by Daan Koolman

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Using control for realizing a growth in a small

service business

by

Daan Koolman

Rijks Universiteit Groningen

Faculty of Economics and Business

Juni, 2009

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ABSTRACT

This paper shows the role which control could play for a small service business (SSB) in realizing a growth. The importance of control for a SSB was considered along the important related contingency factors strategy, environment, and culture. The influence of these

elements on control was studied which resulted in a research model. This research model was tested at Pompkracht to find out its implication in practice.

Results showed that control could create a fundament for a SSB and it could provide clear directions to the employees in carrying out the services. A well considered control system was found to be important for even a SSB since it helps in taking the first important step towards developing the business and pointing out what is important. The research hereby argues that a control system should be taken into use at large businesses, and small business could function without a control system.

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1. INTRODUCTION

Every year a bunch of small firms do have to leave the market because they face financial –or other internal problems. About 78 % of all firms, which do have to leave the market, are small firms with 1 till 20 employees (Assurantiejaarboek 2008, CBS). The main reason for leaving the market is that small businesses fail to survive its first years on the market. In the first years on the market the competition is tough and small businesses face the results of bad

predictions, previous made actions, and having limited resources. Small businesses do not have created a fundament yet, which could help the business when problems occur.

Besides the reasons named above, one of the reasons that small businesses fail is because they have weak control systems (www.associatedcontent.com, 2008). As a result a stronger control system should be one of the primary requirements for business (www.associatedcontent.com, 2008). Probably the use of a strong control system in a small business could prevent the business from leaving the market unwanted.

However, there is also a bunch of small businesses which do survive in the market. To be more specific even nowadays every year more entrepreneurs start a new business (Het

Nederlands ondernemingsklimaat, 2008). The new entrepreneurs are found a lot in the service sector. The service sector offers the opportunity for an entrepreneur to start a new business without the requirement of a large starting capital (Het Nederlands ondernemingsklimaat, 2007). Especially in times of a crisis, a service business does give an opportunity to start a new business since no funds are really needed and the service could be carried out by the founder of the business. But after having survived the first years in a market, the decision has to be made to develop the business or to stay operating like a small business without any noticeable progress. This decision is about the choice to realize a growth with your small business or not.

The businesses which fail to survive the market did of course not realize a growth. However, only a few of the surviving small businesses are growing in such a form that they become important to the economy of Holland (Het Nederlandse ondernemingsklimaat, 2007). Nevertheless growth is important to both the economy and the business itself. ’’It has been said that a little mistake in small business makes ’bigger waves’ – is devastating – than a mistake of the same type in a large firm’’ (Rindt, 1975, p. 13). This sentence underlines the importance for a small business to grow large. Besides, a lot of small businesses do want to establish a growth and the Dutch government even created a special grant for small businesses which are ’fast growing small businesses’. In addition, given the relative rarity of the typical small businesses making substantial growth, academics, management experts and

governments in many countries have been keen to discover ways in which small business growth can be encouraged (Hua Tan & Hui-Hong, 2004).

While the service sector dominates most of the economy little research has been done towards control systems within service organizations (Auzair & Langfield-Smith, 2005). Coupling this fact towards the aspect that small businesses were mentioned to have weak control systems most of the times, it seems very interesting to find out the influence between the control system and the growth a small service business could make. Namely a few small business do realize a noticeable growth, while a bunch of the small businesses do have a weak control system. When coupling these acknowledgements, the focus of the research will be on

realizing a growth for a small service business with the help of control. Therefore the research question will be:

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Research will be done towards the control system in small service businesses, and its

influence on the business. As a results there will be given a look at the influence of different contingency aspects on the control system; the most important contingency aspects for a small service business will be handled. These important contingency aspects will be the following elements: strategy, business environment and business culture. All these elements will be involved when finding out the influence of control on growth. In the research there will be created a research model which helps in understanding the influence of control in realizing a growth. This model will create new insights and it hopefully will deliver a framework which small service businesses could use when wanting to realize a growth. The research consists of a theoretical part and a practical part. The content of the research will be as follows:

First the research methodology will be given to clarify the goal of the research along with its approach to conduct the research.

Second the theory will be handled, the research model will be created in this part.

Thirdly the created model will be tested at a small service business (Pompkracht), this will be done in the results part.

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2. RESEARCH METHODOLOGY

In this section information about the research will be provided. The information will help the reader in understanding the research and it will give insights in how the research is conducted. First the content of the research and the research objective will be explained.

Secondly, the research question will be presented.

Thirdly there will be given some more information about the choices made in the research like the chosen restrictions, used research materials, and the relevancy of the research.

And finally the research strategy will be handled; it will provide information about the used theory and the manner of conducting the research.

After this section the research will start off and hopefully clarity is then created in the ‘why’ and ‘what’ of the research.

2.1 Research

This research has two main themes which will be handled, control and growth. Both will be central in the research. The main themes will be studied in relationship with some

contingency factors. These other aspects will be: the business environment, the strategy of the business and the business culture which dominates. All of these aspects will be fully

explained and linked with each other in other to create a model which will reflect their reciprocal relationship. This model will be created with the help of theory out of diverse literature. After the model is created it will be applied in practice, this will be done at the small service business named ‘Pompkracht’. When applying the model in practice, there will probably pop up some new and other influences/insights about the aspects in the research. The new and other influences/insights along the influences/insights found in theory will lead to a final conclusion.

However, before all of these aspects could be used to answer a question which helps in fulfilling an objective, first should be explained what the focus and thereby purpose of the research will be. There is given a short introduction of what will come up in the research and next the research objective will be given to clarify the goal of the research.

2.2 Research objective

The research objective addresses the purpose of the investigation (Cooper & Schindler, 2003). In the organization Pompkracht there were made some remarkable developments since the start of the company five years ago. Pompkracht realized a growth about ten times its revenues and they also hired more employees to grow along their increasing income. However keeping growing nowadays is difficult, because (as mentioned before) starting companies always get a period of difficulties and a lot of the starting companies then fail and somehow end up bankrupt. Nevertheless this is not the case at Pompkracht and they prefer to keep it that way, who would not?

