Key Performance Indicators in the Dairy Industry

Key Performance

Indicators in the

Dairy Industry

Co-operative Affairs

Key Performance Indicators in the Dairy Industry

Co-operative Affairs

Master Thesis

University of Groningen

Faculty of Economics and Business

MSc Business Administration

Specialization: Organizational and Management Control

Student:

Rob Zwart

Nieuwe Kijk in ’t Jatstraat 77

9712 SE Groningen

Student number:

S2051583

Telephone number:

0625308140

E-mail address:

r.j.zwart.1@student.rug.nl

First supervisor:

Prof. dr. H.J. Ter Bogt

Second supervisor:

Dr. B. Crom

Company supervisor:

Dhr. R. Rothkrantz

Preface

This thesis is the result of my graduation process for my master degree in Business Administration, with the specialization Organizational and Management Control, at the faculty of Economics and Business of the University of Groningen. This thesis was written in a five months period, from September 2012 to January 2013, at the head office of Royal FrieslandCampina in Amersfoort. The empirical research during this internship is conducted to evaluate and redesign the Key Performance Indicators at the department Co-operative Affairs.

I would like to thank several people for their support during this process. First, I would like to thank my first supervisor Prof. Dr. H.J. ter Bogt, for all his guidance and feedback during this period. His help definitely has had a positive influence on the quality of my master thesis, because he continuously encouraged and helped me to revise it. Furthermore, I would like to thank my second supervisor Dr. B. Crom, for his time and effort in co-reading my thesis. I would also like to thank the Director of Co-operative Affairs, Dhr. A. Schaap, for giving me the opportunity of conducting my graduation process at FrieslandCampina. Fourth, I would like to thank my supervisor within FrieslandCampina,

Dhr. R. Rothkrantz, for his contribution during a pleasant and instructive period. In addition, I also like to thank all other managers and employees of the department Co-operative Affairs who have given me the necessary information to get to know the organization and to conduct my empirical research. Finally, I would like to thank my family and friends for their support during the completion of this thesis. With pride I present you my master thesis and I hope you will enjoy reading it.

Rob Zwart

Amersfoort, January 2013

Executive summary

This report presents the research conducted at the head office of Royal FrieslandCampina (FC) concerning the performance measurement of the department Cooperative Affairs (CA), based on the use of Key Performance Indicators (KPIs). Prior to this research the awareness and commitment towards the former KPIs was decreasing, because these KPIs did not seem to measure the actually most

important performance of CA. This was caused by the used type of KPIs, i.e. they were financial figures, result- and performance indicators, instead of KPIs. Furthermore, there was an unbalance between the covered management perspectives and those that should be covered by a set of KPIs. Therefore, the objective of this research is to contribute to solving this problem by creating a new set of KPIs, based on literature and empirical research. The increase in awareness, commitment and usage of the KPIs

following from this new set should result in enhanced employee performance. Eventually this must result in an increase of the total efficiency of the department CA. In order to solve this problem and achieve the described objective this master thesis research used the following research question:

Based on literature and empirical research, conducted at the department CA, what would be a proper set of KPIs which could form a sound basis for the performance measurement and control of CA?

The research is divided into two parts to answer this question. The literature review provides the theoretical foundation which is required in order to achieve a new set of KPIs. And the empirical research did provide the necessary practical information to develop these KPIs, using interviews and brainstorm sessions. Combining the literature review with the empirical research should lead to a coherent set of KPIs which is based on theoretical input and empirical research, i.e. insights obtained in practice. In this way a new set of KPIs should become available which can be used to control and foster the efficiency of the department CA. However, the implementation process of the new set of KPIs is not included in this research; that will be a next step in the process of improving employee performance and CA’s efficiency.

research, i.e. the development of the KPIs, showed that CA makes to a certain extent use of all these types of control. According to Malmi and Brown (2008) and Sandelin (2008), it is essential to make use of such a control package and to make it internally consistent to align management controls and management techniques. Furthermore, Simons (1995, p. 88) also stated that it is essential to use his four levers of control simultaneously, because then they have the power to reinforce one another. Prior to the start of the empirical research it was expected that the BSC would play an important role in this research project. In the end it turned out it was more desirable to come to a balanced set of important controls, based on the KPIs, instead of a ‘real’ BSC. The emphasis on operational aspects and processes, which turned out to be most important during the interviews and brainstorm sessions, made it difficult (and not very useful) to develop a proper ‘traditional’ BSC (where the different perspectives in the end lead to the financial perspective). The reason for this is that the CSFs and KPIs developed in this research where not explicitly focusing on the notion of a cause-and-effect relationship. It was more important, just like Jazayeri and Scapens (2008, p.61) stated in their article, that the developed measures, i.e. KPIs, fitted together in a coherent way and that the different perspectives were all pursued simultaneously. When the different perspectives fit together in a coherent way it can integrate and coordinate the actions of the employees and in the end the activities of CA as a whole. It seems that in that sense the KPIs developed here, although not really fitting a ‘traditional’ BSC, can be quite helpful. The actual set of KPIs was developed, as explained by the theory of Parmenter (2010) and Ferreira and Otley (2009), by following the process of, first, determining the strategy of the department CA, which was derived from the overall strategy of FC. The second step was defining the strategy of the departments, resulting from the strategy of CA. Next, the Critical Success Factors (CSF), for each sub-department, were defined out of these strategies. Fourth, the Key Performance Indicators (KPIs) were defined from these CSFs. The final two steps of target setting and devising proper actions, which are not included in this research, need to be developed in a next stage to complete the process. All in all, the before mentioned literature and the conducted empirical research at the department CA resulted in what seems to be a proper set of KPIs, as presented in appendix 6, which can form a sound basis for the performance measurement and control of CA.

that the awareness and commitment, and with that the use, towards the KPIs will further increase in such a way that the performance of the sub-departments eventually will increase.

In the end, four recommendations are made to CA and FC. First, it is recommendable to start the

implementation process of the developed KPIs as soon as possible. This is so for two reasons. First, it will continue to have its connection with the ongoing reorganization and culture transition within CA. Second, the recent attention for the subject ‘KPIs’ will not diminish, which makes it easier to actually implement the developed KPIs. The second recommendation is to evaluate the KPIs and the attached targets on a frequent basis and adapt them if necessary. In this way the KPIs will continue to measure the most important performances according to currently established targets. Third, to maintain the validity of the KPIs, it is recommendable that the used data and data collection methods are reviewed at least once a year. The final recommendation concerns the acceptance of the KPIs by the employees. This research seems to have contributed to creating the basis for a proper acceptance of the KPIs by the employees, through involving a large number of employees in the development of the new KPIs. Involving and informing the concerned employees in the further implementation process of the KPIs, can increase their awareness and commitment towards the KPIs.

