Management in ControlTheory and PracticeA case study within IBFD

Amsterdam

Management in Control

Theory and Practice

A case study within IBFD

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Management in Control

Theory and Practice

A case study within IBFD

Author: Willemijn L.C. de Vreeze

Student number: 1323768

Specialization: Organizational & Management Control

Date: August, 2008

Place: Amsterdam

First Supervisor University Groningen: dr. E.P. Jansen Second Supervisor University Groningen: dr. A. Plantinga

Organization: International Bureau of Fiscal Documentation

Supervisor IBFD: Ms. C. de Lange

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EXECUTIVE SUMMARY

This research is done as part of the final year of the master specialization Organizational & Management Control of the faculty Economics and Business of the University of Groningen. The research is examined on request of International Bureau of Fiscal Documentation (IBFD). The main objective of the research is:

To facilitate direction and recommendations concerning the communication of the strategy of IBFD through the organization, in order to create focus on factors that are crucial for the performance management of IBFD. This will enable the management to monitor and improve the effectiveness of the organization.

IBFD developed a three year strategic plan (until 2011) which includes objectives for this period. However, even though the strategic plan gives direction in relation to what the company wants to achieve, strategic focus and processes should be communicated throughout and supported by the whole organization in order to become more effective. IBFD implemented new performance management system to monitor and realize strategic benefits; nonetheless IBFD is aware of some difficulties in applying these systems it in the most efficient way.

In order to set a theoretical framework supporting the different research objectives this thesis sets out a literature overview on the subject of strategy, performance management, critical success factors, communication and management control as foundation to achieve the research objective. After setting out a theoretical framework, this thesis uses a semi structured interview method to analyze the specific framework for IBFD. This enables focus on various themes in different interviews.

In order to create the most effective strategic focus, the literature review pointed out that external and internal processes have specific critical issues. After an analysis of the external and internal environment, this research highlights the factors that are most relevant for IBFD. According to the strategic analysis, IBFD should focus mainly on financial growth, quality and employee learning & development.

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the functioning of production and IT systems. And, to retain employees, IBFD should focus on development. These factors should be made measurable so that they can be communicated.

These measurable indicators should be the main input for the communication within IBFD. In order to align communication within the organization, the research pointed out that a corporate approach of communication should be developed. This can be done by goal oriented communication through use of a corporate meeting forms and extending the use of the new internal software system. This system can generate almost all business data, such as data about customers, products, staff, financial data, etc.

Additionally, IBFD should organize platform meetings that are attended by several levels employees and discuss strategic subjects. This can help creating bottom up information loop, which is needed for effective management control.

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PREFACE

The paper that you have in front of you is the final thesis about research done in the International Bureau of Fiscal Documentation (IBFD). This research has the objective to give direction and make certain recommendations to the management of IBFD regarding the communication and management control of their strategy. The research and its outcome is based on a four months internship at IBFD. The research performed and the subsequent analysis thereof have resulted in this master thesis, which is the final milestone of the master Organizational & Management Control within the study Business Administration of the University of Groningen.

I would like to thank some people who helped me along the process and have provided useful feedback in improving the presentation of this thesis and its contents. First of all, I would like to thank Carla de Lange, for the support during the internship at IBFD. She gave me the support and the independence to conduct the research my own way. Furthermore I would like to thank all IBFD employees who co-operated in accomplishing the research.

I would like to pay special thanks to Pieter Jansen for the support from the University of Groningen and his detailed comments on earlier drafts of this thesis. The effort made in reading and providing critical feedback several times have been a tremendous help.

Last, but definitely not least, I want to thank my parents, family and friends for their support during my study time in Groningen. They were a great help and made it possible to benefit from my study time and finish my masters’ degree.

Willemijn de Vreeze

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TABLE OF CONTENT

1.2 CURRENT SITUATION IBFD ... 8

1.3 PROBLEM STATEMENT... 9 1.4 RESEARCH OBJECTIVE... 11 1.5 RESEARCH PROCESS... 11 2 THEORETICAL FRAMEWORK... 14 2.1 INTRODUCTION... 14 2.2 STRATEGY... 14

2.3 PERFORMANCE MEASUREMENT SYSTEMS... 17

2.4 CRITICAL SUCCESS FACTORS... 21

2.5 COMMUNICATION PROCESS... 23

2.6 MANAGEMENT CONTROL SYSTEMS... 25

2.7 CONCEPTUAL MODEL... 28 2.8 RESEARCH QUESTIONS... 29 3 RESEARCH METHODOLOGY... 30 3.1 INTRODUCTION... 30 3.2 RESEARCH TYPE... 30 3.3 DATA COLLECTION... 30

3.4 RELIABILITY, VALIDITY AND VERIFIABILITY... 32

4 RESULTS ... 34

4.1 INTRODUCTION... 34

4.2 ANALYSIS STRATEGY... 34

4.3 ANALYSIS INDUSTRY STRUCTURE... 36

4.4 ANALYSIS INTERNAL ENVIRONMENT... 43

4.5 ANALYSIS CRITICAL SUCCESS FACTORS AND KEY PERFORMANCE INDICATORS... 51

4.6 ANALYSIS COMMUNICATION... 53

4.7 ANALYSIS MANAGEMENT CONTROL SYSTEM... 54

5 CONCLUSIONS ... 57

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5.2 ACHIEVING THE RESEARCH OBJECTIVE – ‘MANAGEMENT IN CONTROL’ ... 57

5.3 FINAL RECOMMENDATIONS... 60

5.4 LIMITATIONS... 61

6 REFERENCES ... 62

APPENDICES ... 65

APPENDIX I ORGANIGRAM IBFD ... 66

APPENDIX II MISSION, VISION, STRATEGY, OBJECTIVES... 67

APPENDIX III BALANCED SCORECARD... 68

APPENDIX IV CAUSAL RELATIONSHIP BALANCED SCORECARD... 69

APPENDIX V EFQM MODEL... 70

APPENDIX VI INTERVIEW QUESTIONS AND LIST OF INTERVIEWS... 71

APPENDIX VII SUMMARY INTERVIEW RESULTS... 75

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1 INTRODUCTION

1.1 Introduction

This research is performed at the request of the International Bureau of Fiscal Documentation (IBFD). IBFD is the portal to high quality independent tax research, international tax information and education. IFBD’s main aim is enabling their customers to do their work efficiently. Since 1938, tax practitioners from all over the world rely on IBFD for authoritative expertise on cross-border taxation issues.

