- MANAGEMENT INFORMATION -
BALANCING SUPPLY AND DEMAND
MSc. Thesis Business Administration:
Organizational and Management Control
University: University of Groningen
Faculty: Faculty of Economics and Business
Degree programme: MSc. BA – Organizational and Management Control
Course: EBM859A20 – MA Thes.BA O&MC
Supervisor: drs. P.C.G. Molenaar
Supervisor 2: Dr. B. Crom
Supervisor Company X: Henrik Postma
Name: Frederieke Bakkerode
Address: Amsteldijk 158a
1079 LH Amsterdam
Phone: 0628881850
PREFACE
This Master thesis is the final part of my Master Business Administration – Organizational and Management Control at the University of Groningen. Inspiration for this thesis was found during my internship as an assistant controller at Company X. Writing this thesis gave me the opportunity to apply academic knowledge to one of the main objectives of the management information project I actively participated in during my internship. Applying academic knowledge to the management problem presented in this research was a challenging as well as a very valuable experience. This thesis underwrites the surprising similarities and differences between organizational and management control theories and practice, which I became aware of from the moment I started my internship as an assistant controller.
I would like to thank several persons for their support during the process of conducting this research. First, I would like to thank my supervisor of the University of Groningen, drs. P.C.G. Molenaar. He gave me interesting insights and unique perspectives to help me developing the conceptual framework and conducting my exploratory case study. In addition, he helped me structuring both my thoughts and my report. I would like to thank Dr. B. Crom for his effort as my second supervisor.
Special thanks go out to Henrik Postma, who was my supervisor at Company X. He gave me the opportunity to do an internship as well as to conduct research at Company X Area Management Asia Pacific. Also, I would like to thank everyone I cooperated with and who gave me advice and support when I was conducting my research. My internship as well as the research I conducted both have been an extremely valuable experience.
I hereby seize the opportunity to also express a word of gratitude to my family and friends for their continuous support.
Frederieke Bakkerode
MANAGEMENT SUMMARY
In this research, from the reviewed literature a conceptual framework is developed which provides guidance on how to improve the effective use of management information on both central and decentralized organizational levels. In decentralized organizations, authority to make decisions is assigned to management at decentralized organizational levels. To effectively communicate between the central and decentralized organizational levels, management information plays an important role.
The conceptual model built using insights from reviewed literature is applied to an explorative case study researching management information at Company X. The information used in the case study is based on a management information project currently running at Area Management Asia Pacific. Comparison of the conceptual model based on literature about management information, and the situation currently present in the case, reveals a gap between literature and practice. Literature suggests that in the relationship between central and decentralized organizational levels, information distributed from central to decentralized levels has the purpose of decision making support. However, the case study reveals that information distributed from central to decentralized levels can also have the purpose steering, as an interactive control system. Both literature and the case study confirm that management information distributed from decentralized to a central organizational level has the purpose of monitoring performance, and is therefore used for management control. Effectiveness criteria for information are subdivided in information systems, information requirements and information characteristics and all influence usefulness of the information. The same systems and requirements apply to both flows of information, however, at a decentralized level a high level of detail is preferred whereas at a central level, integrated and aggregated information enhances its usefulness.
TABLE OF CONTENTS PREFACE………....3 MANAGEMENT SUMMARY………..4 TABLE OF CONTENTS………...6 1. INTRODUCTION………..8 1.1 Introduction………...8
1.2 Motivation for the study………...8
1.3 Outline………..10 2. RESEARCH DESIGN………..11 2.1 Research objective………..11 2.2 Research questions………..11 2.3 Research methodology………11 3. LITERATURE REVIEW………13 3.1 Organizational effectiveness………..……13
3.1.1 Organizational context and structure………..……13
3.1.2 Approaches to organizational effectiveness………...13
3.1.3 Conclusion………..15
3.2 Management information………..16
3.2.1 Information systems………16
3.2.2 Information for decision making………18
3.2.3 Information for control………...19
3.2.4 Conclusion………..20
3.3 Organizational decentralization………21
3.3.1 Market as metaphor for organizational design………...21
3.3.2 Centralization versus decentralization………21
3.3.3 The principal – agent relationship………..22
3.3.4 Conclusion………..23
3.4 Management information and decentralization………..24
3.4.1 Organizational and information assumptions……….24
3.4.2 Management information from a central level to decentralized levels………...25
3.4.3 Management information from decentralized levels to a central level………...25
3.4.4 Conclusion………..26
3.5 Effective management information………..27
3.5.1 Effective information systems..………..27
3.5.2 Content of effective management information………...28
3.5.4 Conclusion………..30
3.6 Conceptual model………...31
3.6.1 Variables and relations……..………..31
3.6.2 Conceptual model………...32
4. MANAGEMENT INFORMATION: AN EXPLORATORY CASE STUDY..……….………..34
4.1 Case study methodology……….34
4.1.1 Single case study……….34
4.1.2 Triangulation………...34
4.2 Data collection………...………..35
4.2.1 Documents and archives………...………...35
4.2.2 Observations………...35
4.2.3 Interviews………36
4.3 Results………..38
4.3.1 Introduction……….38
4.3.2 Flow of information from central to decentralized level………38
4.3.3 Flow of information from decentralized to central level………39
4.3.4 Effectiveness criteria for information from central to decentralized level……….39
4.3.5 Effectiveness criteria for information from decentralized to central level……….40
4.3.6 Management information and the relation between area and regions………....41
4.4 Data analysis………43
4.4.1 Flow of information from central to decentralized level………43
4.4.2 Flow of information from decentralized to central level………43
4.4.3 Effectiveness criteria for information from central to decentralized level……….44
4.4.4 Effectiveness criteria for information from decentralized to central level……….45
4.4.5 Organizational & information assumptions………46
4.5 Conclusion of the case study………...………...……….….……….48
5. CONCLUSIONS……….………..50
5.1 Findings………...……….………50
5.2 Limitations………...54
5.3 Recommendations and suggestions for further research……….…………...55
REFERENCES
1. INTRODUCTION
“Accounting information systems have become more sophisticated in the course of time, but their success rate is lagging behind” (Markus & Pfeffer, 1983).