Key words: management controls, Key Performance Indicators (KPIs), Critical Success factors (CSFs),

Table of contents

Preface ... 3

Executive summary ... 4

1 Introduction ... 9

2

Research methodology ... 12

2.1 Type of research... 12

2.2 Methods of data collection ... 12

2.2.1 Desk research ... 13

2.2.2 Literature review ... 13

2.2.3 Interviews ... 13

2.2.4 Brainstorm sessions / Focus groups ... 14

2.2.5 Conclusion ... 15

2.3 Quality criteria for the research ... 15

2.3.1 Reliability ... 16

2.3.2 Validity ... 16

2.3.3 Generalizability ... 17

2.4 Key concepts ... 17

3

Literature review ... 18

3.1 Management control systems ... 18

3.2 Management controls ... 19

3.2.1 Types of management control ... 19

3.2.2 Management controls as a package ... 23

3.3 Contingency theory and contingency factors ... 24

3.4 Search for perspectives ... 27

3.4.1 The Balanced Scorecard ... 27

3.4.2 Key Performance Indicators ... 28

3.4.3 Adjustments of and additions to the Balanced Scorecard ... 29

3.4.4 Criticism on the Balanced Scorecard ... 30

3.5 Performance management system ... 31

4

Case organization and empirical research approach ... 35

4.1 Description of the case organization and department ... 35

4.2 Empirical research process ... 36

5

Empirical research findings ... 38

5.1 Results from interviews and brainstorm sessions ... 38

5.1.1 Interview findings... 38

5.1.2 Brainstorm session results ... 41

5.2 Critical Success Factors ... 42

5.3 Key Performance Indicators ... 43

5.4 Balanced Scorecard of Co-operative Affairs ... 45

5.4.1 Balanced Scorecard adjustments ... 45

5.4.2 The complete Balanced Scorecard for Co-operative Affairs ... 46

6

Discussion and conclusion ... 49

References ... 55

Appendix 1: Organizational chart FrieslandCampina ... 59

Appendix 2: Organizational chart Co-operative Affairs ... 60

Appendix 3: List of interview questions ... 61

Appendix 4: Interview elaborations ... 63

Appendix 5: Co-operative Affairs strategy ... 69

Appendix 6: Critical Success Factors and Key Performance Indicators of the five sub-

departments ... 70

1

Introduction

Royal FrieslandCampina (FC) foresees a ‘challenging future for a world that in 2050 will be inhabited by nine billion people. The global population growth will demand far-reaching changes in the area of food’ (Annual Report Royal FrieslandCampina N.V., 2011). Those changes in the area of food require also a change in management, because high quality food starts with high quality management (Fuhrmann, 2002). To preserve the quality of management, FC has to be ready for these expected developments. This research intends to contribute in maintaining the quality of the management of FC by investigating the performance measurement at the department Cooperative Affairs (CA) of FC. The Key Performance Indicators (KPIs), that measure the current performance of this department, will be evaluated according to the literature and, if necessary, redesigned. The renewed set of KPIs should help to align the daily performance of CA with the strategic objectives concerning the overall strategy of FC, called route2020. By doing this CA contributes to the anticipation of FC on the expected future changes in the area of food. In this way it is also hoped that a contribution can be made to changing the organizational culture of CA, an aspect which FC also considers as important.

This research will, after a literature review, assess and evaluate the current set of KPIs. The actual problem at the department CA, as observed by its management, consists of a decrease of awareness and commitment towards the current KPIs. This results in managers not using the KPIs to manage their department. With that, a possible opportunity to increase the total efficiency of the department, based on the performance measurement, is lost. The potential cause of this problem could arise from the currently used type of ‘KPIs’ (i.e., they are financial figures, result- and performance indicators instead of KPIs) and the unbalance between the current covered management perspectives and those that should be covered by a set of KPIs.

Based on this the problem statement could be formulated as: The present KPIs of the department of Cooperative Affairs need to be evaluated, because they do not seem to measure all performance aspects of the department which are most important at this moment, which result in a decrease of awareness and commitment towards these KPIs within this department.

to enhanced employee performance (Idhammar, 2009), which eventually must result in an increase of the total efficiency of the department CA.

The research question for this paper is defined as follows:

-

Based on literature and empirical research conducted at the department CA, what would be a proper set of KPIs which could form a sound basis for the performance measurement and control of CA?

In order to find an answer to this research question and to come to a well balanced set of KPIs this research will first answer the following sub questions:

- What is management control?

- Which types of controls are available to manage and control an organization? - Which management theories can be used to create a (well balanced) set of KPIs?

- Depending on the contingency factors which may play a role, which management perspectives might have to be covered to create a well balanced set of KPIs?

- Which specific contingent factors play a role at the department Cooperative Affairs of FrieslandCampina and which KPIs could provide information on them?

These sub questions will help to in the end find an answer to the research question and to the question

which in practice is most relevant to CA:

- How to create a well balanced set of KPIs which increases the awareness and commitment within the functional department Cooperative Affairs?

Norton (1996). Further, Key Performance Indicators (KPIs) are explained (Parmenter, 2010), possible adjustments and additions to the BSC are presented, and some criticisms on the BSC are discussed (Otley, 1999; Nørreklit, 2000, Nørreklit, 2003). To monitor the research process the literature review will include the Performance Management System (PMS) framework of Ferreira and Otley (2009). This framework could be used to check whether the outcome of the research will meet the requirements of a PMS as defined by Ferreire and Otley (2009). The literature review will conclude with some points of attention that will be used as input for the second part of this research. This second part includes the empirical research which must provide the practical information about the critical success factors of the department, which should lead to the development of a new set of KPIs. This information will be collected using interviews and brainstorm sessions with the managers and the teams involved.

Combining the literature review with the empirical research should lead to a coherent set of KPIs which is based on theoretical input and practical insights. In this way a new and well balanced set of KPIs should become available which can be used to control and foster the performance and efficiency of the department CA. However, the implementation of the new set of KPIs is not included in this research. This research will hopefully contribute to the literature in two ways. First, it could be of help to researchers who investigate the management control and the management perspectives that need to be covered to develop a well balanced set of KPIs within the dairy industry. Therefore, this research will investigate whether the perspectives presented by Kaplan and Norton (1996) in the BSC are sufficient or that adjustments and additions are necessary. Second, this research could give a picture of the dairy industry to researchers who do research about KPIs in this industry, or to those who want to compare KPIs of different industries. Furthermore, this research can contribute in two ways to the organization of FC. First, the new set of KPIs, developed in this research, will have to increase the awareness and

commitment towards the use of KPIs, which eventually should lead to an increase in performance and in efficiency of the department CA. Second, when this research is successfully completed, KPIs of other departments could be evaluated, using the format of this research as a basic framework, to increase (if necessary) also the efficiency of those departments.

