize previous definitions as “those systems, rules, practices, values and other activities management put in place in order to direct employee behaviour should be called management controls. If these are complete systems, then they should be called MCSs” (2008, p.290). In short, MCSs can be defined as including all means and systems that are used by managers to ensure that the behaviour and decisions of their employees are in line with the objectives and strategies of the organization. In this thesis the last definition will be central, because it contains the most essential elements of all the previous definitions, which can be linked to the remainder of this literature review.
4.3 Types of management control
Mostly, MCSs consist of more than one type of control. During the last century a lot of scholars wrote about these types. However, Ballou and Heitger (2005) and Scimia (2010) stated that controlling the risk behaviour of employees is still underexposed. Consequently, no types of control could be found in the existing literature, which can specifically be used to control the risk behaviour of salespersons. Therefore, this paragraph will elaborate the general types of control that are frequently discussed in the management accounting literature by well-known scholars. The theories of Ouchi (1979), Simons (1995), Merchant and Van der Stede (2007) and Malmi and Brown (2008) will be discussed.
4.3.1 Ouchi‟s types of control
According to Ouchi (1979), managers need to monitor or measure things to be able to control their organization. The things that can be measured are limited to the behaviour of the employees, or their results. Consequently, Ouchi (1979) distinguishes three kinds of control: behaviour control, output control and clan control. Whether or not measurement is possible depends on the knowledge of the transformation process and the ability to measure the outputs. These two contingencies result in the overview, which is given in table 4.1.
Knowledge of the transformation process Ability to
measure outputs
Perfect Imperfect
High Behaviour or output measurement Output measurement
Low Behaviour measurement Ritual and ceremony, „clan‟ control
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The three types of control can be implemented through three mechanisms. The first mechanism, market mechanism, is based on prices, which express all the necessary information for efficient decision-making. However, it is difficult to meet all the necessary conditions to use prices as a base for decision-making. If these conditions cannot be fulfilled, the bureaucratic mechanism is preferred. This mechanism is based on rules (e.g. written policies), which are partly bundles of information for decision-making. The third mechanism, clan mechanism, is based on traditions, like common values and beliefs. This mechanism lacks the explicit price of the market and the explicit rules of the bureaucracy. Therefore, the organization has to rely on a high level of common agreement between members when defining right behaviour. To be concluded, the output and behaviour control can be implemented through a market or bureaucracy mechanism, and the clan control can be implemented through a clan mechanism.
4.3.2 Simons‟ levers of control
According to Simons (1995), managers face the problem how to control organizations that demand innovation, creativity and flexibility. Consequently, Simons developed a framework with four levers of control as a tool to implement and control organizations‟ strategies (Ferreira & Otley, 2009). The four levers of control are: diagnostic control systems, beliefs systems, boundary systems, and interactive control systems. Each of these four levers of control has an own objective for managers who attempt to make use of the creativity of employees (Simons, 1995).
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4.3.3. Merchant and Van der Stede‟s types of control
Merchant (1982) states that managers can avoid control problems in most situations. Four possibilities can be used to guard employees against undesirable behaviour. These four possibilities are automation, centralization, risk-sharing and activity elimination (Merchant, 1982; Merchant & Van der Stede, 2007). First of all, due to automation, computers and other means of automation will perform more consistently than human beings. Accordingly, control problems can be reduced. By using centralization, important decisions can be taken at the highest organizational levels, as a result of which a reduction of control problems can be realized. The third opportunity is risk sharing, whereby an outside body, like an insurance company, is used to mitigate the risk. Finally, some control problems can be avoided by elimination of the activity, like a business or an entire operation.
However, if management cannot or chooses not to reduce the control problems, controls must be implemented. Merchant (1982) and Merchant and Van der Stede (2007) categorised all the control problems in three main categories, based on the object of control: results control, action control, and personnel/cultural control.