1.1 Introduction
Management information is an important part of an organizations’ total management control system. It gives insight into performance, strengths, weaknesses and critical success factors of the organization. The right management information supports managers continuously in determining and implementing strategy of the organization. It should be consistent with the policies and objectives of the organization and linked to the objective of responsible managers. Management information should be easy to produce and conveniently presented. Moreover, the right management information suits information needs of concerned managers and target groups.
Through the application of more sophisticated computer-based information systems, managers have tools to improve the performance of departments and the organization as a whole (Daft, 2004). These applications use information stored in corporate databases to help managers in decision making and exercise control in departments and their organization. Various elements of information systems are used for decision making and control. As Daft (2004:288) states, “management information systems – including information reporting systems, decision support systems, and executive information systems – facilitate rapid and effective decision making”. Elements for control include various management control systems. Management control subsystems are classified by Daft & Macintosh (1984:43) as “budgets, financial reports, statistical reports, reward systems and quality control systems”. The systems for decision making and control often share the same basic data, but the data reports are designed and used for a primary purpose of decision making versus control (Daft, 2004). This theory illustrates that information can serve different purposes within divisions and within organizations as a whole. Various theories attempt to explain the different types and usage of management information in organizations. Some of them more dedicated to the descriptive approaches, power control (Markus & Pfeffer, 1983) and the agency problem (Eisenhardt, 1989a), whereas others approach the topic from the a more prescriptive angle and elaborate on contingency theory and system theory (Chenhall & Morris, 1986; Gul & Chia, 1994; Chenall, 2003; Malmi and Brown, 2008).
1.2 Motivation for the study
Asia Pacific is responsible for managing and supporting management at regional establishments in the geographical area of Asia Pacific. Area Management Asia Pacific’s Management Team is located at Company Xs two headquarters. The area is subdivided into eight regions with regional management. At all regional establishments Company X general-, commercial-, financial-, and HR managers are positioned, along with local staff. The company chart and Area Management Asia Pacific organization charts can be found in Appendix I.
Analyzing management information about budgeted-, previous year-, actual- and forecasted performance in cooperation with the management at the regional establishments plays a major role at Area Management Asia Pacific. It serves specific information needs within the divisions Ys’ planning and control cycle. This is necessary to steer global market performance and control commercial revenue and costs. Both the geographical distance between Area Management Asia Pacific and the region it manages and supports and the variety of countries within the portfolio of responsibilities of Area Management Asia Pacific enhance the need of accurate management information for steering and to control the businesses. Within the Area Management Asia Pacific organization, the Area Management Team located at headquarters of Company X provides management information in the form of (non) financial reports to the management at regional establishments, as well as to their respective management at a higher level in the organization. For reporting, relied is on multiple data sources and several tools are in place to retrieve data from those sources. Also, management and local staff at regional establishments retrieve data from the various sources themselves and create their own reports for regional steering purposes. Many different (non) financial management information reports are available on a weekly / monthly base. Due to this diversity in management information reports, caused by the multiple data sources and tools, there are complaints. Management at headquarters prefers to standardize reporting across regions for steering purposes, whereas management and local staff at regional establishments also create and use their own reports as they need to analyze more specific and customized regional information for managing and steering purposes. The Area Management Asia Pacific has taken up the ‘Just MI’ project, to investigate what reports are currently used by and distributed to management at regional establishments, what reports are developed by management and local staff at regional offices themselves, and what the (non) financial information needs are of both regional management in Asia, as well as for the Area Management Team at headquarters. The starting point of the project was to assess supply and demand of (non) financial management information reporting is. The projects main objectives are:
- Increase reporting efficiency on a (de-)centralized level. - Move towards more joint Company X reports.
In this paper, the focus is on providing insights and suggestions on the first objective of the management information project.
1.3 Outline
2. RESEARCH DESIGN
2.1 Research objective
The main objective of this research is to develop a conceptual framework providing insights into the use of (non) financial management information reports for decision support and management control purposes on both central and decentralized organizational levels. This conceptual framework will be tested in a qualitative empirical research at Company X Area Management Asia Pacific, which will result in suggestions for improvement of the management information reports currently in use. By analyzing management information for decision making and management control from different angles from an academic point of view, this paper enhances our fundamental understanding of management information types and usage.
Due to the merger between Company A and Company B in 20XX, post-merger information system integration and/or partnering influences management information data sources and availability. Although this topic plays a major role in the International and the Netherlands division, it is outside the scope of this research because it is within the responsibilities of management at a different hierarchical level in the organization.
2.2 Research questions
In order to meet the research objective stated above, the following research question is formulated:
“How to establish effective use of management information on both central and decentralized organizational levels?”
To answer the research question stated above as accurately as possible by providing a theoretical framework from the literature review, this question is supported by five underlying research questions.
1. “What is organizational effectiveness?” 2. “What is management information?”
3. “What is the relationship between central and decentralized organizational levels?”
4. “How does management information influence the relationship between central and decentralized organizational levels?”
5. “How can effective use of management information be established?”
2.3 Research methodology
subsequently answers to above stated research questions. The objective of this part of the study is to develop a conceptual framework that describes possible determinants that lead to effective use of management information reporting on both central and decentralized organizational levels. The research questions will be answered by drawing on literature about organizational theory and design, as well as on literature about organizational and management control. This ultimately enables the formulation of a conceptual framework. The suitability of this framework in practice is assessed in the empirical part of this study in the form of a case study. To be more specific, the framework is assessed at Company X Area Management Asia Pacific.