The research will be presented in six chapters. This chapter is chapter one, which contains the

2

Research methodology

In this chapter the research methodology that will be used in conducting this research will be explained. This chapter should contribute to designing an effective, efficient, scientifically, and professionally defendable approach to finding a solution (De Leeuw, 2003, pp. 3-4) for the problem of FC, which was briefly sketched above. Explicit consideration of several issues with respect to the methodology used should contribute to a certain level of research quality (De Leeuw, 2003, p. 4). This chapter will start with describing the research type used. Secondly, the methods of data collection will be explained. Thirdly, the quality criteria for the research are presented and the chapter ends with the key concepts of this research.

2.1

Type of research

The type of research conducted in this project can be defined as a problem solving (Van Aken et al., 2007, p. 17; De Leeuw, 2003, p. 76), qualitative (Van Aken et al., 2007, p. 129; Berry and Otley, 2004, p. 235), case-based research (Berry and Otley, 2004, pp. 235-236). Problem-solving research requires an in-depth analysis of a problem, not only to achieve usable but also to achieve sufficient results (De Leeuw, 2003, p. 76). Qualitative research does not refer to the quality of the methods, but to the discovery of qualities of things like the properties of objects, phenomena, situations, people, meanings and events (Van Aken et al., 2007, p. 129). Case-based research can be used to study a specific single case of a particular phenomenon, like the case of FC/CA.

The research will be divided into two parts. The first part will contain a literature review. The focus in this review will be on providing a foundation of knowledge on management control types and management perspectives and on obtaining an overview of the points of attention, which have to be taken into account in the empirical research (De Leeuw, 2003, p. 14). The questions that will be asked in the empirical research (in the second part) will be based on these collected points of attention. Now first the way the information is collected will be explained in the next section.

2.2

Methods of data collection

2.2.1 Desk research

Getting an impression of the organization where the case research will be conducted is the first step of the research. Therefore, the research will start with analyzing corporate documents like annual reports, meeting reports, policy documents, and already existing information about the problem. When the researcher has a clear picture of the organization and the department, the second step, i.e. the literature review, can be taken.

2.2.2 Literature review

The literature review is the main part of the desk research, which therefore is discussed separately in this section. The systematic review of the literature makes it possible that a research, which should solve a certain problem, benefits optimally from the existing knowledge on the subject (Van Aken et al., 2007, p. 144). It is likely that problems comparable to the problem of this research have been studied already. Existing literature will probably not provide all the answers to the problem, but it can provide a

framework, or different elements of a framework, in which the problem can be solved. The relevant information is often scattered across different scientific/professional journals and books, which all can provide bits of information which are relevant with respect to the research topic. This information can then be used as a foundation for the further data collection methods.

2.2.3 Interviews

Function Department Sub-department

Manager Quality Affairs Co-operative Affairs Quality Affairs Manager Member Services Co-operative Affairs Member Services Manager Milk Logistics Co-operative Affairs Milk Logistics

Director Finance Co-operative Affairs Finance

Manager Co-operative Support Co-operative Affairs Co-operative Support

The preparation of the interview is an important step in the process of the interviews. Based on the review of literature and the first impression that was obtained of the problem at CA, the researcher needs to define an outline of what he wants to know from each manager. Therefore, he can develop a list of relevant questions, also based on the literature, which he can use during the interview. In this case a semi-structured interview will be used, because a list of relevant questions gives guidance to the interviews, while leaving sufficient room for the manager to give additional information (De Leeuw, 2003, p. 108; Van Aken et al., 2007, p. 135). This gives the researcher the possibility to go beyond the initial response and to ask sub-sequential questions to discuss issues further. The researcher has two roles during the interview. First, he has a content-oriented role, which is aimed at getting clear and unbiased answers of the manager to the predefined questions. Second, the researcher has a managing role, which includes managing the time spent to a certain subject and maintaining an open and pleasant atmosphere (De Leeuw, 2003, p. 108; Van Aken et al., 2007, p. 135). Furthermore, dependent of the situation, the type of information reporting can vary from memorizing, making notes, and recording it (Leeuw, 2003, p. 108). In this research all of these types will be used, but especially the latter, i.e. recording, to make sure that no important information is lost. At the beginning of the interview the researcher has to introduce the research, but especially the topics that will be discussed during the interview and how the results of the interview will be fed back to the manager for conformation. The topics that will be discussed in the interviews of this research concern the strategy and Critical Success Factors (CSF) of both CA and the sub-departments, the current KPIs, and managing these KPIs.

The various issues mentioned before, with respect to conducting the interviews, have indeed been observed and followed during the empirical research.

2.2.4 Brainstorm sessions / Focus groups

among the opinions of the group members (Van Aken et al., 2007, p. 135). The remarks of group members will stimulate other members to clarify themselves, which results in more accurate explained information. However, a disadvantage of brainstorm sessions/focus groups is that some members can be inhibited and less open (Van Aken et al., 2007, p. 136). Despite the latter, possible disadvantage, it was decided to make use of brainstorm sessions in a focus group for this project. The brainstorm sessions/focus groups with the employees and managers of the five sub-departments will be used to evaluate and redesign the current KPIs. They start with discussing the current CSFs and further developing them, so that subsequently KPIs from these CSFs can be defined.

In order to further improve the effectiveness of the research, both the managers and the teams will participate in the research so that the most representative picture of the current situation concerning the KPIs is obtained. The managers use KPIs to measure and manage the performance of their

employees and the employees in the teams will probably have the specific knowledge about the most important activities at the department. Therefore, both the managers and the teams can provide important information that is relevant for developing new KPIs. Apart from this the participation of both the managers and the teams must result in an increase of awareness and commitment towards the new set of KPIs. This is not so much a goal which is directly related to this research project in a more narrow sense, i.e. strictly developing a new set of KPIs. However, the issue of awareness, participation and commitment could be very important to increase the future use of the KPIs (see also Ter Bogt and Van Helden (2011))

2.2.5 Conclusion

By combining the literature review and the empirical research a new set of KPIs can be established which is based on theoretical insights and meets the desires of FC/CA. In this way a new and well balanced set of KPIs should become available which can be used to control and foster the efficiency of the department.

2.3

Quality criteria for the research

The main purpose of this case-based research is to solve the problem of FC/CA and to find out how literature can contribute to this. This suggests that the general criteria mentioned before might be limitedly applicable to this research project (Scapens, 2004, pp. 268-269). However, the applicability of the general criteria will be explained in this section to show that the researcher kept them, as much as possible, in mind during each step of the research process.

