MANAGEMENT CONTROL SYSTEM EMERGENCE AND GROWTH

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MANAGEMENT CONTROL SYSTEM

EMERGENCE AND GROWTH

A CASE STUDY ON THE OUTSET OF MANAGEMENT

CONTROL SYSTEMS IN TWO GROWING

ENTREPRENEURIAL COMPANIES

Alex Marijn Snels

student number S2751941

M.Sc. BA-O&MC (2018/19) – Master Thesis

Faculty of Economic and Business

University of Groningen

Supervisor: Prof. Dr. E.P. Jansen

Co-assessor: Dr. S. Girdhar

Date: 12

th

_{of July, 2019}

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Abstract

This paper explores how management control systems (MCS) of entrepreneurial companies develop in anticipation of or reaction to growth. Despite comprising crucial challenges to surmount, much remains unknown regarding the emergence and development of MCS in a company’s inaugural phases. Although, informal MCS constitute the majority of MCS in small businesses, the role of informal MCS in relation to the broader MCS package remains ambiguous. By enhancing Malmi and Brown’s (2008) framework with the explication of formal and informal MCS, both initially emergent MCS and developments to MCS in view of growth are investigated. Additionally, the influence of organisational actors on MCS developments is studied and processes of MCS developments are examined. In order to collect data, thirteen semi-structured interviews have been conducted among both entrepreneurs and employees of two small, yet growing, entrepreneurial businesses. Results from these interviews indicate that configurations of initially emerging MCS are primarily guided by organisational actors and comprise predominantly informal MCS. Furthermore, MCS formalise both in anticipation of growth and in reaction to growth, but the functionality of formalised MCS depends upon their fit in the broader MCS package. Moreover, the interrelationships between established formal and informal MCS critically influence MCS developments that ensue in view of growth.

Keywords

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Introduction

How do entrepreneurs cope with the growth, and associated growing pains, of their businesses? As a result of the stable rise of new businesses each year (European Commission, 2018) this question is of importance to scholars and practitioners alike. Company growth is commonly considered as a positive development, as it may suggest improvements in turnover and profit, each constituting essential goals for companies. Moreover, growth is often applied as a measure for success, as commended by ratings such as the Financieel Dagblad’s “Gazellen” (n.d.), Fortune’s “Fastest-Growing Companies” (n.d.) and Deloitte’s “Technology Fast 500™” (n.d.). However, such ratings exclusively celebrate extraordinarily successful companies and consequently neglect ordinary businesses and the issues they face. Considering that these extraordinarily successful companies have, at least partly, surmounted said issues, much remains unknown about the earliest challenges businesses experience.

Businesses develop in ways unique to the environment they emerge from. Though contexts may differ, a constant persists in the form of entrepreneurs directing companies. Schumpeter (1934) recognized the crucial role of entrepreneurs, stating that businesses constitute the driving force of economic development. Venkataraman (1997) identified entrepreneurs as the set of individuals who discover, evaluate, and exploit opportunities. Highlighting that the vision and charisma of entrepreneurs is often imperative to the success of starting businesses, functioning as a beacon for the company to follow through often uncertain environments. Therefore, entrepreneurs provide a fruitful avenue to develop an understanding of initial company growth. However, the exploitation of opportunities requires entrepreneurs to rely on other organisational actors. Consequently, a need for coordination of the entrepreneur’s managerial endeavours without requiring continuous personal attention to each individual facet or actor arises.

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of the agents’ effort - the main control approach in the absence of systems - becomes too costly and motivation and monitoring have to happen through the design of appropriate MCS” (Davila & Foster, 2007, p. 909). Suggesting a need for control systems’ accommodation to company growth. Cardinal, Sitkin and Long (2004) state that studying the evolution of informal controls is crucial to understand the phenomenon of MCS, as informal controls comprise most of the organisational controls during the early stages of a company. These findings suggest a need to study how formal and informal controls evolve in accommodation company growth.

The goal of this study is to refine our current understanding of the initial development of MCS in growing early stage businesses by investigating MCS emergence and developments to MCS in reaction to or in anticipation of growth. To provide a comprehensive account a distinction is made between formal and informal controls the perspectives of both entrepreneurs and their employees are addressed. Moreover, to capture the process of MCS emergence both aspects of MCS design and implementation are addressed.