3. LITERATURE REVIEW
3.1 Organizational effectiveness
The question “What is organizational effectiveness?” is answered in this section. Structural and contextual dimensions of an organization are outlined, followed by three approaches to organizational effectiveness and a concluding remark.
3.1.1 Organizational context and structure
Dimensions that describe specific organizational design traits describe organizations much the same way that personality and physical traits describe people. Contextual dimensions describe the organizational setting that influences and shapes the structural dimensions and characterize the whole organization, including its size, technology, environment, culture and goals and strategy. According to Brickley et. al. (1997:121), “there are three key aspects of the organizational context, the external business environment of an organization, that have the greatest influence on the organizational strategy”. First, the technology affects its products, methods of production and information systems. Second, the structure of its markets influences who the competitors, customers and suppliers are. Third, the regulatory constraints on and tax has consequences for its activities. The business strategy of the organization, the choice of industries and basis for competition (price, quality and services), tends to have the most direct influence on the optimal organizational structure, the organizational architecture. Structural dimensions provide labels to describe the internal characteristics of the organization and create a basis for measuring and comparing organizations. The general structural dimensions are the organizations formalization, specialization, hierarchy of authority, centralization, professionalism and personnel ratio’s. Brickley et. al. (1997:122) state that “there are three critical features of an organizations architecture that have to be optimized and in equilibrium”. First, the assignment of decision rights within the organization. Second, the performance evaluation system which identifies the key performance measures by which managers and employees are evaluated. Third, the organizations reward system which defines how people are rewarded for meeting performance goals. “An effective organizational architecture is one that not only links decision-making authority to people with the relevant information, but ensures that decision makers have appropriate incentives to make value-increasing decisions” (Brickley et. al., 1997:121). To ensure an effective organization structure, these three critical aspects – assignment of decision rights, performance evaluation and the reward system - should be mutually consistent and reinforced.
3.1.2 Approaches to organizational effectiveness
for achieving them. It implicitly takes into consideration a range of variables at both the organizational and departmental levels. Whereas “effectiveness” is defined as to what extend a goal is achieved, “efficiency” refers to the amount of resources used to achieve these goals. Efficiency is based on the quantity of materials, money and employees necessary for producing a given level of output. Efficiency is a more limited concept and can be measured as the ratio of inputs to outputs. Managers are supposed to carefully balance the needs and interests of various stakeholders in setting goals and striving for effectiveness. A stakeholder is any group within or outside the organization that has a stake in the organizations performance. If an organization fails to meet the needs of several stakeholder groups, it is probably not meeting its effectiveness goals. There are various approaches to measure effectiveness in organizations, which are described in the sections below.
3.1.2.1 Goal approach
“The goal approach to effectiveness identifies an organization’s output goals and assesses how well the organization has attained those goals” (Price, 1972:3). The important goals to consider are financial and operative goals, because they reflect activities the organization is actually performing. The goal approach is used in organizations because output goals can be readily measured. Two problems that must be resolved are the issues of multiple goals and subjective indicators of goal attainment. Most organizations use a balanced approach to measure achievement of goals, because there are departmental as well as overall performance goals and the full assessment of effectiveness should take into consideration several goals simultaneously. Organizations often have objective indicators for certain goals, such as profit or growth. However, subjective assessment is also needed for other goals, such as employee welfare or customer satisfaction. The primary goal of this approach is productivity, efficiency and profit, sub goals are planning and goal setting.
3.1.2.2 Resource-based approach
3.1.2.3 Internal process approach
From an internal process approach, effectiveness is measured as internal organizational health and efficiency. The important element in effectiveness is what the organization does with the resources it has. According to Cunningham (1977:463), “from an internal process perspective, there are several indicators of an effective organization”. These are corporate culture and climate, teams and loyalty, confidence, trust and communication between employees and management, decision-making near sources of information, undistorted horizontal and vertical communication, rewards to managers for performance, growth and development of subordinates and interaction between the organization and its parts. Efficient use of resources and harmonious internal functioning are ways to measure effectiveness. A shortcoming of this approach is that total output and the organizations relationship with the external environment are not evaluated. Also, evaluations of internal health and functioning are often subjective because many aspects of inputs and internal processes are not quantifiable. The primary goal of this approach is stability and equilibrium, sub goals are information management and communication.
3.1.3 Conclusion
3.2 Management information
The question “What is management information?” is answered in this section. Information systems are described and the purpose of management information to support organizational decision making and the purpose of management information for organizational and management control are outlined. A summary of this section is given in a concluding remark.
3.2.1 Information systems
“Highly successful organizations are typically those that most effectively collect, store, distribute and use information. More than facilities, equipment, or even products, it is the information a company has and how it uses it that defines organization success” (Richards, 1998:30).
3.2.1.1 Information
Information is in general organized data that can be used for used for decision making. Data in this context means detailed facts about business events related to business processes or facts about the external environment. Simons (1991:49) states that “information is necessary for the effective control of organizations if these organizations want to achieve their financial and strategic objectives”. Therefore, information is organized data, used for decision making and necessary for the effective control of organizations if these organizations want to achieve their financial and strategic objectives. For data to become information, some procedure or system is needed in order to collect, process and present data. “Information systems are computerized or manual systems to capture data and transform the data into information” (Sabherwal et. al., 2006:1849). As the complexity of computer-based information systems has increased over the last decades, applications have grown to support effective decision making and management control for complex and uncertain problems. “These systems often share the same basic data, but the information and reports are designed and used for a primary purpose of decision making versus control” (Daft, 2004:288). Figure 1. shows how information systems for decision making and for control are interconnected.
Figure 1. Information systems for decision making and for control.
