Management control and informational
requirements
A case study at Rabobank Emmen-Coevorden
Y.J. Luinge
Supervisors:
Dr. M.P. Van der Steen
Management control and informational
requirements
A case study at Rabobank Emmen-Coevorden
Master Thesis
Business Administration
Organizational and Management Control
S 1928317
Y.J. Luinge
Molenweg 42
9365 PE Niebert
Preface
This thesis is the final piece of work to complete my Master Business Administration, MSc BA specialized in Organizational & Management Control (OMC) at the faculty of Economics and Business of the University of Groningen. In this section I would like to thank everyone who helped me complete my thesis.
The thesis was written during an internship at Rabobank Emmen-Coevorden, one of the local Rabobanks in the Netherlands. I would like to thank everyone working within this bank. Especially Mr. A. Boxem, MBA and Mr. Drs. D. Reintsema for giving me the opportunity to perform a case study within their organization. Furthermore, I would like to thank Mr. D. Reintsema, my supervisor at Rabobank Emmen-Coevorden, for his support and advice during my research. Additionally, I would like to dedicate a word of gratitude to all interviewees and all other people who helped me during my internship. I had a great time within Rabobank Emmen-Coevorden.
Moreover, I would like to thank my first supervisor of the University of Groningen, Mr. Dr. M.P. Van der Steen, for his helpful advice, critical and useful comments and positive feedback during my internship. I also would like to thank my second supervisor, Mr. Dr. E.P. Jansen, for his time and effort.
Finally, I would like to extend special thanks to my family, boyfriend and friends for their support, feedback and advice during my internship and studies.
Emmen, July 2011
Management summary
Rabobank Emmen-Coevorden was established after the merger between Rabobank Emmen and Rabobank De Beek-Dal-Veste in 2007. After the merger and reorganization the bank faced three changes. The most important change was the information overload, i.e. Rabobank Emmen-Coevorden would now receive too much information to control the bank. This information overload is indicated as an operational weakness by the directors of Rabobank Emmen-Coevorden. The opportunity and impact of the weakness result in a high priority to improve the weakness. Consequently, the objective of this thesis was to identify which information is required for the effective control of Rabobank Emmen-Coevorden. The following research question has been defined to achieve this objective:
Which informational requirements are necessary for the effective control of Rabobank Emmen-Coevorden?
To answer this research question, a literature review was carried out. In this review, the literature of management control and management control systems (hereafter MCSs) is described. “Management control ensures that work activities and sub-units fulfilled top managers’ objectives and provided the information and systems to enable the managerial hierarch to correct any deviations from established plans” (Whitley, 1999, p. 507). Subsequently, the MCSs and frameworks of Malmi and Brown (2008), Merchant and Van der Stede (2007), Otley and Ferreira (2005), Otley (1999) and Simons (1995; 1994) are discussed. These MCSs and frameworks can be used to control organizations. According to the aforementioned researchers, the strategy and structure of organizations are important variables, i.e. information from these two variables is needed for the control of organizations. However, the research question is formulated for Rabobank Emmen-Coevorden, which is a co-operative bank, and has other characteristics than non co-operative organizations. Therefore, the characteristics of co-operative banks which relate to control are mentioned in this thesis. Subsequently, the information which is required for the control of organizations and/or co-operative banks is described, i.e. information which results from the strategy and structure. Furthermore, Rabobank Emmen-Coevorden uses the ‘Rabobank Sturingsmodel’. This model is used to control the local Rabobank and the information which results from this model is also taken into consideration. However, first the two variables strategy and structure are defined and explained. Several strategy classifications can be made by type (Miles and Snow, 1978), position (Porter, 1980) and mission (Gupta and Govindarajan, 1984). Moreover, several researchers (e.g. Mintzberg, 1983; Duncan, 1979; Burns and Stalker, 1961) have distinguished structure types. These strategy and structure classifications are described in this thesis. Subsequently, the ‘Rabobank Sturingsmodel’ is defined. This model consists of three compasses, five enablers and three stages of development which are all discussed.
decentralized structures (Duncan, 1979), the machine & professional bureaucracy and the divisionalized form (Mintzberg, 1983) are chosen to be investigated.
Additionally, to be able to answer the research question an empirical research is performed. In this research a cross-section is made of Rabobank Emmen-Coevorden. Several methods are used to gather information, i.e. semi-structured interviews, questionnaires, the intranet and internal documents. The empirical research consists of four parts. Firstly, it is clarified which MCSs are applicable to Rabobank Emmen-Coevorden, i.e. the belief and interactive control systems (Simons, 1995; 1994), results, action and personnel controls (Merchant and Van der Stede, 2007), planning and administrative controls (Malmi and Brown, 2008). Secondly, the strategy of the Individual Customers department can be characterized as defender (Miles and Snow, 1978), cost leader (Porter, 1980) and hold mission (Gupta and Govindarajan, 1984). Thirdly, the strategy of the department should result in a specific structure. Nevertheless, the structure of the Individual Customers department has a high degree of decentralization, formalization and specialization. These characteristics result in a mechanistic structure (Burns and Stalker, 1961), decentralized structure (Duncan, 1979) and in between machine and professional bureaucracy (Mintzberg, 1983). Fourthly, the ‘Rabobank Sturingsmodel’ is investigated. According to the employees who filled in the questionnaire, Rabobank Emmen-Coevorden is in the second stage of development. The strategy, structure and the ‘Rabobank Sturingsmodel’ result in several types of information. This information is explained for each variable and is compared with the literature.