Using results controls can affect actions, because employees become concerned about the consequences of their actions. However, the organization does not tell employees what to do. Instead, the employees are empowered to act in such a way that they believe will produce the desired results. Although, results controls are often used in organizations, it cannot always be used effectively. Results control only works best when all of the following three conditions are present: (i) managers must know what results are desired in the areas being controlled; (ii) the individuals whose behaviours are being controlled must have significant influence on the results in the desired performance dimensions; and (iii) managers must be able to measure the results effectively (Merchant & Van der Stede, 2007).
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Personnel and cultural control are the third type of control. This type can also be seen as two separate ones. Personnel controls are designed to make it more likely that employees perform the desired actions on their own. This type of control can be implemented through: (i) selection and placement of employees; (ii) training; and (iii) job design and provision of necessary resources. Cultural controls exist to shape organizational behavioural norms and encourage employees to monitor and influence each other‟s behaviour. Most important methods of shaping culture within an organization, and thus effectively use cultural controls, is by using codes of conduct and group-based rewards (Merchant & Van der Stede, 2007).
4.3.4 Malmi and Brown‟s types of control
After analysing nearly four decades of MCS research, whereby among others the scientists mentioned above were analyzed, Malmi and Brown (2008) developed controls that managers can use to direct employee behaviour. Their new typology is structured around five types of control: planning controls, cybernetic controls, reward and compensation controls, administrative controls and cultural controls.
Planning controls is based on goals and standards that need to be achieved. Furthermore, it is important that the level of expected effort and behaviour is made clear. Eventually it has the purpose to control the activities of groups and individuals on the short, medium and long term (Malmi & Brown, 2008).
Cybernetic controls link behaviour to targets and establish accountability for differences in performance. These differences become clear when using a feeXXack loop in which standards of performance are represented. The standards are compared to the measured performance and unwanted differences are communicated to the employees (Malmi & Brown, 2008).
The reward and compensation controls try to align individual goals of the employees with the goals of the organization. The focus of this type of control is to motivate employees and increase the performance of both individual workers and groups within an organization (Malmi & Brown, 2008).
According to Malmi and Brown (2008), administrative controls can be defined as “directing employee behaviour through the organizing of individuals and groups, the monitoring of behaviour and who you make employees accountable to for their behaviour, and the process of specifying how tasks or behaviours are to be performed or not performed” (2008, p.292).
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4.3.5 Management control in this research
Despite the differences between the types of control, some similarities exist as well. The types of control can be rearranged, as a result of which it is easier to use them in the empirical research. The rearrangement is based on Ouchi‟s (1979) types of control. In table 4.2 an overview is given of this rearrangement.
Ouchi (1979) Simons (1995) Merchant & v/d Stede (2007) Malmi & Brown (2008)
Output control Diagnostic control Results control Reward and compensation
controls
Behaviour control Boundary control Action control - Planning controls
- Cybernetic controls - Administrative controls
Clan control Belief control - Personnel control
- Cultural control
Culture controls
Table 4.2: overview of scientists and their types of control
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5. Theoretical framework
Ouchi (1979), Simons (1995), Merchant and Van der Stede (2007) and Malmi and Brown (2008) have already recognized that the behaviour of employees can be controlled by the use of a MCS. Nevertheless, controlling the risk behaviour of employees, especially salespersons, is still underexposed (Ballou & Heitger, 2005; Guenzi et al., 2007; Scimia, 2010). In contrast to other types of risk “behavioural risk is a challenge” (Scimia, 2010, p.48). Hence, MCSs are able to cover some types of risk, but still lack to cover every type of risk.
The literature discussed in chapters 3 and 4 is used as a base for the theoretical framework, which is presented in figure 5.1. This framework and its comments will give an overview of the relations between the different concepts, which will be measured during the empirical research.Figure
5.1: Theoretical framework
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However, a side note is essential for the concept of OCS in comparison with the three types of control (output, behaviour and clan). OCS consists of strategic control, management control and operational control, which is similar to the classification of Anthony (1965). As stated in paragraph 4.1, strategic planning is about the process of deciding on organization‟s objectives and changing them (Anthony, 1965). Consequently, MSC will be implemented based on the organization‟s objectives. Therefore, OCS will influence MCS because MSC is part of OCS, which is shown by three arrows (4, 5, and 6).