3.2.1.2 Accounting and control information systems
accounting and control systems within organizations. “Accounting and control systems will be implemented easily to the extend that they are: 1) Consistent with other sources of power in their implications for the distribution of power; 2) Consistent with the dominant organizational culture and paradigm in their implications for values and beliefs; 3) Consistent with shared judgements about technical certainty and goal congruence in the organization” (Markus and Pfeffer, 1983:205). Considering the operation of accounting and control systems, at least three uses to which they are commonly put are related to the acquisition or exercise of power. These three uses are closely related to the organizational architecture of Brickley et. al. (1997) and are decision making, altering organizational performance and conferring legitimacy. Accounting and control systems are related to intra organizational power because they collect and manipulate information used in decision making. Because of the use of accounting and control systems in decision making, those who have control over information flows in the organization come to have increased power. Furthermore, accounting and control systems are related to intra organizational power because they are used to change the performance of individuals and the outcomes of organizational processes. Because of the use of accounting and control systems in individual performance evaluation and action initiation, those who have access to the information in the systems obtain increased power. Moreover, accounting and control systems are related to intra organizational power because they can be used to enhance the legitimacy of individual and group activities, regardless of any substantive impacts on individual or organizational performance. Because they embody the ideology of rational decision making, accounting and control systems and their associated decision making technology can provide power to units with access to and control over these systems through the social legitimacy conferred on the choices made, whether or not such choices were actually affected by the systems. Those who obtain control over key system design variables will ultimately determine the impact of the systems when they are used in decision making.
Munro and Wheeler (1980) focus in their paper on the relationship between information in organizations and organizational control, the Critical Success Factors approach. They state that “the process of determining information requirements for decision making and control purposes consists of the following activities: Understanding business unit objectives, identifying critical success factors, identifying the specific performance measures and standards, identifying data required to measure performance and identifying decisions to be made and information required to implement the plan” (Munro and Wheeler, 1980:29).
- Scope: The scope of an information system refers to the dimensions of focus, quantification and time horizon. Characteristics: External information, nonfinancial information, future oriented (probablistic).
- Timeliness : Provision of information on request, frequency of reporting, speed of reporting. - Aggregation: Information may be provided in various forms of aggregation ranging from
provision of basic raw, unprocessed data to a variety of aggregations around periods of time or areas of interest such as responsibility centers or functional areas. Characteristics: aggregated by time period, aggregated by functional area, analytical or decision models (marginal analysis, DCF, inventory models).
- Integration: Coordination of various segments within a sub-unit. Characteristics: Precise targets for activities and their interrelationship within sub-unit, reporting on intra-sub-unit interactions.
Implicit assumptions about information from Markus & Pfeffer (1983) are the following are closely related to the assumptions made by Chenhall and Morris (1986). First, more detailed information is preferred to less detailed. Second, more timely information is preferred to less timely. Third, quantitative information is preferred over qualitative information.
3.2.2 Information for decision making
3.2.3 Information for control
Another primary use of information in organizations is for control. Effective control systems involve the use of feedback to determine whether organizational performance meets established standards to help the organization attain its goals. The most commonly used methods operating those control activities are Management Control Systems (MCS). MCS are usually described as “information feedback systems” (Green and Welsh, 1988:288). According to Simons (1991:49), “MCS are broadly defined as the formal routines, reports and procedures that use information to maintain or alter patterns in organization activities”. Alternatively, Whitley (1999:507) states that the central task of management control is to “ensure that work activities and sub-units fulfil top managers objectives and provide the information and systems to enable the managerial hierarch to correct any deviations from established plans”. These control systems include the formalized information-based activities for planning, budgeting, performance evaluation, resource allocation and employee rewards. Targets are set in advance, outcomes are compared to targets an variances are reported to managers for corrective action. Advances in information technology improve the efficiency and effectiveness of these systems.
Ouchi (1979) views organizations from a control perspective and identified three management control mechanisms through which an organization can be managed so that it moves towards its objectives. The mechanisms are: 1) Markets; 2) Bureaucracies; 3) Clans.
- Market mechanisms: Prices convey all of the information necessary for decision making. Given a frictionless price mechanism, the firm can reward each employee in direct proportion to his or her contribution, so that an employee who produces little is paid little, and all payments, being exactly in proportion to contribution, are fair.
However, for organizational control the market metaphor is an imperfect one (Ouchi, 1979, Lazear and Gibbs, 2007:116). Market prices are better measures of value than the performance measures that firms usually have available. Therefore, bureaucratic mechanisms and clan mechanisms exist.
- Bureaucratic mechanisms: The fundamental mechanism of control involves close personal surveillance and direction of subordinates by superiors. Informational requirements are the rules established in the organization. Rules differ from prices in the sense that they are partial rather than complete bundles of information.
- Clan mechanisms: When socialization processes characterize the properties of a unique organization. Informational requirements are mainly implicit and in the form of organizational traditions and core values and beliefs.
process is needed, as well as information to measure outputs. Known means/ends relationships (task programmability) lead to behaviour control, and crystallized goals (measurable outcomes) lead to outcome control.
Figure 2. Conditions determining the measurement of behaviour and of output (Ouchi, 1979).
Simons (1995) developed the concept of the ‘Levers of Control’ for the purpose of organizational control. According to Simons (1995:81), “most managers tend to define control narrowly as measuring progress against plans to guarantee the predictable achievement of goals”. But these diagnostic control systems are only one ingredient of control. Three other levers defined by Simons (1995:81) are equally important in today’s business environment: “beliefs systems, boundary systems and interactive control systems”.
- Diagnostic control systems: Allow managers to ensure that important goals are being achieved efficiently and effectively. Critical performance variables of the organization.
- Beliefs systems: Empower individuals and encourage them to search for new opportunities. Core values of the organization.
- Boundary systems: Establish the rules of the game and identify actions and pitfalls that employees must avoid, what risks to avoid.
