Influence of a new manager on management control
adoption in small medium enterprises
Debora Leboraga
S4183819
Abstract
Purpose: The purpose of this research paper is to investigate the influence of a new manager in a
SME on formal MCS adoption, by studying what concrete actions this new manager takes to implement formal MCS in a growing company.
Design/methodology/approach: The case study is based upon a database of interviews which
were conducted in a fast-growing company in the Netherlands. Three interviews of operational team leaders were analyzed.
Findings: Bringing in a new manager in a SME has a positive effect on formal MCS adoption. A
new manager uses standardization and intermediation as main actions to implement formal MCS.
Research limitations/implications: This study is based on a single case study, which limits
generalizability of findings. Future lines of research could aim at refining and testing the propositions made in this research by doing larger scale studies in a different setting.
Practical implications:This research provides food for thought for both new managers and
founders on the influence of a new manager on formal MCS adoption.
Originality/value: Findings advance current knowledge with respect to issues SMEs deal with
when implementing formal MCS by providing an explanation for the influence of a new manager on formal MCS adoption in SMEs
Key words: Managerial control systems, small medium enterprises, manager, formal
Introduction
Over the past two decades, a large amount of research has been devoted to design, use and effects of implementation of managerial control systems (MCS) (Chenhall, 2003; Collier, 2005; Davila, 2005; Davila et al, 2009; Simons, 1994; Ferreira & Otley, 2009; Pešalj et al., 2018). Several studies have shown the huge impact of these systems on strategy implementation, employee behaviour and firm performance (Davila, 2005; Davila et al, 2009; Flamholtz & Randle, 2000; Pešalj et al., 2018).
understanding this transition is an important research topic and also has great managerial implications.
Several studies have found difficulties with respect to formal control systems adoption in small-medium enterprises. One of these issues is related to lack of managerial capability of the original CEO or founder to implement formal managerial control systems in their firm (Fuller-Love, 2006; Glancey, 1998; Garengo, 2005; Pešalj et al., 2018). A solution would be hiring a new manager to support the transition from informal to formal control systems, this would have a positive effect on formal managerial control systems adoption (Davila, 2005; Fuller-Love, 2006; Simons, 1994). Although existing studies stress out the importance of bringing in a new manager, it is not yet thoroughly explained how a new manager could influence formal control systems adoption in a growing firm. Therefore, the current knowledge is incomplete in explaining the transition process from informal to formal controls in a fast growing company. Several authors have already proposed further elaboration of this topic, by for example identifying how a new manager acts in an organization (Davila, 2005) or what specific implications are consequences of his actions (Simons, 1994).
This study investigates the influence of a new manager in a SME on formal control systems adoption, by studying what concrete actions this new manager takes to implement formal control systems in a growing company. This is investigated by asking the research question: “What are the actions that newly brought in managers take to implement formal managerial control systems in a growing company?”.
subscriptions. The business grew substantially during the last three years and nowadays the firm has over 400 employees.
Theoretical background
Managerial Control Systems
Formal controls
Formal controls mostly appear on organisation charts, in policies and procedures and in financial and non-financial reports. Examples are internal financial reports, external information with respect to the market, non-financial information like the balanced scorecard, but also strategic plans, capital budgets and personnel controls like individual performance measurements (Collier, 2005). Simons (1994) defines formal control systems by dividing it into four types of systems: beliefs systems, boundary systems, diagnostic control systems and interactive control systems. Beliefs systems are used by top managers to define, communicate and reinforce core values, mission and vision to the rest of the organisation. Boundary systems are a set of rules, mostly created as codes of conduct. Diagnostic control systems are feedback systems aimed at monitoring performance evaluation, examples are business plans and budgets. Interactive control systems are used by top managers to personally involve themselves in employee decision making, an example is the presence of formal feedback moments.
Informal controls
MCS in small-medium enterprises
In small fast-growing companies, like start-ups, managers mostly prefer using informal practices rather than formal ones (Collier, 2005; Flamholtz and Randle, 2012). Because there are just a small number of employees working in a startup. As a result, these employees have a lot of informal interaction. However, lately more and more attention in research has been paying attention to the emergence of formal control systems in growing firms (Davila, 2005). Since formal MCS can help a business with dealing with a quickly changing environment where there is a lot of uncertainty: typical aspects of a start-up (Davila et al., 2009). The transition process from informal to more formal controls in SMEs is quite critical with respect to the success of these businesses (Davila, 2005).
Human resource issues related to formal MCS implementation in SMEs
However, researchers came up with several issues related to this transition process in fast growing companies. This research focuses on one of these difficulties related to managing human resources, because managing human resources is one of the most troublesome issues that SMEs face and where control systems can play a large role (Davila, 2005).