The blue rectangles show the types of control that can affect the risk behaviour of the salesperson. After rearranging the types of control of Ouchi (1979), Simons (1995), Merchant and Van der Stede (2007) and Malmi and Brown (2008), three types of control, which are underlined, are chosen because each contains the types of control of the other scholars. The asterisks refer to different basic forms of the types of control, which are in line with Merchant and Van der Stede (2007).
These scholars have recognized that the behaviour of employees can be controlled by MCSs. Because a salesperson acts differently in each situation, every situation entails both controllable and uncontrollable risks. The controllable risks can be controlled by the use of output, behaviour and clan control. Moreover, arrows 6 and 10 show that clan control can be used to influence the characteristics of the organizational context and the problem. These two relations will be discussed in the section „clan control‟.
Output control. Results accountability can influence the risk behaviour of the salesperson in
some situations (arrow 7). It is important that the desired results are specific, and effectively communicated to the salesperson. Furthermore, the results have to be congruent, precise, objective, timely and understandable. To make output control effective, rewards and punishments can be linked to the results. However, it is really important that the salesperson can influence the results and knows the results for which he is held accountable.
Behaviour control (arrow 8). The same can be considered for action accountability as for
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Clan control. As stated before, clan control can both influence the risk behaviour of the salesperson
(arrow 9) and the characteristics of the organizational context (arrow 6) and the characteristics of the problem (arrow 10). Four basic forms can influence the risk behaviour of the salesperson. First of all it is important to find the right people during the selection and placement. The risk behaviour of the applicant should be examined carefully. Furthermore, during the tenure of the salesperson training should ensure that the salespersons better understand their job. Consequently, the risk behaviour and the way in which the salesperson has to deal with this can be controlled. The creation of a strong organizational culture is the third basic form of clan control. This can be shaped by codes of conduct, which are written documents that give broad and general statements of organizational values. In these codes of conduct the way in which a salesperson has to deal with his risk behaviour can be incorporated. In short, these codes help salespersons understand what behaviours are expected. Finally, group-based rewards can be used to encourage clan control. Risk behaviour can become a collective item within the organization. By linking a group rewards to this item, salespersons have to cooperate to receive the reward. Consequently, they can learn from one another, which can improve their handling with risk behaviour.
Furthermore, clan control can be used to influence the characteristics of the organizational context and the characteristics of the problem. First, clan control can affect the risk behaviour of the salesperson for example by training, as a result of which the salesperson becomes more familiar with risk. Moreover, training can be used to transfer for example the cultural risk values to the salespersons. In short, clan control can be used to influence both the current risk behaviour of the salesperson as the risk behaviour that the salesperson has gained in the past.
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6. Case Study: XX
This chapter will describe the findings of the case study, which is based on the theoretical framework of chapter 5. On the basis of this framework an interview guide is developed of which an overview will be given in the first paragraph. The findings of the interviews as well as the observations and reports will be presented in the remainder of this chapter.
6.1 Interview guide
In order to verify the theoretical relations formulated in chapter 5, a case study was conducted over a five months period from February to June 2011. Interviews were conducted with fifteen organisational members of XX at different organisational levels and from different divisions (see Appendix 1). The vocational titles are slightly modified keep the respondents anonymous. Due to this, it cannot be identified which statement belongs to which respondent. In addition, the dates of the interviews have been omitted for the same reason. The language used during the interviews is Dutch, because all the respondents have the Dutch nationality. Consequently, the chance of misinterpretation could be limited.
The interview guide (see Appendix 2) started with some general questions, like gender, age and job title. Furthermore, the interview guide consists of six different parts, which are similar to the green and blue rectangles in figure 5.1. The seven parts are chosen to verify the relations between the several theoretical concepts. The questions about the risk behaviour of the salesperson are on the one hand composed of the determinants of risk behaviour (green rectangles) and on the other hand of the three types of control (blue rectangles). During the interviews these questions are applied as a guide, whereby cross-questioning was used to check the relations between the theoretical concepts.