Table of contents Preface ... 2 Management summary ... 3 Table of contents... 5 1. Introduction ... 7 2. Research design ... 9 2.1 Problem statement ... 9 2.1.1 Management problem... 9 2.1.2 Research objective... 9
2.1.3 Research question and sub-questions... 9
2.2 Research domain ... 10 2.2.1 Rabobank... 11 2.2.2 Rabobank Emmen-Coevorden ... 11 2.3 Research methodology ... 11 2.3.1 Literature review ... 12 2.3.2 Empirical research ... 12 3. Management control ... 13
3.1 Definition of management control... 13
3.2 Management control classifications ... 13
3.2.1 Levers of Simons (1995; 1994)... 14
3.2.2 Controls of Merchant and Van der Stede (2007) ... 14
3.2.3 Controls of Malmi and Brown (2008) ... 14
3.2.4 Frameworks of Otley (1999) and Otley and Ferreira (2005)... 15
3.2.5 Discussion ... 15
3.3 Conclusion... 15
4. Co-operative banks... 17
4.1 History co-operative banks in Europe ... 17
4.2 Characteristics of co-operative banks... 17
4.3 Management control systems in co-operative banks... 19
4.4 Conclusion... 19 5. Informational requirements ... 20 5.1 Definition of information ... 20 5.2 Strategy... 20 5.2.1 Strategy definition ... 20 5.2.2 Strategy classifications... 21
5.2.3 Similar characteristics of classifications... 21
5.2.4 Contradicted characteristics of classifications ... 22
5.2.5 Conclusion... 23
5.3 Structure ... 23
5.3.1 Structure definition... 23
5.3.2 Structure classifications ... 24
5.3.3 Similar characteristics of classifications... 24
5.3.4 Contradicted characteristics of classifications ... 25
5.4 ‘Rabobank Sturingsmodel’... 25
5.4.1 INK-model & ‘Rabobank Sturingsmodel’ ... 26
5.4.2 Stages of development ... 27 5.4.3 Conclusion... 27 5.5 Conclusion... 27 6. Theoretical framework ... 28 6.1 Relationship variables ... 28 6.2 Theoretical framework ... 29
7. Case study Rabobank Emmen-Coevorden ... 32
7.1 Case research... 32
7.2 Management control... 32
7.2.1 Management control Rabobank Emmen-Coevorden... 33
7.2.2 Conclusion... 34
7.3 Strategy... 35
7.3.1 Strategy & information Rabobank Emmen-Coevorden... 35
7.3.2 Conclusion... 37
7.4 Structure ... 38
7.4.1 Structure & information Rabobank Emmen-Coevorden ... 38
7.4.2 Conclusion... 40
7.5 ‘Rabobank Sturingsmodel’... 41
7.5.1 ‘Rabobank Sturingsmodel’ & information Rabobank Emmen-Coevorden ... 41
7.5.2 Conclusion... 43
7.6 Relationships between variables... 44
7.7 Control in co-operative banks ... 45
7.8 Conclusion... 45
8. Discussion and conclusion... 47
8.1 Discussion ... 47
8.1.1 Contributions to literature... 47
8.1.2 Contributions to Rabobank Emmen-Coevorden... 50
8.2 Conclusion... 51
8.3 Limitations... 52
8.4 Possibilities for further research... 52
References ... 53
Appendix 1: Rabobank Nederland Organizational chart... 58
Appendix 2: Rabobank Emmen-Coevorden Organizational chart ... 59
Appendix 3: Overview semi-structured interviews ... 60
Appendix 4: Examples of ‘Rabobank Sturingsmodel’... 63
1. Introduction
Rabobank is an international financial service provider which operates on the basis of co-operative principles and has the highest rating of solvency (AAA) possible for banks. The bank emphasizes broad financial services provision in the Netherlands and in particular the food and agribusiness internationally. Furthermore, the Rabobank comprises independent local Rabobanks, Rabobank Nederland, their umbrella organization, and a number of specialist subsidiaries (Rabobank Group, 2011). Rabobank Emmen-Coevorden is one of the independent local banks which was established in 2007 after a merger between Rabobank Emmen and Rabobank De Beek-Dal-Veste. The head office of the bank is established in Emmen and there are six branch offices where people are employed. To control Rabobank Emmen-Coevorden as a whole and the individual branch offices, information is important. All the rules, objectives and procedures of Rabobank Emmen-Coevorden are based on information. If there is no appropriate information available, the management is not capable of implementing and/or adjusting these rules, objectives and procedures.
Due to the merger and reorganization, Rabobank Emmen-Coevorden faced different changes. The three most important changes include the information overload, expansion of the geographical area and changing functions. Firstly, Rabobank Emmen-Coevorden deals with a wide variety of information, e.g. the bank has to comply with different laws and regulations and has to satisfy its stakeholders. As a result, ´information overload´ arises. In the literature information overload is defined in two broad ways. According to Losee (1989) “information overload is the receipt of more information than is needed or desired to function effectively and further the goals of an individual or organization” (1989, p. 1979). Moreover, according to Schick et al. (1990) “information overload occurs when the information processing demands on an individual’s time to perform interactions and internal calculations exceed the supply or capacity of time available for such processing” (1990, p. 199). The definition of Losee (1989) is used in the thesis because this definition is mostly related to the information overload of Rabobank Emmen-Coevorden. Due to the information overload in Rabobank Emmen-Coevorden, there is confusion about the informational requirements and information which are necessary for the effective control of the bank. Differences exist between informational requirements and information. On the one hand informational requirements are “those items of information regarding the adversary and the environment that need to be collected and processed in order to meet the intelligence requirements of a commander”1. On the other hand “information is a message, usually in the form of a document or an audible or visible communication and is meant to change the way the receiver perceives something, to have an impact on his judgment and behaviour” (Davenport and Prusak, 1997, p. 32). Secondly, since the merger the geographical range of Rabobank Emmen-Coevorden has been expanded. As mentioned above, the employees are employed at seven different locations which have consequences for the control of Rabobank Emmen-Coevorden. Finally, the employees do not exactly know what the managers expect from them and vice versa, despite the function descriptions which are made. Nevertheless, this thesis focuses on the first change, i.e. the relevance of this thesis is to identify which information is required for the effective control of Rabobank Emmen-Coevorden.
According to Smith (1987) informational requirements for the effective control of banks should have seven different characteristics. “The requirements should be (i) accurate, consistent and reconcilable, (ii) timely and sufficiently frequent to achieve their purpose, (iii) relevant to the recipient’s decision-making requirement, (iv) flexible and readily adaptable to changing needs, (v) inclusive of all group operations, risks and exposures, (vi) forward-looking as well as concerned with the past and (vii) capable of comparison to the main competitors” (Smith, 1987, p. 21). Unfortunately, Smith (1987) or other researchers have not investigated which information satisfies these characteristics.
As indicated above, organizations need information for the control of their organizations. Extensive research has focused on the topic of control and in particular management control. According to Merchant and Van der Stede (2007) “controls are all systems managers use to ensure that the behaviours of their employees are consistent with the organization’s objectives and strategies” (2007,
1
p. 5). Several researchers have categorized management control systems (hereafter MCSs) for organizations in different ways, such as planning, cybernetic, reward and compensation, administrative and cultural controls (Malmi and Brown, 2008); results, action, personnel and cultural controls (Merchant and Van der Stede, 2007); diagnostic, belief, boundary and interactive control systems (Simons, 1995; 1994). However, the Rabobank is not a ‘standard’ organization, it is a co-operative bank. Management control in co-co-operative banks seems to be an underdeveloped research area. Therefore, this thesis contributes to the existing literature by focusing on which types of MCSs are applicable to co-operative banks.
