Management Control in the Omnichannel Retail Environment

(1)

Management Control in the Omnichannel Retail Environment

The relationships between management control elements

Master Thesis

MSc Business Administration, specialization Organizational and Management Control

University of Groningen Faculty of Economics and Business

Date: June 20^th, 2017 Author: Joy Sieval Student Number: S2473038 E-mail: j.sieval@student.rug.nl Supervisor: drs. D. P. Tavenier Co-assessor: prof. dr. E. P. Jansen

(2)

2

Abstract

With the retail industry undergoing a disruptive change due to the introduction of the online channel and therefore changing customer needs, retailers are transitioning into omnichannel retailers as a response.

Omnichannel, in short, means seamless integration between different channels (Van Ossel, 2014; Verhoef, Kannan & Inman, 2015). Embarking on the transition to omnichannel seems to be the necessity of survival due to changing customer demands, but omnichannel is often coupled with the term “profitless growth” in literature (Treadgold & Reynolds, 2016). For retailers, it is therefore crucial to understand how the business can be profitable and omnichannel simultaneously. In this thesis, it is argued that effective management control can contribute to that, since management control guides employees’ behavior to organizational goals such as profitability (Otley, 1999). Consequently, the research question is as follows: What is the contribution of management control (as a package) in achieving profitability for the retailer in the omnichannel environment?

This question is answered through a case study research. A total of eight managers have been interviewed and asked about their perception of omnichannel, the management control elements involved and the profitability of the organization. In response to the call of Malmi & Brown (2008), the relationships between management control elements are considered and management control is studied in a package. What follows from the data analysis are four propositions: accounting practices conflict with planning controls, cybernetic controls complement administrative controls, cultural controls can substitute reward and compensation controls and planning controls complement (non-)financial measurement systems. In the discussion of the results, it is argued that by following these propositions, management control is more effective in the omnichannel environment. Effective management control eventually results in cost-efficiency, which in turn can lead to increased profitability.

Overall, the contribution of this paper is twofold. Firstly, this thesis shows that management control should be studied in a package, as there are clear relationships between the elements as proposed. Additionally, the study contributes to the field of omnichannel by providing practical insights into effective management control for omnichannel. As shown, by relating management control to omnichannel, retailers can improve their chances to being profitable in omnichannel.

Keywords: management control, package, omnichannel, retail, profitability, case study, complementary, conflicting, substituting, channel management.

(3)

3

1. Introduction

The way we shop nowadays is changing, we demand and get more service and more opportunities to buy whenever and wherever. For the retail industry, this is a disruptive change in the way of doing business which the retailers need to be in control of. The drivers of this change are the online channel, which is new to traditional retail channels, and ongoing digitalization of businesses and customers (Treadgold &

Reynolds, 2016: Verhoef, Kannan & Inman, 2015). With this disruptive change, an emerging phenomenon in the retail landscape is omnichannel. Omnichannel retailing is concerned with providing a highly integrated shopping experience to the customer while at the same time optimizing internal processes (Van Ossel, 2014; Deloitte, 2015; Verhoef, Kannan & Inman, 2015). It is about the combination of multiple channels and thus about the integration of clicks-and-bricks. More importantly, omnichannel retailing is a customer-centric business paradigm. Although this sounds very promising, this phenomenon is coupled in the literature with the term “profitless growth” (Treadgold & Reynolds, 2016). Because, investments need to be made to transform the retailer into this omnichannel form.

An interesting perspective that can shed light on this phenomenon and its source of profitability is the concept of management control. According to Otley (1999), management control systems provide organizations with information to ensure and guide them in achieving their objectives. Profitability, or the need to have viable operations at the minimum, is thus an objective for any commercial, omnichannel retailer. If the retailer is not profitable, the organization simply cannot survive. The field of management control systems knows many analytical conceptualizations (Strauß & Zechner, 2013; Malmi & Brown, 2008). Highly cited conceptualizations are that of Ouchi (1979), Simons (1995) and Merchant and Van der Stede (2007). The management control literature is undergoing change as to what the object of study should be. Malmi & Brown (2008) introduce their research on management control systems as a package. In their article, they call for researchers to study management control elements in a package instead of in isolation.

This approach shows the interconnectedness of different controls.

Overall, the literature on management control systems enhances our understanding of organizational forms and how organizations achieve their goals, such as profitability. Therefore, this literature stream is combined with omnichannel retailing in this thesis. To the best of my knowledge, management control as a package has not been studied in the omnichannel environment. Generally, management control literature is scarce in relation to new organizational forms (Strauß & Zechner, 2013) and pursuing different objectives (Bedford, 2015). Therefore, research on management control systems in the omnichannel retailer can generate new knowledge in that field and is for that reason of theoretical interest. Because, omnichannel is a new organizational form in response to disruptive changes in the retail industry. Additionally, the channels have

(6)

6

no clear boundaries but are interrelated and integrated which can result in different objectives that are pursued simultaneously (Van Ossel, 2014; Verhoef, Kannan & Inman, 2015).

Another contribution of this thesis relates to the necessity of research on the understanding of the source of profitability of the omnichannel retailer. In other words, the objective of the omnichannel retailer having viable operations and even more so, making profits. The literature on management control can generate new insights in this field as these systems are designed to steer towards a certain objective. There is a need to understand what contributes to the profitability of the omnichannel retailer in the academic world (Verhoef, Kannan & Inman, 2015; Zhang et al, 2010).

Thus, the goal of this study is to refine both the current understanding of management control as a package as well as how omnichannel retailers can be profitable by using management control effectively. The contribution of this study is therefore both to theoretical and managerial interest. Both implications will be addressed throughout the study. All in all, this research aims to advance both streams of literature by answering the following question:

What is the contribution of management control (as a package) in achieving profitability for the retailer in the omnichannel environment?

To answer this research question, a literature review on the relevant literature is conducted to gain insights on the concepts studied. The methodology section outlines how the study was conducted. Eight managers of RetailNL are interviewed. RetailNL is a company that is in transition to become omnichannel and therefore a relevant subject to study. The results section focusses on the transition to omnichannel, the management control elements and the profitability of RetailNL. Following these insights, four

propositions about relationships between elements are presented. In the discussion, the results are analysed in relation to other studies and an overall answer to the research question is provided. Finally, a

concluding section summarizes the study, states the limitations of the study and presents avenues for further research.