The subject of this study emanated from challenges as expressed by practitioners. Exploratory interviews indicated entrepreneurs’ uncertainties regarding the trade-offs that delegation present. The entrepreneurs indicated the need to reduce their company’s dependency on them personally whilst remaining thoroughly informed about actual practices and closely connected to actors throughout their companies. Many entrepreneurs will experience this dilemma as a result of continuous company growth as indicated by Greiner (1972, 1998). Davila and Foster (2005, 2007, 2009), indicate the shortfalls of scientific literature addressing early stage MCS adoption in growing companies. Correspondingly, Davila, Foster and Oyon (2009) claim there is a lack of attention of scholars regarding small businesses and that further research is needed to develop frameworks in an entrepreneurial context. Furthermore, Chenhall (2003) expressed a call for more MCS research in the small and medium-sized business context. Aldrich (1999) indicated that our understanding is still limited of how control systems come to be created and evolve during founding periods. Furthermore, Cardinal et al. (2004) signify the shortcomings of the traditional approaches to control research express a call for dynamic research methods. Finally, Dobbs and Hamilton (2007), express a call for process-oriented research regarding small business growth. Notwithstanding, initial advancements have been made, though, still predominantly investigating companies with over 100 employees. Consequently, research regarding the initial development of management controls remains scarce and a chasm in the literature persists.

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effectively do so could potentially inhibit any continuation of growth. Studies on less orthodox notions of management accounting and control in small and entrepreneurial firms advocated the use of a sensitive and deep-probing research method that facilitate tracing of subjectively constructed forms of control (Collier, 2005; Perren & Grant, 2000), which is in line with the call of Cardinal et al. (2004) for systematic, in-depth analysis of the founding and evolution of control.

To address the calls of both practice and literature the thesis sets out to answer the following research question:

How do management control systems in early stage entrepreneurial businesses develop in reaction to or in anticipation of growth?

To answer this question four sub questions will be answered:

1. What MCS do initially develop in early stage entrepreneurial businesses? 2. What MCS developments are outlined in reaction to or in anticipation of growth?

3. What are the attitudes of organisational actors regarding MCS developments and what effect do they have on MCS developments?

4. How do MCS developments actually ensue and what inhibits or facilitates the process?

The remainder of this study is organised as follows: firstly, the existing literature will be reviewed and a theoretical framework will be presented. Secondly, the employed methodology will be illustrated. Thirdly, the results of two case companies will be presented. Fourthly, a discussion of the results will be provided, synthesizing findings of the case companies. Finally, this study will conclude by presenting a summary of the findings, discussing limitations and suggesting avenues for future research.

Literature Review

Management Control Systems in Early Stage Businesses

Entrepreneurship and growing companies. Entrepreneurs play a vital role in the creation and

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personal attributes. Embracing the practical grounding of entrepreneurship, entrepreneurial processes are henceforth defined as: “all the functions, activities and actions associated with perceiving opportunities and creating the organisations to pursue them” (Bygrave & Zacharakis, 2009, p. 2).

Prior research has indicated that both growth intentions and motivation for growth are predictors of actual firm growth (Delmar & Wiklund, 2008; Kolvereid & Bullvag, 1996). However, growth brings about challenges, as with growth the complexity of a business increases. Accordingly, if a firm intends to grow, or is growing, systems need be developed to transmit the entrepreneur’s assessment and decision making patterns throughout the company. MCS comprise such systems, by providing structure their aim is to navigate actual performance towards desired performance. The need for guidance as inferred by Steers (1977), demonstrates that the only way to obtain organisational goals is through the behaviour of organisational actors. Additionally, Merchant and van der Stede (2007) argue that a need for MCS exists due to potential issues regarding the relation between employees and organisational objectives. Such issues may be a lack of direction, motivational problems or personal limitations. In which employees might not know what to do, not want to do it or be unable to do so. MCS can be used to overcome such issues.

Management control systems. Research on management control has evolved from studying

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Figure 1. Malmi and Brown’s (2008) MCS package framework as illustrated in their study.

Cultural control systems. Malmi and Brown’s (2008) MCS framework can be partitioned into five