2.3.1 Reliability

‘Reliability implies an independent, impersonal investigator’ (Scapens, 2004, p. 268). However, in a case study the interpretation of information and the relation of the researcher to the subject are essential elements. Because of the personal involvement of the researcher, impersonal investigation is impossible and in that sense the issue of reliability in a traditional sense is meaningless in a case based study. But in a case study it is important that the researcher adopts appropriate and reliable research methods and procedures, also known as procedural reliability. The criteria to which a procedurally reliable research must meet are (Scapens, 2004, p. 268):

- A good research design with clearly defined research questions; - A comprehensive research plan;

- All evidence should be recorded in coherent and comprehensive field notes; - The case analysis should be fully documented.

By meeting these criteria the researcher can show that the research findings are reliable, and that there is a possibility that another researcher can examine what has been done (Scapens, 2004, p. 268).

2.3.2 Validity

Validity can be divided into two types, i.e. internal and external validity. Internal validity concerns the use of appropriate controls within the research. External validity relates to the extent to which the findings are generalizable. Because a case-based research develops theoretically informed explanations of the observed phenomena, statistical generalizability, i.e. external validity, is not applicable. Scapens (2004, p. 268) state that “validity implies an objective reality”. However, also this criterion is not

2.3.3 Generalizability

Qualitative research does not immediately have the ability to generalize the results to other research areas, because this method is often exploratory and adapted to the specific needs of one research area. Although the findings of the research might be valid for the particular case or research area, it is difficult to draw a wider conclusion without further research.

2.4

Key concepts

On the basis of this introduction, it seems that certain concepts will be very important in this project. The key concepts which play a role in this research project are presented and defined below.

Critical Success The activities that are necessary to ensure the success of the Factors (CSFs) organization/department.

Key Performance Are performance measurement instruments, which measures the Indicators (KPI) progress towards key organizational goals.

Management Controls Control types and activities for planning, organizing, directing, and controlling organizational performance.

3

Literature review

This chapter will contain a literature review which constitutes the basis for the empirical research. The review will start with creating a foundation by briefly discussing what the literature states about management control systems. Then the review continues with examining management controls using the levers of control (Simons, 1995), the types of control (Merchant and Van Der Stede, 2007; Sandelin, 2008), and literature about control packages (Malmi and Brown, 2008; Sandelin, 2008). Management control should help to give guidance and direction to an organization and the people working in it. Performance measurement can be of help in controlling an organization. However, the type of management control to be applied is not uniform for all organizations, i.e. contingencies play a role. Therefore the contingency theory and contingency factors (Chenhall, 2003; Fisher, 1998; Ouchi, 1979; Birnberg, 1998; Merchant and Van Der Stede, 2003) will also be explained in brief. Then the review will zoom further in on management perspectives by using the Balanced Scorecard (BSC) (Kaplan and Norton, 1996), explaining Key Performance Indicators (KPIs) (Parmenter, 2010), investigating which adjustments and additions can be made on the BSC, and presenting the criticisms on the BSC (Otley, 1999; Nørreklit, 2000, Nørreklit, 2003). After that, this literature review will refer to Performance

Management Systems (Otley, 1999; Ferreira and Otley, 2009) and the final section will conclude with the points of attention for the empirical research, based on this literature review.

3.1

Management control systems

An organization can be defined as an organized group of people who have specific goals and common interests. In the fight for success and survival, a high-quality control system is important to help management delegate responsibilities while ensuring managerial supervision, control and surveillance (Sampedro et al., 2010, p. 180). According to Chenhall (2003, p. 129) management control systems (MCSs) are perceived as “passive tools providing information to assist managers”. Simons (1995, p. 5) states that MCSs are “the formal, information-based routines that managers use to maintain or alter patterns in organizational activities”. MCSs refer, according to Bisbe and Otley (2004, p. 710), to the processes utilized by the organizational participants to mobilize resources and action towards some individual or shared interests. Anderson and Oliver (1987, p.76) described control systems as “an organization’s set of procedures for monitoring, directing, evaluating, and compensating employees”. These definitions reveal several reasons for using MCSs. For example, MCSs provide information,

and Van Der Stede (2003, p. 8) present three main reasons for the needs for control. First, employees perform badly if they do not know what the organization expects from them. This occurs by lack of

direction. The first function of management control is therefore to inform employees how they can

maximize their contribution to realize the organizational goals. Second, organizations have to deal with employees that do not have the same objectives as the organization, resulting in motivational problems. The second function of a MCS is therefore to avoid or mitigate ‘negative’ behavior and stimulate

‘positive’ behavior of the employees. Lack of required intelligence, training, experience, knowledge or information indicates the last group of reasons for control: personal limitations. These limitations can affect the performance of the employees. By using an MCS, it is hoped that the right information and resources should be available to employees, so that they can make proper decisions about processes and problems that influence the organizations’ performance. These three management control problems can occur separately or simultaneously.

3.2

Management controls

MCSs were defined in the previous section in general terms. Actually MCSs consist of a collection of control mechanisms which are also called ‘management controls’ (Ouchi, 1979; Merchant and Van Der Stede, 2003). Over the years several researchers investigated management controls (Merchant and Van Der Stede, 2003; Simons 1995) and the management controls as a package (Malmi and Brown, 2008; Sandelin, 2008). Their findings will be discussed in this section.

3.2.1 Types of management control

In his research, Ouchi (1979, p. 843) introduced three types of control which can be used to control organizations, i.e. behavior control, output control, and clan control. Subsequently, Merchant (1982) and Merchant and Van Der Stede (2003) defined their four types of control, closely related to the control types of Ouchi (1979), resulting in four control types in which Ouchi’s clan control is divided into personnel and culture control.

incentives, such as praise, job security, recognition, and autonomy. Using a well-designed results control system influences the actions of employees because they focus on the effects and consequences of the actions they undertake. Results controls do not prescribe employees which actions to take, but instead employees need to take the actions they believe will lead to the desired results. In this way results controls encourage employees to discover and develop their talents and get assigned to jobs in which they can use these talents, according to Merchant and Van Der Stede (2003, p. 25).

Although managers may predominantly use results controls to manage their organization, Merchant and Van Der Stede (2003, pp. 76-92) also describe three other types of controls which can supplement or replace results controls. Together these three other types are similar to Ouchi’s behavior and clan control. Action controls (similar to Ouchi’s behavior control) are the most direct form of management control because they involve taking steps to ensure that employees act in the organization’s best interest by making their actions themselves the focus of control (Merchant and Van Der Stede, 2003, p. 76). However, they are not effective in every situation, because they are only applicable when

managers know what actions are desirable and that they have the ability to let these actions occur. Action controls consist of four basic types: behavior constraints, preaction reviews, action

accountability, and redundancy. The advantage of this variation of action controls is that they can eliminate one or more of the needs for control (which were mentioned in section 3.1) (Merchant and Van Der Stede, 2003, p. 76).