(7)

7

2. Literature Review

In this literature review, concepts that are relevant in the study on management control for omnichannel are introduced and discussed. There are two main reasons for this literature review. Firstly, there should be a common understanding of the concepts at hand before analyzing them further. Secondly, an in-depth understanding of the status on the literature of management control and omnichannel is necessary. It should be clear what the theoretical literature gap is before further continuing with the research. To start with, different management control systems in different frameworks will be discussed. Then, the emerging phenomenon of management control systems as a package will be introduced. Afterwards, the literature status on omnichannel will be presented and finally the two literature streams will be connected.

2.1 Management Control Systems

Management control systems provide organizations with information to guide them in achieving their objectives (Otley, 1999). Different analytical conceptualizations of management control systems exist and some will be discussed in more depth in this literature review. The frameworks are selected based on their relation to this study and their relevance in the academic field. The frameworks that are discussed are the framework of Ouchi (1979), Simons (1995) levers of control and the object of control framework of Merchant & Van Der Stede (2007). For all frameworks, the concepts will be explained and analysed.

2.1.1 Markets, bureaucracies and clans.

An earlier academic framework on management control is that of Ouchi (1979). He proposes three control mechanisms to direct companies to their objectives (Strauß & Zechner, 2013), namely market, bureaucratic and clan mechanisms. The mechanisms of Ouchi (1979) are brought into relation with organization theory, which analyses how and why organisations exist (Ouchi, 1980). Ouchi (1980) examines under which conditions organizations are the most efficient when applying a certain control mechanism. By specifying normative and informational social requirements, the framework of Ouchi (1979, 1980) is applied in the management control literature. It increases the understanding of how organizations can guide employees so that the organization moves towards its objectives (Ouchi, 1979).

The different mechanisms can be found in different organizations; however, it is rare to see a specific mechanism in isolation. When analysing the different mechanisms, it becomes clear why. Firstly, for market mechanisms to prevail, prices convey all the relevant and necessary information. When this is the case, rewards can be set in direct proportion to the contribution of an employee. Ouchi (1979) noted that in a department where this mechanism was present, there was not much supervision by managers. This could be the case because all the information, for example the performance of the employees, was directly measurable

(8)

8

and clear. Ouchi (1980) also refers to this as contractual agreements. Secondly, bureaucratic mechanisms combine with close and strict supervision by managers. Rules contain partial information and are used to guide employees to ensure organizational objectives. Bureaucratic mechanisms are based on an employment contract and the norm of legitimate authority is critical in this mechanism (Ouchi, 1980). Thirdly, clan mechanisms are based on a social agreement about values and beliefs (Ouchi, 1979). Due to socialization processes in the organization, a clan is formed with high goal congruence (Ouchi, 1980). Also, he noted that this mechanism will prevail when markets and bureaucracies fail. There are two contingencies that relate to the different mechanisms, namely the ability to measure performance and the congruence of goals. Because of this, the different mechanisms can be present simultaneously in one organization, for example across different departments working on different tasks.

2.1.2 Levers of control framework.

Another influential study in the management control field is that of Simons (1995) and his levers of control framework. He argues that management control systems serve as levers for organizational objectives. The framework considers diagnostic, interactive, boundary and belief control levers (Simons, 1995; Bedford, 2015). Belief and interactive control levers are related to positive controls whereas boundary and diagnostic control levers are associated with negative controls (Tessier & Otley, 2012; Bedford, 2015). It is not the case that either one is good or bad, as the words might suggest, but Simons (1995) addresses both levers of control that enhance creativity (positive) opposed to those that stimulate stability (negative). This apparent contradiction is also referred to as organizational ambidexterity. This means that the organization on the one hand aims for exploitation of existing resources and on the other hand for exploration, the searching for new resources (Gschwantner & Heibl, 2016). Hence, the underlying idea of the levers of control framework of Simons (1995) is opposing forces (Tessier & Otley, 2012). The dynamic tension between these opposing forces is deemed necessary to effectively balance competing priorities (Simons, 1995; Tessier & Otley, 2012; Bedford, 2015; Gschwantner & Heibl, 2016).

As mentioned, the positive forces come from belief and interactive control levers. Belief systems are defined as mission and value statements communicated by the senior management of the organization (Simons, 1995). It is the communication of core values in the organization (Tessier & Otley, 2012) and it is suggested that this inspires organizational search for new initiatives that relate to the values (Mundy, 2010). Interactive control systems are the formal communications and dialogues about opportunities (Simons, 1995) in the organizational internal and external environment. The focus in the dialogue and communication is on strategic uncertainties the organization faces (Tessier & Otley, 2012). The interactive control system has an attention-focussing role (Simons, 1995). The negative force is associated with both boundary and diagnostic

(9)

9

control systems. Boundary control mechanisms are the formal mechanisms that set boundaries to the activities of the organization as well as minimal requirements of behaviour (Simons, 1995). These boundaries can also be set on managers’ strategic set of opportunities (Tessier & Otley, 2012). Boundary systems restrict opportunity-seeking (Mundy, 2010). Finally, diagnostic control systems are used to monitor variances in performance from goals and correct these deviations (Simons, 1995). Therefore, managerial attention is drawn to these variances when they are negative (Bedford, 2015). Diagnostic control systems are associated with tight control and hierarchically structured channels of information flows (Henri, 2006).

It is interesting to analyse how the levers of control framework of Simons (1995) is used and regarded in the management control literature. It is often used in combination with innovation literature to control both the innovativeness of the firm but also to control the attainment of pre-defined organizational goals (Bisbe

& Otley, 2004; Henri, 2006; Bedford, 2015). Bisbe & Otley (2004) examined the impact of the interactive use of management control systems on product innovation. Henri (2006) examined both the impact of the interactive and diagnostic use on organizational capabilities, such as innovation and organizational learning.

He found support for his proposition that the interactive use positively influences organizational capabilities whereas the diagnostic use negatively influences these. As Henri (2006), other studies are also interested in the influence of the dynamic tension from the opposing forces that Simons (1995) suggests as being important for effective control. Bedford (2015) argues that this dynamic tension is critical for ambidextrous firms, who both pursue exploitation and exploration (Gschwantner & Heibl, 2016), to enhance organizational performance. Even though the levers of control framework is said to have ambiguous concepts (Ferreira & Otley, 2009; Tessier & Otley, 2012), it is and has been an important influence in the management control literature.