Interactive control systems: Enable top level managers to focus on strategic uncertainties, to learn about threats and opportunities as competitive conditions change, and to respond proactively to strategic uncertainties the organization faces.
3.2.4 Conclusion
3.3 Organizational decentralization
The question “What is the relationship between central and decentralized organizational levels?” is answered in this section. After the differences between centralized and decentralized organizations are outlined, advantages and disadvantages of decentralization are discussed. The principal – agent relationship central to the agency theory is applied to the relationship between central and decentralized organizational levels and a summarizing overview of the chapter is given in the conclusion.
3.3.1 Market as metaphor for organizational design
“The largest organization is the economy itself” (Lazear & Gibbs, 2007:110). The optimal organization of an economy was one of the most debated issues in the 20th century. On one side were advocates of centralized economies that were largely run by the governments; on the other side were advocates of decentralized economies with much less of a role for government. By the end of the 20th century, it was apparent that more decentralized market oriented economies have better internal process effectiveness and therefore are more efficient – they are better in creating economic growth, jobs and overall prosperity. Decentralized economies are efficient, self-organizing systems and arrive at equilibrium prices and quantities on their own without any central planner directing the market. “A firm’s organization must provide the same important functions as a market” (Lazear & Gibbs, 2007:114). First, markets use knowledge dispersed throughout the economy. Second, in cases were knowledge is costly/hard to communicate, markets are effective at moving decision making to the location of the knowledge. Third, coordination is achieved despite decentralized decision makers throughout the price system. Fourth, markets provide strong incentives for effective decision making and investment. When the organization wants to use both central and local knowledge effectively, coordinate decisions as necessary and provide strong incentives to make good, coordinated decisions, it first needs to consider whether a decision should be centralized or decentralized. Organizational decentralization is meant to make use of local knowledge. The more valuable is lower level knowledge that is difficult to communicate to top management, the more decentralization is expected. However, the more important coordination and control problems, the more centralized the organization is.
3.3.2 Centralization versus decentralization
are notably a line of business or a geographical area. The decision to allocate decision making to lower organizational levels is related to a number of trade offs between the advantages and disadvantages of centralized versus decentralized organizational structures. Decentralization of an organization has its advantages. In economics, information that is cheap/easy to communicate is usually called general knowledge. Information that is costly/hard to communicate is usually called specific knowledge (Lazear & Gibbs, 2007:120). Information is typically specific if it is perishable, complex, unforeseeable, or requires specific skills. Because in a divisionalized organization decision making authority is at decentralized organizational levels, local managers become experts in their specialized markets and they have the specific knowledge to make decisions that are hard to make at a central organizational level. However, “corporate management will only decentralize when it can implement a performance measurement system that captures the decision rights allocated to divisional managers” (Abernethy et. al., 2004:546). Abernethy et. al. (2004) identified information asymmetries between corporate and divisional managers and division interdependencies as the determinants that are important to control system design. The results of the study of Abernethy et. al. (2004) indicate that decentralization of an organization is positively related to the level of information asymmetries between a central and decentralized organizational level.
3.3.3 The principal – agent relationship
“Agency theory is directed at the ubiquitous agency relationship, in which one party (the principal) delegates work to another (the agent), who performs that work” (Eisenhardt, 1989a:58). Agency theory attempts to describe this relationship using the metaphor of a contract. The relationship between central and decentralized organizational levels can be viewed as an agency relationship in which the central organizational level (the principal) delegates decision making authority to the decentralized organizational level (agents). Two problems can occur in an agency relationship. The first is the agency problem, when desires or goals of the principal and agent conflict and when it is difficult or expensive for the principal to verify what the agents are actually doing. The second is the problem of risk sharing that arises when the principal and agent have different attitudes toward risk. Because the unit of analysis is the contract governing the relationship between the principal and the agent, the focus of the agency theory is on determining the most appropriate contract given the following assumptions about people, organizations and information:
- Human assumptions: People are self interested, bounded rational and risk averse.
- Organizational assumptions: There is a partial goal conflict among participants, efficiency is the effectiveness criterion and there is information asymmetry between the principal and the agent.
- Information assumption: Information is a commodity which can be purchased. The
“Specifically, the question becomes if a behaviour-oriented contract (salaries, hierarchical governance) is more efficient than an outcome-oriented contract (commissions, stock options, market governance)”, states Eisenhardt (1989a:58). Because the principal-agent relationship should reflect efficient organization of information and risk-bearing costs, it is effective mostly from an internal process approach in which the primary goal is stability and equilibrium and sub goals are information management and communication. Figure 3. shows the agency relationship between central and decentralized organizational levels. The arrows from central level to decentralized level and from decentralized level to central level represent flows of information. The arrows from the agency assumptions in the middle of the figure to the central and decentralized level represent the assumptions of the relationship between those levels.
Figure 3. Agency relationship in a decentralized organization.
3.3.4 Conclusion
3.4 Management information and decentralization
The question “How does management information influence the relationship between central and decentralized organizational levels?” is answered in this section. From section 3.2 we have learned that management information serves the purpose of decision support and the purpose of management control. From section 3.3 we have learned what the relationship is between a central organizational level and decentralized organizational levels. This section combines what we have learned from section 3.2 and section 3.3. The flow of management information from a central organizational level to decentralized levels is described, as well as the flow of management information from decentralized organizational levels to a central level. A summary is given in the concluding remark.
3.4.1 Organizational and information assumptions
The organizational and information assumptions of agency theory are relevant to the use of management information between central and decentralized organizational levels. The organizational assumptions of the partial goal conflict among participants, efficiency as the effectiveness criterion and information asymmetry between the principal and the agent are relevant to the relation between the central and decentralized organizational levels. The information assumption that information is a commodity which can be purchased is relevant to the management information system. Specifically the question becomes if behaviour-oriented contracts are more efficient than outcome-oriented contracts to overcome goal conflict and information asymmetry between the central and decentralized organizational levels.