Personnel controls build on employees’ natural tendencies to control and motivate themselves

(Merchant and Van Der Stede, 2003, p. 83). Personnel controls serve three purposes. First, personnel controls ensure that employees know what the organization wants by clarifying expectations. Second, they make sure that employees have the capabilities and resources to do a good job. And third, personnel controls stimulate self-monitoring (Merchant and Van Der Stede, 2003, p. 83). Cultural

controls are introduced to prevent that individual employee’s deviate from organizational and group

norms and values. This is accomplished using mutual monitoring. Cultural controls intend to ensure that the individual employee is corrected in his norms and values by means of group pressure. The two most important and commonly used methods to shape culture within an organization are code of conduct and group rewards, according to Merchant and Van Der Stede (2003, p. 85).

particular in organizations with ‘empowered’ employees. In many organizations in the Western world the generally well-educated employees are to some extent empowered nowadays. The four levers intend, on the one hand, to allow the empowered and high educated employees to be creative and react flexible and independently to problems and specific situations which might rise, whilst, on the other hand, they also giving ‘guidance’ to their activities and to control them to a certain extent. Each of the four levers of control has a distinct purpose for managers who want to utilize the creativity of their empowered employees.

Diagnostic control can be used to monitor goals and profitability and to measure progress towards

targets (Simons, 1995, p. 81). Managers can make use of diagnostic controls to ensure that these targets are achieved efficiently and effectively. These controls can help managers with monitoring the progress of individual employees, departments, and divisions and are largely or completely based on quantitative (accounting) information. In that sense they resemble results controls. The output of the controls can be used to adjust inputs for the next period to ensure that next period’s outputs will be more consistent with the defined goals. The main purpose of diagnostic controls is to eliminate the manager’s burden of constant monitoring. But according to Simons (1995, p. 81) diagnostic controls alone are not sufficient to ensure effective control. Therefore it is necessary for managers to think also about the other three essential levers of control.

To give individual employees a clear and consistent understanding of the core values and their

importance for the organizations, belief controls are useful. Beliefs controls intend to make the mission, norms and values of the organization clear, and by making use of them the organization hopes that its employees know better what activities and effects ‘fit’ in the organization. In this way the beliefs controls can offer the employees guidance when taking initiatives, i.e. make clear to them what kind of activities are appreciated, and they can encourage employees to search for new opportunities to create value for the organization. Managers can increase their amount of control by using belief controls, because they have the characteristic to strengthen the diagnostic controls (Simons, 1995, p. 84).

Boundary controls define limits to employees about what not to do, but allow innovation within these

limits. Boundary controls are stated, in contrast to diagnostic and beliefs controls, in negative terms or minimum standards. An example of a situation in which these controls are particularly critical is in an organization where trust is a key competitive advantage. Simons (1995, p. 86) states that when the specific boundaries are exceeded the punishment must be severe, to give a clear signal to the

(1995, p. 86), boundary controls can in combination with belief controls motivate, inspire and protect against damaging opportunistic behavior. The description of beliefs and boundary controls indicates that they can overlap with cultural/personnel and action controls to a certain extent.

Interactive control can be used by managers to identify strategic threats and opportunities and to

respond proactively. It seems that they are a unique control element added by Simons (1995). Using these controls, managers can involve themselves regularly and personally in the decisions of employees about strategic issues. Interactive controls distinguish themselves of diagnostic controls by four

characteristics. First, the focus of managers is on constantly changing information. Second, this information is important enough for regularly sharing it with operating managers and other

subordinates at all levels of the organization. Third, interactive control data need to be interpreted and discussed in face-to-face meetings with managers and employees. Fourth, interactive controls stimulate the ongoing discussion about the used data, assumptions and action plans. The intention of interactive controls is to keep the focus of all involved on strategy and changes in strategy needed, and eventually they should lead to new ideas and action plans within the organization (Simons, 1995, pp. 87-88). The ideas about (types of) management control as presented above have been supported and/or

criticized by various authors. Without having the intention to discuss all such criticisms here, it should be pointed out that Ferreira (2002, p. 33) indicated that Simons’ (1995) levers of control have some

strengths and weaknesses. The first strength concerns the strong focus which the four levers have on strategy and on the implications of strategy for the control system. Second, the levers look at active controls which offer a broad perspective of the control system and the purpose for which they are used in the organization. The fact that purposes are usually attached to particular tools adds to understand the way the control system is designed. The weaknesses of Simons’ framework first concern the design and use of control systems for higher hierarchical levels, in which lower hierarchal levels often will be neglected (Collier, 2005, p. 336; Ferreira, 2002, p. 34). The second weakness is making use of concepts which leave too much scope for subjective interpretation and the framework not being universally applicable (Ferreira, 2002, p. 34). The latter relates to the fact, for example, that empowerment cannot be found everywhere.

lost. Simons (1995, p. 88) also emphasizes that it is essential to use the four levers of control simultaneously, because then they have the power to reinforce one another.

3.2.2 Management controls as a package

different types of controls, is crucial for the effectiveness of the MCS. On the basis of his research, Sandelin (2008, p. 339) also indicates that when there is a shift in business strategy the existing control package generally cannot meet the challenges of this new strategy without adjustments.

Nowadays organizations do everything to differentiate themselves from competitors to have a

competitive advantage. Therefore it is necessary to continuously adapt MCSs to new situations. Making use of a control package helps organizations align management controls and management techniques. Following Malmi and Brown (2008) and Sandelin (2008), an optimal alignment of the used management controls will hopefully give the organization the desired competitive advantage. However, because the concept of the package is relatively new, further research about control packages is necessary.

3.3

Contingency theory and contingency factors

Although Sandelin (2008) suggests that contingency theory did not play a role in his research, it seems that in his cases contingency variables actually did play a role. That is, the situation with respect to certain (contingency) variables clearly seemed to differ between the cases. Contingency theory says that the design and use of MCSs is contingent upon certain elements of the context as a certain characteristic of the organization, i.e. of the organizational setting in which these controls operate (Fisher, 1998, p. 48). Galbraith (1973, p. 2) states that contingency theory argues that there is no best way of organizing which fits all organizations, instead the optimal organization structure depends on a number of

contingency factors such as environmental complexity, the strategic position of the organization, and used technology. Contingency factors increase or decrease the possibilities for specific forms of organizational structures and processes to take place (Jacobsen, 2006, p. 304). Not only for

- Environment (Chenhall, Fisher, Birnberg, Merchant and Van der Stede); - Strategy (Chenhall, Fisher, Merchant and Van der Stede);

- Technology (Chenhall, Fisher); - Size (Chenhall, Fisher);

- Structure (Chenhall, Fisher); - Culture (Chenhall, Fisher);

- Task uncertainty (Ouchi, Birnberg, Fisher); - Outcome observability (Ouchi, Fisher).