2.1.3 Object of control framework.

In their book, Merchant & Van der Stede (2007) analyse four types of control: results, action, personnel, and cultural controls. Results control focuses on the outcome of employee behaviour (Strauß & Zechner, 2013) and it monitors these results (Van der Kolk, 2016). Then, action controls have the actions of the employees as the focus of control (Merchant & Van der Stede, 2007). The actions are for example controlled using policies and procedures that prescribe desired behaviour. Personnel and cultural controls are closely related (Strauß & Zechner, 2013). Personnel controls focus on the inherent motivation of employees to achieve organizational objectives (Merchant & Van der Stede, 2007) and the controls are used to manage human resources (Van der Kolk, 2016). Cultural controls are in place to monitor the behaviour of employees as it should be aligned with the organizational values.

(10)

10

Van der Kolk (2016) combined both insights from Merchant & Van der Stede (2007) and Ouchi (1979) in his study on management control in public organizations. He classifies the control elements of Merchant and Van der Stede (2007) according to the contingencies described by Ouchi (1979). He argues that when knowledge of the transformation is perfect and the ability to measure output is low, action control is preferred over results control. Of course, a prerequisite for results control is to have full knowledge of the results (output) for the control to work effectively. On the other hand, when knowledge of the transformation process is imperfect but the ability to measure output is still high, results control is preferred over the other types of control. Then, when the ability to measure output is low in this situation, personnel and cultural controls will mostly be established. According to Merchant & van der Stede (2007), the different types of control can be used in different degrees of tightness or looseness. Overall, the goal of this framework is again to work towards achieving the organizational objective(s) (Strauß & Zechner, 2013).

2.2 Management Control Systems as a Package

The above discussion on management control systems is a subset of the many conceptualizations of management control systems (Strauß & Zechner, 2013). In addition to this, most frameworks have been researched under many different contingent claims (Otley, 2016). In his paper, Otley (2016) aims to give an overview of the literature on management control and accounting that has used a contingent perspective. He concludes that the number of contingencies continued to expand which makes cumulative results more difficult and rare to find in management control literature. As a response to the many conceptualizations and contingent claims, the idea of management control systems as a package emerged (Malmi & Brown, 2008). This concept of a package was firstly mentioned by Otley (1980), however he does not conceptualize this further. Only after the special issue of Malmi & Brown in 2008 has the concept of management control systems as a package received the attention it deserves (Otley, 2016).

As Malmi & Brown (2008) state, studying management control systems as a package has the potential to enhance the theory on management control. It results in a better understanding of how management controls support organizational performance amongst other objectives. They give three reasons for studying management control systems as a package. The first and foremost is the reason that management control elements do not operate in isolation. The context of the organization is crucial for a comprehensive understanding of the impact of the control systems in place. Also, when implementing a new management control system, the existing management control systems need to be considered. When ignored, spurious results in different studies will be the result (Malmi & Brown, 2008). Finally, the management control literature has a limited understanding of the impact of informal controls on more formal controls that are

(11)

11

studied. Studying management control systems as a package can help overcome these limitations prevalent in the current literature.

In response to the call of Malmi & Brown (2008), management control literature is emergingly moving towards studying management control systems as a package. Without explicit mentioning of management control systems as a package, Ferreira & Otley (2009) propose a descriptive framework for assessing performance management systems. Their framework builds on the framework of Otley (1999) and Simons (1995) levers of control. They propose 12 questions which give a comprehensive picture of the management control systems in its context. Bedford, Malmi & Sandelin (2016) do explicitly research management control systems as a package. In their study, they first examine different management control practices in different strategic contexts and how they enable effectiveness of management control. They also research the relationship between the different management control elements in a package and find complementary and substitutable relationships. One interesting result is that different management control packages can be equally effective in a strategic context. This lends support for ‘equifinality’, which undermines contingency research as it states that different packages can create equivalent results (Gerdin, 2005). Van der Kolk (2016) adds the possibility of a conflicting relationship between management control elements in a package, next to the complementary and substitutable relationship. In this case, the management control package works less effective than the management control elements in isolation. The possibility of conflicting elements in a package should be considered. In this study, the overview provided by Malmi & Brown (2008) will be further elaborated on and used as a guideline to examine management control packages, as it has a broad scope and provides opportunities for in-depth discussions. The package for management control systems is shown in figure 1 below with five types of controls: cybernetic, cultural, administrative, reward and compensation and planning controls.

Figure 1. Management control systems as a package (Malmi & Brown, 2008).

(12)

12 2.2.1 Cybernetic controls.

Cybernetic controls relate to systems that link behaviour to organizational goals by information and decision-support for managers. When the system shows variations, cybernetic controls provide accountability (Malmi & Brown, 2008). An important element of cybernetic control is target setting, which is also covered by Ferreira & Otley (2009) as a critical part in their framework. One can relate cybernetic control as explained here to the diagnostic control of Simons (1995). Variations from targets are monitored and corrected accordingly (Simons, 1995). In both diagnostic and cybernetic controls a feedback loop communicates the deviations (Simons, 1995; Malmi & Brown, 2008). In using results controls (Merchant

& Van der Stede, 2007), targets may or may not be used to measure deviations. However, the characteristics of this type of control (clear outcomes) would suit the use of cybernetic controls. Malmi & Brown (2008) make a distinction between different settings of cybernetic controls: budgets, financial measures, non- financial measures and hybrid measures containing both financials and non-financial measures.

2.2.2 Cultural controls.

Otley (2016) recognizes that culture, defined as organizational culture, can have a significant impact on behaviour of employees in the organization and that this culture can be managed to an important extent.

Ferreira & Otley (2009) highlight the importance of vision and mission statements as this is the first concept in their framework. This is based on the belief systems of Simons (1995) and regards the communication of the core values of the organization. Here, organizational culture is used to direct employee behaviour by explicating the values of the organization to which the employee needs to adhere. The clan control proposed by Ouchi (1979) also relates to cultural controls: here, due to socialization processes employees work towards the same organizational goal. Merchant & Van der Stede (2007) also mention cultural controls in their objects of control framework. Overall, cultural controls can be used to regulate behaviour aligned with organizational values and to provide a context for the other controls. However, they are also slower to change (Malmi & Brown, 2008).