6.2 Characteristics of the salesperson
Within XX a salesperson is seen as someone whose task is “to map the actual situation, determine the
needs of the customer, and to use their expertise and experience to develop a proposal that meets as many requests of the customer”. One respondent added that an additional task of the salesperson is to
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After explaining the characteristics of the salesperson of XX in a nutshell, the concept of risk will be discussed. The respondents differ in their definition of risk. One is critical to what is meant by risk, while the other directly refers to the credit risk definition. Credit risk is indeed an obvious kind of risk within XX, because it is about the inability or unwillingness of the borrower to meet the obligations of the bank (Santomero, 1997; Bessis, 2003). This definition is in line with that of one of the financial controllers, who states, “I define risk as the probability that a loan amount is partly or not refunded”. Another financial controller gave a more broad definition, specifically “I see risk as the time and
money you invest in that do not result in the returns you expected”. Furthermore, a salesperson calls
risk a very broad concept. He defines risk as “the situation in which I suffer damage. This can be
financial loss, reputational damage or immaterial damage. But the main question is how big a risk is and whether it is manageable or incalculable”.
However, credit risk is not the only risk that is important within the banking industry. Santomero (1997) and Bessis (2003) determined that besides credit risk other types of risk could be distinguished. This is confirmed by the previous quotes of the respondents. Some respondents mentioned other types of risk by itself, like market risk, reputational risk, political risk, interest rate risk, business risk, financial risk, and group structure risk. Nevertheless, some respondents were decisive that credit risk is the only type of risk that is applicable to XX. Some salespersons even admitted that due to doing a lot by experience, they were less aware of the risks that arise. This indicates that not all employees are equally aware of the risks within the lending process.
Many risks are covered within the lending process, which will be elaborated in paragraph 6.3. However, it is important that the salesperson disposes of financial knowledge. Several financial ratios influence the customer‟s riskiness and thus the credit proposal. According to a financial controller, profitability, subordinated debt, coverage, solvency, credit rating, total debt/EBITDA, and personal commitment can be distinguished as ratios of interest. Several other respondents confirmed these ratios. Furthermore, the respondents consider the quality of the customer and the confidence in the customer essential. The profile of the customer is created by one or more conversations. In addition, the experience and the knowledge of human character of the salesperson are of interest. One salesperson explained: “In the case of a new customer, I always look at his track record. When the
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The risk behaviour of the salesperson is shaped among others by his expertise and experience. Most respondents have been working in similar functions for some time and should therefore be able to indicate and identify most of the risks. However, according to some respondents, not every salesperson is performing at the expected level, given the amount of expertise and/or experience. The underlying reason for this could not be discovered during this short research, because it is influenced by a lot of internal and external factors. Though, it can be stated that the salespersons use historical information of the customer to make the decision whether or not to grant a credit. First, a new customer is obliged to deliver up financial statements of the past three years or a business plan in the case of a start-up company. Furthermore, forecasts can be used as well as sectoral information and internal financial data. In the case of forecasts, the arguments of the customer are important for the lending decision. The customer must show that he understands his business. In addition to the financial statements, forecasts and sectoral information, customers and their lending request can be discussed with the Head of Sales, and other colleagues. Moreover, the salesperson can glance through the customer‟s statement of account and meeting reports.
Dependent on the customer, actions around the lending process will be strictly or more lenient. The following statement confirms this: “If I have a good experience with a customer I am more lenient
in the case a credit limit exceeds”. However, the contrary is also true: “If a customer does not keep a promise, I do not give the customer another chance the next time”. Therefore, it depends on the
situation whether or not the salesperson takes a risk. Still, most salespersons agree that they want to be sure about the quality of the customer. Furthermore, the salesperson must fulfil the wishes of the customer by offering relevant solutions that need to be profitable for the bank. According to one salesperson, “I am willing to take risks as long as it does not cost money, but is profitable for the
bank”. Another salesperson sees it as a continuous consideration between customer satisfaction and
the desires of XX. In short, salespersons are willing to take risks, but to a certain extent.