The design of MCSs for organizations is influenced by a number of situational and contingent factors, e.g. strategy, structure, size, technology and competitors (Gerdin and Greve, 2004; Chenhall, 2003; Fisher, 1998). Currently, the influence of these factors on co-operative banks seems to be an underexposed research area. According to the literature of management control, the strategy and structure of organizations are primary factors which influence the design of MCSs. This view is supported by Pertusa-Ortega et al. (2010) who have stated that “the decisions about the design of the organization and the competitive strategy of an organization are very important in order to gain competitive advantage and to improve the performance of the organization” (2010, p. 1282). In the aftermath of the financial global crisis, competitive advantages are important for Rabobank Emmen-Coevorden to attract customers who left other banks. An important competitive advantage of the Rabobank is the co-operative structure. Moreover, customers consider the Rabobank as a reliable bank, partly due to their triple A-status and the sustainable way in which Rabobank has operated in the recent past. Nevertheless, this thesis focuses on the two contingency factors strategy and structure. Furthermore, Rabobank Emmen-Coevorden uses a model which incorporates the strategy and structure of the bank. This model is called the ‘Rabobank Sturingsmodel’ and is derived from the Instituut Nederlandse Kwaliteit-model (hereafter INK-model). The INK-model is an instrument which allows organizations to control their businesses better (Franssen and Schepers, 2004). Consequently, this model is also taken into consideration.
To summarize, the central problem of this thesis is that Rabobank Emmen-Coevorden faces difficulties in controlling its business effectively. The bank does not exactly know which information is needed for the effective control of the bank. In the existing literature the relationship between information and the control of co-operative banks is also an underdeveloped research area. Consequently, the research question of this thesis is: Which informational requirements are necessary
2. Research design
This section focuses on the design of the research and consists of three paragraphs. Firstly, the problem statement of this thesis is discussed and the motivation for the research at Rabobank Emmen-Coevorden is described. As a result, in the second paragraph short business descriptions of this bank and its umbrella organization, Rabobank Nederland, are presented. Moreover, to answer the research question of this thesis a literature review and an empirical research are performed. In the last paragraph, the methods of these researches are further explained.
2.1 Problem statement
This paragraph discusses the problem statement which consists of the management problem of Rabobank Emmen-Coevorden and the research objective. Subsequently, the key research question and the related sub-questions are formulated (De Leeuw, 1996).
2.1.1 Management problem
Due to the merger and reorganization, Rabobank Emmen-Coevorden is confronted with different changes. The three most important changes are the expansion of the geographical area, the functions that have changed and the associated function descriptions and the information overload. Firstly, the geographical area of Rabobank Emmen-Coevorden is expanded to the Southeast of Drenthe. The employees are employed at seven different locations within the geographical area which of that has consequences for the control of the bank, e.g. some departments are divided among two different locations and the distance to the head office in Emmen has grown. Secondly, the functions and the associated function descriptions of the bank are changed. Moreover, the expectations of the managers with regard to the employees have changed. As a result, the expectations of both the managers and employees should be aligned again. Finally, the directors and/or managers are overloaded with different sources of information, e.g. they receive information from all seven different locations as well as from different employees. Due to this information overload it is difficult for the directors and/or managers to determine which information is important and which information is less important for the effective control of the bank. Moreover, the information overload is indicated as an operational weakness by the directors in the bank-wide risk analysis. Based on the opportunity and impact of this weakness, the priority of the weakness is high. To conclude, this thesis concentrates on the information overload of Rabobank Emmen-Coevorden, i.e. it will be investigated which information is required for the effective control of the bank.
2.1.2 Research objective
The objective of this thesis is to identify which information is needed for the effective control of Rabobank Emmen-Coevorden. To achieve this objective, it will be investigated which information is important for the effective control of the co-operative Rabobank resulting from the strategy, structure and the ‘Rabobank Sturingsmodel’.
2.1.3 Research question and sub-questions
Based on the management problem and research objective, the following key research question is formulated:
Which informational requirements are necessary for the effective control of Rabobank Emmen-Coevorden?
To be able to answer the key research question, eight questions are formulated. The first four sub-questions are related to the literature:
1. According to literature, which management control systems can be used to control organizations and what are their characteristics?
2. In which types of control can the management control systems further be distinguished?
The MCSs which are described in sub-question one can be distinguished in several types of control. In this sub-question these types will be discussed, i.e. the types are important mechanisms for the control of organizations.
3. What are the characteristics of co-operative banks and which management control system(s) is/are, in general, applicable to co-operative banks?
The MCSs and types of sub-questions one and two are developed for organizations. However, Rabobank Emmen-Coevorden is an organization based on co-operative principles. Existing literature does not focus on MCSs in co-operative banks. As a result, the characteristics of these banks will be mentioned in sub-question three. In the second part of this sub-question the relationship between MCSs and the characteristics of co-operative banks will be described, i.e. the answers on sub-questions one, two and the first part of sub-question three will be analyzed. The MCSs which co-operative banks use, contribute to the control of these banks.
4. According to literature of management control systems, which informational requirements are necessary for the effective control of organizations?
The literature of MCSs focuses on two contingency factors, i.e. strategy and structure. These two factors are incorporated in the ‘Rabobank Sturingsmodel’. Consequently, in this sub-question several definitions of strategy and structure will be introduced. Moreover, the ‘Rabobank Sturingsmodel’ will be introduced. Subsequently, it will be investigated which information results from these three variables and which information is needed for the control of organizations. Based on the first four sub-questions a theoretical framework will be built to describe the relationships between management control, informational requirements, the characteristics of operative banks and the control of co-operative banks.
Moreover, the following four sub-questions will be answered by performing an empirical research:
5. Which management control system(s) is/are applicable to Rabobank Emmen-Coevorden?
This sub-question aims to identify which MCSs will be applicable to Rabobank Emmen-Coevorden. In the theoretical framework different MCSs will be chosen and in the empirical research these chosen control systems will be investigated.
6. Which informational requirements currently exist within Rabobank Emmen-Coevorden?
In the theoretical framework several strategy and structure classifications will be chosen. Based on these chosen classifications and the ‘Rabobank Sturingsmodel’, the existing types of information of Rabobank Emmen-Coevorden which result from these three variables will be identified in the empirical research.
7. Are the informational requirements which result from literature similar to the informational requirements which exist within Rabobank Emmen-Coevorden?
This sub-question will compare the answers on sub-questions five and seven and contributes to answer the research question of this thesis.
8. What are the results and conclusions based on the outcomes of the previous sub-questions?
The last sub-question will describe the results and conclusions of sub-questions six and eight. Furthermore, the theoretical framework will be tested in Rabobank Emmen-Coevorden. The answers and test will be combined to answer the research question of this thesis.