2.2.3 Administrative controls.

Administrative controls are subdivided in governance structure, organization structure and policies and procedures. All subdivisions result in the same form of control: control by organizing people in the organization, to monitor them and to specify how the work should be performed (Malmi & Brown, 2008).

Organizational structure sets responsibility and accountability for organizational members as well as provides guidelines for which activities to perform by whom (Fereirra & Otley, 2009). Policies and procedures are set rules that organizational members need to adhere to. This relates to the bureaucratic mechanism as proposed by Ouchi (1979). Additionally, action controls also have policies and procedures

(13)

13

of how to perform certain activities (Merchant & Van der Stede, 2007), so in part they relate to the administrative controls as explained here. How the organization is organized and structured also impacts the use of interactive control systems as proposed by Simons (1995). As explained, interactive control systems are the formal communication and dialogues about strategic opportunities. Therefore, the right governance systems and other administrative controls needs to be in place to facilitate these communications.

2.2.4 Reward and compensation controls.

Then, reward and compensation controls strive to increase goal congruence and motivation in the organization (Malmi & Brown, 2008). They argue that it often relates to cybernetic controls as discussed above, however this is not always the case. Motivation can be either intrinsic and extrinsic. However mostly the extrinsic part has been researched in management control literature. The controls proposed by Merchant

& Van der Stede (2007), mostly result and action control, can distinguish how rewards and compensations schemes should look in different organizational settings. For example, you can get a certain bonus when a target/result is met. In reward and compensation controls the dynamic tension of Simons (1995) can also be considered. Either the negative and the positive forces can have an impact on how performance is evaluated, assessed and appraised. Ferreira & Otley (2009) also explicitly mention reward systems in their comprehensive framework. They argue that rewards can be culturally flavoured, both by national culture and organizational culture. The influence of national culture on rewards and compensation schemes was proven to be significant by Jansen, Merchant & Van der Stede (2009), thus important to consider when studying across national cultures. This is not the case in this thesis.

2.2.5 Planning controls.

Finally, planning control is separated in long range planning and action planning. The differentiator between the two is the time frame. Action planning are the planning activities with less than a year, whereas long range planning is more in the future. Respectively these types of planning have a tactical and a strategical focus (Malmi & Brown, 2008). We can also find planning controls partly in the framework of Ferreira &

Otley (2009). They argue that it is important to understand what activities are deemed important by the organization for the near future. Also, how this planning is communicated in the organization should be considered as having solely the information available is not sufficient for effective management control.

2.3 Omnichannel

The next concept to be analysed in literature is omnichannel. Relatively new to the retail landscape is the online channel. As a response, multichannel strategies have been developed (Verhoef, Kannan & Inman,

(14)

14

2015). These strategies are concerned with managing the different channels, such as the brick-and-mortar stores but also the online channel. Due to increasing digitization and therefore changing customer needs, multichannel strategies do not suffice. Pursuing an omnichannel strategy seems to be the answer. In what follows, omnichannel as a concept will be defined and explained.

Omnichannel retailing is concerned with providing the customer with a highly integrated shopping experience while at the same time optimizing internal processes (Van Ossel, 2014; Verhoef, Kannan &

Inman, 2015). Most of all, omnichannel is a customer centric business paradigm. Verhoef, Kannan & Inman (2015) define the management of omnichannel as an organizational form. In their definition, they highlight the importance of synergetic management of multiple channels in order to optimize the performance over channels. Because of digital revolutions in the retail environment (Treadgold & Reynolds, 2016), omnichannel is considered the organizational goal to achieve to be able to survive. Above definitions are similar and identify that channels are integrated but also used simultaneously without boundaries in omnichannel. This means that for the customer, there is no clear distinction between channels. Also, in the internal organization the distinction is minimized. However, the definition by Verhoef, Kannan & Inman (2015) is more related to the management of the channels whereas the definition of Van Ossel (2014) is more from the customer perspective. In this thesis, omni-channel is understood as seamless integration amongst channels to provide the optimal customer experience.

In literature, omnichannel is recognized as an evolution from the multichannel concept (Piotrowizc &

Cuthbertson, 2014; Verhoef, Kannan & Inman, 2015). The multichannel concept attends to the proliferation of more channels than in the traditional brick-and-mortar setting (Neslin et al, 2006). In the latter setting there is solely one channel, namely the store where the retailer interacts with the customer. In the multichannel setting, however, the retailer adds channels such as a web shop to its existing channels (Neslin et al, 2006) but the channels have limited integration amongst them (Verhoef, Kannan & Inman, 2015). A retailer makes the transition from single-channel to multichannel by starting with one channel and adding new channels. An important distinction between multichannel and omnichannel was highlighted by Verhoef, Kannan & Inman (2015). In multichannel, channel management is done per channel and objectives are measured per channel. However, in omnichannel retailing, management needs to be done cross channel and objectives need to cover all channels in one measure.

Having multiple channels creates opportunities for synergies when channels are more integrated and working dependently (Zhang et al, 2010). In literature, this is referred to as crosschannel. However, this integration does not eliminate that channels have different objectives. This can result in potential channel

(15)

15

conflicts (Zhang et al, 2010; Verhoef, Kannan & Inman, 2015). A fear that plays a role in these conflicts is channel cannibalization, meaning that the performance of one channel is undermined by performance in another channel (Zhang et al, 2010; Verhoef, Kannan & Inman, 2015). Between the different concepts there seems to be overlap in the academic world (Verhoef, Kannan & Inman, 2015), however it is not within the scope of this study to solve these ambiguities. It should nevertheless be clear that in the understanding of this study the concept omnichannel is defined and understood as described above and that the retailer evolves into this organizational form. The transition can be linear, from single- to multi- to cross- to omnichannel, but this is not necessarily the case.

After thoroughly understanding the concept of omnichannel retailing and its previous configurations, how exactly profitability can be achieved in this new retailing organizational form (Verhoef, Kannan & Inman, 2015) remains unclear in literature. It is questioned whether this new form can even be profitable as suggested by the phrase “profitless growth” (Treadgold & Reynolds, 2016). On the other hand, research on consumer trends found that in the direct future, consumers expect to spend 32% of their total expenditures via online channels (Shopping Tomorrow, 2016). Following this insight, not pursuing the omnichannel concept would mean such a significant reduction in sales that financial viability will not be possible at all (Treadgold & Reynolds, 2016). Omnichannel is hence a strategic necessity for retailers, which makes the identification and understanding of profitability even more crucial.

