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Control in the Field Sales Management
A Case Study
Lian Smilda
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Control in the Field sales management:
A case study
Author: Lian Smilda Student number: S1724746 Email: liansmilda@hotmail.com Address: Van Swinderenstraat 30
9714 HE Groningen
University of Groningen
Faculty of Economics and Business Administration Master of Science in Business Administration Specialisation Organizational and Management Control
First Supervisor: Dr. B. Crom Second Supervisor: dr. E.P. Jansen
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Preface
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Abstract
This paper will focus on the control issues that occur in a field sales environment. The paradigm of this research is phenomenological focused. I will focus on the meaning
rather than the measurement of control systems and performance measurement in the field sales group. The objective of the case study is to determine what current control systems and performance indicators are already used on the case company‟s sales departments , and second to decide to which conditions performance indicators have to conform to satisfy the companies needs to combine control and autonomy. Research in the following fields is explored ; (1) Performance measurement systems, (2) Behavior-based and outcome-based control, (3) Agency theory, (4) Organizational theory, (5) Control systems in the field sales management and(6) Non-financial performance measurement. Data from interviews and questionnaires are applied to the conceptual model. A combination of both a behavior-based and outcome-based control will give focus on the long-term while remaining the autonomy of the employees. In case of behavior- based control focus should be on the understanding of the appropriate behavior in the selling-process and the communication between field sales
management and company representatives. Training of salespeople on their job and in personal skills is key in achieving this. The current focus of control is outcome-based and appeared not to be effective. As Krafft(1999) remarked, it is better for an organization to change the variables in the control system , rather than an organization to change its complete control system. An alternative to the current outcome-based control was given in the shape of non-financial performance measurement. In the discussion of using non-financial measures as an indicator of performance, an emphasis was put on customer satisfaction as an indicator of performance.
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Table of contents
Part 1 Introduction ... 7 1.1 Initial motive ... 7 1.2 Company X Netherlands ... 7 1.3 Problem statement ... 111.4 Definitions control and prerequisites ... 13
1.5 Structure of the paper ... 15
Part 2 Theoretical Framework... 17
2.1 Types of control ... 17
2.2 Behavior-based and Outcome-based control ... 20
2.3 Agency Theory ... 22
2.4 Ouchi‟s organizational theory ... 25
2.5 Research on control systems in the field sales management. ... 29
2.6 Research on nonfinancial performance measures ... 34
2.7 Conclusion ... 39
Part 3 Research Design ... 42
3.1 Place in research field ... 42
3.2 Research objective ... 43
3.2.1 Research objective ... 43
3.2.2 Research conditions ... 44
3.2.3 Data collection ... 44
3.3 Conceptual model ... 46
Part 4 Findings and analysis ... 49
4.1 Current control systems ... 49
4.2 Hygiene representatives questionnaire ... 52
4.3 Theoretical findings ... 54
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Part 5 Conclusion and Recommendations ... 61
5.1 Conclusion ... 61
5.2 Recommendations ... 65
References ... 70
Appendix 1 : Questionnaire ... 72
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Part 1
Introduction
In this part an introduction is given on the initial motive of the paper. Further the case company is shortly introduced. The problem statement explains the background of the initial motive for this research paper and is followed by the definition of control and prerequisites of this research. At the end of this part an overview is given of the structure of this thesis.
1.1
Initial motive
“The old organization was built on control, but the world has changed. The world is moving at such a pace that control has become a limitation. It slows you down. You‟ve got to balance freedom with some control, but you‟ve got to have more freedom that you ever dreamed of.” (Welch, 1993,p. 21)
This paper will focus on the control issues that occur in a field sales environment. It will focus specifically on which types of control systems the field sales management of the case company, Company X, can use to combine control and autonomy.
The goal of this study is to propose types of control systems that take the specific contingent situation of the case company into account.
This study will initially focus on the HPR sector of the company, since the research is initiated by this sector. The other sectors are attended in the research to give an overall view of which control systems are currently used within the company and to possible learn from them.
First an introductory overview of the company‟s strategy, organization and distribution is given to place the problem in perspective, before the problem itself is introduced.
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Company X Netherlands
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annual sales of about €100 million. They are active and divided in the following market sectors; health care, business service contractors and HPR(food service and contract catering, government and retail).
The strategy of the company is to give the customers a complete package of products and services. They state on their website “Wij bieden meer dan oplossingen voor reiniging en hygiëne, wij maken het onze klanten makkelijker”. The customer oriented focus can especially be found on the sales department and is therefore key for the employees in the field to be controlled upon.
The organization of the sales department can be found in the figure below.
Figure 1: Organization of the sales department
The head of the sales department is the Sales Manager who is responsible for the overall sales department. The sales department is divided into three sectors, namely Health services, Business services and HPR. Each sector is regionally divided and for each region a field sales manager is responsible for its sales team consisting of account managers and hygiene representatives.
In figure 2 a close up of the organization of the HPR-sector can be found.
HPR Region North Field Sales Manager North HPR Region Central Field Sales Manager Central HPR Region South Field Sales Manager South
Sector HPR Sector Health
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Figure 2: Organization of the HPR sector
In the HPR-sector three field sales manager are active. Each field sales manager has its own region, divided in North, South and Central Netherlands. Each region is again divided into cells, with each cell consisting of one account manager( in the figure noted as AM) and two hygiene representatives( in the figure noted as HR). The account manager is responsible for the larger and more complex accounts/customers and the hygiene representatives for the remaining.
The distribution of the products to the end-user can be direct to the end-user or indirect via wholesale or official dealers . The official dealers have their own field sales department and will not be included in the scope of this paper.
The indirect distribution is most practiced, an end-user buys the desired products of Company X at the wholesale. The wholesale holds products of Company X on stock and makes orders on products running out-of-stock. The direct distribution from Company X to end-user include special products or larger quantities.