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Within the lending process it is proportionally easy to keep the customer tight, but this does not mean that this process is riskless. The customer has to meet the credit terms. If this is not the case it can be pointed out to the customer. As a response to this, a salesperson answered, “It varies by customer how
quick I react if the terms are exceeded. If the customer often overdraws its account, I will interfere more rapidly”. Naturally, this depends on the confidence in the customer. When the customer is not
profitable, the salesperson must discuss this with his customer and search for opportunities.
6.3 Characteristics of the organizational context of XX Due to privacy reasons this part cannot be published.
6.4 Characteristics of the problem
All respondents are working in the same industry or similar functions for some time, as a result of which they experienced risk-related situations in their past. During the interviews some salespersons admitted that they make a lot of decisions based on past experiences. Because they experienced some situations more than once, the risk level of that situation declines. Consequently, it can be concluded that the level of experience of the respondents confirms the literature of Sitkin and Pablo (1992). They state that individuals, who are more experienced, may be willing to take risks which less experienced individuals would avoid.
6.5 Output control
The employees of XX are empowered to act in such a way that they believe will produce the desired results, which is in line with Merchant and Van der Stede (2007). The business policy of XX is used as a guideline to which the employees can give meaning to themselves. The new business strategy is generally transferred to the employees. However, the employees do not know yet what is expected from them, specifically what the desired results are. Moreover, XX focuses on relatively small customers compared to the customers that XX has in mind for their „new‟ focus. Consequently, it is harder for the salespersons to meet their targets.
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According to one salesperson, “XX has determined that we cannot do business in certain branches,
because it is too risky. However, if I find a customer in such a branch with high benefit opportunities, Risk Management will not approve my credit proposal. Consequently, the way I can generate benefits is greatly reduced”. The Head of Sales confirmed that this target is a challenge for the salespersons.
He stated, “On the one hand salespersons must say gooXXye to less profitable customers, but on the
other hand, these customers bring in benefits. In short, every less profitable customer must be substituted by a profitable customer in order to offset the lost benefits”.
In addition, XX focuses on individual objectives. These personal objectives are formulated in an assessment system of XX. On the one hand the individual formulates its personal objectives and on the other hand this same individual assesses oneself. If the objectives are not met the relevant employee will receive a warning the first time if he does not meet his objectives, and has to leave after a second time of not meeting his targets.
6.6 Behaviour control
Merchant and Van der Stede (2007) distinguish four basic forms of action control (behavioural control according to the rearrangement): (i) behavioural constraints, (ii) pre-action reviews, (iii) action accountability, and (iv) redundancy. Within XX several behavioural constraints are already implemented to reduce the risk behaviour of salespersons. Most of these behavioural constraints are applied within the whole industry, and can therefore be seen as general behavioural constraints. Every employee must use a login procedure to make use of the network of XX. Furthermore, the decision-making authority is restricted by a “four-eyes-principle”. This principle means that at least two people have to be involved in the decision-making. For example, one salesperson can enter an entry in the accounts, but another person is needed to approve this entry. In the case of conflicting interest this entry will not be approved before discussing it. Consequently, no one can enter a self-interested entry. In addition to behavioural constraints, pre-action reviews are based on the “four-eyes-principle”.
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6.7 Clan control
The third type of control of Merchant and Van der Stede (2007) is personnel and cultural control (clan control according to the rearrangement). Personnel control can be implemented through selection and placement of employees, and training. Codes of conduct and group rewards are the basic forms of cultural control.
Many respondents have been working a long time in the industry. At that time, no attention was paid to risk behaviour, because it was not included in the legislation and duty of care with regard to the recruitment and selection process. However, some respondents are relatively new within XX. These respondents were mostly assessed on their previous experiences and education.