IBFD has grown from a tax documentation centre into a contemporary online research institute. It caters for both the private and the public sector. IBFD fulfils information needs of tax advisory firms, multinational enterprises, international organizations, ministries of finance, tax administrations, universities and other tax practitioners in over 150 countries. IBFD employs over 50 research specialists and teacher’s staff from approximately 25 different countries1. In addition, a worldwide network of local correspondents, who report on the latest tax changes and trends, supports the organization. IBFD carries out government consultancy projects and its International Tax Academy provides a wide range of courses on international taxation (ibfd.org). IBFD is a foundation and uses its surplus from publications for funding of its research practices.

1.2 Current Situation IBFD

Since 2006, IBFD focuses on improving its performance and therefore implemented a performance management system. Recently, IBFD has changed its management information system into an enterprise resource planning system. Management systems can be defined as the integrated set of processes and tools that an organization uses to develop its strategy, translate it into operational actions, and monitor and improve the effectiveness of both (Kaplan & Norton, 2008).

The new system improved on communicative facilities to become a link between financial administration, resource administration, administration of purchase & sales and personnel administration. The objectives of the implementation of this system are 1) to be more transparent, 2) enhance the efficiency of the communication within the business 3) contribute in achieving the strategic goals of the organization.

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To identify profitable customers, IBFD implemented a Customer Relationship Management (CRM) system in combination with the software program Oracle. This is an information system which is able to generate many different types of data and figures. With this system, IBFD is able to link and analyze different client data (Boonstra, 2002, p. 67). Although, the system has improved the situation and generates an informative database, the data are not yet translated in comprehensive and usable information for the different departments of IBFD to operate more efficiently.

IBFD is doing a good job especially because it is a relative small player within a highly competitive environment. They adjust to market demand and are growing the last three years in terms of business volume.

1.3 Problem Statement

As a consequence of the development of a new management information system, a preliminary analysis of the new system is requested, in order to enhance the use of information with more focus on the commercial insight of the organization and improve monitoring of the performance. The main problem of IBFD is that, although there is a clearly formulated strategy, there are difficulties in communicating the strategy into the organization. The communication problems can be caused by several issues.

Oracle

An example of the problems with the new system is the development of the software program Oracle. This system produces reports with different data for different departments. It can generate almost all business data, such as data about customers, products, staff, financial data, etc. However, at the moment this system is in the development phase and the lay out of different reports and processes has to be improved. The management team has a relatively good vision on the data needs of the different departments. However, the information should be communicated better to the different levels of the organization. A uniform report which gives insight in the performance of the different departments could achieve this.

Employee retention and culture

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Future orientation through the organization

Furthermore, IBFD wants to realize a more future oriented perception on outcomes. The foundation of control was providing financial information and this was based on past figures. Making decisions on past experience and figures only is not sufficient to realize future objectives and goals. To anticipate more on the future and changing environment there should be a system in which you can develop an enhanced future perspective. The past can be used as an input for the future. In order to establish a future perspective, there is a need for objectives, because objectives represent what the organization seeks to attain (Merchant & Van der Stede, 2007).

With the aim of increase a future oriented view; the management team of IBFD developed a three year strategic plan (until 2011) and formulated its objectives. This plan aims at achieving their mission2. A mission gives insight in the purpose for the existence of an organization.

The mission of IBFD is to research, develop, process and disseminate information and insight in the field of international and comparative taxation and foreign investment legislation. In order to be able to achieve this purpose, a strategy is defined. A strategy can be seen as the pathway, which has to be passed through in order to achieve the purpose of the organization. The strategy of IBFD is described as follows:

Generate profit through its publishing activities in order to be able to support the Academic activities of IBFD. Focus is on delivering customers an authoritative expertise portal in the field of cross-border taxation, thereby allowing access to our databases in order to provide up to date high quality content, easy to use with quick search facilities3.

Although the strategy gives direction to what the business wants to achieve, strategic processes and focus should be enhanced in order to become more efficient. Strategic process describes the managerial activity inherent in shaping expectations and goals and facilitating the work of the organization in achieving these goals (Simon, 1990). The strategy has to be explained and communicated to the organization. In order to do this, insight is required in the critical success factors of the different departments of IBFD. These critical success factors then need to be translated in understandable and accessible figures consistent with the goals set. By doing this strategic uncertainties will be observable. Strategic uncertainties must be clarified in order to monitor the goals the organization wants to achieve (Simon, 1990, p.135).

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See Appendix 2: Mission, Vision, Strategy, Objectives

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Bottom up information loop

Additionally, bottom up information should be used in order to achieve strategy and specifying focus. Recently an employee satisfaction research pointed out IBFD has too little bottom up communication, which is a requirement for effective management.

In order to unravel the above mentioned problems, which need to be examined, focus should be on the person or group who has to deal with the problem. In this case the management team. The management team wants to enhance the control of the organization. Good control means that management can be reasonably confident that no major unpleasant surprises will occur (Merchant & Van der Stede, 2007). Also, it can be seen as a structure in which a maximum of delegation of responsibilities is possible.

By establishing a well-developed vision on the organizational problems a collective objective of the research can be made based upon the specific problems.

1.4 Research Objective

The problems mentioned previous should be taken into account in order to formulate one general research objective. This objective should give direction to the reason of the research, the possible outcomes, the relevance and the methodology in which the research will take place and for whom it will be completed (De Leeuw, 2002). The following objective will be suitable for the research at IBFD.