2.4 Management Control in Omnichannel

Given the argument raised that omnichannel is a strategic necessity, the question is how can the previous discussion on management control contribute to this? Logic dictates that survival in the omnichannel environment means that omnichannel retailers need to be profitable, because if they are not profitable they will not survive in the long run. But, investments need to be made to change the organization into omnichannel, and secondly, omnichannel is a different way of doing business (Treadgold & Reynolds, 2016). This implies respectively direct and indirect costs. Thus, making profits is an organizational objective of omnichannel retailers, perhaps amongst other objectives.

Achieving this organizational objective can be linked to the literature on management control. Namely, management control is defined as guiding organizations in achieving their organizational objectives (Otley, 1999). It is therefore interesting to address how they connect. When looking at management control systems as described above the following can be argued. The control mechanisms of Ouchi (1979), market and bureaucratic, are based on transaction costs theory (Ouchi, 1979; Strauß & Zechner, 2013). Therefore, the term ‘loose coupling’ was introduced to deal with organizations that do not follow the transaction costs

(16)

16

economics approach. This term covers organizations that have loosely joined subunits with differing objectives, such as channels in a retail organization. The clan control is argued to be preferable in this case (Ouchi, 1979), as it is an informal form of control. Formal controls will likely not be effective as knowledge is not perfect on the process and output within each channel and across channels. Simons (1995) levers of control framework is often referred to in studies related to innovation (Bedford, 2015) as the dynamic tension is addressed between competing priorities (Bisbe & Otley, 2004; Henri, 2006; Bedford, 2015).

Interestingly, for the omnichannel retailer, channel objectives are not always aligned which can result in channel conflict (Zhang et al, 2010; Verhoef, Kannan & Inman, 2015). It becomes clear that channels can have competing objectives which needs to be managed. This lends support for using Simons (1995) theory.

However, this thesis wants to respond to the call of Malmi & Brown (2008) to study management control systems as a package. Since management control systems and elements do not operate in isolation, the overall context needs to be considered. In this thesis, the context is the omnichannel retail environment and the management control systems that are in place. Researchers have found support for equifinality (Gerdin, 2005), meaning that multiple management control packages can have the same result (see for example Bedford, Malmi & Sandelin, 2016). Therefore, this possibility also needs to be considered in the omnichannel retailing perspective.

Taking it all together, this research hopes to contribute to both literature streams. To start with, the research on omnichannel is limited on the profitability for the retailers. As argued above, profitability is (one of) the most important organizational objective(s). The omnichannel organization has different channels that are interrelated and integrated. As Verhoef, Kannan and Inman (2015) noted, channel management in omnichannel should be involving all channels. This is different from multichannel, where channels are managed separately. The gap in literature is how omnichannel retailers can achieve their organizational goal of profitability through effective use of management controls.

As explained, that is where management control steps in. Research on management control systems helps organizations to control for their profitability. However, there is a gap in the literature on management control when management control systems as a package are taken as the study focus (Malmi & Brown, 2008; Otley, 2016). As Malmi & Granlund (2009) argue, researchers should utilize more comprehensive management control systems in their studies to more fully understand their impact. Management control packages are comprehensive since they take multiple management control elements and systems into account (Malmi & Brown, 2008). Therefore, this study also hopes to theoretically contribute to the management control literature by providing more insights into management control systems as a package.

(17)

17

3. Methodology

In the methodology section, the research approach will be introduced and explained. Justification will be provided for the use of a case study. It will be outlined how the proposed study is conducted and therefore how the research question will be answered by a case study. The selection of the case, data collection methods and the analysis plan are described in detail. Also, three quality criteria, controllability, reliability and validity will be discussed with respect to this study.

3.1 The Method

To answer the research question, the method of this study is based on theory development. The development of theory will be done with the use of a case study. The aim is to develop theory and refine existing theory, therefore the approach of the study is inductive. Theory will be inducted from the findings and insights that are gained from the case study, using a qualitative approach.

There are several arguments favouring a case study as the research approach (Van Aken, Berends & Van der Bij, 2012). Firstly, literature is scarce. Omnichannel is a recent phenomenon in literature and therefore the literature field is underdeveloped (Verhoef, Kannan & Inman, 2015; Treadgold & Reynolds, 2016).

Also, management control elements have mainly been studied in isolation. As Malmi & Brown (2008) argue, management control systems do not operate in isolation. These elements should therefore be studied as a package. Because in both fields research is limited, a case study is the appropriate approach.

Secondly, the purpose of this study is to provide a thorough understanding of the contribution of management control in the search for profitability as an omnichannel retailer. Therefore, theory development in the form of a case study is the appropriate research approach as it will give insights in the underlying dynamics (Eisenhardt, 1989; Yin, 2003). The research question raised in this study questions what the contribution is of management control to the profitability of the omnichannel retailer. To answer this, both ‘how’ and ‘why’ questions need to be answered.

Thirdly and finally, one main critic on the management control literature as of its current state is that the research-practice gap is too significant (Malmi & Granlund, 2009). This means that the literature is too disconnected from what is happening in practice. A case study allows for a more practice-oriented approach than a solely analytical approach, for example. By choosing a case study as research approach, the findings are more grounded in practice. Therefore, by choosing a case study approach this study responds in this aspect to the call to bridge the gap between research and practice in management control literature.

(18)

18 3.2 The Case Study Design

3.2.1 Selection of the case.

After getting started with a research question and gaining an understanding of the constructs at hand, the next step is to select the case (Eisenhardt, 1989). The focus of this study will be on the retail industry, where the omnichannel phenomenon is present and actual. However, this industry is still very broad. Without a more specific focus, it might prove to be difficult to find conclusive data. Therefore, the cases selected will be from the home furnishing industry, a subset of the retail industry. This is an interesting industry, as Deloitte (2015) found that the growth of revenue in this industry stemming from e-commerce is high (20%) from 2013-2014, especially relative to other industries (for example books, 3%). Since the online channel is an important driver for omnichannel (Verhoef, Kannan & Inman, 2015), the home furnishing industry seems suitable for this study.