2.2 Research domain
2.2.1 Rabobank
The first co-operative Rabobank was founded in the Netherlands in 1898 by farmers and small and medium enterprises, who had no access to the capital market. Two offices were established, in the north of the Netherlands the ‘Coöperative Centrale Raiffeisen Bank’ and in the south the ‘Coöperatieve Centrale Boerenleenbank’. In the 1940s, the first forms of partnerships arose and in 1972 the two offices merged to the ‘Co-operative Centrale Raiffeisen-Boerenleenbank’, generally known as the Rabobank. From this moment, the number of local banks which were operating at the heart of the community increased and they knew their customers personally. As a result, loans with better terms and conditions could be provided to the customers. The wide regional spread, access to relevant information and low costs enabled the local co-operative banks to gain a favourably distinctive position in the market for credit and savings. In the late 1990s, when Rabobank had 140,000 business customers and seven million retail customers, Rabobank could not be characterized any longer as a co-operative of borrower (Rabobank Group, 2009; Sluyterman et al., 1998).
Nowadays, the Rabobank Group consists of 141 autonomous local Rabobanks plus the Coöperative Central Raiffeisen-Boerenleenbank (Rabobank Nederland), their umbrella organization, and a number of subsidiaries and associates (the organizational structure is depicted in appendix one). The local banks are Rabobank Group’s co-operative core businesses which provide the customers with optimal services. The primary aim of the local Rabobanks is to create customer value and to help and support its customers and members to realize their own aspirations. Additionally, the Rabobank Group is an international financial services provider which offers retail banking, wholesale banking, asset management, leasing and real estate services. The co-operative bank focuses on achieving market leadership as an all-finance bank in the Netherlands. This high level of diversification promotes financial stability for the Rabobank. To offer a full range of financial products and services, the level of knowledge and expertise is high which leads to benefits in innovation and synergies (Rabobank Group, 2011).
2.2.2 Rabobank Emmen-Coevorden
In the 2000s, Rabobank consisted of too many local banks and in 2005 the Rabobank decided to maintain only 150 strong local banks. However, to achieve this several local Rabobanks had to merge. The merger between the Rabobanks Emmen and De Beek-Dal-Veste in 2007 was one of these mergers. Other reasons for this merger include economies of scale and efficiency of costs. Nowadays, Rabobank Emmen-Coevorden is divided into three departments: Individual Customers, Businesses and Business Management. Subsequently, the Individual Customers and Businesses departments consist of three and two subparts (Personal Banking, Private Banking & Customer Service Centre and Business Advice & Business Relations) (Rabobank Emmen-Coevorden, 2011). The organizational chart of the bank is depicted in appendix two.
Moreover, Rabobank Emmen-Coevorden has seven different locations. The head office, also called the advice centre, is located in Emmen. Five of the six other offices are sales offices and the last office is a service point for customers. These offices are located at carefully selected locations to provide all kind of services to the customers in the geographical area of the Southeast of Drenthe. Currently, the bank has 100,000 customers, 13,000 members and employs 240 people. Additionally, Rabobank Emmen-Coevorden is part of the Rabobank Group and follows the overall policies of this group. The mission of Rabobank Emmen-Coevorden is to help its customers to achieve their ambitions by providing them with socially and ecologically sustainable products. The bank wants the customers to become members, i.e. in this way the Rabobank distinguishes itselves from other Dutch banks. Furthermore, Rabobank Emmen-Coevorden has tight and close relationships with its customers. As a result, the bank can anticipate the personal needs and wishes of these customers (Rabobank Emmen-Coevorden, 2011).
2.3 Research methodology
2.3.1 Literature review
Two methods are used to gather data for the literature review. Firstly, through scientific articles and books important data and information about management control are collected. The literature of management control implies that the strategy and structure of organizations are important for the effective control of organizations. As a result, the main literature of strategy and structure types is collected. Furthermore, the ‘Rabobank Sturingsmodel’ is investigated. Subsequently, the most important parts of management control, strategy, structure and the ‘Rabobank Sturingsmodel’ are combined in a theoretical framework which describes the relationships between all these variables. Secondly, internal data, internal documents, the intranet and internal databases are consulted to gather information for the thesis. These data are also used in the empirical research to verify the results of the interviews.
2.3.2 Empirical research
Empirical research can be based on single or multiple case studies. This research is based on a single case study and can be justified for different reasons. Single case studies are appropriate for extreme or unique cases. “Extreme cases occur, according to the rules of probability, very rarely, hence there is often no more than one case available” (Blumberg et al., 2008, p. 376). The Rabobank is a unique case in the Netherlands because the Rabobank is the only bank which is based on co-operative principles. Due to the limited time available, only one local Rabobank is investigated. Moreover, a case study is the proper research method because there exist literature about management control, strategy and structure types in organizations, but little is known about the relationship between these variables and co-operative banks. By using exploratory research, like a case research, it will be investigated if the existing literature is also valid for co-operative banks (Blumberg et al., 2008).
Moreover, in the empirical research two methods are used to gather information from employees. Firstly, semi-structured interviews are used. According to Blumberg et al. (2008) “semi-structured interviews have two main objectives: on the one hand the researcher wants to know the informant’s perspective on the issue, however, on the other hand the researcher wants to know whether the informant can confirm insights and information he or she already holds” (2008, p. 378). Different employees of Rabobank Emmen-Coevorden were selected to be interviewed: the chairman of the bank, the directors Business Management and Individual Customers, the manager Control, the business, financial and process controllers. Furthermore, the managers of the sub-departments, the manager assistant and several other employees of the Individual Customers department are interviewed. All these employees have been interviewed because they are dealing with different types of information which are necessary for the effective control of Rabobank Emmen-Coevorden. To be sure that the employees provided all relevant information during the interviews, a statement of non-disclosure was signed by the researcher. Moreover, the information that is collected within one interview is checked with the other interviews to enhance the validity of the information. Furthermore, minutes were made during the interviews with the employees. The minutes were e-mailed to the employees, as a result the employees were able to verify whether the information they provided has been interpreted well by the interviewer. If necessary, the employees were able to make changes or additions. Secondly, a questionnaire was used in the empirical research. The questionnaire consists of questions about the ‘Rabobank Sturingsmodel’ and was e-mailed to different employees, i.e. the chairman, the directors, the managers and the business controllers of each department. These employees were chosen because they are most familiar with the ‘Rabobank Sturingsmodel’. The model will be introduced in paragraph 5.4 and consists of three different stages of development. The results of the questionnaire lead to a certain stage of development but first the different responses are checked with each other to verify the results.