The research will facilitate direction and recommendations concerning the communication of the strategy of IBFD through the organization, in order to create focus on factors that are crucial for the performance management of IBFD. This will enable the management to monitor and improve the effectiveness of the organization.

1.5 Research Process

To facilitate direction and make recommendations concerning the problems/issues, to the management of IBFD, a research process should be developed. This chapter discusses the problem and the objective of this research process. After the establishment of the problem statement and the research objective further process can be decided.

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reality. Doing a literature review should make the conceptual model. After the conceptual model is built a research question and related sub questions can be formulated. The literature review; the conceptual model and the research questions will be discussed in chapter 2.

The literature review will start with a discussion of the type of strategies (§ 2.2), since IBFD wants to communicate this. In order to be able to distinguish the critical issues for achieving the strategy the balanced scorecard theory and the EFQM theory will be discussed (§ 2.3). These models are developed with the aim of distinguishing critical success factors. After that, the factors should be made measureable to be able to get insight in fluctuations and changes. The way in which this can be done will be discussed (§ 2.4). In line with the research objective, insight in the literature of communication will be argued next (§ 2.5). Finally, the management control systems will be discussed, in order to be able to maintain strategic focus and head towards strategic objectives (§ 2.6). This will lead to the conceptual model in § 2.7 and the research questions in § 2.8.

In turn, this will lead to an empirical research methodology wherein questionnaire/interviews will be developed and which will give insight in the situation of the operating business environment. The methodology and the empirical set up will be discussed in chapter 3.

After all, this will lead to an analysis and results, which will be argued in chapter 4. The results will enable to acknowledge recommendations based upon the theoretical framework in order to improve the actual situation within the business. This will in turn allow this thesis to give recommendations for improvement based on the theory and reality. In order to gain insight in the strategic focus IBFD should acknowledge the type of strategy it will use (§ 4.2). Additionally, the external and internal critical success factors will be analyzed (respectively § 4.3 and § 4.4). This analysis will lead to a certain strategic knowledge and focus and enables the organization to know what should be communicated and controlled (§ 4.5). Finally, in § 4.6 and § 4.7 analysis of communication processes and management control will be done.

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Figure 1: The Research Process

In order to build up a good examination and understanding of the research process the next chapter discussed the themes which need to be examined in order to be capable of understand the problem. Problem statement Research Design Literature review Conceptual model Methodology

Data collection and Preparation

Results

Data analysis and Interpretation

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2 THEORETICAL FRAMEWORK

2.1 Introduction

This chapter will discuss the theoretical issues which are needed to acknowledge being able to give directions and make recommendations for improvement for IBFD.

With the intention to facilitate and formulate recommendations concerning the communication of the strategy, a generic understanding of strategy is needed. Therefore, strategy and factors that are important for strategic focus will be discussed first. The model of Porter will be used to explain this, mainly because the five forces of Porter (1985) describe the competitive environment of a business as IBFD is operating in a highly competitive market.

Furthermore, to be able to communicate a strategy, there will be paid attention to several models. In this paper the Balanced scorecard of Kaplan & Norton (1992) and the EFQM model (2003) will be discussed, as it explains the different financial as well as non-financial factors of a business strategy which need to be monitored. The models enable IBFD to get insight in the important perspectives for their organization.

After having distinguished the strategic focus and the important business processes, the way in which these factors has to be communicated will be discussed.

This in turn will lead to a creation of a vision on how to control and monitor the several important business processes in order to be able to continue good communication and make sure a business is using the right systems for the future. Therefore elements of a management control system will be discussed. This makes important issues for IBFD clear, which enables the control of the business and achieve determined objectives and strategy.

2.2 Strategy

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The competitive strategy defines how a firm or entity within the entity chooses to compete in its industry and tries to achieve a competitive advantage relative to its competitors. According to de Wit and Meyer (2004) there are two central issues that are meaningful to consider when choosing the competitive strategy. The first is the attractiveness of the industry for long-term profitability and the factors that determine it. Furthermore, the determinants of relative competitive position within an industry should be clarified.

2.2.1 The structure of industries

In order to determine the attractiveness of the industry the five forces model of Porter (1985) can be used. Porter explains the elements of the industry structure. He argues that in any industry five competitive forces represent the rules of competition: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors. The collective strengths of these elements determines the capacity of firms in an industry to earn, on average, rates of return on investment in excess of the cost of capital. So, by applying this model a well-defined examination of the business structure will be developed. This enables to distinguish important environmental factors and issues that are important for strategic focus. The next figure highlights the fundamentals that may drive the competition in a business environment.

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It becomes clear that focus on competition is an important strategy focus. The focus on business structure can enable organizations to give route to the formulation of the strategy and enables managers to make it concrete.

2.2.2 Competitive strategies

The second central element in competitive strategy is a firm’s relative position within its industry. Positioning determines whether a firm’s profitability is above or below the industry average (De Wit and Meyer, 2004). There are two basic types of competitive advantage a firm can possess; low cost or differentiation. Cost advantage or differentiation is a result of the industry sector. The objective is to use the competitive advantage, which will serve the business the ability to cope with the five forces better than competition.

The two basic types of competitive advantage can be combined with the competitive scope. The scope can be broad or a narrow target group (De Wit and Meyer, 2004). The combination of the competitive advantage and the competitive scope of activities for which a firm seeks to achieve them lead to three generic strategies: cost leadership, differentiation and focus. Cost leadership involves offerings of relatively standardized, undifferentiated products; vigorous pursuit of cost reductions; generation of volume to exploit economies of scale and to move down the learning curve; acquisition of process engineering skills; and as much as possible, establishment of routine task environment (Merchant and Van der Stede, 2007). A differentiation strategy involves the creation of a product or service that customers perceive as uniquely differentiated from competitors offerings. (Merchant and Van der Stede, 2007). The third scope is focus. This strategy rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and fits its strategy to serving them to the exclusion of others (de Wit and Meyer, 2004). The focus strategy has two variants. In a cost focus strategy an organization seeks a cost advantage in its target segment, while in differentiation focus a business seeks differentiation in its segment. See figure 3.