HPR Region North Field Sales Manager North AM HR Cell HR Cell AM HR HR Cell AM HR HR HPR Region Central Field Sales Manager
Central Cell AM HR HR Cell AM HR HR HPR Region South Field Sales Manager
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Figure 3: Product distribution at Company X
The wholesale and the relations with them are of importance for the company. The relation with the wholesale are the responsibility of the account manager and the trade department of Company X. The activities concerning wholesale are not the core activities of the hygiene representatives. The hygiene representatives focus on the companies who use the products (end user), whom they visit and keep relations with. Despite the fact that the relations with wholesale are of importance for Company X, the focus in this paper is on the relation between hygiene representative and the end user of the products.
For clarity‟s sake, the companies that hygiene representatives visit will be referred to as consumers, since these will be the end users of the products. The wholesale will be referred to as customer, as they will resale the products and order from Company X.
The hygiene representatives work from their homes, they visit consumers and potential consumers. The daily activities are registered by the hygiene representatives into the CRM system of the company, called Frontdesk. They file which consumers they have visited and what the purpose and outcome of the visit has been.
Information on sales figures comes from three sources. The first is the internal source, called the Weekstaat. In this all data can be found on what has been shipped from Company X to the wholesale on a week to week bases. The second source is external and is the indirect sales reporting of wholesale. The wholesale register what has been sold of Company X‟s products and to whom. This information is reported on a monthly basis and is on consumer level. The latter includes information on the sales results of the hygiene representatives, since the
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consumer can be linked to a hygiene representative. The third source is information that comes from the direct trade from Company X to the end-user. In the figure below the flow of
information can be found.
Figure 4: Flow of information
1.3
Problem statement
For a control system to be effective there has to be knowledge on the desired results, an ability to influence the desired results and there has to be the ability to measure the results effectively ( Merchant and Van Der Stede 2007 p. 218)
The above statement issues three important aspects and phases of control; the knowledge of desired results, the ability to influence results and the ability to measure results.
Figure 5: Phases of control
The first aspect is the first step in control, namely defining desired results. What has to be the outcome of a process, what should taken actions lead to? Results are often set in targets or goals
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to make it possible to identify whether the targets or goals are met. In the case company there is clarity on the desired results, they are set in hard objective sales figures. Sales targets are given top-down to the overall sales department and are divided among the field sales managers. The field sales managers are responsible for the division among the individual members of their sales team.
It is uncertain to what extend the hygiene representatives are able to influence the sales results. There is no clear knowledge with the field sales management on which actions lead to the desired results. The field sales management has ideas on which actions are likely to create the desired results; however they cannot quantify whether those actions truly lead to the desired results.
The ability to measure the results effectively is linked to the quality of the information on the results. The quality of the information is not optimal. The following problems coexist with the two sources of information.
First, the figures from the internal source, the Weekstaat, are not consumer specific and do not consider the stock of the wholesale. It therefore gives no specific information on what consumers buy and with that, no relation can be made to the efforts of the hygiene representatives to a specific consumer.
The second source relates to the information received from the wholesale. This information is consumer specific. However reporting the information is optional and not all wholesalers report these sales. An estimate is that about two third of wholesalers report the sales to Company X and it is expected that in the near future less wholesalers will report. Company X is thus dependent on the wholesale regarding this sales information. Besides the issue that the wholesale can stop providing this information, the dependence on the wholesale also causes an ambivalent relation. The relations between Company X and the wholesale should be concentrated on the business-customer relation and not as the wholesale as a information provider for Company X.
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In sum, Company X does not know exactly and timely what consumers buy, when and how much. This leads to problems concerning the control and monitoring of the hygiene
representatives.
For the field sales management this missing information leads to a problem of control. The field sales management cannot see how a hygiene representative is performing at the moment. For example, when a hygiene representative loses a consumer, the field sales management will not be aware of this until two months after the last order of the consumer. At that time it is too late for field sales management to intervene.
Another example of how this information imperfection might cause problems. At the end of the year field sales management looks at the performance of the hygiene representatives. They see that overall sales has been good, however they do not know if this has been due to the
performance of the hygiene representative or that it has been by influenced by other
(uncontrollable) factors. This will lead to difficulties in the planning of the period ahead, since the forecast of coming periods are based on the previous periods. As field sales management does not know exactly how previous sales has been established the forecast is based on assumptions. Is it therefore correct to account the hygiene representatives for not realizing the planning? And how can they intervene when they do not know for two months what is actually going on in the field?
In the following paragraph definitions on control are specified and followed by a discussion on what the management feels is “good” control and which prerequisites a good control mechanism should have.
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Definitions control and prerequisites
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employees willing to take those actions required by a firm? Finally personal limitations can prevent an employee from doing what is expected from him, a firm has to make sure the right person is in the right place.
Good management control has many characteristics, but there are also many ways to describe what managers understand by good control. In the research of Merchant(1982) good control is defined as “that an informed person could be reasonably confident that no major
unpleasant surprises will occur” (Merchant, 1982, p. 44).
Merchant and Van der Stede (2007) divided control into strategic and management control. Strategic control is focused on strategy formulation and strategy updating, management control is focused on influencing the behavior of employees. Management control systems are “ the systems that managers use to ensure that the behavior and the decisions of their
employees are consistent with the organization objectives and strategies” (Merchant and Van
der Stede ,2007, p.5) This paper will focus on the latter two, management control and management control systems.
From the interviews with the field sales management on what they believe is good control, two main characteristics emerged. First they stated that good control means to be able to look forward and not solely backwards. “It should be the windscreen of the car and not the rearview mirror”. This reflects the desire of the field sales management for a control system that supports management to detect problems in the field in an early stage. It should indicate when problems arise in order for field sales management to intervene and help hygiene representatives before the problem gets out of hand, and above all it should be more orientated on the long term.
Secondly, it should lead to the empowerment of the hygiene representatives . It should help them to chose their own actions to achieve the right results. “ It should be a mirror for the hygiene representatives in which they can look to see if the actions they take are right” . This indicates the desire of a control system which gives high autonomy to the hygiene representatives and releases management of the burden of continuous monitoring.
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provide a straightforward clear overview of what is going on in the field and easy to be accessed. Second, the system should be applicable for all sectors of the sales departments of Company X Netherlands.