Both in the past and nowadays, training takes place, like on-the-job training. Mostly, these are focused on becoming a better salesperson. In the past, a practical oriented training has tightened the risk perception. The purpose of this training was to make the salesperson more critical regarding risks, which was confirmed by one salesperson who said “I learned to have a more in-depth conversation
with my customers”. Furthermore, this training ensured that the salesperson considered the future of
the customer.
Currently, the salespersons attend training as well. A salesperson explained this as training were “we practice conversation skills, whereby we give each other tips and tools how certain things
can be done”. Most respondents agree that training is refreshing and ensures habituation. In addition to
training, internships can be used to learn and understand other parts of the lending process.
The respondents agree that training is a good thing to become familiar with risks. According to a salesperson, “The training provides a little extra baggage. However, a lot of old information is
provided as well”. Moreover, the training makes a salesperson alert again. However, over time much
of this recedes into the background.
Finally, XX‟s way of thinking is passed on to the employees by presentations. The global philosophy is known, but the exact realization is still unknown. This results in uncertainty and obscurity within XX. Moreover, online training is available, which is compulsory for every employee.
6.8 Conclusion
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It is remarkable that the respondents differ in their definition of risk. Some are critical regarding to this concept, whereas others are certain that credit risk is the only type of risk applicable to XX. There are two hypotheses which might explain this difference. On the one hand it could be that the salespersons cannot define the different types of risk, and classify all risks that are involved in the lending process as credit risk. On the other hand it might be possible that the salespersons are really not aware of the different types of risk that exist within the lending process. Most salespersons have been working in similar functions for some time and should therefore be able to indicate and identify the different types of risk. However, not every salesperson is performing at the expected level, given the amount of expertise and/or experience. Unfortunately, the underlying cause of this could not be discovered during the short period of research.
Due to the new strategy the salespersons had to change the focus of their working activities from relation-oriented to a combination of relation-oriented and sales-oriented. Although another line of thought and acting is expected of the salesperson, the headquarters do not precisely prescribe how to achieve this. Moreover, no training is given to acquire the new way of acting, except some general presentations to transfer the new philosophy to the employees of XX.
Another finding involves the strictness of the salesperson. Most salespersons adjust their strictness to the confidence they have in the customer. The quality of the customer, combined with the condition that the customer should be profitable for XX is becoming more and more important for the salesperson. However, most respondents answered that it depends on the situation and the customer how quick they will interfere.
In addition, most salespersons have been working in similar functions for some time. They experienced some situations more than once resulting in declined levels of risk in these situations.
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7. Discussion
The findings of the empirical research in the previous chapter indicate several events that occurred within XX. This chapter will analyse these events both practically and theoretically, and will give related recommendations. Furthermore, the contribution of this thesis for both XX and the existing literature will be indicated.
7.1 Practical discussion
Due to privacy reasons this part cannot be published.
7.2 Theoretical discussion
Risk management is an essential element of business management, because business decisions are in general made under conditions of risk (Hung & Tangpong, 2010). Therefore, it is important that organizations develop a system to enable managers to control the risk behaviour of their employees, specifically salespersons within the banking industry. According to Merchant and Van der Stede (2007), salespersons need to know the results for which they are hold responsible. Consequently, the salespersons must know what actions are (un)desirable. Within the banking industry, this means that the salespersons must be able to identify the various types of risk that exist regarding the lending process.
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According to Richard and Jones (2009) the focus changed from short-term (transactional exchanges) to long-term (relational exchanges). A short-term focus should be controlled in another way than a long-term focus. The theoretical framework (figure 5.1) does not mention anything about these two kinds of focus. Malmi and Brown (2008) make this distinction, because one of their types of control is planning control, which focuses on the short, medium and long term. The element of short term and long-term focus is therefore available in the literature, but not yet explicitly included in the theoretical framework. This is due to the rearrangement of the different types of control of the various scholars.