Figure 3: The Generic Strategies (source: De Wit and Meyer, 2004). Narrow Target

Differentiation

Broad Target

Lower Cost

Cost leadership

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Although a strategy gives a good direction in being able to create value to the organization, there should also paid attention to several risk of focus on one pathway. Organization should keep an eye on the different risks, which can be caused by their strategy. During the process of strategy formulation but also during the period the strategy is implemented, several risks, recognized by de Wit and Meyer (2004) should be realized and taken into account. In table 1 the potential risk of focusing on a specific strategic drift are shown.

Risks of Cost leadership Risks of differentiation Risks of focus Cost leadership is not

sustained

Differentiation is not sustained The focus strategy is imitated The target segment becomes structurally unattractive

 Competitors imitate  Technology changes  Other bases for cost

leadership erode  Competitors imitate  Bases for differentiation become less important to buyers  Structure erodes  Demand disappears Proximity in differentiation is lost

Cost proximity is lost Broadly targeted competitors overwhelm the segment

The segment’s differences from other segments narrow The advantages of a broad line increase

Cost focusers achieve even lower cost in segments

Differentiation focusers achieve even greater differentiation in segments

New focusers sub segment the industry

Table 1: Risks of Strategy Focus (source: De Wit and Meyer, 2004).

2.3 Performance Measurement Systems

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2.3.1 Balanced scorecard

The Balanced Scorecard4 developed by Kaplan en Norton (1996) aims to formulate objectives and success factors of an organization based upon a clearly described strategy. The objectives and success factors are focused to deliver a continuously focused direction of control, assessment and monitoring of the organization. It emphasizes the need focus on different angles and future oriented view of an organization.

According to Kaplan en Norton, the Balanced Scorecard has to be a combination of ‘outcome measures’ and performance drivers’. Outcome measures are indicators that inform you about the past and the effects of decision made in the past, for example, profit. Performance drivers’ are indicators that tells something about the future and future oriented performance e.g. development of new products. The performance drivers actually give an indication to the aspects that are needed in order to realize the strategy.

To be able to develop a broad future oriented performance measures, the balanced scorecard examines the performance from different perspectives. The four different perspectives, which are differentiated by Kaplan en Norton, are:

 Learning and growth perspective: To achieve our vision, how will we sustain our ability to change and improve?

 Internal perspective: To satisfy our stakeholders and customers what business processes must we excel at?

 Customer perspective: To achieve our vision how should we appear to our customers?  Financial perspective: To succeed financially, how should we appear to our

stakeholders? The financial performance measures define the long run objectives of the business unit.

Kaplan and Norton (1996) argue that there is a causal relationship between these different perspectives. They explain that if the learning and growth perspective improves the internal processes will be better. Consequently improved internal processes will lead to more satisfied customer, which in turn, will lead to better financial results5. Thus, a good score realized in a perspective will lead to good scores in other perspectives, which will eventually lead to achieving objectives.

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Appendix 3: Balanced scorecard

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To use the balanced scorecard adequately, every perspective should have a limited amount of subdivisions to sustain a good overview. The intention of the balanced scorecard is on one hand to focus on the (recent) past financial measures and on the other hand, pay attention to measures that will be crucial for the future of the organization. Furthermore, Kaplan and Norton (1996) point out that the balanced scorecard can also be used as a communication tool in the organization in order to accomplish strategic objectives. This is because the outcome and performance drivers’ measures on the balanced scorecard should be the subjects of intensive and extensive interactions between senior and middle level managers as they evaluate strategies based on new information about competitors, customers, markets, technologies and suppliers.

2.3.2 EFQM model

EFQM6 stands for the European Foundation for Quality Management. The EFQM model is about defining the purpose of an organization and then looking at how that purpose can be achieved (Sandbrook, 2001). The model provides an ideal framework for managing and continuous improvement in an organization. The model is a set of criteria systematically articulated that represent the different organizational areas of the enterprise. It has nine criteria, that is, a subset of ‘enablers’ and a subset of ‘results’ (EFQM, 2003)

Enablers are categories, which set conditions, which are focused on quality policy. Thus, an enabler can be seen as a mechanism that makes wished developments possible. The enablers are very important in the establishment of quality and other important elements of the organization. The enablers are leadership, people, policy & strategy, partnership and resources and processes. Good leadership is needed to have well functioning processes. In turn, this will lead to good results, which is the main goal of a business. Different attention can be given to impact on society, customer results, people results and key performance (business) results. The people, the strategy and partnerships and resources are the inputs that can influence the functioning of the processes. The performance, which is gained, has to give feedback to the management of the organization. The model should be used backwards (Sandbrook, 2001). First observe the purpose in terms of meeting the needs of the customers, achieving performance results, maintaining the motivation of the people and having a beneficial impact on society. How do we achieve this purpose and what methods do we use. Which activities constitute the key delivery processes and which exist to support these? Using the model is this way, will lead to a learning loop and enables the organization to have continuous improvement of the functioning of the firm.

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The EFQM model recognizes some other concepts that create value to customers. These are leadership and constancy of purpose, management by processes and facts, people development and involvement, partnership development and corporate social responsibility (Jacobs and Suckling, 2007, p. 374). The concern with consumer orientation, focus on results, continuous learning, innovation and improvement, considered in the EFQM model can provide a business in an effective way in achieving maximum performance.

2.3.3 Comparison Balanced scorecard and EFQM model

There are differences and similarities between the balanced scorecard and the EFQM model. First of all, both models recognize that there are more than pure financial measures. The models emphasize the fact that non-financial figures should be used in measuring the performance of an organization.

Both models take a financial perspective into account. The financial perspective of the balanced scorecard corresponds with the results perspective of the EFQM model. Furthermore, the customer perspective of the balanced scorecard can be compared with the customer results of the EFQM. The internal perspective matches with the processes mentioned in the EFQM model. And, within the employee area in the EFQM model and the internal perspective of the balanced scorecard is also an affinity. The innovation perspective is unique for the balanced scorecard and the social area is unique for the EFQM model.