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Because the growth Pompkracht already made and because they want to grow even more, they also need to consider its control system. The owner indicated that he lost the complete oversight and he does not exactly know which employee is responsible for which business aspect in explaining results for example. Since the need for a certain control system is becoming more desirable when an organization grows beyond a certain size (Davila, 2007), the thought was created to connect control to growth at Pompkracht. Therefore the research objective will be:

Improving the quantity and quality of the services with the proper use of a control system. When reading this research objective, the part of the quality and quantity of the services does need further explanation. Getting more and better services will help Pompkracht realizing its growth, which of course helps to earn more revenues.

Improving the quality of the services means: Registrants should be placed at job openings more adequately and faster. The complete service towards the client should be better communicated, maintained and ’produced’ internally, for guaranteeing a certain level of performance towards registrants and gas stations (clients).

Improving the quantity of the services stands for:placing more registrants at gas stations or increasing the amount of services for clients, and realizing an increase in the number of clients. It simply comes down to increasing the number of services carried out by the business (Pompkracht).

When both the quality and quantity are improved, more and better services will be carried out. When realizing such a situation the organization will as a result generate more revenues. All this together means the organization would have realized a growth in services. So therefore realizing a growth with the help of a control system will be the generalized goal of the

research. In order to reach this objective some questions are formulated which will need to be answered in order to realize the research objective. Therefore the research question will be handled next.

2.3Main research question

To fulfill the research objective some proper questions have be created. The research

questions need to be formulated in order to give the research a well build body. First the main question will be stated and then some sub questions will be formulated. The sub questions will be answered in the research one by one so that when those answers are collected the main question can be answered in a conclusion based on the answers found on the sub questions. Main question:

- How could control help a small service business in realizing a growth? Sub-questions:

- What is a small service business? - What is control?

- What is growth?

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- How is the current business situation (at Pompkracht)? - Current environmental influences?

- Current control system? - Current strategy?

- Current business culture?

- What change/control system is needed to realize growth in the organization (Pompkracht)?

- How could control help the small service business (Pompkracht) in the future? However to avoid misunderstandings and ambiguity some restrictions to the research will given. This will create more clarity in the domain of the research.

2.4 Restrictions to the research

What will be used in -and what will be left out of the research, will be handled in this section. At first the concepts which will be used in the research will be described and then the

restrictions of the research will be given. This will show the focus of the research and it will handle the aspects which are left out of the research. In the research the main concepts (control system and growth) are already given and argued, but the three contingency factors need to be explained. Daft (2004) presents five contingency factors which influence a business. Three of these contingency factors will be included in the research, which are: the business environment, the strategy, and the business culture.

First the environment will be used in the research. The environment can have a considerable influence on an organization. Therefore a control system should handle the influences which are a threat or opportunity to the organization. In the research will be taken a look at which environmental influences are important to the service organization (Pompkracht). When those influences are discovered they should, if possible, be involved or left out the control system. This decision will be made with the help of a model which will create an understanding of the environmental influence on the control system.

Secondly the strategy of the organization will be used in the research. The strategy of the organization (Pompkracht) gives an important signal in if the organization wants to grow. Therefore the strategy should be included in the control system because it could have a serious influence on growth and thereby the direction in which an organization is going. Thirdly since the employees seem important for a small service business (Pompkracht), the business culture will be the last aspect which will be used. The culture tells about the way ‘things’ are done within the business and how employees behave and do ‘things’ within a small service business.

However when doing research there also have to be made some restrictions, because else the research would become too broad and the research question could not be addressed

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- Focus will be on small businesses - Businesses in the service sector only

- Business culture, environment and strategy will be used only in relation to the control system (and growth), meaning control (and growth) will be the main focus of the research.

These restrictions are chosen in the context of the service organization Pompkracht. In the research the choice is made to only handle the aspects which assuminglyhave the most important influence on growth and control system. Therefore the two left over contingency elements technology and life cycle are left out of the research. Since the technology is considered as less important for a small service business as the other three elements. The life cycle on the other hand is a kind of involved through handling growth as a main aspect in the research.

2.5 Relevancy of the research

While the service sector dominates within most economies there has been done limited research towards the design of control systems in service organizations (Auzair & Langfield-Smith, 2005). In addition, most of control/accounting research focuses on manufacturing -and large firms. Therefore the idea was created to focus this research on the control within a small business in the service sector. It could give small firms an indication in what ways they could control different aspects and what they should consider when they want to grow. Seeing that a lot of small firms fail within the first years of the start-up, and seeing when organizations become larger they are more in need of a control system gives a motivation to discover how an earlier adoption of a control system could also be used to realize a growth. Besides in small companies there usually are no adequate resources to maintain a control system, the control system has usually developed in a haphazard manner with little coherent attention being given to its suitability for the conditions faced by the company (Jarrett, Rhodes & Wright, 1983). Therefore a challenge exists to point out important aspects of an organization where they can use control. And if small service businesses can use control in a proper way they even should be able to realize a growth, using the right type of control mechanisms in a proper manner. Additionally, given the relative rarity of the typical small business making substantial growth, academics, management experts and governments in many countries have been keen to discover ways in which small business growth can be encouraged (Hua Tan & Hui-Hong, 2004). This makes it interesting to find out the relationship of control and growth for small service businesses.

Since research towards growth of small businesses and control in service organizations is becoming more and more interesting, the link between control and growth of a small service business could provide some unique valuable insights. Hopefully the research will contribute in helping a small service business in overcoming problems and avoiding difficult periods by making proper use of control in the business. Next the research material will be discussed.

2.6 Research material

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Monitoring is like observation of actions of groups of decision makers for example (Cooper & Schindler, 2003). The monitoring will be done within the organization and if possible in its external environment.

Interviewing/communication means questioning the subjects and collect their responses by personal or impersonal means (Cooper & Schindler, 2003). The interviews will be done among the employees, and the owner/manager of the company (Pompkracht). However Cooper & Schindler (2003) do distinguish different forms of interviewing namely, personal interview, telephone interviewing and surveys through mail. Personal interviewing will be used when interviewing the employees within Pompkracht as well as the owner/manager. An oversight in the opinion of the employees will be created, whereas the opinion of employees could be very valuable within service businesses. Next the kind of research will be explained.