From an agency perspective, in the case of complete information, the principal knows what the agent has done. A contract based on behaviour is most efficient, because an outcome-based contract would needlessly transfer risk to the agent. In the alternative scenario, the principal does not know exactly what the agent has done. The principal and the agent have different goals, and the principal cannot determine if the agent has behaved appropriately. Two aspects of this problem are: 1) Moral hazard: lack of effort on the part of the agent; 2) Adverse selection: misrepresentation of ability of the agent by the principal. In the case of unobservable behaviour due to moral hazard and adverse selection, the principal has two options (Eisenhardt, 1989a:61). One is to discover the agent’s behaviour by investing in information systems such as budgeting systems, reporting procedures, boards of directors and additional layers of management. The required information is about rules. The other option is to contract on the outcomes of the agent’s behaviour. The required information is about prices. The following propositions as listed by Eisenhardt (1989a) apply to organizations and information.
Proposition a: Information systems are positively related to behaviour-based contracts and negatively
Proposition b: The goal conflict between the principal and the agent is negatively related to
behaviour-based contracts and positively related to outcome-based contracts.
Proposition c: Task programmability is positively related to behaviour-based contracts and negatively
related to outcome-based contracts.
Proposition d: Outcome measurability is negatively related to behaviour-based contracts and
positively related to outcome-based contracts.
Proposition e: The length of the agency relationship is positively related to behaviour-based contracts
and negatively related to outcome-based contracts.
3.4.2 Management information from a central level to decentralized levels
Because decision making authority is pushed down to decentralized organizational levels in divisionalized organizations, at those decentralized levels there is a need for management information to support decision making. The flow of information from a central organizational level to decentralized organizational levels can therefore be described as information to support decision making. This management information is only effective if it serves this decision support goal. This relationship is shown in Figure 3.
3.4.3 Management information from decentralized levels to a central level
3.4.4 Conclusion
3.5 Effective management information
The question “How can effective use of management information be established?” is answered in this section. From section 3.1 we have learned that in an effective organization, decision making authority, performance evaluation systems and reward systems are balanced. Furthermore, in this study, effectiveness is measured as the efficient use of resources for internal information management. From section 3.2 we have learned that management information serves the purpose of decision support and the purpose of management control. This section combines what we have learned from section 3.1 and section 3.2. What information is needed to support effective decision making and what information is needed for effective management control can be viewed from different organizational perspectives, which are outlined in this section. The perspectives are summarized in the concluding remark.
3.5.1 Effective information systems
Information used for both decision making and management control is stored in organizational accounting and control information systems. The alignment between the information needs and the information supply determines the level of effectiveness that information has. To be efficient the organization should aim for equilibrium in management information supply and demand, this enhances information management and communication. The first step in identifying effective management information therefore is to consider effectiveness of the accounting and control information systems.
3.5.1.1 Effective accounting & control systems to support decision making
Markus and Pfeffer (1983:205) suggest that “power structures and organizational paradigms must be considered in both research and practice dealing with accounting and control information systems”. To ensure use of accounting information systems for decision making, Markus and Pfeffer (1983:205) state that “information systems will be implemented easily to the extend that they are: 1) Consistent with other sources of power in their implications for the distribution of power; 2) Consistent with the dominant organizational culture and paradigm in their implications for values and beliefs; 3) Consistent with shared judgements about technical certainty and goal congruence in the organization”. Therefore, the assumption can be made that to ensure effectiveness of the accounting and control systems for the use of decision making, they have to match characteristics derived from the ideas of Markus and Pfeffer (1983).
3.5.1.2 Effective management control systems
outcomes) lead to outcome control. When both are not applicable to a situation, clan control is used. Information comes in the forms of prices, rules and traditions. Ouchi’s (1979) extension to include clan control, goal congruence between people, is similar to relaxing the assumption of goal conflict in agency theory. The ability to measure either output and/or behaviour which is relevant to the desired performance is critical to the application of market and bureaucratic forms of control. The typology of management control systems derived from the ideas of Ouchi (1979) can be used to interpret effectiveness of organizational management control systems.
According to Simons (1995) management control systems containing explicit information about all four levers of control will enhance organizational performance. The four levers of control are diagnostic-, beliefs-, boundaries-, and interactive control systems and were described in section 3.2.3. Respectively information about the critical performance variables, core values, risks and strategic uncertainties will enhance organizational performance.
3.5.2 Content of effective management information
Focusing on a manager’s goals and critical success factors has been advocated as an approach to defining senior and middle managers information requirements by Munro and Wheeler (1980:27). Focusing on a manager’s “critical success factors” (CSF’s) is the most suitable to assist managers defining their significant information needs. CSF’s are those factors which determine success for a company or business unit, those tasks that must be done well to ensure success. As such, CSF’s are the areas of activity that should receive constant and careful attention from management. The current status of performance in each area should be continually measured and that information should be made available. Ensuring the attainment of an organization’s goals necessitates good performance in these areas and it is therefore imperative that management receives constant feedback regarding them (Munro & Wheeler, 1980:28). The approach emphasizes the link between a managers information needs on the one hand, and decision responsibilities and the organization’s objectives on the other hand. It also requires the manager to play an active role in the process, an ingredient often cited as essential to successful systems design and implementation. Because in an effective organization, resources are obtained and used effectively towards the attainment of organizational goals, it is necessary that managers be able to determine where they and their business units stand in relation to such goals. However in practice, corporate goals do not make very useful operational yardsticks because of their unquantifiable nature. Consequently, there is a requirement for more detailed, intermediate targets – targets which constitute a translation of the relevant corporate goals into operationally useful performance measures for a business unit. The process of determining information requirements consists of five major activities (Munro & Wheeler, 1980:29):
- Identify specific performance measures and standards. - Identify data required to measure performance.