Hiring a new manager
An approach to dealing with lack of managerial capability is bringing in a new manager to replace the founder or to support the founder. New managers will often bring in new ideas and implement MCS to foster their ideas into the company, because these managers mostly feel the need to break old behavioural patterns and overthrow organizational passivity (Simons, 1994). Several studies have shown the positive impact of bringing in a new manager on implementation of more formal managerial control systems (Davila, 2005; Fuller-Love, 2006). A new manager will not only allow development of controls, but will also implement these controls in the firm (Davila, 2005).
So far most research has emphasized the importance of bringing in a new manager to the success of implementation of more formal managerial control systems in small-medium enterprises, but it is not yet thoroughly explained how a new manager could influence formal MCS adoption in a growing firm. Therefore, this research focuses on the direct influence of hiring a new manager on formal MCS adoption on the workfloor. With other words; consequences for existing employees of employment of a new manager to enhance formal MCS adoption. This knowledge is needed to create a deeper understanding about the positive effects of hiring a new manager on formal control systems adoption in a fast growing company(Davila, 2005; Fuller-Love, 2006; Simons, 1994).
Research methodology
Case company
This research relies on a database of a number of interviews. This database consists out of fourteen semi-structured interviews from a Dutch e-commerce business called Phone Inc.
Phone Inc was established about ten years ago by two entrepreneurs. Phone Inc. sells phones and phone subscriptions within the e-commerce business and grew enormously during the last three years. Nowadays, the firm employs about 400 people with 300 million Euros of turnover and has seven stores located in the Netherlands. The interviews in the dataset are based on experiences that people in the organization had with formalizing control in Phone Inc. Questions in the interviews are aimed at what control systems looked like in Phone Inc in the beginning, how Phone Inc implements formal control systems and what the challenges are of that implementation.
Data collection
departments. Therefore, actions taken by this operations manager are better visible in interviews of operational departments.
Data analysis
The analysis of all data was undertaken using a process coding method as described by Gioia et al. (2012): coding is a process which consists of a first, second and third order analysis.
Findings
In this case study, an operations manager was hired during the transitory phases of the firm. Therefore, findings focus on actions he executed to implement MCS. The interviews show the positive impact of installing this new manager into a growing firm on implementation of formal control systems(Davila, 2005; Fuller-Love, 2006). For example, team leader 2 stated about the operations manager: “I think it helped having a contact person on the work floor. Because nowadays we are getting coached directly in our work, which was not the case in the first place”. And team leader 1 stated: “We started sending daily and weekly reports to the operations
manager, because it helped to detect any flaws in the numbers”.
Standardisation
operations manager” (Team leader 3). Another arising formal communication routine is the formal daystart. During the formal daystart, information of the previous day, expectations of this day and other important information is given. This formal daystart is organised twice a day. “We have had this day for 3 years. Well, we always had a day start, but it was not that formal.
Everyone just said “hi” to each other and talked to each other in the beginning of the day. And now it is more elaborate; with a PowerPoint presentation” (Team leader 1). “Recently people get to hear what their tasks are at the daystart” (Team leader 2). “During the day start, every
coworker has to read the important announcements” (Team leader 3). Another example of a formal communication routine are the daily and weekly reports to the operations manager. “We have been doing these daily- and weekly reports for 2,5 years, due to the fact that some mistakes were made in the past. These reports can be used to find out what went wrong” “We discuss these daily- and weekly reports with the operations manager and then he will discuss the reports with all teams on monday” (Team leader 1) “It is true that the last years those weekly reports became more and more professional” (Team leader 3).
Implementation of formal controls also appeared as boundary systems: a set of rules, codes of conduct (Simons, 1994). Transfer of codes of conduct happens, for example, by use and implementation of protocols. “New people have to use the protocols to prevent work
enables a more consistent working method. “People have to succeed the my learning programme, before they will be hired”“The e-learning programme can be used by employees as a back up, when they don’t know what to do” (Team leader 1).
These quotes and examples not only show the process of transitioning from informal to formal managerial control systems, but they also show what role the new manager, the operations manager plays in that transition. Formal communication routines and codes of conduct both enable a more consistent working method, by standardizing work processes. Thus,
standardisation of work processes and communication is an arising theme when looking at the role of the new manager in the transitioning process.
Intermediation
Interactive control systems, systems used by top managers to personally involve themselves in employee decision making (Simons 1994), are implemented as personal development support for employees. The operations manager offers personal development support by coaching and providing feedback to his subordinates. “The operations manager coaches the team leaders” “We will be penalized if there are any problems with the report. We have to have a statement about the reason for a certain problem” “I also have regular assessment reviews with the
Furthermore, regular assessment reviews are also carried out by the operations manager to implement formal controls.“These standard assessment reviews were not here at first, so that is something that has changed” (Team leader 2)”Performance evaluation dialogues are becoming more and more formal at Phone Inc.: in the first years I worked here I didn’t even have an assessment review” (Team Leader 3).