2.7 Type of research

In this section the kind of research will be typified. There are basically four types of studies when doing a research according to Cooper & Schindler (2003), namely descriptive,

explanatory, reporting and predictive. Cooper & Schindler (2003) describe the studies as follows:

A descriptive study answers questions like who, what, where, when, and sometime how. The researcher then tries to describe or define a subject.

An explanatory study answers the questions how and why. There will be tried to explain the phenomenon that is researched.

The reporting study is quite simple and gives a summation of some data or generates some statistics.

The last one is the predictive study which gives a plausible explanation of an event after it has occurred, this makes it desirable to be able to predict when and in what situations the event will occur.

When considering these types of studies, this research is like the descriptive study. A descriptive study, because the goal of the research is to realize growth with the help of a useful control system. However, the research gives answer to a ‘’how’’ question, it tries to explain how control can contribute to realizing a growth. The research will try to describe how a control system could contribute in realizing a growth in a small service business. Finally a research strategy will be used to achieve the goal of the research, which will be described in the next section.

2.8 Research strategy

A framework will be created in which a small service organization can see what kind of control would be proper for them to realize a growth. The framework which will be created will be based upon the model of Jarret et al. (1983).

The basic model (the one of Jarret et al. (1983)) focuses on control process in a business, but in the research the model will be adjusted and extended with the other aspects used in the research (growth, environment, culture, and strategy).

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After a model/framework is created it will be tested and applied at a small service

organization (Pompkracht), which does want to realize a growth and they hope/think some control mechanisms and ideas could help them in realizing a growth again.

Here the employees will be questioned, observations will be made, and problems will be addressed. Further the owner has got some whishes and will provide access to all information within the company about the company.

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3. THEORY

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3.1 The small service business

The focus of this research will be on small service businesses, but what could someone imagine when talking about these businesses and how will they be defined within the

research? Small business exists in many forms whereas services could be very diverse too. In this section an explanation will be given about what is meant when talking about a small service business in this research. First the small business will be handled followed by an explanation of services.

Small businesses are most of the times referred to as SME, small and medium sized enterprises. SME is split up in a definition of small -and medium size businesses. Both for small –and medium sized businesses several different definitions exists. A definition can namely be formed in qualitative measures as well as in quantitative measures. In this research the focus will be on quantitative measures for defining a small (service) business. By defining a small business in quantitative terms misunderstandings will be avoided, because clarity about the small business is given in exact numbers. However, in the world there are still differences in what defines a small business therefore the two most recognized definitions will be handled. First in Great Britain they stated the following in the Companies act of 1985 (www.smallbizcrm.com):

- A turnover of not more than 2.8 million pound (about 3.26 million Euro)

- A balance sheet total of not more than 1.4 million pound (about 1.63 million Euro) - Not more than 50 employees

Whereas the European commission (2003) decided following criteria for defining a small business:

- A turnover of not more than 10 million Euro.

- A balance sheet total of not more than 10 million Euro. - Not more than 50 employees.

The difference between the two definitions could be found in the balance sheet and in the turnover. The European commission named companies with a turnover and balance sheet of respectively 2.8 Million pound and 1.4 Million pound a micro business, whereas in Great Britain these are the criteria for a small business.

Still could be said that a company with like 100 employees and a turnover of 40 million could be a small player in a certain market and therefore be mentioned as a small business.

However in this research the focus will be on small service businesses which do want to realize some growth. To handle these kinds of small businesses there will be made use of the criteria presented above. But the interpretation of the numbers will be different from these criteria. There is chosen for a small business definition as the following:

- A turnover of more than 1 million Euro and less than 20 million euro. - 5-50 employees (working for the business).

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coming into the group which will be handled in the research. There will also be referred to the choice for the amount of employees a bit further on in this section.

Since the small business part is made clear, it leaves the part of services to be explained. The focus will be on small service business because only little research about control has been done towards service organizations, and besides even less research has been conducted towards control in small service organizations. Services will be explained in two parts, first: what do services stand for, and second: what kind of services exists and what is the influence of a certain service on the business.

To explain services, the characteristics of it will be given. The characteristics of services are unique and include (Auzair & Langfield-Smith, 2005, p. 400):

- Intangibility of services,

- Inseparability of production from consumption, where customers are also involved in the production of services

- Perish ability of services, where services not consumed are lost

- Heterogeneity in service products, where services provided by the same person may differ between customers or differ at different times

When taking a closer look at services, a few kinds of distinctions can be made in determining the type of service dealing with. In their article Auzair & Langfield-Smith (2005, pp. 402-403) name a good distinction in services namely:

Professional services: organizations with relatively few transactions, highly customised, process oriented, with relatively long contact time, with most value added in the front-office and where considerable judgment is applied in meeting customer needs. Examples are management consultancies and corporate banking.

Mass services: have many customer transactions, involving limited contact time and little customisation. The offering is predominantly product-oriented with most value being added in the back-office and little judgment applied by the front-office staff. Examples are tobacco and newspaper retailers and transport

Service shops: a categorization that falls between professional and mass services. Examples are hotels and rental services.

This categorization of services is clear and shows that there are differences between services. However to further clarify differences between services and making them more

understandable for this research, some more specific differences between the different services will be presented.