3. Management control
Management control is one of the most widely discussed topics of control in the literature. Franssen and Schepers (2004) have stated that management control is concerned with the implementation of (strategic) objectives of organizations. According to these authors, if organizations and their employees are more capable to achieve the predetermined objectives, organizations are better controlled. This section focuses on management control in organizations and consists of three paragraphs. After addressing different definitions of management control, one of these will be used as the basis definition for the remainder of this thesis. Moreover, several researchers have identified MCSs which can be used to control organizations. In this thesis the MCSs of respectively Simons (1995; 1994), Merchant and Van der Stede (2007), Malmi and Brown (2008) and the frameworks of Otley (1999) and Otley and Ferreira (2005) are discussed. The MCSs of these researchers can be further distinguished in several types. In paragraph two these various MCSs and types are described. Finally, both an overview of the MCSs and a conclusion are presented.
3.1 Definition of management control
Several researchers have conceptualized management control in broad and narrow views. The first definition was made by Anthony (1965) who defined management control 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). However, the definition of Berry et al. (1995) is broader: “management control is primarily the process for motivating and inspiring people to perform organization activities that will further the organization’s goal. In addition, it is a process for detecting and correcting unintentional performance errors and intentional irregularities” (1995, p. 18). Moreover, Whitley (1999) has stated that the central task of management control is to “ensure that work activities and sub-units fulfilled top managers’ objectives and provided the information and systems to enable the managerial hierarch to correct any deviations from established plans” (1999, p. 507). In conclusion, the given definitions are quite similar, but some definitions are broader than others. The definition of Whitley (1999) is preferred over the other definitions because Whitley explicitly emphasizes the relationship between management control and information. Furthermore, this definition was chosen because it is most familiar with the problem of Rabobank Emmen-Coevorden, i.e. the bank faces difficulties with the information which is needed for the control of the bank.
3.2 Management control classifications
As indicated earlier, the field of management control is broad and complex. Some researchers have focused on specific control devices while other researchers have developed more-inclusive frameworks or identified contrasting control archetypes. According to Merchant and Otley (2006) several researchers have focused on the latter namely Malmi and Brown (2008), Merchant and Van der Stede (2007), Otley and Ferreira (2005), Otley (1999) and Simons (1995; 1994). This view is supported by Berry et al. (2005) who have reviewed the recent literature in the field of management control. As a result, the classifications of respectively Simons (1995; 1994), Merchant and Van der Stede (2007), Malmi and Brown (2008), Otley (1999) and Otley and Ferreira (2005) are presented in this thesis.
Additionally, the classifications were chosen for different reasons. Firstly, the levers of control of Simons (1995; 1994) are important within the existing literature. This conclusion is based on the number of references by other researchers to Simons (in the period 1998-2010, the article of Simons from 1994 is 66 times quoted2). Secondly, the MCSs of Merchant and Van der Stede (2007) are published in a study book (Management Control Systems: performance measurement, evaluation and
incentives, 2007). Consequently, it can be concluded that these controls are widely accepted in the existing literature. Furthermore, the MCSs of Merchant and Van der Stede (2007) are based on the controls of Ouchi (1979). Since 1979 researchers have 527 times referred to the controls of Ouchi3. Thirdly, Malmi and Brown have defined their controls types in 2008. Despite their recent work, they
2
http://apps.isiknowledge.com.proxy-ub.rug.nl. Retrieved, May 9, 2011.
3
have been quoted for eight times by researchers in highly reputable journals4 (e.g. by Otley and Ferreira (2009); Bisbe and Malagueno (2009); Malmi and Granlund (2009)). Fourthly, the framework of Otley (1999) was chosen because it focuses on the reciprocal relationship between MCSs and strategy. Moreover, the research of Otley (1999) provides insights into how strategic control systems are used and implemented (Berry et al., 1995). Finally, the extended framework of Otley and Ferreira (2005) is selected. Although the framework is recent in the existing literature, already six researchers have referred to the framework5 (e.g. by Chenhall and Smith (2011); Broadbent (2010)). In the following sub-paragraphs, the MCSs and the different types are explained.
3.2.1 Levers of Simons (1995; 1994)
Simons (1995; 1994) has made a distinction between four levers of control which managers can use in organizations, i.e. diagnostic, belief, boundary and interactive control systems. The first lever, diagnostic control systems, is a feedback system which monitors the outcomes of organizations. If these outcomes diverge from the performance standards, adjustments can be made by the management. Secondly, belief systems support employees to find new opportunities. Moreover, the systems define, communicate and reinforce the basic values, purpose and direction of organizations. Consequently, the behaviour of employees is influenced and opportunity-seeking behaviour is suppressed. In contrast, boundary systems define, communicate and reinforce the actions and behaviour of employees which are unsuitable within organizations. As a result, boundary systems are characterized by the power of negative thinking and only tolerate innovation within defined limits of freedom. Finally, interactive control systems are formal information systems which enable managers to involve themselves regularly and personally in the decisions of their subordinates. By doing this, managers focus the attention and learning of organizations on strategic issues (Simons, 1995; 1994).
3.2.2 Controls of Merchant and Van der Stede (2007)
Merchant and Van der Stede (2007) have distinguished four control mechanisms which should be in balance to achieve optimal control in organizations, i.e. results, action, personnel and cultural controls. Firstly, results controls focus on the results produced by employees. Consequently, employees are more aware of their activities and it should encourage them to act appropriately. Secondly, action controls concentrate on the actions taken by employees which should be favourable to organizations. Four different forms of action control can be distinguished: (i) behavioural constraints (make it impracticable for employees to perform tasks which should not be done), (ii) pre-action reviews (entail the modification and approval of action plans of controlled employees), (iii) action accountability (focuses on employees who are held accountable for the performed actions) and (iv) redundancy (implies that more employees are assigned to tasks than is strictly needed). Thirdly, personnel controls ensure that employees control their own behaviours (self-monitoring). Personnel controls can be implemented through three manners: (i) selection and placement of employees (the probability that a job is performed well increases if the right employee is appointed), (ii) training (facilitates employees to do a good job) and (iii) job design and provision of necessary resources. Finally, Merchant and Van der Stede (2007) defined cultural controls which guarantee that employees control each other’s behaviour (mutual monitoring). There are five approaches of how culture can be shaped and created: (i) codes of conduct (general statements), (ii) group rewards (collective achievement of results), (iii) intra-organizational transfers (spread culture), (iv) physical arrangement (office plans and dress codes) and (v) tone at the top (managers are role models) (Merchant and Van der Stede, 2007).
3.2.3 Controls of Malmi and Brown (2008)
Malmi and Brown (2008) developed a MCSs package which consists of five types of control, i.e. planning, cybernetic, reward and compensation, administrative and cultural controls. The first type, planning control, is used in organizations for various reasons, e.g. it defines the short and long run objectives of organizations, it provides standards to be achieved in relation to goals and it enables congruence by aligning goals in organizations. Secondly, cybernetic controls include procedures
4
http://apps.isiknowledge.com.proxy-ub.rug.nl. Retrieved, May 9, 2011.