Some of the contingency factors in this selection will probably be more important for this research than others. Some first impressions from the case organization, were the empirical case research is

conducted, suggest that certain contingency variables will not be relevant there. For that reason only a small number of the previously mentioned contingency factors will be further discussed here. However, if the empirical research shows that this selection is incomplete, other relevant contingency factors will be added and discussed later on.

As a consequence of the recent reorganization of FC’s department Cooperative Affairs (CA), FC/CA is affected by and much attention is paid to organizational culture. Culture might also influence the

realization of FC’s strategy to a considerable extent. CA will change from a line organization into a matrix organization, for which a culture change has to be made. Furthermore, FC is located in a dynamic

environment with lots of external influences, which makes it important to take the environment into account. Because of the large size of FC it is necessary, in order to monitor managers, to focus the control (also) on the performance. Therefore the measurability and observability of performance are contingencies which play a role here and which will influence the type(s) of control and MCS to be used. Because of the above mentioned reasons it can be expected that at least the contingency variables culture, strategy, environment, and outcome observability will be important in this research. First, culture could be important, because all employees have to change their mind-set and way of acting to make the implementation and functioning of the new set of KPIs a success (Uydess and Meyers, 2011, p. 64). Like Schiff (2007, p. 8) stated in his research, it is one thing for employees to understand the

internal elements of the organization (e.g. the knowledge of how the production process functions precisely and what should be changed if something goes wrong in this process). Furthermore, uncertainty can relate to external elements. For example, Birnberg (1998, p. 28) stated that the predictability of the environment describes the ability of the management to anticipate on changes in the environment in the quickest way possible. Therefore, in the case of CF/CA it seems important to take the effect of the environment on CA’s new set of KPIs into account. Third, strategy can also be a relevant contingency factor. Strategy can be characterized in various ways, like Porter (1980) described cost leadership, differentiation, cost focus, and differentiation focus (McGee et al., 2010, pp. 78-79). Miles and Snow (Miles et al., 1978, pp. 550-558) used the terms defenders, prospectors, analyzers, and reactors to characterize strategy types. Merchant and Van Der Stede (2003, p. 728) state that strategy drives the design of MCSs and that the organizational effectiveness depends on the extent to which strategy and MCS are aligned. Organizations that align their MCSs with their strategy are more likely to achieve higher performance and eventually become more successful. To reach such a high performance situation it is important to keep Merchant and Van der Stede’s (2003) observation in mind during the empirical research (as well as Sandelin’s (2008) observation about the internal consistency of a MCS, i.e. a package of controls). Fourth, several researchers (Fisher, 1998; Ouchi, 1979; Thompson, 1967)

examined outcome observability (and measurability) as an important contingency factor. Performance evaluation intends to give a signal to a worker or business unit which is measured, evaluated, and rewarded. However, controlling employees using this method is only possible if the used variables are somehow observable for the evaluator (Fisher, 1998, p. 51). So the contingency factor observability will influence the development of a new set of KPIs, because the KPIs have to be observable and measurable in one way or another, i.e. either in quantitative or in more qualitative terms. Related to this, it seems that in practice organizations often try to define their KPI’s (predominantly) in quantitative terms, i.e. in figures and numbers.

3.4

Search for perspectives

For CF/CA it is clear that its top management would like to implement a broad form of performance measurement. The management intends to define several KPIs which together give a clear picture of the most important performance aspects. However, before the new set of KPIs can be developed it seems to be necessary to present perspectives in which the KPIs can be classified. These perspectives need to give a balanced picture of the current operating performance of the organization and could provide

suggestions for how these performances can be controlled. In this section it will be investigated whether the four perspectives (Financial, Internal business process, Learning and Growth, and Customer) of the Balanced Scorecard (BSC) of Kaplan and Norton (1996) can be used, if they need adjustments, if other perspectives could be added to the traditional BSC, and what critics could be defined on the BSC (Otley, 1999; Nørreklit, 2000, Nørreklit, 2003). Next to that, the concept of Key Performance Indicators will also be explained (Parmenter, 2010).

3.4.1 The Balanced Scorecard

Kaplan and Norton (1992; 1996; 2004; 2007) developed the BSC to provide managers with a

results. Furthermore, this perspective includes both short-term and long-term value creation. Short-term value creation represents the control and improvement of existing operations. And long-Short-term value creation is for developing totally new innovative processes (Kaplan and Norton, 1996, p. 63). The fourth perspective, learning and growth, identifies the organizational infra-structure which must create long-term growth and improvement and consists out of three sources: people, system, and

organizational procedures. This perspective is essential for the functioning of the total BSC, because all perspectives depend on, for example, skilled employees and functional information systems. In fact organizations will have to invest in training employees, improve information technology and systems, and align procedures and routines to ensure optimal efficiency of the perspectives (Kaplan and Norton, 1996, p. 64). It is suggested that for each of these perspectives should include about five measures of performance. Together these measures should represent the critical success factors which are necessary for realizing strategy and continued organizational success. This results in a close link between the organizational strategy and the desired performance, which represents the main strength of the BSC, according to Otley (1999, pp. 374-375). The second advantage of the BSC, according to Otley (1999, p. 375), is that it is a stakeholder approach, including as many of the main factors and stakeholder interests as possible which have an impact on the organization.

3.4.2 Key Performance Indicators

Performance measures have to be linked to one or more organization’s critical success factors and more than one BSC perspective in order to become a Key Performance Indicator. Many performance

measures in organizations are a mix of the below mentioned four types of measures (Parmenter, 2010, p. 1):

- Key Result Indicators (KRIs) indicate the performance in a certain perspective or critical success factor (CSF);

- Result Indicators (RIs) indicate what the performance of the organization was in the previous period;

- Performance Indicators (PIs) indicate what the organization has to do next to improve/maintain performance;

- In the terminology of Parmenter (2010, p. 1) Key Performance Indicators (KPIs) indicate what to do to increase the performance radically.

The characteristic of KRIs is that they are the result of many actions. Some examples of KRIs are

on invested capital. KRIs provide information about the direction the organization is going; therefore KRIs are mostly useful for the Board of Directors, according to Parmenter (2010, p. 2). They cover a long time period, are reviewed on a monthly or quarterly basis, and do not tell the ‘lower’ managers (i.e. those managers who are involved in the day-to-day management) what to do to improve the results. Between KRIs and KPIs are the result and performance indicators. These indicators are important to the organization but are not the most important, i.e. not ‘key’. PIs are non-financial and complement the KPIs. Some examples of PIs are percentage increase in sales, number of employees’ suggestions implemented in the last month, customer complaints from key customers, and late deliveries to key customers. RIs are financial performance measures (or measures directly related to financial

performance) which summarize the activity of the organization. Examples are net profit, yesterday’s sales, and one week’s utilization of a production machine.