- Identify decisions and information required to implement the plan.
If the information system is designed from the top down, management at a central organizational level is able to determine the information most critical to support the manager’s decision making. The CSF approach provides information which is tailored to the managers needs. As a result, the manager is not only more effective, but also more efficient. Since only information directly associated with the managers control processes is provided, the volume of information which the manager must absorb and analyze is significantly reduced. The main advantages of this approach are:
- Reduced amount of information needed. - Reduced time spent on analyzing.
At central organizational levels, management information for performance evaluation and rewards is needed. This management information serving the purpose of management control is made available by a decentralized organizational level and can be retrieved from the corporate databases, accounting and control systems. Using the CSF approach, information provided by the system is used directly in the management control function, i.e. used to compare performance against standards fro the purpose of indentifying the need for corrective action. Performance measures are tailored to ensure that the manager meets key responsibilities to achieve the objectives and carry out the strategies of the corporate business plan.
3.5.3 Characteristics of effective management information
they use efficient processing of information as a criterion for choosing among various organization design forms.
Implicit assumptions about information from Markus & Pfeffer (1983) are the following. First, more detailed information is preferred to less detailed. Second, more timely information is preferred to less timely. Third, quantitative information is preferred over qualitative information. Agency theory has similarities to these political models of organizations. Both perspectives assume the pursuit of self-interest at the individual level and goal conflict at the organizational level (Pfeffer, 1981; Markus and Pfeffer, 1983; Eisenhardt, 1989a). Also, in both perspectives information asymmetry is linked to the power of lower order participants (Markus and Pfeffer, 1983). The difference is that in political models goal conflicts are resolves through the power mechanism of political science (bargaining, negotiation and coalitions) while in agency theory they are resolved through the price mechanism of economics (the coalignment of incentives) (Brickley et. al., 1997). Both the political organizational perspective and the organizational contingency perspective highlight quantification and timeliness of information as important for effective decision making.
3.5.4 Conclusion
3.6 Conceptual model
From the literature outlined in the previous sections of chapter three, a conceptual model is developed. The theoretical background is derived from the thoughts of various authors and attempts to provide background to further investigate the research questions listed in section 2.2.
3.6.1 Variables and relationships
In this section, the variables and five relationships drawn from the literature about effectiveness, management information and the relationship between central and decentralized organizational levels are described.
The first relationship (arrow 1) drawn from the literature is the flow of information from central to decentralized organizational levels. This flow of information is characterized by its nature to support decision making by management at decentralized organizational levels.
The second relationship (arrow 2) drawn from the literature is the flow of information from decentralized organizational levels to a central organizational level. This flow of information is characterized by its nature to evaluate performance of the decentralized levels by a central level and assign rewards to those performances.
The third relationship (arrow 3) links the effectiveness criteria of information to support decision making to the flow of information from a central to a decentralized organizational level. The variables supporting ‘Effective information for decision making’ are divided into the sections A, B and C. First, section A lists variables that enhance effectiveness of information systems. Variables Aa, Ab and Ac are derived from the thoughts of Markus and Pfeffer (1983) on how to enhance implementation and usage of accounting and control systems to support decision making. Second, the variables listed in section B are the typology of information requirements derived from the idea of Munro and Wheeler (1980). A managers information requirements can be defined by focusing on a managers goals and critical success factors. Variable Bd. is ‘Data required for decision making’ to be consistent with the nature of the flow of information to support decision making. Third, the variables in section C. are about the characteristics of effective information. Characteristics in Ca are derived from the thoughts of Chenhall and Morris (1986) about the characteristics of information enhancing effectiveness and characteristics in Cb are derived from the implicit assumptions Markus and Pfeffer (1983) make about information.
and F. First, section D lists variables that enhance effectiveness management control systems. Variables in Da are derived from the thoughts of Ouchi (1979) on mechanisms through which organizations can seek to cope with performance evaluation and control. Variables in Db are derived from the thoughts of Simons (1995) on exercising adequate control in organizations. Second, the variables listed in section E are also derived from the idea of Munro and Wheeler (1980). The content of information requirements of information to support decision making and information for management control are both related to the managers goals and critical success factors. Variable 2d. is ‘Data required to measure and reward performance’ to be consistent with the nature of the flow of information to support management control. Third, the variables in section C. are about the characteristics of effective information. Characteristics in Ca are derived from the thoughts of Chenhall and Morris about the characteristics of information enhancing effectiveness and characteristics in Cb are derived from the implicit assumptions Markus and Pfeffer (1983) make about information. Characteristics implicit to useful information can be applied to both flows of information.
The fifth relationship (arrow 5) embodies the organizational and information assumptions about the nature of the relationship between central and decentralized level made by Eisenhardt (1989a). The object of the relationship between central and decentralized levels is therefore perceived as an agency relationship. In this study, the organizational and information assumptions are researched. This is because the research question highlights the topics of organizational decentralization which could be explained from the organizational assumptions, and the topic of management information which could be explained from the informational assumptions made by Eisenhardt (1989a).
3.6.2 Conceptual model
4. MANAGEMENT INFORMATION: AN EXPLORATIVE CASE STUDY
This chapter describes the case study methodology applicable to this study, the data collection technique used, the results of the data collection and an analysis of the results. In the data analysis, collected results are interpreted from the point of view of the conceptual model developed in chapter 3.
4.1 Case study methodology
Case study research is widely used and very effective in management research.. A case study is defined as “An empirical inquiry that investigates a contemporary phenomenon within its real life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used” (Blumberg et. al., 2008:375). With case studies, theories are developed and tested in a sequential, step-by-step manner. Starting with a previously developed theory the researcher compares the results of the case study with the theory.