5
which facilitate the quantification of activities. The performance standards which have to be achieved are associated with cybernetic controls. Moreover, cybernetic controls compare the outcomes of activities with the standards, as a result a variance analysis is made. The third type, reward and compensation controls, increases the performance of employees by providing rewards to control the direction, duration and intensity of their efforts. Sometimes these controls are associated with cybernetic controls, but Malmi and Brown (2008) took reward and compensation controls apart because organizations have also other motives to provide employees with rewards and compensations. Fourthly, administrative controls influence the behaviour of employees by organizing them in groups, by monitoring their behaviour and by making them accountable for their own actions. Three forms of administrative controls can be distinguished: (i) organization structure (improves types of contact and relationships), (ii) governance structure (board structure and composition of organization) and (iii) policies and procedures (define procedures and actions of employees). Finally, cultural controls include the values, beliefs and social norms of organizations. Three forms of cultural control can be defined: (i) value controls (direction, basic values and purpose of organizations (Simons, 1995)), (ii) symbol-based controls (observable expressions which lead to a type of culture) and (iii) clan controls (individuals exposed to socialization process (Ouchi, 1979)) (Malmi and Brown, 2008).
3.2.4 Frameworks of Otley (1999) and Otley and Ferreira (2005)
Otley (1999) developed a framework with the intention to provide a checklist which guarantees that a whole picture of control systems operation is examined. The framework implies how organizations can manage organizational performance. The central contingency variables of the framework are the strategy and the objectives which organizations want to achieve. Otley and Ferreira (2005) extended the framework and renamed the framework into performance measurement system. “This reflects a shift from the traditional compartmentalized approaches to control in organizations to a broader perspective of the role of control in managing organizational performance” (Otley and Ferreira, 2009, p. 266). The framework focuses on several aspects, e.g. vision and mission, organization structure, strategies and plans, information flows and performance evaluation (Otley and Ferreira, 2009). In the extended framework the strategy and structure of organizations are mentioned. The strategy is a direction which organizations choose to pursue the long term for achieving organizational objectives (Johnson et al., 2005) and the structure of organizations establishes the specification of how individual roles and tasks should be performed (Chenhall, 2003). Furthermore, information flows, systems and networks are very important within the framework; these aspects are the glue that binds the whole framework together.
3.2.5 Discussion
The MCSs and the types mentioned in the sub-paragraphs are, explicitly or implicitly, linked with each other and with the strategy and structure of organizations. The rules, procedures and plans of organizations and the behaviour of employees are associated with the strategy. Furthermore, the design of MCSs is influenced by different situational and contingency factors which include the strategy, structure, size, technology and competition of organizations (Gerdin and Greve, 2004; Chenhall, 2003; Fisher, 1998). Pertusa-Ortega et al. (2010) have stated that the strategy and structure of organizations are the most important contingency factors to achieve competitive advantages in comparison with other organizations. Moreover, according to several researchers, like Galan and Sanchez-Bueno (2009) and Chandler (1962), there is a reciprocal relationship between strategy and structure. Subsequently, if these two contingency factors are developed well, this can positively influence the performance of organizations.
3.3 Conclusion
controls and Malmi and Brown (2008) have defined planning, cybernetic, reward and compensation, administrative and cultural control systems. In table one the characteristics of the different types of controls are summarized. These MCSs are the basis on which a theoretical framework will be made in section six.
Table 1: Overview MCSs
Researchers: Classification: Types of management control: Explanation:
Diagnostic control Monitors organizational outcomes and correct deviations from preset standards of performance.
Simons (1995) Levers of control Belief systems Explicit set of shared beliefs that define basic values, purpose and direction. Boundary systems Formally stated limits and rules that must be respected.
Interactive control systems
Used by managers to regularly and personally involve in the decision activities of subordinates.
Results control
Indirect form of control because they do not focus explicitly on the employees' action but on the results of these employees.
Merchant & van
der Stede (2007) Object of control Action control
Ensuring that employees perform (do not perform) certain actions known to be beneficial (harmful) to the organization.
Personnel control
Designed to make it more likely that employees will perform the desired tasks satisfactorily on their own.
Cultural control
Shape organizational behavioural norms and to encourage employees to monitor and influence each other's behaviour.
Planning
Sets out goals of the organization thereby directing effort and behaviour. Furthermore, it provides the standards to be achieved in relation to the goal.
Malmi & Brown (2008)
Elements of management control systems
package Cybernetic
First, measures that enable quantification of an underlying phenomenon. Second, there are standards of performance to be met. Third, a feedback process that enables comparison of outcome of activities with the standard. This variance analysis is the fourth aspect. Fifth is the ability to modify the system's behaviour.
Reward and compensation
Motivating and increasing the performance of individuals and groups through attaching rewards to control effort direction, effort duration and effort intensity. Administrative
Direct employee behaviour through the organizing of individuals, the monitoring of behaviour and who employees are made accountable for their behaviour. Cultural
The values, beliefs and social norms which are established influence employees behaviour.
Otley (1995)
Performance management framework
Five questions related to the objectives, the strategies and plans, the targets, the rewards and the feedback of organizations.
Otley & Ferreira (2005)
Performance management systems
Twelve questions related to the vision and mission, key success factors, organization structure, strategies and plans, key performance measures, target setting, performance evaluation, reward systems, information flows, systems & networks, performance measurement systems use, change and strength & coherence.
4. Co-operative banks
As mentioned in the previous section, the MCSs of Malmi and Brown (2008), Merchant and Van der Stede (2007), Simons (1995; 1994) and the frameworks of Otley and Ferreira (2005) and Otley (1999) were designed for organizations. However, Rabobank Emmen-Coevorden is a co-operative bank which has other characteristics associated with control than non co-operative organizations. As a result, this section emphasizes co-operative banks and consists of four paragraphs. Firstly, a short overview of the history of co-operative banks in Europe is presented. The history of Europe is described because the empirical research is conducted within the Netherlands. After that, the characteristics of co-operative banks are discussed. Based on these characteristics and the MCSs of Malmi and Brown (2008), Merchant and Van der Stede (2007) and Simons (1995; 1994) it is stated which MCSs are, in general, applicable to co-operative banks. These hypotheses are described in paragraph three. Finally, a short conclusion is presented.
4.1 History co-operative banks in Europe
Historically, consumers of the rural population including the farmers and small and medium enterprises were not provided with financial services in contrast to the customers who were wealthy and lived in the urban areas. The lack of providing financial services to all consumers was the reason for the entrance of co-operative banks in the 19th century in Europe (Germany). These banks were founded on the ideas of Hermann Schulze (1803-1883) and Wilhelm Raiffeisen (1818-1888). The problem was solved by the establishment of co-operative banks because the members and consumers had financed the institutions and they were engaged in the decision making process. However, the need for the establishment of co-operative banks has ebbed away in the last 50 years, i.e. co-operative banks do not longer rely only on their members for funding. The banks have entered the debt capital market, consequently they must satisfy rating agency requirements to secure funding on favourable terms (Rabobank, 2009; EACB, 2004).