KPIs represent a set of measures focusing on those aspects of organizational performance that are the most critical for the current and future success of the organization and can be defined in seven characteristics. Parmenter (2010, p. 6) indicates that they:

- are non-financial measures; - are measured frequently;

- are acted on by the responsible manager;

- clearly indicate what action is required by the employees; - tie responsibility down to a team;

- have a significant impact on one or more CSFs and BSC perspectives; - encourage appropriate action.

Since the KPIs are the most important indicators of the organization, they have to be monitored very frequently, for example, daily or weekly, and can only be current or future measures (Parmenter, 2010, p. 10).

3.4.3 Adjustments of and additions to the Balanced Scorecard

essential for the functioning of the BSC. They can be seen as a suggestion, but in practice other (and more or less than four) perspectives could be used. Therefore, it could be possible that the empirical research at CF/CA will produce some perspectives which are adapted forms of, or are added to the original perspectives. Bhimani et al. (2008, p. 784), for example, state that culture could be added to the BSC as a fifth perspective, in order to control and influence the culture in such a way that it will have a positive effect on the performance of the employees. Rosemann and Wiese (1999, p. 773) included the

project perspective to the BSC, to increase the completeness and the quality of projects and

implementation reports. Krauth (1999) and Reo (1999) suggested integrating the elements of the European Foundation for Quality Management (EFQM model) within the BSC. Furthermore, Ignacio and Scott (2005, p. 16) indicated in their research to include an additional perspective which provides specific information on social demographic factors regarding the operating environment of hospitals. Hwang and Rau (2007, p. 217) introduced in their research at an engineering organization the technical perspective, because of the high level of technical activities. Pandey (2005, p. 51) stated in his research that social responsibility and environmental concerns are two possible candidates to add to the BSC. As shown above, several authors suggested lots of options to add to the BSC. The empirical research will show which perspectives the BSC of CA will contain and whether it is desirable to adjust it.

3.4.4 Criticism on the Balanced Scorecard

Some authors (Otley, 1999; Nørreklit, 2000; 2003) critically evaluated the BSC and made critical remarks about the framework. These critical remarks will be discussed here in brief. The reason for this is not so much that the BSC cannot be a useful instrument for organizations. On the contrary, the extent to which it is used in practice suggests that it often regarded as useful. But even if an instrument is regarded as useful, it is good to be aware of its limitations, when using it in practice.

And finally, Otley (1999, p. 377) commented that little attention was paid to the role of feedback in the BSC.

Nørreklit (2000; 2003) complements these critical notes with some others. First, Nørreklit (2000, p. 74; 2003, p. 592) states that there is no clear cause-and-effect relationship between some of the

perspectives. Somewhat superficially seen a cause-and-effect relationship may seem to exist, but this is often not underpinned by evidence from a critical analysis of data for a longer period. For example, there is not necessarily a clear cause-and-effect relationship between customer satisfaction and loyalty, and subsequently between loyalty and financial results (Nørreklit, 2003, p. 601). Second, according to Nørreklit (2003, p. 617), the BSC is not really a valid management tool, because it does not take strategic uncertainty, in terms of risk, into consideration, which may threaten or invalidate the present strategy. Furthermore, Nørreklit (2003, p. 617) observes that the BSC is actually based on a top-down process, which contains widely criticized control features for not being rooted in the dynamic environment or in the organization. This could result in serious dysfunctional behavior and a loss of strategic control. When developing the BSC and KPIs for FC/CA, it makes sense to keep these critical comments in mind. And that will be even more the case when using the BSC and KPIs in practice, for the moment supposing that CA will also make use of a BSC, because the comments indicate that the BSC and KPIs have their limitations (even though the various stakeholders can indicate that they are satisfied with the developed BSC and KPIs). The criticisms presented here suggest that the BSC is not so much a precisely defined and rigorously developed instrument or technique, but rather an ‘idea’ which needs further development and substantiation in practice and should be used with some care (instead of interpreting all information in it, e.g. about causal relationship as ‘facts’.

3.5

Performance management system

The BSC and KPIs are elements of the management control system of an organization, which is nowadays also indicated as the performance management system (because in controlling an organization the focus is often on performance). To make sure that the performance management system in an organization meets the ideal requirements, constant monitoring and evaluation are important. Ferreira and Otley (2009) developed a framework which they call the Performance Management System (PMS) framework, which is a tool to critically monitor and evaluate an

plans are implemented effectively. The framework of Ferreira and Otley (2009, p. 264), consisting of twelve questions, is developed from relevant literature by elaborating the five questions of Otley’s earlier PMS (1999, pp. 365-366) and integrating some aspects of Simons’ levers of controls framework (1995). The framework consists of ten ‘what’ questions and two ‘how’ questions. Together they represent the twelve-questions of the PMS framework, which can be used as a basis for a critical evaluation of a performance management/control system, and are listed below (Ferreira and Otley, 2009, pp. 266-267).

1. What is the mission and vision of the organization and how is this brought to the

attention of managers and employees? What mechanisms, processes, and networks are used to convey the organization’s overarching purposes and objectives to its members? 2. What are the key factors that are believed to be central to the organization’s overall

future success and how are they brought to the attention of managers and employees? 3. What is the organization structure and what impact does it have on the design and use of PMSs? How does it influence and how is it influenced by the strategic management process?

4. What strategies and plans has the organization adopted and what are the processes and activities that it has decided will be required for it to ensure its success? How are strategies and plans adapted, generated, and communicated to managers and employees?

5. What are the organization’s key performance measures deriving from its objectives, key success factors, and strategies and plans? How are these specified and communicated and what role do they play in performance evaluation? Are there significant omissions? 6. What level of performance does the organization need to achieve for each of its key

performance measures, how does it go about setting appropriate performance targets for them, and how challenging are those performance targets?

7. What processes, if any, does the organization follow for evaluating individual, group, and organizational performance? Are performance evaluations primarily objective, subjective or mixed and how important are formal and informal information and controls in these processes?

8. What rewards, financial and non-financial, will managers and other employees gain by achieving performance targets or other assessed aspects of performance?

the organization in place to support the operation of its PMSs?

10. What type of use is made of information and of the various control mechanisms in place? Can these uses be characterized in terms of various typologies in the literature? How do controls and their uses differ at different hierarchical levels?

11. How have the PMSs altered in the light of the change dynamics of the organization and its environment? Have the changes in PMSs design or use been made in a proactive or reactive manner?