The analysed case is an organization that pursues an omnichannel strategy in this specific industry. The case company is RetailNL. RetailNL is part of RetailGlobal, however in this study the focus is on RetailNL. Due to resource constraints, analysing RetailGlobal was not possible. RetailNL is still a suitable case, as they have their own omnichannel strategy and program which they are pursuing. Moreover, they have been profitable during the past years. According to Malmi & Grandlund (2009), management control literature needs to devote more attention to analysing successful organizations as this has not been the case so far.

RetailNL is a successful organization in terms of achieving profitability when pursuing an omnichannel strategy at the time of the study.

3.2.2 Data collection.

After selecting the case, data is collected. For this, instruments and protocols need to be crafted to enter the field with (Eisenhardt, 1989). Data is mainly collected from eight in-depth, semi-structured interviews, but also from documents and financial data available. Semi-structured interviews provide possibilities for deviation and probing after a set of specified questions (Cooper & Schindler, 2008). This leaves much room for new insights that are discussed during a specific interview. With this possibility, the study tries to keep connected with actual practice and emergent topics that arise. The use of interviews is advised by Malmi &

Brown (2008) when studying management control as a package as this guarantees data quality to some extent. The documents are taken from the company’s intranet or shown during the interviews. An example is an outline of the transition program. Using multiple sources for data collection improves the outcome of the study, as it can be checked if one data source contradicts the other for example.

(19)

19

Each semi-structured interview resulted in 60-120 minutes of recordings, which resulted in 81 pages of transcript to analyse. The interviews were held in a three-month period, namely in March, April and May 2017 in different locations in the Netherlands. The interviews were, with respect to the resources and time available, structured around different channels in the organization. In table 1, an overview is presented. Two interviews were conducted with store managers, representing the channel already present in the single- channel environment. One interview was held with the e-commerce manager, also responsible for the omnichannel transition program. Four interviews were held with managers from the customer service channel, an increasingly important channel because of the growth of the online channel. And one interview was conducted with the manager of the social media channel, a new channel for customer contact that has its links to both the store channels and e-commerce channel. Not only were the current positions of the interviewees taken into consideration, however their background in different channels is also considered (see table A1, Appendix C). Only managers were considered for interviews because they are familiar with control systems. All in all, the interviewees were selected to ensure a comprehensive picture of the organization and the different channels in omnichannel at RetailNL.

Who? When?

E-commerce manager; Manager Transformation Program Omnichannel March 14^th, 2017

Customer Service manager April 13^th, 2017

Business Service manager April 26^th, 2017

Knowledge & Insights manager April 28^th, 2017

Store manager A May 8^th, 2017

Social Media manager May 10^th, 2017

Store manager B May 17^th 2017

Operations manager May 26^th, 2017

Table 1. The interviewees.

The questions that were asked in the semi-structured interviews can be found in Appendix A. The same interview guide was used for all the interviews. Because the interviews were held in a semi-structured fashion, this still allowed for deviations based on the expertise of the interviewee. The interview guide was developed based on a few elements and topics were established based on the relevant concepts. The interviews started with an introduction to the study, followed by questions about the interviewee and his/her function in RetailNL. Then, questions to understand the status of the omnichannel strategy were followed by questions to develop a picture of management control elements and finally questions about the profitability in omnichannel and closing questions were asked. The questions were supported by figures to

(20)

20

support a common understanding of the concepts, which can be found in Appendix B. The questions regarding the omnichannel concept were developed based on the information provided by the literature described above. The questions regarding management control were derived from the elements in a package that Malmi & Brown (2008) suggested. For all interviews, the goal of the questions was to gain a comprehensive understanding of the omnichannel strategy and management control elements in the organization.

3.2.3 Analysis plan.

The next step is to analyse the data collected. This already starts when the first data is collected (Eisenhardt, 1989). After each interview, transcripts are made of the recordings within a week after the interview. Writing these transcripts provides for initial ideas to further develop. To guide in the analysis, codes are made and kept track of in a separate code book to search for patterns and (ir)regularities (Miles and Huberman, 1994).

As Eisenhardt (1989) has stated, analysis of the data is an evolving process. Company documents and data are mainly used to provide background information and to confirm the statements made in the interviews.

From the analysis, propositions can be shaped. The steps provided by Eisenhardt (1989) are followed as these are specific to case study research. First, the concepts in the study are refined. From the data, the concepts of omnichannel and management control elements can be sharpened with respect to the context.

For this, the data collected and analysed needs to be constantly compared to the concepts as defined in the literature section. Then, the propositions made need to be verified according the actual findings from data collection. This implies that detailed explanations of the propositions are presented in relation to the findings. Also, the propositions are related to the existing literature, both complementary to the propositions or contradictory (Eisenhardt, 1989) in the discussion section. As will be discussed below, this enhances the internal validity of the study. Verifying the propositions with both the data and the literature increases the strength and consistency of the paper.

3.3 The Quality

To ensure quality of the research, three quality criteria will be discussed based on the research of Van Aken, Berends & Van der Bij (2012). The first criteria, controllability, requires that results are presented as precisely as possible. This also means that the methodology section is a detailed prescription of how and why certain decisions are made to come to the conclusion of this thesis. By writing memos, keeping a code book and a notebook of evolving ideas and making precise statements, this study addresses the controllability criteria.

(21)

21

Then, reliability requires that results are independent and when replicated yield the same results (Yin, 2003;

Van Aken, Berends & Van der Bij, 2012). This study will try to control for reliable results by analysing different channels, so different characteristics are considered (situational bias) and by using multiple data sources in the data collection (instruments bias). Also, by using explicit procedures, such as the case-study research approach of Eisenhardt (1989), researcher bias is limited to some extent to increase the reliability of the thesis.

Finally, validity or more specifically, external, internal and construct validity is addressed. The quality criteria validity concerns the way results are generated as this should be justified (Van Aken, Berends &

Van der Bij, 2012). By focusing on the home furnishing industry, external validity, the generalizability of result is limited to that industry. However, by comparing propositions to existing literature, internal validity is enhanced through theoretical generalization (Eisenhardt, 1989). Finally, questions and codes are formed based on existing literature to ensure construct validity. By developing the questions, the framework of Ferreira & Otley (2009) is studied and the questionnaire of Van der Kolk (2016) is thoroughly analysed.