However, the balanced scorecard dissimilar is with respect to enablers and process perspectives to the EFQM model. The balanced scorecard distinguishes only result areas, whereas the EFQM differentiates the enablers and processes. Additionally, the balanced scorecard does not identify a social perspective, whereas the EFQM model does identify a social result perspective.

For both models it is important to have full management support. Without management support, the balanced scorecard or the EFQM model will not work in practice.

2.3.4 Critical issues of the two models

Although there are various positive aspects of the use of performance measurement system such as the balanced scorecard or the EFQM model, there are also critical issues that can be mentioned.

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relationship the observation of an event X necessarily, or almost certainly, implies the following observation of another event Y; and the two events can be observed close to each other in time and space. In a cause and effect relationship events X and Y are logically independent and there is a time lag between the several events. This is not the case for the balanced scorecard. Financial and non-financial measurements are monitored at the same moment. A logical relationship would be a better denomination for the relationship.

Furthermore, the scorecard does not monitor the competition or technological developments (Nørreklit, 2000). Even though, the competition seems to have big impact on the formulation of the strategy and thus the performance measurements. In order to create usable systems external environmental issues should be taken into account.

Additionally, the balanced scorecard is highly mechanical and a top down method (Nørreklit, 2000). This ‘top down’ control points another area of the balanced scorecard: the relationship with its stakeholders. It may be difficult to get the scorecard rooted into the employees. There has to be some kind of learning loop. Employees must have the feeling of cooperation in the process in order to make it work.

According to Otley (1999, p. 374) and Kaplan and Norton (1996) it is recommended to use a limited amount of performance indicators in order to be able to maintain a good overview. The disadvantage of focusing on only a limited amount of indicators is that it will be difficult to keep in track with the more complex reality.

Another issue concerning the balanced scorecard and the EFQM model is limited direction in order to distinguish the critical success factors. The indicators are mentioned in the models, however there is no direction in how the management of an organization should decide upon the most critical issued of their business.

Neely et al. (2007), notify that the focus on customers in quality models, such as the EFQM model, can detract from the importance of other stakeholders and the need to deliver value to them to achieve advantageous effects overall.

2.4 Critical Success Factors

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important in distinguishing different critical success factors and what is important in making it possible to measure these factors. This will be needed in order to enforce good communication.

Kostas N. Dervitsoitis (1999) argues that given a set of strategic goals that come from a vision that can stimulate people to realize it, it is important to identify and improve those processes that best support the desired competitive advantage. The general approach for assessing critical processes and how these contribute to achieving business excellence assumes several things. How well an organization achieves its strategic goal is affected by the performance levels of each process, in terms of relevant criteria identified for evaluating that process. To determine the critical processes and factors it is essential to determine the importance and priority of the established objectives (Dervitsoitis 1999; Eckerson, 2005)

Neely (2007), points out the meaningfulness of the measures should be consistent with the needs of the stakeholders. Assumptions should be made about what stakeholders want to achieve. In turn the strategies pursued to satisfy these sets of wants and needs should be taken into account. Next, it is important to pay attention to the processes needed to enable the organization to achieve these strategies. And, always monitor the capabilities, which are required to operate these processes successfully. Finally, meaningful measures also take into account what the organization wants en needs from stakeholders. According to Neely (2007), companies should keep in mind if the business does not fulfill the needs of the customers it is idealistic to expect the customer to be loyal/profitable to the organization.

Furthermore, to be able to monitor and direct the critical success factors (CSFs), important is to appoint measurable indicators. You have to define the key performance indicators (KPIs) in order to measure your critical success factors. This enables to observe fluctuations in different processes and stipulate where improvement should occur. According to Eckerson (2006, p. 16) effective KPls often exhibit the following 12 characteristics:

 Aligned. KPls are always aligned with corporate strategy and objectives.

 Owned. Every KPI is "owned" by an individual or group on the business side who is accountable for its outcome.

 Predictive. KPls measure drivers of business value. Thus, they are leading indicators of performance desired by the organization.

 Actionable. KPls are populated with timely, actionable data so users can intervene to improve performance before it is too late.

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 Easy to understand. KPls should be straightforward and easy to understand, not based on complex indexes that users do not know how to influence directly.

 Balanced and linked. KPls should balance and reinforce each other, not undermine each other and sub optimizes processes.

 Trigger changes. The act of measuring a KPI should trigger a chain reaction of positive changes in the organization, especially when the CEO monitors it.

 Standardized. KPls are based on standard definitions, rules and calculations so they can be integrated across dashboards throughout the organization.

 Context driven. KPls put performance in context by applying targets and thresholds to performance so users can gauge their progress over time.

 Reinforced with incentives. Organizations can increase the impact of KPls by attaching compensation or incentives to them. However, they should do this cautiously, applying incentives only to well understood and stable KPls.

 12. Relevant. KPls gradually lose their impact over time, so they must be periodically reviewed and refreshed.

The outcome of the measures should give an indication on impact on costs, quality, speed or flexibility of the processes (Fearer et all, 2000).

2.5 Communication Process

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Figure 4: Source Schermerhorn (2002)

Furthermore, according to Kaplan and Norton (1996) the design of a communication tool in order to keep the organization informed starts with several fundamental questions.

 What are the objectives of the communication strategy?  To which groups should we focus the communication?  What is the core message that needs to be communicated?  What is the best communication tool for each group?

 What is the timeframe for the different sources of communication?

 How do we know if the communication efforts assisted to complete desired effect?

Additionally, to make sure the information is received well, management should have empathy and support for reactions and acceptation. Also participation and involvement appears to overcome resistance in planned activities or change (Cummings & Worley, 2005).

Combining these two concepts, communication within an organization should be multi directive and flow between all the different departments of the organization. Furthermore, to make the communication effective, everyone who wishes to communicate should first establish the objective, the group focus, the core message, the communication tool and the timeframe. Finally, the feedback and knowledge is needed in order to identify the usefulness of the communication.