Since the service type ‘Service shops’ falls right in between ‘proffesional services’ and ‘mass services’, it contains a characteristics of both types. Therefore the service process type will be somewhat left out of the research but it will be viewed as a continuum ranging from ‘mass service’ firms to ‘professional service’ firms. Drawing on the dimensions used to characterize these process types, mass service firms are more likely to experience low levels of

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Figure 1: Mass service vs professional service (Auzair & Langfield-Smith, 2005, p. 419)

When looking at figure 1, it shows that there is mainly a difference in attention to costumers and in the influence/involvement of the employee within the service process. When talking about the influence or involvement of employees within the service process, the link towards the labour intensity within service businesses could be made. The labour intensity namely differs among different service organizations (Schmenner, 1986). This means that some (service) businesses are more dependent on employees than other. For example, a hospital uses a lot of expensive plant and equipment which helps out the employees and thereby makes it less labour intensive to carry out services within a hospital, while on the other hand a

barbershop can almost do nothing without employees and is very labour intensive. Employees however stay a very important factor in the service businesses; they carry out the work which its labour intensity differs among different businesses. And still most of the interaction with customers is still realized with the help of frontline employees of a service organization (Donnelly, 2004). Besides the significant human participation (of employees) in the service process is an important feature which is relevant to the control system design in service businesses (Auzair & Langfield-Smith, 2005).

This indicates that employees are a main factor within a service business and should be well recognized. In addition it also notices that different services businesses have different amount of employees while their revenues could be the same, just because one organization is more dependent on its equipment while the other needs more employees to realize it. When coming back to the number of employees which is chosen for the research, 5 till 50, it indicates that a small business could be of a certain size but could only have a few employees and the other way around. Therefore 5 employees is chosen as the lower limit because this could be the point were an owner of a small service business could steer it employees directly, but also it would cost little time to change its control mechanism. The control mechanism could be changed in order to take all advantages out of it when wanting to realize a growth with the small service business.

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3.2 Control and Growth

In this chapter the main themes of the research will be handled, control and growth. There will be made a start with explaining control in the relation with a small service business, the context of the research. This will be followed by a model which will be used as a main framework throughout the research and which will help in explaining the control system in a small service business. Later-on the model will be expanded towards a model of how control could be used to realize a growth.

Secondly growth will be given attention. Growth will be explained in the context of the research with the help of different growth stage models. There will be given insight in aspects like what growth is about and what the consequences of growth could be for small service businesses.

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3.2.1 Control

In this section control will be handled in the context of a small service business. First several definitions will be given to create an idea about what control is about. Next there will be given an explanation about why to use control within a small servicebusiness and what aspects are involved when talking about control. Additional different kinds of control will be handled and there will be ended with a framework which helps in explaining how control functions. This part will improve the understanding in what control is about and it will present the framework (model) which will return every time throughout the research.

However besides the assumption that control could be of great value for a small service organization, different researchers gave it different definitions. A few definitions are:

‘’Control consists of verifying whether everything occurs in conformity with the plan adopted, the instructions issued, and principles established. It ('s) object (is) to point out weaknesses and errors in order to rectify (them) and prevent recurrence’’ (Fayol, 1949, p. 107) and ‘’Controlling is the measurement and correction of performance in order to make sure that enterprise objectives and the plans devised to attain them are accomplished’’ (Koontz, 1980). These were some old definitions, some more recent definitions are: ‘’measuring progress against plans to guarantee the predictable achievement of goals’’ defined by Simons (1995, p. 155) as a definition as given by managers in different organizations and ‘’control is the back end of the management process’’ (Merchant & van der Stede, 2007, p. 5). Considering these different definitions, control has been given different meanings which will differ considering the context in which control is placed. In this research control will be seen as:

‘’Measuring if the organization does realize its goals, and taking actions to improve the performance’’.

Knowing how control is described gives a start in understanding what control is about, in the next paragraph the why of control is going to be handled. There will be explained why control should be used in a small service business and there will be explained what could happen when making use of control.

While focusing on small service businesses, it should be considered that the employees are the ones who carry out the services and probably interact, mostly direct, with the customers. Small businesses have limited resources of manpower, time, skills, expertise and finance (Bridge, Cromie & O’Neill, 2003). But on the other side small business have the advantage in having more flexibility in reacting to the market and environment (Bridge, Cromie & O’Neill, 2003), and better and easier ways to communicate because there are just fewer people in a small business than in a large business. When considering these advantages and

disadvantages, the employees are the main factor in these service businesses and therefore they are the ones to ensure the business with most of the advantages and less of the

disadvantages.

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Merchant and Van der Stede (2007) mention that control could help an organization in motivating personnel, overcome personal limitations or give some direction to the employees and thereby organization. Besides they mention that control should positively influence people in achieving goals of the business. In addition Anthony and Govindarajan (2001) further explain control in their book, they explain control as follows: control is about communication, motivating employees and evaluating performances.

A very important aspect to realize a certain control in the business is information. Information is used by managers to communicate plans, goals, to monitor performances on goals and plans, keeping the personnel informed and to signal the employees where to search for opportunities (Simons, 1995). Consequently information should be well spread and used in the organization and help control in communication, evaluation of goals and motivating employees. However it also notices that an organization had to settle some goals and plans, in order to use the information in the organization. When coming to this point the question comes up how to realize these goals. A strategy helps in carrying out the plan in how to realize the goals created in the organization. Anthony and Govindarajan (2001) and Merchant and Van der Stede (2007) mention in their books in turn that control focuses on carrying out the strategy of the business through their employees. This helps in understanding how control helps in realizing the goals set in a business. And besides carrying out the strategy, control also motivates the employees to realize the best results (realizing the goals) for the

organization and of course motivate themselves in enjoying their work.

When taken this perspective to small service businesses it should be noticed that the

motivation of front-line employees becomes crucial to the service delivery process, quality of the service provided and the overall well-being of the organization.

The above explanation and accessory arguments indicate that control could be a valuable tool for a small service organization. Especially when knowing that when control is used properly an organization could then be reasonably confident that no major unpleasant surprises will occur (Merchant & van der Stede, 2007). This helps a small service business in restraining their disadvantages. Whereas the other functions of a control system could help the business in making the most of their advantages, and stimulating the employees to achieve good results for the organization. Therefore when a small business does make proper use of control it could prevent itself from a lot of problems and help itself to develop their organization further on. Control helps out problems and it probably can help the organization becoming more stable and from there on develop on points that really matter.

To create and understand the functioning of a control system some more explanation is necessary which will be presented in the coming paragraphs, starting with some important aspects of control, next types of control will be handled, and there will be ended with a framework of control.