Additionally, The operations manager also works as an intermediary between the founders and the rest of the company. “First I had to get used to an extra management layer between me and the Founder, because I have worked for five years without any person between me and the Founder” (Team Leader 3). That is why he is in the best position to communicate the vision of the founders to the rest of the company, a job that he actively executes and which is related to implementation of a beliefs system (Simons, 1994). “The operations manager is now our contactpoint” (Team leader 3). “From the operations manager we get a lot of information about where the founders want to go with Phone Inc., we hear that every week since we speak to him almost daily” “Actually he is some kind of communication point or spokesman for vision” (Team leader 2). These quotes show that the operations manager motivates people to follow where the organisation is heading by communicating vision to them.
Discussion
This research examines growing pains of formal managerial control systems implementation in fast growing firms and particularly focuses on the role of a new manager in that transition process (Ferreira and Otley, 2009). This study examines that role by focusing on the direct influence of hiring a new manager on implementation of formal controls.
The findings of this research are in line with existing research that claims hiring a new manager has a positive effect on formal managerial controls adoption (Davila, 2005; Fuller-Love, 2006; Simons, 1994). This was most apparent in the regular assessment reviews with team leaders. Prior to the presence of an operations manager, almost no assessment reviews were held. Due to the installment of the operations manager, assessment reviews are now held regularly. Assessment reviews are formal controls; more specifically these are diagnostic control systems according to Simons (1994), because they aim at monitoring performance evaluation.
In the case company, standardisation of work processes and communication acts as a tool that improves work performance by making sure all people handle the same work standards and it also enables frequent and clear communication on the work floor. This was most apparent in the regular meetings that are held on standard days during the week, where there is always a standard agenda about what needs to be discussed. Standardisation as action to implement formal control systems by a new manager is similar to what is found by Simons (1994): a new manager implements changes to existing boundary systems when his first evaluation of the firm shows there is a need for more structure in the organisation. The findings extend these results by demonstrating what these concrete changes are to the boundary systems and what the consequences of these changes are for subordinates in the company. For example, the e-learning programme, my learning, helps new employees to learn the basics about their work in an interactive computer programme. This allows them to first learn all the rules and codes of conduct before they start on the work floor. Another example of these changes to the boundary systems are the implementation of formal protocols. These protocols are guides which employees can consult if they experience any difficulties on the job.
stimulating commitment, creativity and innovation to communicate and reinforce company values, vision and mission. This research extends this knowledge by demonstrating that intermediation is a communication process where information flows both ways: to the founders as well to the team leaders and other employees. For example, during regular assessment reviews, the operations manager also gains more intel about events on the work floor. Intermediation as a means to implement formal managerial controls is also similar to what was found by Ferreira and Otley (2009): communicating strategy is as important as strategic planning. Lack of direction is a major control problem. Failure to pass on mission and vision to subordinates can result in a lack of understanding of personal contribution. Which can result in demotivated employees. The importance of communicating strategy was particularly visible during weekly meetings where the operations manager communicates company vision from the founders to the team leaders.
This study has implications for newly hired managers as well as founders from SMEs. Employment of a new manager positively influences formal control systems adoption in a SME (Davila, 2005; Fuller-Love, 2006; Simons, 1994). This study provides food for thought for newly hired managers as well as founders on the influence of a new manager on formal managerial control systems adoption, with a special focus on consequences for existing employees. Standardisation and intermediation could be considered when formal MCS are implemented. This is particularly important in the case of SMEs, since the process of exchanging informal managerial controls to formal managerial controls is quite critical to their firm success (Davila, 2005).
just from two departments of the whole company. Therefore, not the whole company is captured and represented in the investigation. A future line of this research could be taken by conducting interviews with people from different departments or with people that belong to different organizational levels to capture the whole company. Next to this, because the study is a case study, empirical validity and transferability of results is limited. Future lines of research could aim at refining and testing the propositions made in this research by doing larger scale studies in a different setting. For example in other fast growing companies that operate in different markets or countries. Furthermore, the research goal of this study was to elaborate on the influence of hiring a new manager on formal control systems adoption in SMEs. However, the study fails to identify where the new managers’ knowledge to implement formal managerial control systems comes from. This is important to create a better understanding of the research topic (Davila, 2005). A future line of research could aim at that specific research gap by, for example, investigating if there is a relationship between a new managers’ working experience and success of formal control systems implementation. The study also fails to identify what the effect on formal managerial controls adoption would be if the founder would be replaced entirely by a new manager instead of just being supported by one. This is also important to better understand the influence of hiring a new manager on implementation of formal controls, because it could be assumed that this influence will be much greater if not somewhat different than what was investigated in this research. Due to the fact that this new manager would have a lot more space in his or her ways to implement formal managerial control systems (Davila, 2005).
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