Top Management Formulates strategy, policy, long term plans, and objectives and makes

strategic decisions. Intelligence information

Is gathered from external environment

Public information

Is disseminated to the external environment

Middle management

Formulate operational plans and objectives to implement strategy and make operational decisions.

First level management

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To make sure the information and decisions are accepted, empathy and support should be given and participation and involvement should be acquired.

2.6 Management Control Systems

Finally, management control plays a key role in eventually achieve the settled goals and focus. Whenever performance measurement systems such as the balanced scorecard of or the EFQM model are used, the management control aspect should be focused on the behavior of the employees. The behavior of employees should be monitored in order to gain insight in the ways employees should be influenced in desired ways. There are three different alternatives for management control and influence the behavior in preferred ways. Furthermore, the framework of levers of control by Simon (1995) will be explained.

2.6.1 Results Control

First, results control is based on rewarding employees for generating good results (Merchant & Van der Stede, 2007). Results control will be most effective under three conditions. There has to be great knowledge of the desired results. That means organizations should be able to determine what results are desired in the areas being controlled. Secondly, the employees who are being controlled and are accountable for results should have the ability to influence the desired results. Finally, there has to be the ability to measure the controllable results effectively. This can be done when results are precise, objective, timely and understandable (Merchant and Van der Stede, 2007, p. 34). Results control does not focus explicitly on the actions of employees and can be seen as an indirect form of management control. It can be used in a situation where employees have a great amount of autonomy. Results control has the advantage that it can be used when it is not clear which behaviors are most desirable. Results control is used in almost every organization, but is frequently complemented with action or personnel/cultural control because it is difficult to satisfy all the requirements of the conditions.

2.6.2 Action Control

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2.6.3 Personal/Cultural control

Finally, the last alternative of management control is personnel/cultural control. Personnel control is based on the assumption that employees have a natural tendency to control themselves and/or have an intrinsic motivation. This form of control can be influenced by effective personnel selection and placement, training, job design, provision of necessary resources, group rewards, intra-organizational transfers, physical and social arrangements and tone at the top (Merchant & Van der Stede, 2007, p. 92).

2.6.4 Simon’s levers of Control

According to Simons (1990) management control systems should be used for monitoring the organization but also for formalization of procedures in order to use information, maintain to modify patterns in organizational activity. Simons argues that the strategy of a business creates strategic uncertainties that top managers monitor. These uncertainties stipulate the choice of interactive management control systems by top management. The monitored processes can be instrumental in allowing the organization to learn and adapt over time. See figure 5.

Figure 5: Process Model of Relationship Business Strategy and Management Control Systems (Simons, 1990)

The recursive nature of the model illustrates why management control systems should be considered as important input to strategy formulation. The research of Simon makes clear that companies with a cost leadership strategy generally focus on strategic uncertainties that deal with changes in technology and buyer needs, whereas organizations with a differentiation strategy are more focused on the timing of new products and tactics of competitors. This special focus has consequences for the management control systems of the companies.

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According to Simons (1995), the control system has several different levers of control which should be taken into account. The core of the control is strategy. The strategy has to appoint which factors are most important to monitor. To control these factors Simon discusses four different levers that can influence achieving good performance. First, beliefs systems are used to encourage and direct the search for new opportunities; provide basic values, purpose and direction for the organization. Second, boundary systems are used to set limits on opportunity-seeking behavior. The first lever reinforces opportunity-seeking opportunities and the second lever selects acceptable ones in order to define an acceptable domain. The last two levers aim to control the implementation and formulation of the business strategy. Diagnostic control systems are used to motivate, monitor, and reward achievement of specified goals. Interactive control systems are used to stimulate organizational learning and the emergence of new ideas and strategies. The first two levers are focused on defining opportunities and how to formulate them in the best interest of the business. The last two levers, explain the way in which the opportunities should be monitored in order to achieve the wanted results and make corrections in order to improve strategy and goals.

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2.7 Conceptual Model

The previous argued theory can be summarized in the following conceptual framework (figure 6). This visualization of the theory makes clear how the different concepts are involved.

Information

Learning loop

Control

Figure 6: Conceptual Model

The literature review made clear that management chooses and sets a strategy. This strategy will be influenced by internal and external factors. These influences can be important for strategic focus. To achieve strategy, critical success factors should be formulated and have to be measurable in order to be able to constantly monitor. The balanced scorecard and the EFQM model point out that it is important to distinguish financial and non-financial measures in order to provide as much insight in the future as possible. To focus and achieve strategic objectives and goals, it will be highly essential to communicate this information and learn from the way in which

Strategy Critical Success factors/Objectives  KPI Communication + application information External influences  New entrants  Substitutes  Buyers  Suppliers  Competitors Financial Non-Financial Management Internal influences  Processes  Internal learning &

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the application of the information is being used. In doing so, the management can monitor the internal and external processes learn from employees and, if needed adjust their strategy and/or their objectives with the purpose of maintain competitive advantage.

2.8 Research Questions

After having developed a theoretical framework and a conceptual model, research question can developed. Themes that are mentioned in the research objective are discussed and will be the input for developing the research question. Based upon the research objective the main question can be formulated as follows:

How should strategy and its objectives be communicated through the organization, in order to control and improve the performance of the organization?

The main question leads to the following sub questions:

 What is the type of strategy IBFD applies?

 What are the important external factors of strategy that should be taken into account to create strategic focus?

 What are the important internal factors of strategy that should be taken into account to create strategic focus?

 How to make objectives measureable to achieve the strategy that can be monitored?  What is the best way to communicate the strategy and its objectives?

 How should critical success factors be monitored and controlled?

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3 RESEARCH METHODOLOGY

3.1 Introduction

In this chapter the methodology of the research will be discussed. In the previous chapter a conceptual model is developed, based upon the theoretical framework. This model shall be used to set up the methodology. The research type should be distinguished, to gain insight in the way of doing research. Furthermore the research question should be answered by using the right data. Therefore, the data gathering process will be discussed. Based upon the research objective (§1.4) and the conceptual model (§2.6) research questions are formulated. The way in which these questions will be answered shall be explained here. Finally, information about the research criteria will be given, which is needed to ensure to conduct a consistent research (§ 3.4).