The above described steps are the focus areas to ensure the overall quality of the study and therefore also the results.

(22)

22

4. Results

In this section of the thesis, the results of the data analysis are presented following the structure of the interviews. Firstly, the case RetailNL is described to thoroughly understand the setting of the thesis. Because of anonymity considerations, the description might seem limited in some aspects, since not all information is presented about RetailNL. Only facts considered relevant are discussed. For example, country of origin is not relevant in this study and therefore not discussed. Financial numbers are not all publicly available;

therefore, the numbers are not the real numbers. The ratio however is kept intact, so interpretations and conclusions can still be derived from the numbers. After the case description, the different topics discussed in the interviews are elaborated on. The transition to omnichannel is discussed, after that the management control elements in RetailNL are presented and the profitability of RetailNL in the transition is described.

After the findings are elaborated on sufficiently, propositions about the relationships in the management control package of RetailNL are presented. Numbers are used to refer to the different interviews, ranging from 1-8 (see table A1, Appendix C).

4.1 The Case: RetailNL

RetailNL is a retailer that operates in the home furnishing industry. RetailNL has its own country management, but is part of RetailGlobal. RetailGlobal is active in the management throughout the whole value chain of RetailGlobal. However, RetailNL has its own country management and they set their own strategy relevant for the Dutch industry and market. The general mission and vision, to be a omnichannel leader in retail comes from RetailGlobal, but RetailNL needs to act on this and control this transition.

RetailNL is closer to the operational level and therefore is more knowledgeable about the transition in the Netherlands specific, which makes it appropriate to limit the case to RetailNL.

Since this thesis is interested in management control, it is important to consider how RetailNL is organized.

As mentioned, RetailNL has its own country management which has a supportive function in RetailNL.

There are 9 stores in the Netherlands of RetailNL and each store has its own store management. For example, every store has a human resources manager as well as a customer relations manager, sales manager and other functions. Each store has between 200 and 350 employees and about 20 employees form the management of this store. The e-commerce channel of RetailNL has 20 people employed at the time of the interviews [1]. These employees are mostly working on web and digital services. Some sales managers that arrange transportation, also for the stores, are on their budget as well [1]. The number of employees at e- commerce is in contrast with the brick stores, since both make about the same in sales revenues. The customer service channel consists of about 300 employees, including its own management [2]. The channels are overall organized in similar fashion with own management functions and management layers.

(23)

23

Because this thesis also looks at how omnichannel retailers can be profitable, it is of course relevant to look at the financial numbers. The net profit of RetailGlobal is continuing to grow, making this organization a successful case in that aspect. More specifically, in 2016 the net profit for RetailGlobal was €2.8 billion. In 2015, this figure amounted to €2.33 billion, so it increased with 20%. The revenues from sales were €22.8 billion in 2016, a 7.1% increase compared to 2015. This is total sales revenue; the online sales contributed

€983 million to this amount in 2016 [1]. The revenue from online sales increased with 40% compared to previous year. Compared to the increase of 7.1% in total sales, this is a big difference indicating the increasing importance of the online channel. This supports the notion that customers increasingly go digital to make a purchase. However, store visits globally continued to increase, from 514 million in 2015 to 522 million in 2016. But, this increase is only about 1.5%, whereas online visits globally increased with 9% to 1.4 billion visits in 2016. The number of customers visiting the apps was more than doubled. All in all, RetailGlobal is growing in profitability and sees the effects of the increasingly digital orientation of customers.

In comparison, the revenues from online sales at RetailNL are approximately expected to be €64 million in this fiscal year [1]. This is the pure figure for e-commerce, and excludes online orders such as click &

collect. These are online orders, but the customer picks up the items at the store nearby. This service has a revenue of approximately €13 million. Revenues coming from customer that were redirected from social media accounts are calculated to be about €3.5 million. In RetailNL, the increases in revenue from online sales have been growing between 30%-40% in the past years, since the introduction of e-commerce. This is in line with the increase in online sales for RetailGlobal, which was 40%. For RetailNL, the e-commerce channel contributes on average the same to the total sales revenue from RetailNL as a store. To give an example, the fifth largest store of RetailNL has a revenue €67 million from sales in store. The ambition of RetailNL for the e-commerce channel is high. The planning and strategy for 2025 is set for an expected grow to €200-€260 million online sales. This also means that the e-commerce channel surpasses the stores in terms of sales revenues. Because of this ambition, the transition to omnichannel is ever more relevant to research in RetailNL.

Both figure 2 and figure 3 are graphical representation of the numbers that have been discussed in text above. In figure 3, click & collect revenues are separate from online sales revenues. Social media revenues amount to €3.5 million and are part of online sales revenues of RetailNL. This number indicates how many online sales revenues were generated because customers visited the website prompted by posts on different social media platforms.

(24)

24 Figure 2. Summary of financial numbers at RetailGlobal*.

Figure 3. Summary of financial numbers at RetailNL*.

* numbers are from company documents and interviews; numbers are modified but ratios are intact. All numbers are X €1.000.000.

€ 2.330 € 2.800

€ 21.270

€ 22.800

€ 667 € 933

€ -

€ 5.000

€ 10.000

€ 15.000

€ 20.000

€ 25.000

2015 2016

Net profit RetailGlobal Sales Revenues RetailGlobal Onlinesales Revenues RetailGlobal

€ -

€ 10

€ 20

€ 30

€ 40

€ 50

€ 60

€ 70

€ 80

Average store revenues RetailNL 2016

Onlinesales revenues RetailNL 2016

Click & Collect revenues RetailNL 2016

Social media revenues RetailNL 2016

(25)

25 4.2 The Transition to Omnichannel

An omnichannel transition program is set in place at RetailNL to facilitate and help structuring the transition [1]. RetailNL has launched different initiatives that are supposed to bring the organization closer to the omnichannel goal, and the transition program helps to bring these initiatives together [2]. Since September 2016, a project leader was appointed from RetailNL to manage this omnichannel transition program [1].

Interestingly, this manager was also appointed e-commerce manager in February 2017. This strongly indicates the importance of the online channel in an omnichannel organization.