1.5
Structure of the paper
In this part an introduction was given on the initial motive of the paper. The focus of this paper is on control issues that occur in a field sales environment. The study aims to propose types of performance measurement systems that take the specific contingent situation of the case company into account. Further the case company, Company X, was shortly introduced. The problem statement explained the background of the initial motive for this research paper and a definition of control and prerequisites of this research were introduced The remaining part of the paper is structured as follows:
In part 2 the theoretical framework is introduced. The object of this part is to first explain different types of control. Different classifications of control are discussed, the characteristics of outcome- and behavior-based control are explained, the concepts of the Agency and
Organizational theory will be summarized, the paragraph on control in the field sales
management will place the control issues in a specific context and the part will be concluded with the subject of non-financial performance measurement
After the theoretical framework, the research design will discuss the place of this paper within the research field. Subsequently the objectives, research questions and research conditions are determined in the problem statement. Following is the methodology. The conceptual model is discussed in the last paragraph.
The findings and analyses of the hygiene representatives questionnaire and the theoretical framework is given in Part 4. This part will apply the theoretical framework to the situation of Company X‟s field sales organization. In this part the objective is to discuss the research question.
In the conclusion and recommendations both sub-research questions are answered. The recommendations will expand on these answers.
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Part 2
Theoretical Framework
In the previous chapter management control systems were described as “ the systems that
managers use to ensure that the behavior and the decisions of their employees are consistent with the organization objectives and strategies” (Merchant and Van der Stede ,2007, p.5)
In this part different theories on control will be introduced. The chapter will start with an introduction on different types of control. This introduction will be based on the classification of Merchant and Van Der Stede , who classify control on the object upon which control is exercised.
Performance measurement is a part of control, in which the combination of rewards linked to results give employees direction and motivation to achieve those results which the firm desires. Merchant and Van Der Stede view performance measurement as a part of results control, since the objects of control are results. Ouchi and Thompson rather look at what is measured, whether this is the behavior of employees or rather the outcomes of these
behaviors. They explain the advantages and disadvantages of both types and what they entitle in the second paragraph.
The Agency theory explains in which situation behavior or outcome-based control is most suitable. Ouchi‟s Organizational theory explores further which mechanism of control is most suitable in which contingency.
After this exploration on types of control, a view on control systems within the context of field sales management is given. Propositions from the Agency and Organizational theory on outcome and behavior-based control are explained. The subsequent paragraph gives an alternative look on what to measure as result or outcome when using outcome-based control. Instead of linking financial results to performance, non-financial performance measures might be an alternative to behavior-based control and financial outcome-based control.
This part will close with conclusion taken from the theories.
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Types of control
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action control), control on the type of persons employed by the company( personnel control) and control on norms and values( cultural control). Below the four types of control based on the object of control will be discussed.
1. Results Control
Results control gives employees the empowerment to chose their own actions. A firm indicates which results are important for the organization, it links these results to rewards, which motivates and informs employees to produce the desired results.
Results control is a preventive type of control. It employs personal and organizational goals to control the behavior and activities of employees on different levels of the organization. It informs employees timely and clearly in which direction the organization is going and in which direction they have to focus. It gives clearance on targets set by management and the remuneration offered for achievement of the established targets. Results control therefore lead to the encouragement of employees to take those actions leading to the desired results. The implementation of results control consists of four steps. From defining the performance measures, to actually measuring the performance, setting the performance targets and providing rewards linked to the targets. The main issues of implementation and in order to use results control effectively are threefold; First there has to be adequate knowledge and information on the desired results, second there should be the ability to influence the desired results and third, the ability to measure the controllable results effectively.
2. Action Control
Action control(Process control) focuses on the action the employees should or should not take to benefit the organization. Merchant and Van der Stede mention four basic types of action control. Behavioral constraints limit employees possibilities to take undesired actions. The most common example is a separation of tasks which makes it impossible for one
employee to be solely responsible for a taken action. Preaction reviews limit employees by the requirement to ask permission to a superior before they can take action. Action
accountability makes employees accountable for the actions they take. It includes defining which actions are and are not desired, communicating these, evaluating actions and
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For action control to be effective it is necessary to know which actions lead to the desired results. A great disadvantage of action control is that it limits the autonomy of the employee by saying which actions an employee has to take.
3. Cultural control
A guideline or code of conduct can give directions to the employees of what action are likely to be desirable without constraining. It gives the employee the autonomy to decided for himself which action to take. Codes of conduct are part of cultural control. It encourages employees to work as a group with similar norms and values and gives a guideline to what actions to take.
Group rewards are a method to encourage cultural control. By rewarding not individually but by group, employees stimulate each other and encourages teamwork.
4. Personnel control
Personnel control helps employees to control themselves. It clarifies what is expected from employees, it makes sure that employees are capable for the job and stimulate
self-monitoring.
Personnel control exists of three major components. The first is selection and placement of employees, the second component is training, it gives information on which actions to take to achieve the desired results. Thirdly , job design helps employees to succeed in their job.
For a company to implement or to enhance its control system it is important to consider what they want to control( results, actions, culture or personnel) and whether these types will help them to overcome their control problems. Further they should consider whether the object they would like to exercise control on is suitable for control within their company.
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actions taken and the ability to measure the results or track the actions taken, influence the level of tightness and therefore the fit a control system has with an organization‟s situation. For a company it is therefore import to consider before choosing a control system how much knowledge they have on the relation between the objectives and the control objects.
2.2
Behavior-based and Outcome-based control
Thompson(1967) and Ouchi(1979) discuss in their work on organizational theory that control can be either on the behavior of employees or the outcomes of those behaviors. The choice of which type to use has been discussed in many studies and will be explained in the latter part of this chapter. In the figure below the main characteristics of the two types of control can be found.