3.2 Research Type

The research will be based on the developed conceptual model discussed in chapter 2. Analysis done by collected data, will give recommendations and directions in order to solve the stated problem. This can be seen as a case study, since interpretations are done based upon observations and based upon qualitative depth research (Hopper and Powell, 2001). Preceding to the case study a diagnose has been done to gain insight in the problems by looking at causes and backgrounds of the problem (Verschuren & Doorewaard, 2007).

3.3 Data Collection

In order to provide information about the research objective, several sources of data can be of use. In order to be able to develop a conceptual model, literature has been used, such as academic articles and books. The literature was about strategy, performance management systems, critical success factors, communication and management control systems. This was the basis for focus for the data collection.

3.3.1 Desktop research

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3.3.2 Semi structured interviews

To gather primarily information several interviews are held. The interviews were semi-structured. This means that the researcher has a list of themes, and questions to be covered, based upon the theoretical framework, although the focus on the themes may vary from interview to interview. This has the advantage to omit some questions in particular interviews, given the specific organizational context which is encountered in relation to the research topic (Saunders e.a., 2000 p. 244). According the theory and the conceptual model the following subjects will be covered in the interviews7;

 Environmental analysis  Strategy

 Non Financial factors  Financial Factors

 Management control system.

The management team of IBFD is selected for the interviews. This is due to the fact that the management team is the main constituent of this research. Furthermore, to be able to gain additional information of the information system, middle management plays a key role, since they are next in the information chain. The middle management has the fundamental role to stand between the management team and employees. Therefore the middle managers are also interviewed. Since the problems diagnosed at the start of the research are mainly caused by changes at the commercial side of the organization, interviewees selected are limited to the middle managers of these commercial departments of IBFD.

3.3.3 Observation

The data used were collected during a four month internship at IBFD. In this time period the researcher attended meetings and strategy sessions. Furthermore, by doing the internship the researcher was also able to observe the normal way of working and was in a position to hear things about the processes within the business, during e.g. “corridor chats”. Information gathered by this method is all documented and notes were made during different meetings and sessions in order to be able to document all information. Furthermore, to ensure information by observation is interpreted well, notes were always made. These notes were verified by sending them to the particular person and ask for approval for use of this information. Therefore, gathered information

7

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by observation is verified on consistencies or discrepancies in the interviews and by desk research. Te gathered information by this method is processed in the interview results8.

3.4 Reliability, Validity and Verifiability

To guarantee a research satisfies the outcome, there are three main criteria for evaluating measurement tools of a research. The criteria are; validity, reliability and verifiability and shall be discussed in this section.

3.4.1 Validity

Validity can be seen as the extent to which differences found with a measuring tool reflect true differences among respondents being tested. The content validity of a measuring instrument is the extent to which it provides adequate coverage of the investigative questions guiding the study (Cooper and Schindler, 2003 p. 231-232). Due to the fact the research questions are based on a clearly defined objective, literature and a developed conceptual model, the research can be seen as valid. The research measures what it attempt to measure.

3.4.2 Reliability

Reliability refers to the extend a measure supplies consistent results. Reliability is concerned with estimates of the degree to which a measurement is free form random or unstable error (Cooper and Schindler, 2003 p. 236). In the case the research for IBFD, reliability is consistent9. The research is build up out of literature on which a conceptual model is based. This model is the fundamental of the research question. And the sub questions are based upon the used literature. Furthermore, to structure the interview questions, the literature structure is used. Therefore, it is highly plausible to assume that if the same question was researched by someone else, the results of the interviews shall be mainly the equivalent.

3.4.3 Verifiability

Finally, verifiability is the last criteria for measurement tools used in a research. Verifiability refers to the extent to which the collected data can be confirmed. In this research verifiability is ensured by make notes during the interviews, meetings and other data gathering methods. These notes were subsequently put in a report. This report was send to the interviewee for approval. All of these documents are filed and easy to acquire. Furthermore, to give an overview of the most important information for the research the data is also summarized in appendix 7.

8

See Appendix 7: Summary Interview Results

9

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4 RESULTS

4.1 Introduction

This chapter will give insight in the results of the research done by various research methods10,11. Insight in sub questions, which are formulated in the theoretical framework, shall be given and will be the basis to make interpretations. First of all, the strategy type of IBFD will be discussed. Secondly, the industry sector will be analyzed in the next section. Third, an analysis of the internal environment will be given. Fourth, the critical success factors and the distinguished key performance indicators will be put in a table. Additionally, there will be given recommendations in the way in which the critical success factors and its key performance indicators should be communicated. Finally, focus will be on critical success factors and the key performance indicators and how these should be monitored and controlled in order to stay focused on achieving the strategy.

4.2 Analysis Strategy

Here, the strategy type shall be discussed in order to be capable to acknowledge the main issues for focus of the strategy. This will give the answer to the following sub question; what is the type of strategy IBFD applies?

4.2.1 Competitive strategy

The interviewed members of the management team12 classify IBFD as a operating company within a niche market of taxation legislation, namely the market of international taxation around the whole world. Thereby, IBFD is the market leader in delivering online databases and wants to preserve this position in the market. Competition is focusing on a more broad area and comprehends more facets of the taxation legislation. Competition is, for instance, operating in areas such as corporate law, accounting, financial services etc.

The formulated strategy13, the management team and middle managers14, acknowledge that IBFD wants to distinguish itself by delivering high quality products in a niche market with the purpose to gain profit for the support of research activities.

10

See Appendix 6: Interview Questions and List of Interviewees

11

See Appendix 7: Summary Interview Results

12

See Appendix 7: Summary Interview Results

13

See §1.2 and appendix 2

14

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The strategy is formulated in order to be able to focus on the delivery of quality for clients. On line publicity has to make sure to integrate different sources of information and thereby improve this information better for our customers (Publisher).