Knowing what control is about is a good start, but there are more aspects towards control. Control can be applied at multiple levels in an organization and control requirements may differ among the organizational levels (Fisher, 1998). However because this research concentrates on small service businesses the focus will be on the ’main’ control function, which is described above.

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& Otley, 1995). In addition could be mentioned that it is wise to insert some goals for as well the long -as the short term. When doing so the continuity of the business will be guaranteed. The focus will be on control throughout the whole small business and control which helps the business in reaching its goals/desires.

The setting of objectives/goals is important for a business because it is the starting point for a control system, it gives the indication of what the organization wants to know and thereby control. Besides it also has influence on and got influenced by the strategy of the organization. However, this will be handled in a section later-on in the research.

When objectives are made clear, then they should be measured and evaluated on the performance which is realized on them and finally some action could be made to correct or reinforce the performance which was realized (Todd, 1976, p. 1). This corresponds with the following three steps:

1. Setting objectives

2. Measurement and evaluation of performance 3. Taking action to correct or reinforce performance.

An organization has to consider these three processes and does have to give the right value or content to it in order to create the link towards growth. This part will be handled in the section of strategy.

Jarrett, Rhodes & Wright (1983, p. 40) give a somewhat different view and give other

essential elements of a control system, namely activities which could be seen as a replacement of the processes of Todd. These elements could also be considered to be valuable to an

organization and should therefore be taken a look at. The four elements are: 1 Aim (what do you want)

2 Plan (how will the aim be achieved)

3 Action (carrying out the plan with the mechanisms of control)

4 Feedback (monitoring of the overall performance in the same terms as set at the aim) Both the steps of Todd and the elements of Jarrett et al. mention that a business should create goals which it does want to realize and that the goals should be controlled. However, while these principles are somewhat dated the steps and aspects they contain are still relevant and are useful when explaining control.

As mentioned, when the goals or objectives are set they should be controlled. To control these objectives or goals, some indicators should be made up to create a starting point of control. Therefore key performance indicators (KPIs) and key performance areas (KPAs) could be an outcome. Key performance areas are the issues ‘that determine the organizational health and vitality’ in which good performance is necessary. KPIs are the measures by which

performance can be tracked within these key result areas (Parmenter 2001, p. 100). Therefore the KPAs and the KPIs will create a good oversight of the organization and also indicate some strong and weak points of where control could be used in a business. Whereas the strong points are the ones indicating the value drivers of a business and the weak points are the points which point out problem areas or weaknesses in the business.

KPIs are especially useful for small service businesses because they are frequently used to ‘value’ difficult measurable activities such as the benefits of leadership development,

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important for the business. However, since small businesses are handled not both KPIs and KPAs should be set, but using KPIs only will be enough to create clearance. KPIs will

provide enough key points for a small business, whereas KPAs will become more valuable for a large business in separating departments and providing oversight. For small business it is more important to focus on performances realized, KPIs only will be sufficient. Therefore, the KPIs which will be created will function as starting point for the business goals and the controls to use along the goals.

When knowing what to control leaves the question of how to control the things you want to control. There are different types of control which all do use some other approach. All of these different types of control therefore give some further understanding of control. Besides they give classifications of how different types of control could be used within an

organization in helping getting the best control within the organization.

Merchant and Van der Stede (2007) describe four types of control which could form alone, or mixed together a management control system which is used in a business. The four distinct types of control are: action control, results control, personnel control and cultural control. In addition they give the distinction between tight control and loose control. This distinction helps in applying control in a certain way.

The types of control are described by Merchant and Van der Stede (2007) as follows.

Action control is the most direct form of control because it focuses on the action of employees ensuring the right behaviour for the organization. An example could be when some directly look at all the actions a masseur takes when he does a massage to a client, and then all those actions could be controlled at the hand of a checklist or a journal.

Results control is an indirect form of control because it does not focus directly on the action of employees but on results of the management. Employees are judged on the results they produce.

Personnel control and cultural control are a soft form of control and they focus on

encouraging self –and mutual-monitoring. Personnel control could be a form of self control by employees and cultural control could be executed with codes of conduct or a manager who gives the proper example for the employees.

While the four types of control are explained, an organization could still make the choice to use a tight form or a loose form of control on the types of control described above.

Tight control will ensure the organization with the employees behaving in the desired way of the organization. A lot of knowledge about achieving the goals and processes is needed, because a business could then exactly focus on what the results are and who did what. When less knowledge is available some more loose control is desired, there is some

information of what the goals should be but not all the information/knowledge is present to exactly judge by the results acquired by their employees. If a business does use tight control while they do not have all the information in hand then such a form of control could harm the organization.

In addition Merchant and Van der Stede (2007) mention that control could only be effective when employees can really influence the things they are controlled on. Therefore objectives to -and the type of control should be carefully chosen.

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because the result of the business could be measured (or not) as well as the services which are carried out in a service business.

Though there are some more influences on deciding the type of control to use in an

organization, the matrix created by Ouchi certainly would give a great starting point. However some adjustments are made, in such a manner that along the dimensions given by Ouchi all the types of control given by Merchant & Van der Stede fitted in the model. The original input of the model is therefore replaced by the types of control given by Merchant & Van der Stede, see figure 2.

Figure 2: Conditions determining the type of control, based on Ouchi (1979, p. 843)

The model in figure 2 helps in determining which kind of control to use in a small service business. As mentioned there are more factors influencing the kind of control to use, but these will be handled further-on in the research.

Finally knowing the content of control, a framework (figure 3) will be given which will contain the most important aspects of control named above. The most important aspects are:

- Type of control in a control system

- Strengths and weaknesses of the organization (KPI) - Goals or objectives of the organization

- Information - Evaluation

- Employees (motivating them, giving them direction, overcoming limitations and of course performing the services)

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Figure 3: Control framework based on Jarrett et al. (1983, p. 44)

The framework contains all the aspects of control handled above and gives insight in how control could function within a small service organization.