12. How strong and coherent are the links between the components of PMSs and the ways in which they are used?

As can be seen from the twelve questions, Ferreira and Otley draw the attention to various aspects which can be important when developing and using a BSC and KPIs. The framework intends to give an overview ‘of the structure of control systems that are currently in use in a specific organization’ (Ferreira and Otley, 2009, p. 266). The authors do not take a normative position on the system that should be used in a specific context; that is a matter for empirical research and paying attention to specific considerations which can play a role in practice. Ferreira and Otley (2009, p. 267) did not explicitly include the contextual factors and organizational culture in their framework, because they regard these factors as contingency variables that might explain why certain patterns of control are more effective than others, rather than as characteristics of the control system. They do indicate, however, that both factors are often very important and influence the organization and individuals in it. For that reason, this research will probably take these contingency factors into account, as was already indicated in a

previous section. This research can use the PMS framework of Ferreira and Otley (2009) to assess the process of developing new KPIs, and whether they meet the requirements belonging to a PMS. Furthermore, the evaluation process of the KPIs can in the future make use of this framework to keep the KPIs continuously up to date. If the KPIs, following from the empirical research, do not seem to be evaluated very positively on the basis of Ferreira and Otley’s questions, for example, it could make sense to explain why this is the case. The KPIs developed could be further substantiated then with strong arguments, or the set of KPIs developed could be critically reconsidered.

3.6

Points of attentions and conclusion from the literature review

This literature review draws the attention to several points which have deserved to be taken into account during the empirical research. First, making use of controls and control packages helps

the organization and increasing its performance. Furthermore, there are several contingency factors that can have a certain influence on the organization and its KPIs and for that reason might be relevant for this research. Which specific factors are relevant, will become clear from the empirical research, but culture would probably be one of them. Third, the perspectives that will be used for developing a BSC on the basis of the empirical research will in first instance probably include the four standard perspectives of the BSC. These general and in practice frequently used perspectives can provide the basis for the BSC and KPIs, which can be (if necessary) changed by means of adjustments and/or additions to

perspectives. The literature indicates that various perspectives could be included in the BSC. Such additional perspectives will be established on the basis of the empirical research. However, it should be clear that the department CA is particularly interested in a set of well-developed and coherent KPIs and probably less in a complete BSC.

The interviews and other information will indicate which areas are critical for the sub-departments, seeing the strategy and strategic goals of the organization can then be assigned to specific perspectives that have to be filled with a ‘proper’ set of KPIs. The empirical research will provide the information to determine which perspectives eventually could be used for the BSC of CA. This can mean that some of the four basic perspectives of the BSC will not be included in the BSC of CA, or that some perspectives will be combined. The entire process of developing new KPIs has to be monitored by making use of the critical remarks of Otley (1999) and Nørreklit (2000, 2003), and in particular of the twelve questions from the PMS framework of Ferreira and Otley (2009). Making use of their remarks and framework is desirable to ensure that the new set of KPIs meets the requirements of a ‘good’ PMS, and to decide deliberately on possible deviations from what Ferreira and Otley suggest. All this should contribute to a ‘proper’ set of KPIs which must assist in measuring the performance and in the end controlling the organization.

4

Case organization and empirical research approach

This chapter will first contain a description of the case organization, i.e. FrieslandCampina, and of the department, i.e. Cooperative Affairs, where the research took place. Secondly, the empirical research process is explained.

4.1

Description of the case organization and department

This research is conducted at the head office of Royal FrieslandCampina N.V. (FC) in Amersfoort. Every day FC provides millions of people worldwide with healthy and tasteful high-quality dairy products, like dairy drinks, cheese, butter, desserts, infant- and child nutrition, and nutritional ingredients. FC is, with an annual turnover of 9.6 billion euro, one of the five largest dairy companies in the world. Further, FC distributes its products to more than 100 countries in Europe, Asia, and Africa and has locations in 26 countries with over 19,000 employees (Annual Report Royal FrieslandCampina N.V., 2011, pp. 10-13). The 14,400 member dairy farmers throughout the Netherlands, Belgium, and Germany, which constitute the dairy cooperation, are the owners of the enterprise FC. The organizational chart of FC, presented in appendix 1, gives a graphical representation of this structure between the cooperation and the

enterprise FC. The green part of the organizational chart represents the cooperation and the blue part represents the enterprise FC. This enterprise is divided into four divisions, i.e. Consumer Products Europe, Consumer Products International, Cheese, Butter & Milkpowder, and Ingredients, which all produce, sell, and distribute different kind of products. Both the cooperation and the enterprise FC are supported by the corporate centre.

Cooperative Affairs (CA), where this research is conducted, is one of the departments which constitute this corporate centre. CA is, with more than 127 employees, responsible for maintaining contacts with, and providing services to, the approximately 17,500 dairy farmers, members and suppliers throughout the Netherlands, Germany and Belgium. The services ranges from professional account management to advice on milk quality, quality assurance, sustainability and member financing, substantive and practical support for the administrative framework of the cooperative, and support for the transport of raw milk and internal transportation between the factories. Like the organizational chart of CA shows, in

for the Netherlands, which probably can be applied/copied to the foreign departments in Germany and Belgium at a later stage. The main activities of Quality Affairs are to develop, monitor, and redevelop policy regarding quality, sustainability, health- and food safety, in all processes within the cooperation. Member Services deals with maintaining member- and supplier relationships. Milk Logistics mainly collects and delivers milk flows according to the predefined planning and takes care of the milk flows between the factories. The sub-department Finance controls the internal and external financial flows. And Co-operative Support assists the cooperation with providing optimal support to the cooperative bodies and continuously improvement of the connection with current and future members.

4.2

Empirical research process

As was briefly indicated above, the research process in the organization started with the clarification of the problem by reading organizational documents and already existing information about the problem, such as annual reports, information about the department (with regard to the ongoing reorganization), and current KPI reports. The second step was investigating already existing scientific information about the subject, through a literature review. The conclusion of this review contained points of attention regarding the empirical research. These points of attention provided a foundation for the questions in the first stage of the empirical research, i.e. the individual interviews with the managers of the sub-departments. The topics that were discussed during the interviews were the strategy of CA, the strategy of the sub-department, the current KPIs, controlling on the basis of these current KPIs, and the critical success factors (CSFs) for CA and the sub-departments. After the interviews, five brainstorm sessions with the individual teams of the five sub-departments took place. The knowledge of the team members participating in these brainstorm sessions resulted in fully elaborated CSFs. However, the actual

development of the CSFs happened (depending on the team) during and/or after the brainstorm sessions. When the development took place after the brainstorm session, it occurred with one or two employees who are responsible for the activities related to a certain CSF of that team. Subsequently, the KPIs could be defined using the developed CSFs. All developed KPIs were then evaluated and (if

literature. The final step in this research was to develop an overall BSC for the department CA. This BSC has to show which perspectives are measured adequately, but also which perspectives might need more attention to improve the balance in the performance measurement system. Such further improvements could be an issue then for the future.