Consistent with the theory of De Wit & Meyer (2004) discussed in § 2.1.2, IBFD attempts a differentiation strategy with a narrow focus. Using this strategy type, it is of highly importance to acknowledge the several risks, which go along with this position in the market. The risks that should be taken into account by IBFD are summarized in table 2.

Risks of differentiation Risks of focus

Differentiation is not sustained The focus strategy is imitated The target segment becomes structurally unattractive  Competitors imitate  Bases for differentiation become less important to buyers  Structure erodes  Demand disappears

Cost proximity is lost Broadly targeted competitors overwhelm the segment The segment’s differences from other segments narrow The advantages of a broad line increase

Differentiation focusers achieve even greater differentiation in segments

New focusers sub segment the industry

Table 2: Risks of Differentiation Focus Strategy (source: de Wit and Meyer, 2004)

These risks are relevant because they give direction of needed focus on factors that can be crucial to achieve the formulated strategy. The risks mentioned should be a point of attention to be capable to achieve strategic objectives.

4.2.2 Strategic critical success factors

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4.3 Analysis Industry Structure

Theory of De Wit & Meyer (2004), Porter (1985) and the conceptual model (§ 2.7), point out that the structure of the business industry is an important factor influencing strategy components. To create strategic focus, anticipation on the external environment it is important. This is because it helps to focus on the main external factors that can ensure continued competitive advantage. As argued in the theoretical framework by Porter (1985) monitoring the competitor has to be done by generating an overview of potential new entrants, threat of substitutes, bargaining power of suppliers, bargaining power of buyers and your industry competitors. These factors will be discussed below for IBFD. And will facilitate the answer on the sub question: What are the important external factors of strategy that should be taken into account in order to focus on the right elements?

4.3.1 Porters five forces

As Porters theory (1985) and the conceptual model made clear, external factors can influence an organization’s strategy. Although the strategy of IBFD is set, these factors are important to analyze in order to be able to focus on most essential objectives.

Quality, financial growth and employee retention are important issues of IBFDs strategy (Conclusion of Strategy Session, May 2007)

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Figure 7: Porters five forces for IBFD (1985)

4.3.1.1 New Entrants

Observation of potential new entrants can be essential since it can influence the market share of IBFD. In order to be able to be market leader in delivering quality; the less potential entrants will be the better.

The technical director and the human resource director indicate the importance of technology and human assets for IBFD:

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IBFD is a peoples business. Without employees and reporters we cannot achieve what we desire. Highly skilled people are needed to be successful in the industry and to deliver reliable products. Furthermore, we are focusing on online publications. Therefore the IT system is very important.

These assets can be an advantageous for IBFD. Due to constant changes in demands for new software and hardware techniques, this industry relies on technology. This makes the market difficult to enter, because the latest assets are continuously required to be successful. Furthermore, the size of the labor market plays a role here. When there is more supply of labor, it will be easier to recruit skilled people. At the moment, the labor market is tight. However, IBFD has build up a unique network of employees over the years15. In other words, the market is capital intensive and complex and thus forms a high barrier to enter. On the other hand, with regard to switching costs16, the market can be seen as sensitive. It is not difficult to cancel a subscription and switch to a competitor or substitute.

According to a desktop research in confidential business report17, IBFD is a dominant player in the industry. The study points out that IBFD has a positive brand identity with respect to the following elements:

 Complete offering international tax information  Non-profit publisher

 Offers seminars, courses and training  Offers free newsletters

 Proprietary product differences

Due to these factors, on a relative basis, IBFD does not have to be very concerned for new competitors in their niche of the market.

4.3.1.2 Substitutes

Furthermore, substitutes can be of influence on the strategic focus. It is important for IBFD perform better on quality than substitutes. Therefore, knowing the substitutes is important.

The amount of substitutes for IBFD products is high. There are many tax specialists that can be consulted when taxation information is needed. Also, Internet or governmental information can be of use (Publisher).

15

See appendix 7: Summary Interview Results

16

Switching cost are costs that has to be made when transfer from one product or company to another. This can also be costs in money but also emotional costs or costs in time.

17

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This points out that the high amount of substitutes should always be a point of attention and monitored in order to remain competitive in comparison to the substitutes. However, the advantage for IBFD is the high price demanded by the tax specialists and the lower reliability and quantity of information provided by Internet and governments. This translates to a relatively average threat for substitutes.

4.3.1.3 Buyers

As becomes clear by interviews done with managers of IBFD and desktop research, buyers are very important for the focus on strategy and the way in which it should be communicated through the organization. The buyers or customers determine their vision on delivered products and this vision in crucial for the sales of products.

Retention and Loyalty

As explained before, the switching costs of buyers are low. It is easy to switch to another product; there is no emotional value or technical difficulties what so ever. Therefore it is important for IBFD to focus on customer retention and loyalty. Mainly, due to the fact buyers have several alternatives to explore. Tax specialists, Internet and advisors can be used instead of IBFD products18. However, these substitutes can be very expensive and the Internet is not always reliable. According to a confidential business report19, quality of IBFD products is perceived as good, however there are some issues that should considered;

Up to datedness’ of our information is an important issue for the retention and loyalty of our customers. Although, due to blue prints several publications seems up to date, whether in reality it is not. Blue prints are loose leaves which are put in publications whenever a change in information occurs. These blue prints cause a bias in up dated time This can cause a decrease in the retention and loyalty of our customers. Furthermore, due to changes in the control system, data concerning retention are not always available (Production Manager).

Thus, this clarifies that the quality should be a special point of attention, since quality is the main focus of IBFD and should be used in order to sustain and gain competitive advantage and are important for retention and loyalty of clients, which in turn will lead to higher revenue and profit.

Quality

Delivering quality is as set out before as a strategic issue. There are several indicators that could give IBFD information about perceived quality of their products by customers. Subscription level of different publications and products give insight in the demand side of the industry. Fluctuations

18

See Appendix 7: Summary Interview Results

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