Figure 6: Characteristics Outcome and Behavior-based control
The outcome-based control system monitors the final outcomes of a process. In this, there is relatively little monitoring and managerial directions and therefore there is greater autonomy for the sales force. The measurement of results is mostly objective and based
on the final, bottom line result. Salespeople are held accountable for the results they achieve and not for how they achieve these results. In this situation, the marketplace determines and guides which actions salespeople take. Risk is in this situation shifted to the salespeople which are commonly rewarded by bonuses based on their results. Outcome-based control is
Outcome-Based Control
Behavior-Based Control
· Little Managerial Involvement
· Reliance on straightforward, objective result
measures( Such as sales)
· Marketplace guides action
· Short-term focus
· High level of managerial supervision
· Complex methods of evaluation based on
salespersons input( Such as; personal qualities, sales strategy, activities)
· Management guides action
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widely used because of its ease to link the results to individual performance. The main advantage of outcome control in the field sales can be found in the nature of the selling profession. Supervision might be difficult due to the work in the field. The success of sales is hard to predict and difficult to estimate. Furthermore it is difficult to define and profile which actions of the salesperson lead to the desired outcomes. It is hard to state which way is the best to go from input to output, each salesperson has its own manners and managers like to give them the freehand to use these manners. In spite of the advantage of outcome-based control, Anderson and Oliver(1987) mention the disadvantage of using this type of control. First they mention the risk that a lack of direction might cause to the firm on the long run. Lack of direction might cause salespeople to focus on the activities that give a direct positive result to the outcomes on which they are evaluated, while in the future these actions might cause a negative effect. This problem can be addressed by using multiple indicators of outcome, however with this the system increases in complexity and becoming a more behavior-based system.
In the behavior-based control system the individual stages of the selling process are monitored. Here, monitoring of activities and a higher level of managerial directions are important. The evaluation and compensation is not based on results and measures of achievement but on the achievement that lead to the results. The measures are more subjective and complex. Management has an active role in monitoring and directing the actions of the salespeople. It is clear for the management which actions salespeople need to take and how they can ensure that salespeople behave appropriately to the desires of
management. An important point is that the sales result or outcomes are assumed to be a result of this behavior and that the focus of the control system is on the long-term.
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based control gives management the ability to focus on the long term. Inputs are not
indicators of results, but are expected to generate the future results. For example, salespeople can focus on forecasting and planning rather than solely on selling. Another advantage of behavior-based control is the ability of management to correct the evaluation for factors outside the control of salespeople. Management can reward those salespeople for their efforts by using subjective evaluation, where with outcome-based controls the salespeople might be punished for factors they cannot influence.
The two types are two ends on the continuum and a mixture of these two types are more common within organizations ( Churchill et al. 1985). Both types have their advantages and disadvantages, and contingent variables can explain which type is most suitable for an organization.
The theory on outcome- and behavior-based control gives an idea on two concepts widely used for performance measurements systems. It explains the main differences between the two concepts and their advantages and disadvantages. For a company to design or re-shape its control system, it is important to look at the benefits which one system has over the other.
2.3
Agency Theory
Performance measurement as a part of control has the advantage that employees are given autonomy while being controlled at the same time. This is one of the issues in the Agency theory. The theory deals with the agency relationship, in which one party, called the principle, delegates work to another ,called the agent. The question in this theory is how principals can control the activities of autonomous agents. The unit of analysis in this theory is the contract between the agent and the principal. Performance measurement variables are part of the contract and therefore this theory is relevant for this research paper. The following assumptions concerning people are made in the theory and are important to keep in mind while using this theory; first the assumption that people are by nature self interested, second people have a bounded rationality and third people have an natural aversion towards risk.
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concentrating on different issues and research outcomes.
The first, the positivist stream, focuses on the potential goal conflicts and design mechanisms that can limit the agents autonomous self-interested behavior, or which mechanism to use which results in the agent being more likely to behave in the interests of the principal. Research in this stream indicates that the use of outcome-based incentives and contracts lead to a greater success chance of solving the diverging interest between the owner and manager. This is because the agent will receive a reward for achieving the desired outcomes of the principal. It therefore signifies that with outcome-based control the agent is more likely to behave in the best interest of the principal.
The second stream, the Principal-Agents stream focuses on the design of an optimal contract and is applicable to more different relations than the positivist stream. In this stream was found that the type of contract can be predicted by task programmability, the information system ,outcome uncertainty, outcome measurability and the length of the relationship. The relevance of what performance measurements to use is issued here. In the case of a
programmable task, it is clear and understood which behaviors are appropriate in the transformation process. According to the theory a high task programmability is positively related to the use of behavior based control. The information system refers to the information that is available on the activities of the agent. In case that there is perfect knowledge on those activities, the optimal contract should include behavior-based control mechanisms. Outcome uncertainty deals with the uncontrollable factors that might influence the outcomes. The uncertainty in outcome hinders planning efforts and also brings along extra risk. With a high outcome uncertainty it is better to have a behavior-based control, because here the risks stay with the principal and the performance measurement is not influenced by uncontrollable factors.
Outcome measurability deals with the measurability in terms of cost and effort of the outcomes, when it is difficult/ expensive/ time consuming to measure the outcomes a
behavior-based control is preferable. In a long- term relationship between agent and principal it is likely that the principal knows how to assess the behavior of the agent and is behavior-based control preferable. Visa versa, in a short-term or new relationship behavior might be unpredictable and outcome-based control is chosen.
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alignment, the risk of gaining these results is transferred from the principal to the agent, and the risk exist because the outcomes are only a small part of the overall behavior of the agent and outcomes can be influenced by uncontrollable factors.
In the agency theory the importance of using incentives, by means of performance
measurement, is recognized to reduce the self interested behavior of agents, which should have a positive effect on the performance of the firm. However the theory does not focus explicitly on which performance measurement variable can be used in solving the agency problem, only the type of contract is researched. According to Perrow (1986) the agency theory is too narrow as it does not recognize cooperation situations and it concentrates on two types of contracts, behavior and outcome based, while more types of contracts do exist.
Since the agency theory is narrowed by two types of contracts this theory cannot be used in detail for this paper however the ideas and background of the Principal-Agent stream are useful to get an insight into the relation between field sales management and hygiene representatives and how this can be enhanced with a control system adjusted to a companies specific situation.
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Figure 7: Conclusions agency theory on outcome and behavior-based control
The Agency theory explains in which situation a behavior or outcome-based control is most suitable for a company. This theory focused on both environment, organization and
salesperson level. In the following paragraph Ouchi focuses more in depth on the
organizational level and explores which mechanism of control is most suitable in which contingency.