First, the points which could be seen as an input: the goals of the organization, the services, goals of the employees and the KPIs of the organization. The goals of the business are clear, but the goals of the employees should be explained. The goals of the employees could be things like: the wage expectancy, development of the employee (training for example), job satisfaction etc.. All these points could be seen as starting points in creating a clear picture of the organization and thereby creating a good starting point for a small service organization. The next step is then to decide how the service, which is provided by the organization, should be carried out. Meaning how do the employees start and carry out the services within the organization, and how should they start and carry out the service in the business. Are they motivated, do they face uncertainties, are there difficulties which should be resolved? and so on.

Then the next step is to decide what kind of control will be applied in the organization, related to the employees and the services. This will be done along the described model (see figure 2) which gives an indication of which kind of control to use based on Ouchi (1979).

The following step is the performance on the services. There will be given a look at how the services are carried out, and at if the desires about the (carrying out of the) service are realized. When the performances on the services are given a look at, then it brings us to the point where the question is asked if the goals, set by the business as a whole, owner and employees in the beginning, are achieved or not.

At this point, the realized results should be evaluated. Based on the evaluations the carrying out of the services should be discussed and eventual adjustments should be made in order to realize better results in the future (realizing a changed situation). The evaluation of the results and the way the services are carried out can be done by the owner or by arranging a meeting for example.

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3.2.2 Growth

In this section the growth of a small service business will be handled. There will be given some insights into the normal life cycle of an organization, and also there will be taken a look at the development of an organization throughout these phases in the life cycle. This will be done with the help of models which will present the life cycle -and the development of a business. Both models will be explained and of course the links towards the small service business will be made. At first will be explained what is meant by growth, followed by why a small business should want to realize a growth, then the life cycle model will be discussed, and after that the organizational development model will be given a look at.

Small business owners often started because they did not agree with norms and actions taken by a big business. The small business owner most of times already picked up some useful experiences in a large business, and then started off for themselves using those experiences in the hope of realizing a success. Many of the small businesses see growth as optimal success and they want to do a lot to realize growth, which sometimes leads to reaching behind their capabilities (Mckenna & Oritt, 1980). Therefore during the past decade, a major concern has been the failure of small and medium-sized manufacturing firms (SMEs) in transforming themselves into large firms (Hua Tan & Hui-Hong, 2004). But on the other hand when a firm does realize growth it gets rewarded in the form of revenues (Mckenna & Oritt, 1980). Still when talking about growth, different people will give a different meaning to the concept of growth. As a result differences in the approximation of growth exist. In this research the focus will be on the real growth of a small business, the growth of transforming a small business into a large business.

This kind of growth could be realized in different ways: an increase in employees, an increase in revenues, and an increase in market share are. These different possibilities for creating growth in a small business are traditional measures of success (Brown & Walker, 2004). All of these possibilities do have the same result, the small business will become larger in business size.

However, there are some different steps to take before becoming such a large business and on the other hand when becoming a large business a lot of other important issues will pop-up. Or as Yamada (2007) mentions in her article ‘’the growth and development of the firm is a change of its scale and characteristics’’. This sentence acknowledges that when a firm grows it becomes bigger in scale (employees, revenues, market size), but it also acknowledges that other aspects in the organization will change. What is left are the steps which a small business does need to take in becoming a large business. There are different models which explain the growth of a business in different steps, and to fit the citation of Yamada (2007) there will be given a look at different growth models and at a model which handles the development of a small business. In such a manner both the ‘external’- and ‘internal’ growth (development) will be considered.

There are several distinctions in kinds of models which describe the development of a

business. Yamada (2007) mentions in her article several distinctions in kind of models which describe the growth in a business but all have a different focus. In this research the following could be seen as important: Models focussing on life phases and models which do focus on the development of a small business. A few models describing life phases where chosen to be valuable for stating the phase which is going to be handled in the research.

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difficult periods along the way. Figure 3 shows how the growth of a business could develop throughout the lifetime of a business. The dotted lines C and D show the growth-curve when a business does not overcome its problems in continuing its growth. Parks (1977) named these dotted lines ‘hurdles’. The growth of a business as shown in figure 4 is related to an increase in revenues.

Figure 4: Growth development and discontinuities (by parks, 1977, p. 26)

The model used here is functional to indicate and consider the problems which a business faces when it realizes a growth. The dotted lines C and D (figure 4), which show a decline in growth, are seen in the beginning of the growth-curve. This is the phase when the business is still rather small and relatively young and it is about to realize the starting of some serious growth. At this point some other models come into play. Namely it is important to focus on beginning of this growth and consider what the characteristics (of the small business) at the point of a starting growth are. There are several models which do handle all the life time phases of a company and therefore could be considered useful. The models which will be handled will be some old -and some more recent models to find out if there was a shift during the years in the past in describing growth of a business.

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Figure 5: Five stages of growth model by Bruce & Scott (1987, p. 43)

The model as seen in figure 5 presents a categorization of 5 life cycle phases. A lot of researchers do also talk about 5 phases when handling the phases of growth, for example: Greiner (1972); Churchill & Lewis (1983); Hanks, Watson, Jensen & Chandler (1993); Thompson (1994); Johannisson (2000). Sometimes there was chosen for 4 phases in the life cycle of a business, as done by: Child (1984); Mintzberg (1984); Withane (1990); Daft (2003); Hisrich & Peters (2002). This already indicates a lot of research towards business growth has been conducted. Besides, when considering the differences in life cycle phases, some of the models do apply more to small business (Bruce & Scott, 1987; Churchill & Lewis, 1983; Johannisson, 2000; Hanks, Watson, Jensen & Chandler, 2000; Hisrich & Peters, 2002), whereas most of the others are more designed for business in general. To create an idea of the growth phase a business goes through, the phases of the model of Bruce & Scott (1987) will be used. Besides also some other models will be used when they provide some valuable additional information along a similar phase.