4.1.1 Single case study
Single case studies are appropriate for investigating extreme or unique cases. The selection of a case is based on “replicating logic” (Blumberg et. al. 2008:376). The results of case studies are not generalized to populations, but to theoretical propositions. Based on one’s theory one expects that the same phenomenon occurs in the same circumstances or that the phenomenon differs if circumstances change. Research is based on reasoning (theory) and observations (data or information). How observations and reasoning are related to each other is a philosophical debate on the development of knowledge. Interpretivists hold the view that “the social world cannot be understood by applying research principles adopted from the natural sciences and propose that social sciences require a different research philosophy” (Hopper & Powell, 1985:445). Interpretivism does not attach a great deal of importance to the generalizability of findings. The world, and especially business world, is constant ly changing and in an ever changing world, generalization becomes questionable.
4.1.2 Triangulation
4.2 Data collection
Empirical analysis of documentary data, observations and interviews on which interpretations are based were collected during an internship as assistant controller at Company X Area Management Asia Pacific for a period of nine months. Data is collected about the flow of management information from a central to decentralized level, the flow of management information from decentralized to central level and about the influence of information on the relationship between central and decentralized level. An overview of the data collection is presented in Figure 6. The three sources of evidence all cover data about information from area management to regional management and data about information from regional management to area management. From both observations and interviews, data about the influence of information on the relationship between area management and regional management is obtained. (Blumberg et. al., 2008:378) underwrites the triangulation theory by stating that “an important aspect of data collection for analyzing a specific organizational situation is the use of multiple sources of evidence”.
Figure 6. Data collection
4.2.1 Documents and archives
“Documents including archival sources form a rich source of evidence and play a crucial role in case study research” (Blumberg et. al., 2008:378). Documents and interviews supplement each other. Documents are useful in preparing the outline of any interview and in discovering and identifying issues relevant to the case. In this research, relevant documents are internal management information reports containing financial information that are distributed from a central to decentralized organizational level. Also, presentations used to evaluate performance of the regions are used. A list of documents used is available in Appendix II.
investigation is used. “Participant observation offers access to information that is hard to obtain from outside the organization, however there is a risk that the researcher loses its neutral, objective view” (Blumberg et. al. 2008:379).
I was located in the main empirical site of this study, Area Management Asia Pacific, at a central level within the Area Management Asia Pacific organization. During my internship, I had the opportunity to cooperate with all members of the Management Team of Area Management Asia Pacific, and with all commercial directors and financial controllers who are located in the eight regions of Asia Pacific. I assisted the area controller in analyzing and monitoring performance of the regions and attended monthly meetings of the central area management, in which performance was discussed. Also, I was assigned project coordinator of the management information project from March 2011 to October 2011. The goal of the project is to facilitate management information reports for both area management and regional management. To be able to facilitate management information reports for area management and regional management, all five project team members have knowledge of the information systems, tools and management information reports. Also, the project team needs to have knowledge of the information needs of both area management and regional management to be able to facilitate management information reports. With the project team, we cooperated with the area controller and we arranged at least one conference call, lasting ½ - 1, hour with every regional commercial director and financial controller. Te goal was to gain knowledge of their information requirements and gain knowledge of what sources are regionally used to obtain information from, in order to be able to facilitate them in management information reports. During the period, there was a MI meeting in which the project and progress was discussed for a full day. Furthermore, I attended a controllers meeting attended by both area and regional controllers in which management information was discussed for three hours. Also, I attended a meeting attended by area and regional commercial directors in which management information was discussed for three hours. Reviewed and documented minutes of calls and meetings are consulted, they augment validity of the observations as a source of evidence.
With these insights I developed knowledge of both information used at the central level of Area Management Asia Pacific, as well as of the information used at the regional establishments. The longitudinal observations provide a relevant source of evidence for this study. A list of minutes reviewed is shown in Figure 7.
4.2.3 Interviews
Semi-structured interviews are used because they create the possibility to explore the main subject and to restructure and add or remove variables and relations drawn in the conceptual model. One-on-one
Figure 7. Observations
interviews are used to enable the possibility for the interviewees to speak more freely and open” (Blumberg et. al. 2008:378).
Managers being interviewed are involved with management information on either a central or a decentralized level within the Area Management Asia Pacific organization. From a functional perspective management information requirements of financial managers and commercial managers differ and therefore on both organizational levels an interview is conducted with a commercial and a financial manager. The interviewees were chosen because of their extensive experience both within the company and within the subject of management information. Because in the conceptual model one decentralized level is assumed, there are no differences assumed in perspectives between the regions.
4.3 Results
In this section, the results of the data collection are described. Documentation, observations and interviews result in facts about the current situation of the management information landscape. From the observations and interviews, data is obtained about management information and its influence on the relationship between central and decentralized organizational levels. The structure is based on the conceptual model in section 3.6, which is also the basis of the interview questions. In the introduction, the structure of the department is outlined, followed by a description of the management information systems, the effectiveness criteria of the management information and the influence of management information on the relationship between central and decentralized levels.
4.3.1 Introduction
At Area Management Asia Pacific, authority to make decisions is geographically decentralized to regional management. Also, authority to make decisions is decentralized to regional management by functional area. (Appendix I). The two main resources for internal information management are firstly the information systems and secondly staff involved in production of management information. There are two main information systems storing information for the International and the Netherlands division. One information system was originally developed and used by Company A. The other information system was originally developed and used by Company B. They are respectively called System A and the System B. It can be challenging to obtain management information from two information systems because of the tooling (Appendix II ad. 4). Timing and availability of Company A and Company B data is not always aligned due to data processing throughput times, and various tools exist to retrieve information from the systems (Appendix II ad. 4). The second main resource are the employees with knowledge of information systems who are responsible for internal reporting and ad hoc analyses. Usually this involves financial controllers and business intelligence employees. At headquarters as well as at all regional establishments staff is positioned who are responsible for management information reports and do ad hoc analyses.
4.3.2 Flow of information from central to decentralized level