2.4
Ouchi’s organizational theory
The research of Ouchi (1979, 1980 and 1981) focuses on the question which mechanism of control is suitable in which specific situation and how to design such a mechanism. He remarks that one of the issues in every organization is “obtaining cooperation between
individuals who only share partially congruent objectives.” (Ouchi 1979, p. 833) This issue of goal congruence was stated in the Agency theory as well.
For the purpose of evaluating and controlling organizations, Ouchi proposed three types of
· High task-programmability
· Perfect knowledge on activities
· High outcome-uncertainty
· Low outcome-measurability
· Long-term relationship
· Low task-programmability
· Little knowledge on activities
· Low outcome-uncertainty
· High outcome-measurability
· Term of relationship of none importance
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control mechanisms; a bureaucratic mechanism, a market mechanism and a clan mechanism. The choice between the three types should be based on the social and information
requirements of the organization. Ouchi defines social requirements as “that set of agreements between people which, as a bare minimum, is necessary for a form of control to be
employed.”(Ouchi 1979, p. 837) The informational requirement is the information needed for a control system to work properly and is related to the measurability of outcomes or behavior. In the case of the first type of control mechanism, the market mechanism, the social
requirement of reciprocity is enough to be controlled upon. In this mechanism specific information is available, namely market prices. Here the output is perfectly measurable and therefore there is a minor need for social requirements. Such specific information is not always available. Ouchi explains that when there is less specific information there is a greater need for social requirements. In the case of a clan mechanism there is a high level of social requirements as it lacks the explicit information of market prices. Social requirement in the form of shared values and beliefs are in this mechanism required to have adequate control. In a bureaucratic mechanism there are rules introduced to control behavior, the social
requirement needed for this mechanism to work is the agreement upon authority.
Ouchi further distinguishes two types of control strategies. The first strategy refers to the evaluation of performance and is related to the cybernetic process of monitoring and
rewarding performance. It deals with the information needed to control and more specific to what degree the information is available for the purpose of assessing performance. The second strategy emphasizes the divergence between the goals of employees, the goal incongruence. A minimal level of goal incongruence among employees, helps to achieve the organizational goals. This strategy deals with the reducing of goal incongruence by means of training, selection and socialization. Ouchi acknowledges that firms deal with this goal incongruence between employees and the firm, and the fact that not all information, input or output, is available and can be measured perfectly.
What is measured can be behavior of employees, input, or the outcomes of these behavior, output.
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Next to the two performance measurements systems of behavior and output control, Ouchi introduces the concept of clan control. This third type of control is neither based on behavior nor outcome, it is based on socialization. According to Ouchi social prerequisites can help goal congruence, while the informational characteristics lead to the
measurement of input or output. In the case that neither input or output can be measured , socialization leads to a loyalty of the employees towards the organization and its goals, leading to a high level of goal congruence. In the literature little attention is paid to the clan system and it is not clear how this socialization process exactly works(Ouchi 1981).
The choice of which control to use depends on the information characteristics of the task to be evaluated. Ouchi(1979) divides these characteristics into (1) the knowledge of the
transformation process( task programmability) and (2) the ability to measure output. These task characteristics determine which control strategy is appropriate. With a high task
programmability ,behaviors can be explicitly defined and can be used as measurement. When outcomes can be measured, goals can be clearly defined and performance evaluations of outcomes is appropriate for control. If both behaviors and outcomes can be measured, then either can be used.
Ouchi uses the information characteristics to define which type of control is most suitable for a company to apply.
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Figure 8: Conditions determining appropriate control measure to apply, adapted from Ouchi 1979:843
Ouchi acknowledges that most firms deal with goal incongruence between employees and the firm, and the fact that not all information, input or output, is available and can be measured perfectly. Ouchi explains that a company can measure the behavior of employees, input, or the outcomes of these behavior, output. The type of control for a company depends then on the knowledge of the transformation process, the input which Ouchi calls the knowledge on the transformation process, and the ability to measure outputs. In this a high level of goal incongruence is no problem as long as there is a precise evaluation system.
Figure 9: Conclusions Organizational theory on outcome and behavior-based control
Knowledge of the Transformation process
A b il it y t o m e a s u re O u tp u t H ig h L o w Perfect Imperfect Behavior or Output
Control Output Control
Behavior Control Clan Control
· Little knowledge on transformation process
· High ability to measure output
· Knowledge on transformation process
· Low ability to measure output
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After this exploration on types of control, a view on control systems within the context field sales management is given.
2.5
Research on control systems in the field sales management.
In this part the research on control systems in the context of field sales management is discussed. The field sales management control problem has many relevant theoretical approaches. From Agency theory to theories from the psychological field to cultural studies can be applied to the control problem in this field. In this study the focus will be on agency theory and organization theory will be since these two are the most common used theories in research on the control problem in the sales field.
The specific information of research in this paper is focused on performance management systems in the field sales management, however most studies and specifically the more renowned studies are focused on control systems in the field sales management.
Therefore both studies on performance measurement and control systems are used and intertwined.
Anderson and Oliver define field sales management control systems in terms of an
organizations set of procedures for monitoring, directing, evaluating and compensating its sales force( Anderson and Oliver 1987). They discuss two types of control systems, behavior and output-based, and their effect on the cognition, behavior and motivation of the sales force. They propose a framework on control system strategies. In the framework three types of variables are identified which can give a preference to using outcome or behavior-based control systems. These variables are divided in Environmental, Firm and Salesperson
variables. The variables are taken and reviewed in different types of theories, namely agency, organization, transaction cost and cognitive evaluation theory.
In summary they concluded from these theories that firms that deal with environmental uncertainty, difficulties in predicting sales outcomes, risk-averse and intrinsically motivated salespeople argue for behavior control.
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sales activities and performance can be found, outcome-based control is the preferable option. From this Anderson and Oliver present a set of propositions for further empirical research.
The study of Anderson and Oliver in 1994 tests this framework empirically. The
consequences of output-based control versus behavior-based control on sales representatives in the electronic components industry in the U.S. is studied. Sales managers where asked to classify their sales organization by means of a survey and to ask three of their hygiene representatives to fill in another survey. The study focuses on the perceptions of the sales representatives on the control systems used within their sales organization.