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some control is needed (Bruce & Scott, 1987). Additionally, it is the phase where the owner becomes more like a manager where he was an operator before (Forsyth, Mount, & Zinger, 1993). Within the growth phase exists the situation where the owner/manager is loosing the direct oversight on processes (Forsyth, Mount, & Zinger, 1993). This will be a result of hiring more employees and the switch the owner has to make from being operator to becoming a manager. This new evolved situation will need some control or performance measurement, which helps in realizing a growth and staying in that direction (Forsyth, Mount, & Zinger, 1993). Besides, Churchill & Lewis (1983) argue that a crisis of control will come up in this phase, making it important for a business to use its control system properly. Finally Dodge and Robbins (1992) mention that this second (growth) stage is the phase in which an increase in profit should be realized and where sales are stabilizing. For small service businesses it is very important to stay in control of the business. All the employees within the business need to carry out the services, and when oversight and control are lost the services could become uncoordinated and a mess could be created. Therefore it is important to keep the business in line in a phase like this.

The other relevant phase, Expansion, is partly relevant. Only the first part of this phase will considered relevant. In this part of the Expansion, the first steps are set toward becoming a more professional firm with a clear organization structure and a good control system. The growth will slow in this phase (Churchill & Lewis, 1983; Dodge & Robbins, 1992) and is therefore more difficult to realize. Further developing controls and developing the business into a more professional managed firm could be the steps which are taken in this phase (Bruce & Scott, 1987; Dodge & Robbins, 1992; Forsyth, Mount, & Zinger, 1993).

Concluding there will be taken a look at the phase of a growth/life cycle of a business where the business is realizing a certain growth in revenues, business size, and where problems exist towards steering the company into the direction wanted by the business. This will provide an indication of the phase of growth (of a small service business) on which the focus will be. Next there will be taken a look at a small business development model.

Flamholtz (1990, p. 41) in his book ‘Growing pains’ presents a model which describes the developments a small business makes when starting off small end ending up large. These are the developments realized within the business. Figure 6 presents the model which takes a view on the development stages of a business. The model shows what the needs are when becoming a larger organization; it shows the steps a small business has to make in order to become a large business. With the help of this model an organization could be characterized based on the situation they are in, besides from the growth phase(s). When relating this model to the phase of growth, the needs for realizing a growth with the business could be indicated. When a small business starts off it should be in a market and have a service which it delivers to the costumers. This can be seen in the two lowest blocks in the model. However when a business is then some time in the market they need finances, employees and some

development to stay and survive in the business, see the block of ‘resource management’ in the model. When this is realized it comes to the phase of growth, which will be handled in this research. When taking a look at the model of Flamholtz (1990) again, there can be seen that the next two steps in the model are the blocks: operational -and management systems, which should be used in the business when realizing a growth. These systems could be part of the control system in an organization; therefore in the phase of growth some control systems should be improved or developed to stay in course (for the growth).

The model could be used by a small service organization to analyze its current state, and when it does want to grow. When a business thinks it is ready to grow, the model will help in

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Figure 6: Model of organizational development (Flamholtz, 1990, p. 41)

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3.2.3 Relating control to growth and growth to control

In this part of the growth and control section, control and growth will be related towards each other. The information and insight given in the previous parts will be combined to find out the influence of control and growth on each other. Control and growth will be related in such a manner that will become clear what the influence of control could be on the growth of a small service business. Otherwise the specific phase of growth could certainly have influence on control as well. First the relationship between control and growth will be discussed and in the end growth will be added to the main model of control (figure 3, section ‘control’), this will help in understanding the relationship between control and growth.

In the previous parts, ‘control’ and ‘growth’, the following definitions were given:

Control: Measuring if the organization does realize its goals, and taking actions to improve the performance.

Growth: Growth is the transformation of a small business into a large business which brings along growth in scale and the development of the business with a change of its characteristics. While the points of view towards control and growth are already given, the relationship

between control and growth does need some further explanation. Several models will be handled to give an explanation about the relationship between control and growth. Besides the different models, some problems and some developments throughout growth phase(s) will be taken into consideration to further explain the link between control and growth.

First when taking a look at a lifetime of a business throughout the life cycle there can be noticed that, especially in the growth -and expansion phase, the line which represents the business only is going up (see figure 4 and 5) and therefore the business is only becoming larger. However, as mentioned, throughout this increasing lifeline of a business there will be some difficulties and problems which will show up during each phase and during the whole life cycle of an organization. Still, when putting the process of growth and

difficulties/problems together, some kind of ‘’S’’- curve (figure 7 will come up which will represent the life cycle of a company for example (Parks, 1977).

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This ‘’S’’ curve indicates that growth could come along with up and downs. It remains for a certain business to make sure the middle part, the rising line, will be as long as possible. Because as could be seen in figure 4 in the ‘growth’ section, along the growth several branch offs are shown when becoming a large business. This situation gives the opportunity for control to control the situation where the organization is facing a ‘down’ period in their growth. When doing so, the organization can keep focussing on the ups and by doing so the business is able to keep on growing. A control system should help the organization reach its potential by controlling the factors that create a ‘down’ period. When controlling the difficult periods as good as possible the potential of the business will be reached and the ‘’S’’ curve will be as large as the potential of a firm. In a different situation, when problems can not be controlled, the ‘’S’’-curve could be smaller then when it does control such situations.

The problems during realizing the ‘’S’’-curve could also be related to the phase(s) of growth which will be handled. In figure 8 the focus of the research is shown. Besides the focus of the research, figure 8 also shows the problem parts which could be seen as the ‘down’ period in the ‘’S’’-curve, these are the dotted lines. These dotted lines indicate that some

problems/difficulties could arise and if a company does not handle them properly it could result (in the worse scenario) to a failure of the business. Therefore in these situations a control system should help the business in overcoming the problems and thereby continuing their growth.

Figure 8: Phase(s) of growth, focus of the research (Bruce & Scott, 1987, p.43)

The problems which could occur at different moments in the focused growth phase(s) are diverse. Some problems which could occur at those moments will be pointed out to give an example of how control could help a small service organization in handling those problems in their growth phase. Daniel Burrus (2008) mentions five top failures of business growth:

- Failure to anticipate - Failure to communicate - Failure to collaborate - Failure to innovate

- Failure to de-commoditize

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will be given an explanation in how a control system could have a positive influence on those problems in such a manner that an organization could continue or even improve their growth. First the failure to communicate, this implies that communication (in a business) is going one way, someone is informing someone but is not getting a respond or some information in return. When using a control system it will help in better spreading the information around the organization, it informs the employees for example and if they are well motivated they could reply by realizing good result and they can take initiative. At least all the information, which is seen as useful, should be well spread throughout the organization when using a proper control system, it improves the information flow and helps the people get the information they need and desire.