Nowadays, the environment of co-operative banks has changed considerably. This tendency is clearly reflected in the evolution of the co-operative banks, i.e. in the past the banks were locally oriented, after that nationally oriented and now a lot of co-operative banks are internationally oriented (Rabobank Group, 2009). Additionally, the interests of co-operative banks are represented by the European Association of Co-operative Banks (EACB). According to the EACB (2004) “the primary mission of co-operative banks is to promote the economic interest of their members, who are their customers. Co-operative banks strive to do so by offering quality products and services at attractive prices from the perspective of what is good for the customer” (2004, p. 5). As a result, co-operative banks are major players within the financial sector. This position is determined by the stability and competitiveness of co-operative banks which is based on their capitalization, low-risk profile and steady performance (EACB, 2004). Other characteristics of co-operative banks are discussed in the following paragraph.
4.2 Characteristics of co-operative banks
Co-operative banks have other characteristics than non co-operative organizations (EACB, 2004). In this paragraph the most important characteristics of co-operative banks which may have consequences for the control of these banks are described. Firstly, co-operative banks have a special share capital structure because the banks have members who are at the same time the customers. As a result, the degree of conflict of interests in co-operative banks is lower because the interests of the members and customers are the same, i.e. the principle-agent problem is not applicable to co-operative banks (this problem exists when the owners of organizations, the principals, delegate work to the managers, the agents, who not always act in the best interests of these organizations (Eisenhardt, 1989)). However, the members are not the only stakeholders of co-operative banks whose needs and expectations should be satisfied. Consequently, it can be assumed that the control of co-operative banks is complex because of the different needs and expectations of multiple stakeholders (EACB, 2004).
co-operative banks. The council of members of Rabobank Emmen-Coevorden has different roles; the council (i) approves the policies and statements, (ii) appoints the members of the supervisory board, (iii) amends the statutes, (iv) decides about mergers and (v) takes part in the decisions about the allocation of the funds of the Incentives Plan6. Moreover, the supervisory board partly consists of the members of local banks and is informed by the Audit Rabobank Group (ARG) about the control of the local Rabobank. The ARG has an important role in the control of each local Rabobank. The ARG provides an independent and objective additional assurance to the executive and supervisory board and the management of the subunits to the extent to which they are in control. Moreover, the ARG provides a declaration of loyalty to the financial statements to the banks (Rabobank, 2011).
Thirdly, co-operative banks deal with multiple kinds of performance measures. The performances of co-operative banks include more than solely financial performance and favourable pricing for the customers. “Performance is also reflected in the degree of customer satisfaction, in the extent banks act in customers’ interest, in the access offered to networks and knowledge of the bank, in the stability/duration of relationships, in the way banks deal with the environment/sustainability and in the degree of transparency” (EACB, 2010, p. 10). It is complex to control all these different kinds of performances in an appropriate manner.
Fourthly, the environment of co-operative banks is constantly changing. Customers are part of this environment and their needs and expectations are changing. Co-operative banks have to react to and anticipate these new circumstances. If a co-operative bank wants to react, it is important that the processes of the bank are flexible. The changing environment has consequences for the control of co-operative banks because the banks want to achieve their predetermined budgets and targets (Rabobank Nederland, 2009).
Fifthly, co-operative banks are decentralized networks which are established at the local level. In this way, co-operative banks are deeply rooted in the local environments and play important roles in the development of regional and local economies and social cohesion. As a result, co-operative banks have many responsibilities to the local customers which they have to fulfill (EACB, 2004).
Sixthly, the umbrella organization, Rabobank Nederland, performs multiple tasks with respect to the local banks, i.e. support, advice and guidance. These roles have consequences for the control of the local Rabobanks. Rabobank Nederland has a very important role in the formulation of the overall strategy and policy of the local Rabobanks, i.e. the board of directors of the local banks has to comply with different policies of Rabobank Nederland before they can define their own strategies. Furthermore, Rabobank Nederland has developed the products which are offered to the customers. As a result, the role of the local Rabobanks in the development of new products is very limited. Moreover, Rabobank Nederland provides systems to the local Rabobanks which they have to use. The umbrella organization has also standardized the processes. Consequently, the behaviour of the employees in the local Rabobanks is influenced. To summarize, the local Rabobanks are highly dependent on Rabobank Nederland and have little freedom of action, i.e. the local banks have solely the freedom to decide how they are going to attract and maintain their customers in the local areas (Rabobank Nederland, 2010). Finally, employees have an important role in the relationship with the customers because the employees have the first contact with the customers of the local Rabobanks. As a result, the employees should represent the local bank in an appropriate manner. To achieve this, the behaviour of the employees should be controlled (Rabobank Nederland, 2010). In the next paragraph the characteristics of co-operative banks are related to the MCSs of Malmi & Brown (2008), Merchant and Van der Stede (2007) and Simons (1995; 1994).
6
4.3 Management control systems in co-operative banks
In the existing literature, the relationship between co-operative banks and management control is underexposed. Based on the characteristics of MCSs and co-operative banks, some hypotheses can be made. As mentioned earlier, the local Rabobanks are decentralized networks but they have limited freedom of action. The high influence of Rabobank Nederland has in general three consequences for the local banks. Firstly, the direction of the local Rabobanks is clearly defined and the employees are less motivated to find new opportunities (belief system of Simons, 1995; 1994). Secondly, the interactive control system of Simons (1995; 1994) can be applicable to co-operative banks because Rabobank Nederland is highly involved in the decisions of the local Rabobanks. As a result, Rabobank Nederland focuses the attention of the local Rabobanks on specific strategic issues. Thirdly, the standardized processes strongly define and influence the actions and behaviour of employees (belief and boundary systems of Simons, 1995, 1994; action control of Merchant and Van der Stede, 2007). Moreover, the employees are essential in co-operative banks because they are the representatives of the banks. Consequently, the behaviour of employees should be controlled to ensure that they act favourably. Different MCSs focus on the behaviour of employees, i.e. the action controls of Merchant and Van der Stede (2007), reward and compensation and administrative controls of Malmi and Brown (2008). Consequently, the hypotheses are that action controls, reward and compensation and administrative controls can be applicable to co-operative banks to control the behaviour of the employees. Furthermore, the behaviour of employees is partly influenced by personal and mutual monitoring and the culture which exists within co-operative banks (personnel and cultural controls of Merchant and Van der Stede, 2007; cultural controls of Malmi and Brown, 2008). As a result, it can be argued that personnel and cultural controls are applicable to co-operative banks to control the behaviour of employees. In addition, co-operative banks focus on multiple kinds of performances. One of the most important performances is the stability of relationships with customers and members. However, Merchant and Van der Stede (2007) stated that the results of employees are also important (results control). It is interesting to know if results controls are applicable to Rabobank Emmen-Coevorden.