Results from the study show support for the framework. However not all results where strong. Strong support was found for the relation between behavior-based control and the affect and acceptance of hygiene representatives for the system. Acceptance of performance reviews, cooperation as part of a sales team and acceptance of authority and direction where found to be higher with behavior than outcome-based control.
Sales representatives were found to have more commitment to the organization when this organization uses a behavioral approach. Interesting was that sales representatives did not see a behavioral based control system with a lot of managerial supervision to be bureaucratic but rather it was seen as innovative and supportive. Also sales representatives were found to be more intrinsically motivated and to have more professional competences when behavior-based control was applied.
Krafft(1999) tested the propositions of Anderson and Oliver as well. In an empirical study he tested the antecedents of sales force control systems in 270 German sales organizations. The companies‟ were divided in having a more behavior-based or outcome-based control system. The antecedents were divided in accordance with the theories which control type would be most suitable. The study concludes that most companies tested designed their control systems in accordance with the theoretical approaches from agency theory, organizational and
transaction cost theory.
For the research Krafft tested 11 hypotheses taken from the theory and tested them empirically. The hypotheses were divided into three categories of which each have antecedents influencing the category.
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theory, more uncertainty in the environment and a higher sales volatility leads to companies being more efficient to have a behavior-based control. The more customers per salesperson the more a company is suited to have an outcome-based control system. According to managers interviewed in the research, more customers per
salesperson leads to a better diversification of risk of customers. With less risk , outcome- based control is preferred according to the agency theory. These hypothesis were supported by the research of Krafft.
The second category deals with company variables. An increase in the size of the salesforce is positively related to an outcome-based control system. Complexity of products has a negative effect on the knowledge of the transformation process, less knowledge or imperfect
knowledge leads to a preference of output-based control according to the organizational theory of Ouchi. More routine activities lead to a greater knowledge of the transformation process and therefore a preference for behavior based control.
The third category is salesperson variables. The more a salesperson is risk averse( not preferring risk), it is more preferable to have behavior-based control. The effectiveness of selling consists of the following measures; age, selling experience and duration at company. The higher these measures, the more the salesperson was considered effective and therefore according to the Agency theory output-based control was most preferable. However these hypotheses are not supported by the research.
An interesting aspect of the research of Krafft is that the influence of environment and the company seem to have a more important role on the design of control systems than salesperson characteristics.
In sum, companies are more likely to have a behavior-based control system when:
· There is more uncertainty in the environment.
· The size of a sales force is low, products are less complex and the more routine activities there are.
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Figure 10: Conclusions Krafft on outcome and behavior-based control
Another important note from the author is with regard to changing circumstances. Rather than changing the control system to adjust to new circumstances, the factors mentioned in the research should be adopted. When for example the perceived uncertainty in sales forecast has increased, managers could decrease the number of salespeople per sales force or decrease the complexity of the product assortment.
Baldauf and Cravens(1999) studied how more and less effective field sales organizations differ with respect to specific organizational and sales person characteristics. They analyzed factors related to the effectiveness of field sales management. The study was performed on 159 field sales managers in 79 Austrian companies. There definition of sales organization effectiveness is taken from Churchill et al (1997) who define it as the summary evaluation of outcomes achieved by a sales unit during a specified time period. They found that effective sales organizations place more emphasis on sales territory design and that the sales forces have differences in both personal characteristics and performance dimensions.
The salespeople in the more effective sales organizations show higher levels of intrinsic and extrinsic motivation, sales support and customer orientation.
Also was found that salesperson behavior and outcome performance were assessed higher by managers in the organizations where sales units were more effective .
Further they find support in their study that higher levels of sales unit effectiveness can be Company Variables:
· High complexity of products
· Greater size of sales force
Outcome-Based Control Behavior-Based Control Company Variables:
· More routine activities
Environmental variables:
· High uncertainty in environment
· High sales volatitility Environmental variables:
· More customers per salesperson
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associated with sales organizations that use behavior based sales management control
systems. The activities of sales management that show the strongest link to this effectiveness are(1) reward employees for achieving an increase in their sales results, (2) Actively
participate training salespeople in their job, (3) coaching salespeople regularly,(4) include and discuss the sales performance with the salespeople,(5) stimulate the development of
salespeople.
Churchill et al. look in their study at the evidence on factors that influence sales performance found in literature in this field. They used a meta-analysis on 116 articles which led to 1653 associations between performance and determinants of that performance. They look at the structural characteristics that have been found in these studies such as number of companies involved and the number of salespersons. The major determinants of salesperson performance were (1) personal factors, (2) skill, (3) role variables, (4) aptitude, (5) motivation, and (6) organizational/environmental factors. In this order the least variation was found. Personal characteristics were found to have some relation to performance. However most relation to performance was found to those personal characteristics that can be influenced by training, company policies, motivation and experience. For example the recruiting of salespeople influences the sales performance less than the actions taken after the take on. Job training, guidance and motivating new and current sales personnel is therefore more effective than focusing exclusively on the recruitment process.
However not one single determinant was found that can explain the wide variation in
performance. According to Churchill et al. this has two main implications for managers. First, managers should be careful with using a single or several related factors as a measurement of future sales person performance. The second implication is that the use of a multiple set of determinants to predict future sales performance has a greater chance of being accurate. The main finding of the study is the seemingly obvious statement that the determinant of sales performance should be job related and should reflect the specific and unique characteristics of the job.
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and Oliver and added antecedents influencing these variables.
Baldauf and Cravens studied sales organizations control systems and how these organizations differ with respect to organizational and sales person characteristics. In this study they
analyzed factors considered related to the effectiveness of sales organizations. Churchill et al looked at determinants of salesperson performance and the level of influence the determinants have on the performance.
In contingencies where based control is not suitable, some benefits of behavior-based control can be adopted in outcome-behavior-based control by using non-financial performance measures.
The following paragraph will explain the options of using outcome-based control with non-financial performance measures and all the benefits non-non-financial indicators might have over financial.