Second the failure to anticipate, most of the times businesses react to a crisis for example, while anticipation could help them in handling and seeing the crisis coming. When using a proper control system which is well designed and contents the most important aspects in an organization, then meetings could be arranged to discuss the current business. In those meetings some notified signals of a crisis or bad economic periods could be discussed. Besides could it be part of the control system to monitor the economic environment in order to keep in touch with developments outside the business, such as the economical situations at certain moments.These two examples give a brief and short idea of how control could affect growth and thereby your business, because control could help the business overcome the problem in the growth phase. Control helps in solving the mainly problem: moving the information to the right people in the organization (Davila & Foster, 2007). Although the examples are simple and brief, they give an indication of how control and growth could affect each other.

However there is more evidence for the need of a control system in times of growth. Simons in his book (1995) mentions that there are 4 systems which are important to control the strategy in a business: diagnostic control-, beliefs-, interactive control-, and boundary systems. He also takes a look at the phases a business goes through throughout its lifetime, including growth. When Simons (1995) considers the phases of a business lifetime he links the systems for control to the every phase. When taking a look at this oversight, created by Simons (1995), control is starting at the growth phase. This means that at the moment a company is starting to realize some growth, a control system is desirable to stay in course. Or as Simons (1995, p. 127) mentions in his book: ‘’in the growth stage, the increasing size requires more decision-making authority be delegated to the lower level. As a result, formal, measurable goals, and the monitoring of participants’ activities become more and more important. Diagnostic control systems are implemented for the first time to meet the information and control needs of senior managers. Performance incentives are tied to achievement of diagnostic targets‘’. In the start up phase of a small business only some simple internal controls are necessary and some accounting information is enough for the control, while oversight is kept by the owner.

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Figure 9: The relationship between growth and the control system’s need to adapt (Jarrett et al., 1983, p. 46)

The model shows that in the situation at E, F and G (seen in figure 9), the growth goes actually faster than expected and thereby chaos could be the result and control is needed. The D in figure 8 shows stability, this could still be a growing business, but this business does make use of a proper control system which helps in growing and therefore growth will continue as desired or expected.

Knowing that when growth occurs control could help in preventing or solving problems which could prevail, it also is important to take a look at the growth part. Already is explained what growth is about, however it remains to be handled how growth influences control. Knowing that growth comes with problems and control could be a solution to it, the other way around should be considered as well when talking about relating control to growth and

otherwise. Therefore how does control affect growth, what influence does control has on growth besides prevailing problems which do come up in the growth phase.

The most important influence when taking the point of control influencing the growth is to create clarity in a business. Or as Mckenna & Oritt in their article (1980, p. 48) mention it: ‘’Running your business better not making them larger helps in getting successful’’. And also as Davila & Foster describe it in their article (2007, p. 933): ‘’an informal approach to managing organizations becomes harder when they grow beyond a certain size. At this point, the adoption of control systems becomes important to provide the management infrastructure required to scale-up the organization’’. These sentences support the idea that a control system will provide clarity in a business.

Control namely helps in better spreading the information throughout the organization and could be used in various aspects of a business. If control is properly made use of, it will provide the desired information to the owner. Then when the owner notices some changes he does not like, he could react to those changes or even prevent problems before occurring. The prevention of problems could be very useful because: ‘’many problems coming with change are overlooked by small business’’ (Mckenna & Oritt, 1980, p. 46).

Because at each new step realized with growth some competence levels need to change, and people need to change as well to go along the growth and realize more development

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in different roles, measuring progress towards objectives, preventing company failure or avoiding risks (Davila & Foster, 2007). Control helps the business handling different aspects and different organizations could choose different control systems to steer the growth into their desired direction. In addition it also helps in preventing a situation which happens a lot of times in small businesses namely: the nature of ‘doing business’ for the small business owner may actually result in the strategic growth decisions being taken out of the hands of the owner/manager and dictated by the growth process itself (McKenna & Oritt, 1981).

When looking at the main influence of control on growth there could be said that it does help in organizing the business and steering it thereby into the right direction. However, of course there should be taken into consideration that when a control system is not carefully taken care off and is not given a good thought over when taken it into use, it could even create more problems within a business.

Having analyzed the influences of growth and control on each other at the hand of some speculations and examples, there can be concluded that control can be seen as the leading factor. The leading factor because control has the main influence and is dominant in

determining how the growth will occur. Meaning that when having created a valuable good constructed control system which provides the right information for the small service

business, then this should result in a growth as meant by the owner/manager/whole business. Therefore when growth has to be placed in the control model it will be placed at the end, see figure 10.

Figure 10: Growth added to the control model

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3.3 Strategy, environmental influences, and business culture

Besides knowing that a small service business could use control for influencing their growth, it is also important to consider elements which in their turn are important in influencing the control system and thereby growth process. Three separate elements which all influence the control within a business will be added to the research. The three elements should be well constructed or considered when a small service business wants to realize a growth.

These three elements will be: strategy, business culture and environmental influences. They all do have a serious influence in relationship to control and running a business. These

elemental influences where chosen because they all influence each other and the business and all should be well considered when wanting to realize a growth. The elements are seen as an important condition in order to control the business to set the direction towards growth. Strategy gives direction to the company and employees and could be seen as a central point of control, whereas control tries to carry out the strategy.

Business culture handles the behaviour of the employees and the way how ‘things’ are handled within the organization. By doing so the business culture also influences the employees and the running of the business.

The environmental influences are the influences which could affect the business at any time, some could be difficult to handle while others should be carefully considered, considering competition and the economy as main aspect or sometimes technology could be a factor. The environmental influences are more difficult to control and affect both control and strategy and thereby the functioning of the business.