The goal of this transition program at RetailNL is to become an omnichannel retailer [1;2;4;6;8], but how is omnichannel understood by RetailNL? Omnichannel retailing means ensuring optimal customer experience throughout all the different channels [1;5;6;7]. Also, this experience should be the same across all channels, which makes that the customer sees one RetailNL [1;3;8]. To enable this, the channels should have seamless integration with each other [1;2;3;4;8]. Because of changing customer demands, the transition is crucial for RetailNL to stay relevant [1;5;8]. The transition to omnichannel needs to be made to satisfy current customers as well as to enable new market penetration [1;4;8].

Some ambiguities were found to surround the question of when the transition from a single-channel retailer to an omnichannel retailer started for RetailNL. Some interviewees argued that this transition started before the start of e-commerce, so before adding another channel [1;2;7;8]. It started with a changing mindset [2]

and having an internet platform which many customers visited [1]. Also, it was stated that e-commerce was the start of this transition [4]. Another view was that e-commerce was added before the transition in mindset started [5]. Only after the structural change, the change in mindset happened. These conflicting points of views could be because in the single- and multichannel setting, channels as well as communication is not integrated throughout all channels. This implies that even though some managers saw the change in mindset [1;2], this was not visible for others [5].

Knowing that the transition is in full effect at RetailNL, it is interesting to see the different perspectives on where RetailNL is now. In figure 4, the transition is linearly drawn. Interviewees were asked to indicate where RetailNL is currently, at the time of the interviews. Most interviewees indicated that RetailNL is on its way from a multichannel retailer to cross- and omnichannel. At this moment, channels are not integrated seamlessly [4;5;6;8]. They were operating still too much in silos [4;6] due to for example the accounting practices that limit integration [5;7]. Another reason for not being completely cross- or omnichannel is that there is yet to be a single view of the customer throughout the channels [2]. Interestingly, the project leader of the program has the most positive view of the current position [1]. The interviewee is more informed

(26)

26

about the initiatives. Therefore, the transition is likely to be more advanced according to his perspective, since he knows exactly what steps are going to be taken and when.

Figure 4. The current position of RetailNL in the transition.

Different obstacles in the transition were named. One was the fact that RetailNL is a relatively large company that has been growing in the single-channel retail environment [5]. Being a relatively large organization also means for RetailNL that it takes time to make, maybe crucial, decisions [6]. The mindset was also seen as an important obstacle [3;4;8]. The mindset is still too much set on single- or multichannel instead of omnichannel. The biggest internal change was a mix between operational processes [2;3;4;5;7]

and the mindset that needs to be changed overall [1;4;8]. Additionally, the need for organizational structure that enables knowledge generation and spreading was indicated as an important change in the transition to omnichannel [3;5;6].

Interestingly, an important aspect of the omnichannel transition program, is the co-worker. Employees at RetailNL are specifically named co-workers in all documents, indicating the flat organizational structure [1] and equality [6]. In the transition program, the co-worker aspect is regarded equal to the customer aspect.

Part of the omnichannel strategy is to empower the co-workers in their job and enable them to pursue the omnichannel goal of the organization [1]. The co-workers are crucial in the transition since they make the connection with the customers [5]. The focus on and the high importance of co-workers in this transition provides support for the importance of studying this transition through the lenses of management control.

Management control literature namely guides organizations in achieving their organizational goals through the guiding of employee behaviour (Otley, 1999). The organizational goal of RetailNL is to be a profitable omnichannel retailer and their co-workers should be guided to this organizational goal. Next, the management control elements to guide co-workers are discussed.

4.3 Management Control Elements

After having provided a detailed overview of the transition to omnichannel for RetailNL, the focus of this section will be on the management control elements that play a role. How these elements are used at RetailNL and their importance for omnichannel according to the interviewees is discussed. The categorization of management control elements is based on the framework of Malmi & Brown (2008) as shown in figure 1. The relationships between the elements are discussed later, in section 4.5. Before outlining these relationships, the findings per management control element need to be discussed. The

Single Channel---Multichannel-3;4;5;6;7---2;8---1-Crosschannel---Omnichannel

(27)

27

interviewees are all managers; therefore, they have knowledge about the management control elements in place at RetailNL.

4.3.1 Cybernetic controls.

Firstly, cybernetic controls were discussed in the interviews. With the transition to omnichannel, it was a challenge for the new e-commerce channel and the changing customer service channel to get the budget that was needed [1;2]. At this point, it is generally felt that the budget is appropriate for the channel needs, but it took some effort to get there [1;2;5]. This problem not only arose for budgets, but other accounting practices were also not ready to consider a new and different channel such as e-commerce [7;8]. Issues arose such as how to allocate revenues and costs [1]. At this point, revenues of e-commerce are allocated to the stores based on the location of the online customer [1;2;5;7]. However, costs are not allocated in this way and both revenues and costs are not considered on the profit and loss statement of the stores [5;7]. When stores are spending time on a customer helping them to shop online, the store needs to allocate the costs for the employee on their profit and loss, but they get no revenue in return on that same statement [7].

When looking at the types of measures, mostly financial measure systems are used to keep track of revenues, costs and profits [1;3;5;6]. However, the non-financial measures are becoming more important for the whole organization, such as customer experience and satisfaction [2;4;5;8]. Together, these could form hybrid measure systems to show how non-financial measures translate into financial measures [3;6]. By making weekly reports, deviations are spotted [1;2]. An interesting change is a new performance dashboard that RetailNL is introducing. Before, financial and non-financial KPI’s were divided between online and for the stores. Now, a new KPI dashboard is divided according to the different channels that the customer can choose, even if this choice affects both online and the stores. This is graphically displayed in figure 5.

· Revenue

· Costs

· Profits

· ...

· Revenue

· Costs

· Profits

· ...

· Revenue

· Costs

· Profits

· ...

Revenue Costs Profits ...

· Revenue

· Costs

· Profits

· ...

· Revenue

· Costs

· Profits

· ...

Self-

service Home

delivery Collect in

store Click &

Collect

Collect in store &

home delivery

Online order &

delivery

· Revenue

· Costs

· Profits

· ...

· Revenue

· Costs

· Profits

· ...

Online Store

Figure 5. The change in performance dashboard at RetailNL as part of the omnichannel transition program.

In addition to the change in the set-up of the performance dashboard, the way KPI’s are measured will change as well. However, this is just at the beginning and not yet implemented at RetailNL. In this new setting, the KPI’s are measured from the customer perspective [1]. For example, a KPI that measures stock

Management Control in the Omnichannel Retail Environment