2.6
Research on nonfinancial performance measures
The main objective of most private firms is to make a profit, therefore many companies base their performance measurement on summary measures. Where the final, bottom line figures such as accounting profits are measured. They can roughly be divided in market measures and accounting measures, which both have their own defects. The main problem with market measures is that the controllability principle does not hold as the measure variables can be influenced by the market. The problem with accounting measures is management myopia, the excessive focus of manager on the short term performance.
An inevitable side effect of using financial performance measurement, especially measures based on accounting performance such as accounting profit( EBITDA), is management myopia( Hayes and Abernathy, 1980). In this, the management is disproportionately focused on the short term performance of the firm. To reduce the myopia problem, a firm can use a combination of financial and nonfinancial performance measurement systems to focus on the long term as well.
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and give motivation for firms to adopt nonfinancial measures.
The first is the perceived limitations in traditional accounting-based measures. In comparison to nonfinancial measures, traditional accounting measures reward short term and incorrect behavior. The traditional accounting measures are history based and look at performances from the past and therefore give no indication of future performances. A second deals with competitive pressure. Changes in the intensity of competition forces companies to look at their value drivers, those factors who truly drive value in an organization. Finally the arising of new ideas such as Balanced Score card and Total Quality Management have led to an increasing interest in nonfinancial measures.
Ittner, Lacker and Rajan (1997) performed a study on the factors influencing the relative weights put on financial and nonfinancial performance measures in CEO bonus contracts. Their study does not emphasize the performance results form using one measure over another, but the type( strategy) of company using what kind of measurement variables. For their sample they included companies of whose CEO annual bonuses are solely based on financial measures and firms whose CEO‟s bonus are based on both financial and nonfinancial
measures. They used two data sources to develop a sample. The first they used were the proxy text files in Lexis/Nexis and searched these files on keywords
related to nonfinancial measures for the firms using both financial and nonfinancial measures. For firms using only financial measures a search was performed on keywords such as solely, entirely in the close proximity of keywords related to the compensation. The second data source was a confidential data file form a consultancy group in human resources which included data on weight put on performance measures in CEO bonuses. From this sample was found that firms using both financial and nonfinancial performance measures, 36.8 % placed weight on customer satisfaction.
From the result of this study, Ittner and Larcker (1998) based a further study on the analysis of customer satisfaction as a leading indicator of financial performance. In the article is the relation of customer satisfaction and future firm performance discussed, however it does not discuss the use of customer satisfaction in performance measurement. The research was performed on three levels; customer, business unit and firm-level.
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performance. Accounting performance is an internal measure opposed to market performance which is an externally focused measure. The business unit level takes costs and profits into account and looks as well at the implications of customer growth due to positive result of customer satisfaction and the implication on accounting based results.
The firm level goes beyond the accounting measures and looks at information for stock markets received by the information of customer satisfaction measures. The first, customer level, is most interesting for this paper, as it researches the question whether customer satisfaction measures are leading indicators of accounting performance.
The research on customer level was conducted on existing customers of a telecommunication firm to predict the firms future accounting performance. The customer satisfaction was measured by taking a random sample(n=2,491) of customers who bought in 1995 a specific service, these customers were asked three questions which assess the overall satisfaction of the customer with the service. From here the customer satisfaction index (CSI) was related to the following three indicators of performance, with its assumptions on the relation to CSI; 1. Retention rate ; more satisfied customers are less likely to switch to the competitor 2. Revenue level; more satisfied customers buy more than less satisfied customers 3. Revenue change; customers with a higher level of satisfaction increase purchases more
than less satisfied customers.
The control variables where based on the size of the customer‟s firm and the number of years the customers had been a customer. In their analysis they found evidence for a positive relation between customer satisfaction measures and future accounting performance. Ittner and Larcker conclude in their article to have found support for the enclosure of customer satisfaction indicators in internal performance measurement systems.
Empirical evidence on the use of nonfinancial measures in an incentive plan and their impact on firm performance are found in the study of Banker, Potter and Srinivasan(2000).
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short time series. Furthermore Banker et al is the first to study longitudinal archival data both before and after the implementation of an incentive system including nonfinancial measures. In their study in the hospitality sector they found that customer satisfaction measures are significantly associated with future financial performance as measured by business unit revenues and operating costs. in addition they found that customer satisfaction is associated more with long term rather than immediate financial performance.
Limitations in their research are that the hospitality sector in which the study is conducted is not representative for other sectors as it is a sector highly dependent on customer service. Banker et al. found an average lag of six months between customer satisfaction and future financial performance in this service sector. It is assumable that in a sector where visits from customers are less frequent, the lag can be longer and can have less economic consequences.
The influence of nonfinancial performance measures included in the compensation contracts on current and future performance is studied by Said, HassebElnaby and Wier (2003) For their empirical research they created a dummy variable to capture the firm‟s reliance on
nonfinancial measures in it‟s bonus plan. They compared the performance of this sample of firms who use nonfinancial measures, albeit together with financial measures, with the
performance of firms using only financial measures in it‟s bonus plan. They found support for the argument that firms that employ a combination of nonfinancial and financial performance measures have a significant higher level of return on assets and higher levels of market returns.
However, this positive relation has been found for the market based returns but not for the accounting based returns. An explanation they give for this is that the accounting based returns are based on accounting numbers, which are subject to manipulation by managers and therefore might not reflect real improvement in performance by nonfinancial measures. Further they note that accounting performance such as Return on Assets reflect short term performance for which nonfinancial measures are less important than long term performance. Additionally they found that nonfinancial measures and firm performance are contingent when the firm‟s characteristics, such as strategy, are related
to the nonfinancial measures.
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other measures. Research into the specific individual nonfinancial measures could clarify these limitations.
Financial and non-financial control is used in the balanced scorecard of Kaplan and
Norton(1992) . It is set as a model for operationallizing of strategy, using both financial and non-financial measures in four perspectives. The perspectives are based on non- financial performance drivers, leading to financial outcomes. Financial outcome measures are a cause of the non-financial performance drivers, assuming a cause and effect relation between these financial and non-financial measures.