Finally, a gap exists between the perceptions of several respondents who are differently hierarchical classified. Both perceptions are neither right nor wrong. However, this gap needs to be filled to be able to control the risk behaviour of the salesperson. According to Merchant and Van der Stede (2007), it is important that the desired results are specific, and effectively communicated to the employee. When a gap exists between the perception of the salesperson and his manager, it is more difficult to communicate the desired results specific and effectively. Merchant and Van der Stede (2007) included this communication element in their scientific articles, but not all the scholars concerning MCS recognize communication between the employee and his manager. Hierarchical communication might be an important subject that needs to be added to the existing theoretical framework.
It can be concluded that the theoretical framework, which is used as a base for the case study, has contributed to the literature in several ways. The case study confirmed that most of the basic forms of control could be used to a certain extent to control the risk behaviour of the salesperson of XX. However, a few elements are missing in the existing theoretical framework as well. First, the difference between actual and expected behaviour is important when developing training to control the risk behaviour of the salesperson. When training is based on expected behaviour, and this behaviour does not correspond to the actual behaviour, training will not be effective. Second, a distinction has to be made between the short term and long-term focus. A short-term focus asks for transactional behaviour, whereas a long-term focus asks for relational behaviour. The salespersons should perform different according to the focus. Finally, a gap might exist between the perception of the salesperson and the perception of his manager. To be able to control the risk behaviour of the salesperson, both perceptions should be in line with each other.
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The CEO is the person who determines which behaviour is acceptable within the organization. The CEO transfers these thought to his subordinates, and they transfer them to their subordinates. Eventually, the thoughts of the CEO are transferred via the different levels to the salespersons in the case of a bank. However, it is doubtful whether this is actual the case. The preferences and perceptions of the managers stem from the past experiences of the individual and will influence the thoughts that need to be transferred to the subordinates. In case the thoughts of risk behaviour need to be transferred to the salespersons, the risk orientation of their direct manager is important. His risk orientation will influence the way in which the thoughts about risk behaviour are transferred to the salespersons.
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8. Conclusion
This chapter will start with the conclusion regarding the research question. Subsequently, the main limitations of this thesis will be discussed. These limitations might be taken into account during further research. Moreover, some implications will be given for further research. Consequently, the understanding of the findings of this thesis can be deepened.
8.1 Conclusion
The literature research has shown that some types of risk currently cannot be controlled by the existing distinguished MCSs. The objective of this research was to develop a MCS which enables organizations to control the types of risk that are less logical, concrete or rational. In order to achieve this objective, the following research question needs to be answered:
Which characteristics should a MCS comprehend to control the risk behaviour of the salespersons of XX?
The theoretical framework in figure 5.1 has been developed, and shows the characteristics of a MCS as basic forms of output, behaviour and clan control. In the previous chapter it appears that some of these basic forms of control indeed can contribute to control the risk behaviour of the salespersons of XX.
It can be concluded that the developed theoretical framework can be used to control the risk behaviour of the salesperson. The management of XX should use behaviour, output and cultural control to realize this. The existing characteristics of MCSs can be used to control the risk behaviour of the salesperson. However, it is of great importance that the existing characteristics are more accentuated and deepened within XX.
8.2 Limitations of the research
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8.3 Implications for future research
Further research is needed to deepen the understanding of the findings of this thesis. The empirical findings showed that the risk behaviour of salesperson plays an important role within the banking industry. However, each salesperson, each situation and each organization is different. Therefore, future research can be valuable.
The case study showed that variations exist in the risk behaviour of the salespersons. However, the existing literature does not recognize these variations in any sector of industry. Therefore, understanding in these variations in risk behaviour is an important subject for future research. The focus should be on the risk orientation of the manager of the salespersons. He is the one who transfers the thoughts of the CEO about the risk behaviour to the salespersons. The risk orientation of the manager might influence these thoughts slightly. Future research should therefore focus on the influence of the risk orientation of the manager on the risk behaviour of the salesperson and the variations in the risk behaviour of the salespersons.