To summarize, most of the MCSs of Malmi and Brown (2008), Merchant and Van der Stede (2007) Simons (1995; 1994) can be applicable to co-operative banks. However, one co-operative bank relies more on a certain control type than the other does due to several reasons. According to the literature of management control, these differences are based on the strategy and structure of organizations and/or co-operative banks.
4.4 Conclusion
5. Informational requirements
According to the literature of management control and in particular the MCSs and frameworks of Malmi and Brown (2008); Merchant and Van der Stede (2007); Otley and Ferreira (2005); Otley (1995) and Simons (1995; 1994) information which results from the strategy and structure are important for the control of organizations. Within these classifications, the strategy and structure are implicitly or explicitly mentioned. In addition, according to Simons (2000) strategy is an important part of effective control because control supplies the discipline and communication channels to standardize the strategy and guarantees that strategic goals are communicated through the entire organization. Moreover, the structure of organizations is important because it influences the efficiency of activities, motivation of employees, information flows and the control of organizations (Chenhall, 2003). Based on the aforementioned researchers, this section concentrates on the information which results from the strategy and structure. Moreover, the Rabobank uses the ‘Rabobank Sturingsmodel’ for the control of the local Rabobanks. As a result, the information which results from this model is also discussed. This section consists of five paragraphs. First it has to be defined what information and informational requirements are. After that, different strategy classifications and the associated information are described. In paragraph three several types of structures and information are discussed. Moreover, in paragraph four the ‘Rabobank Sturingsmodel’ is introduced and the associated information is explained. Finally, a short conclusion is provided.
5.1 Definition of information
Information had an important role in management control in the past and also will in the future. Hinomoto (1971) has investigated the relationship between information and management control. According to Hinomoto (1971) management control consists of three processes: (i) collection of information about the conditions of activities, (ii) evaluation of this information and (iii) execution of proper control actions when this is necessary. However, Hinomoto (1971) did not define what information is. According to Davenport and Prusak (1997) information is a message which should have an impact on the judgement and behaviour of the receiver. Additionally, the view of Hinomoto (1971) is supported by Simons (2000), i.e. information is necessary for the effective control of organizations if these organizations want to achieve their financial and strategic objectives. Moreover, informational requirements are necessary for the control of organizations. As indicated earlier, informational requirements are items of information which should be collected in order to meet the requirements of the commander7. The relationship between information and control is not mentioned in this definition but Murno and Wheeler (1980) have focused on this relationship. According to these researchers “the process of determining requirements for control purposes consists of five major activities: (i) understand the business unit objectives, (ii) identify the critical success factors, (iii) identify the specific performance measures and standards, (iv) identify data required to measure performance and (v) identify decisions and information required to implement the plan” (1980, p. 29).
5.2 Strategy
To be able to define the information which results from the strategy, first it should be defined what strategy is. Several definitions of strategy are described in sub-paragraph one. Secondly, numerous researchers have classified strategies and the reasons why specific classifications are chosen in this thesis are described. Subsequently, the similar and contradicted characteristics of these classifications and the information which results from these characteristics are described in sub-paragraph three and four. Finally, a short overview is presented.
5.2.1 Strategy definition
Several researchers have conceptualized strategy. One of the first researchers, Chandler (1962), defined strategy as “the determination of the basis long-term goals and objectives of an organization, the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (1962, p. 13). However, this is a very broad definition and it does not make a distinction between corporate and business unit strategies. According to Langfield-Smith (2006) corporate
7
strategies focus on the markets where organizations want to operate in and business strategies focus on the individual business units of organizations and how these units are operating in their industries. The business strategy view is supported by several researchers, e.g. Porter (1980) and Simons (1990). Porter (1980) argued that a strategy depends on the choice of a different set of activities to deliver a unique product to the customers. Moreover, Simons (1990) stated that the business strategy includes how an organization competes in a given industry and positions itselves compared with the competitors. To summarize, strategy as applied in this thesis could be defined as follows: strategy determines how an organization distinguishes itselves from its competitors by focusing on activities and industries to deliver unique products, which is in line with the definitions of Porter (1980) and Simons (1990).
5.2.2 Strategy classifications
This thesis focuses on the strategies of Miles and Snow (1978), Porter (1980) and Gupta and Govindarajan (1984). Miles and Snow (1978) classified four strategy types which are based on the reactions of the management to the entrepreneurial, technological and administrative problems and on the interactions between the organization and its environment. The typologies of Miles and Snow (1978) are chosen because Rabobank Emmen-Coevorden depends on Rabobank Nederland but it is relevant to examine which influence the management of a local Rabobank has on the three problems. Furthermore, the types are chosen because Miles and Snow (1978) emphasized that control systems should be congruent with the strategy of organizations (Simons, 1987). In addition, this thesis describes the position strategies of Porter (1980) which are based on the competitive advantages of organizations, the length of the product life cycles and the development of industries that the organizations operate in. The positions of Porter (1980) are chosen because they are mainly focused on competitive advantages. The local Rabobanks want to use their co-operative principles to distinguish themselves in relation to other non co-operative banks. Thirdly, this thesis discusses the mission strategies of Gupta and Govindarajan (1984) which are based on the development of the market, the life-cycle phase of products and the decision of management to maximize market share or short-term profits. The missions of Gupta and Govindarajan (1984) are selected because the missions emphasize the decision which management has to make. It is interesting to examine if the local Rabobank Emmen-Coevorden has the opportunity to make this decision by its own or if they are influenced by the policies of Rabobank Nederland.
Additionally, there are some extra reasons why the strategy classifications of Miles and Snow (1978), Porter (1980) and Gupta and Govindarajan (1984) are selected. Firstly, the classifications have the same point of departure, i.e. the management is responsible for the strategic choice of organizations (Kald et al., 2000). Secondly, many researchers have used these classifications to test the empirical validity in different contexts of the industry (Dent, 1990). Finally, according to Kald et al. (2000) “in studies of relationships between business strategy and the design and use of MCSs, the classification schemes of Miles and Snow (1978), Porter (1980) and Gupta and Govinarajan (1984) have had considerable impact” (2000, p. 198). As a result, the classifications share some similarities which are described in the following sub-paragraph.
5.2.3 Similar characteristics of classifications