Norreklit (1999) examines this relation between drivers and outcomes. She concludes that there is no causal relationship between the performance drivers and outcomes. She claims that coherence between drivers and outcome logically lead to a positive relationship and that therefore there is rather a logical relationship than a cause and effect relationship. It is therefore doubtful whether the balanced scorecard is an actual control system.
In the discussion on the use of non financial performance measures, a lot of attention has been called to customer satisfaction.( Hayes and Abernathy 1980, Kaplan and Norton, 1996, Ittner and Larcker 1998). While the interest in customer satisfaction was discussed in a study of Lingle and Schiemann(1996), who found that customer satisfaction information was highly valued by 85% of the respondents. The use of customer satisfaction as a performance
measurement is left behind, in the study only 37% of respondents linked customer information as a measurement for compensation.
Banker, Potter and Srinvasan(2000) found empirical evidence particularly focused on customer satisfaction to support the premise that nonfinancial performance measurement are significantly associated with long term, future financial performance and that those
nonfinancial measures reflect additional information which cannot be subtracted from past financial measures.
The marketing literature argues that a better customer satisfaction leads to an improved financial result, by increasing the loyalty of existing customers, reducing price elasticity, lowering marketing costs through positive word-of-mouth advertising, reducing transaction costs, and enhancing firm reputation ( Anderson, Fornell, and Lehmann (1994)
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financial performance measures and all the benefits non-financial indicators might have over financial.
In contingencies where based control is not suitable, some benefits of behavior-based control can be adopted in outcome-behavior-based control by using non-financial performance measures. The short term focus which outcome based control might entail can be dissolved by preferring non-financial indicators over financial measures( Hayes and Abernathy, 1980). Furthermore, financial measures look at performances from the past and therefore give no indication of future performances ( Fisher, 1995).Customer satisfaction was further found to be a leading indicator of financial performance and future firm performance (Ittner and Larcker, (1998) Banker, Potter and Srinisvan(2000) and Said et al.(2003)).
Financial and non-financial indicators are used in the balanced scorecard model of Kaplan and Norton(1992) in which they assume a cause and effect relation between non-financial
indicators and financial performance. Norreklit(1999) rejects this assumption and claims there is rather a logical relation between them. In this she doubts whether the balanced scorecard is therefore a good control mechanism.
2.7
Conclusion
In Part 2 the theoretical framework was introduced. The object of this part was to give an clear understanding of research in differing subjects related to the field sales management control issue.
In the first paragraph an exploration on types of control was made and important consideration that have to be taken before choosing a control system were given. Merchant and Van Der Stede explained that for a company to implement or to enhance its control system it is important to consider what they want to control( results, actions, culture or personnel) and whether these types will help them to overcome their control problems. Further they appointed that the implementation of the control system is limited by the knowledge that management has on the relation between the objectives and the control objects. For a company it is therefore import to consider before choosing a control system how much knowledge they have on the relation between the objectives and the control objects.
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concepts widely used for performance measurements systems. It explains the main differences between the two concepts and their advantages and disadvantages. For a company to design or re-shape its control system, it is important to look at the benefits which one system has over the other. The main characteristics of the two control concepts was given in figure 6.
The Agency theory explains in which situation a behavior or outcome-based control is most suitable for a company. This theory focused on both environment, organization and
salesperson level. From this theory a behavior-based control system is most suitable when a company deals with the following variables; a high task-programmability, high knowledge on activities, a high uncertainty with high environmental uncertainty, a low outcome-measurability.
Ouchi focuses more in depth on the organizational level and explores which mechanism of control is most suitable in which contingency. According to Ouchi a behavior-based control system is most suitable when there is a low output-measurability and a high knowledge on the transformation process.
In the following paragraph research on control systems in the context of field sales
management was discussed. Anderson and Oliver tested proposition made in the Agency and Organizational theory in an empirical study in the field sales context. In their studies they looked at a number of variables in a company and the preference of these variables on outcome or behaviour-based control. Sales representatives were found to have more
commitment to the organization when this organization uses a behavioral approach. Also sales representatives were found to be more intrinsically motivated and to have more professional competences when behavior-based control was applied.
Krafft explored this theory further. His research tested the variables mentioned by Anderson and Oliver and added antecedents influencing these variables. The main findings from this research were that companies are more likely to have a behavior-based control system when there is more uncertainty in the environment, the size of a sales force is low, products are less complex and routine activities are present.
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salespeople,(5) stimulate the development of salespeople.
Churchill et al looked at determinants of salesperson performance and the level of influence the determinants have on the performance. They found that most relation to performance was found to those personal characteristics that can be influenced by training, company policies, motivation and experience.
In contingencies where based control is not suitable, some benefits of behavior-based control can be adopted in outcome-behavior-based control by using non-financial performance measures. The last paragraph explained the options of using outcome-based control with non-financial performance measures and all the benefits non-non-financial indicators might have over financial.
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Part 3
Research Design
In this part the research design is discussed. First an discussion of the place of this paper within the research field is given. Subsequently the objectives, research questions and research conditions are determined in the problem statement. Following is the methodology. Finally the conceptual model .
3.1
Place in research field
This paper will follow Hopper and Powell (1985) on their discussion of philosophical ideas underlying management accounting research.
They relate the assumptions made in the literature on ontology, epistemology and human nature. The nature of this paper will be discussed based on these three classifications, all three explained by the two main ends on the continuum.
The nature of reality is captured by ontology. Reality can be seen as a hard concrete objective fact( realism) or as a product of individual consciousness( nominalism). Epistomology explains how we lean and how we receive knowledge. This can be by a subjective personally experienced way( Anti-positivistic) or in a way that we receive knowledge as hard and objective manner( Positivistic). The third classifications deals with the relationship between the human being and their environment, are human beings a product of the environment and conditioned by the environment( Deterministic) or do human beings have a free will and are the creators of the environment( Voluntarism)?
The nature of this study will have a both positivistic and interpretive nature. The literature study and the comparison of the literature to that of the situation at Company X will have an objective, positivistic nature. Most literature on management accounting has a positivistic nature( Hopper and Powell 1985) . The part which is case related, will have a more
interpretive nature. It will be more subjective and the point of view from the company will be included.