groups, the first of which are cultural controls. A definition of organisational culture is taken from Flamholtz, Das and Tsui (1985): “the set of values, beliefs and social norms which tend to be shared by its members and, in turn, influence their thoughts and actions” (p. 158). Malmi and Brown (2008) acknowledge that culture may, to some extent, be inalterable to managers, as has been suggested by Clegg, Kornberger and Pitsis (2005). Nevertheless, Malmi and Brown (2008) state that culture should be regarded as a control when employed to regulate behaviour, which may be especially prevalent in malleable early stage firms. Malmi and Brown’s (2008) notion of clans controls rests upon the conceptualization of clans by Ouchi (1979), defining clans as distinct subcultures in which individuals are exposed to a socialization process. The socialisation process instils a set of skills and values in group members. Boundaries of these groups can be diverse and actors may be part of more than one group at a given time. The concept of value controls finds its origin in Simons’ (1995) beliefs systems, constituting values, purpose and direction as communicated formally and reinforced systematically by senior managers in order to support the adoption of these by their subordinates. These core values are linked to the strategy of the firm. The impact of values on behaviour can be found on three distinct levels. Firstly, deliberate recruitment of individuals with values corresponding to those of the organisation. Secondly, socialization of individuals whose values differ with those of the organisation. Thirdly, communication of values resulting in acceptance of them, even though individuals may not share them personally. Symbol controls encompass visible expressions deployed in order to develop a particular culture (Schein, 1997). Workspace design and dress codes clear examples of this. Symbol control is based upon the idea that visible expressions influence attitudes and communication.

Planning control systems. Planning can be employed to develop and align goals of both individuals

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First, action planning characterized by a tactical focus and a time span approximating 12 months. Second, long run planning, which has a strategic focus and addresses the medium to long run.

Cybernetic control systems. Green and Welsh (1988) describe cybernetic control as feedback

loops built up from standards of performance, measurement of performance and analysis of the difference, where unwanted variance can be communicated and changes made accordingly. Budgets provide businesses with a complete and broad tool to unify differing operations throughout the company in a quantifiable manner. As a system for control it provides a tool to plan acceptable levels of behaviour and to evaluate performance against those plans. (Malmi & Brown, 2008). Financial measures provide tools for narrow target setting. The key distinction of budgetary controls is found in the relatively simple single measure approach of financial measures (Malmi & Brown, 2008). Financial measures may either be market oriented, relating to company value, or accounting oriented, relating to residual terms or ratios (Merchant & van der Stede, 2007). Non-financial measures are useful tools to identify drivers of performance (Malmi & Brown, 2008), providing a more diverse perspective on performance, by going beyond what can be expressed in financial terms. A combination of financial and non-financial measures composes a hybrid control system (Malmi & Brown, 2008).

Rewards and compensation control systems. Bonner and Sprinkle (2002) argue that rewards and

compensation provide organisations with tools to create goal and behavioural congruency between employees and the organisation. Flamholtz et al. (1985) indicated that rewards or sanctions can either be extrinsic or intrinsic and may take an either positive or negative form. Traditional research predominantly focussed on extrinsic rewards (Ittner & Larcker, 2001). However, the relevance of intrinsic rewards is increasingly recognized in contemporary research (Pink, 2009), suggesting the need for a balanced use.

Administrative control systems. Administrative controls can be considered as systems designed

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notion of action controls. They comprise the bureaucratic specification of processes and behaviour (Malmi & Brown, 2008).

Formal and informal control systems. Previous research has found that small companies are

typically characterized by soft and informal controls (Chenhall, 2003; Davila & Foster, 2007, 2009; Merchant & van der Stede, 2007). Nevertheless, MCS research is primarily concerned with formalised methods of control aimed towards established firms (Simons, 1995; Merchant & van der Stede, 2007). Davila (2005) indicates that as firms grow MCS develop in an increasingly formalised manner to balance out the decreasing efficiency of informal controls. Moreover, he found both firm size and age to be explanatory variables in MCS emergence. Informal controls comprise the initial primary mode of control in early stage firms (Davila & Foster, 2007; 2009). Though, some frameworks incorporate informal controls (Ouchi, 1979; Merchant & van der Stede, 2007), constructs are mainly tailored to established firms. Consequently, terminology regarding ‘formal’ and ‘informal’ remains ambiguous in the literature. For example, though, Davila and Foster (2007; 2009) rely on the constructs of ‘formal’ and ‘informal’ controls in their studies of MCS emergence, they refrain from explicitly defining them. In previous studies the distinction between the constructs most closely resembles that of ‘written’ and ‘unwritten’. Henceforth, a control is considered formal if its contents can be documented and without further explanation interpreted by a third party and informal controls are those for which their contents only become intelligible in the context of their enactment. Synthesis of Malmi and Brown’s (2008) MCS framework and the distinction of formal and informal MCS allows for assessment of a broader scope of MCS than is possible by means of traditional MCS frameworks. Consequently, allowing for depiction of complete MCS packages of early stage firms, incorporating the collection of MCS that traditional frameworks would disregard.

Development of Management Control Systems and Growth

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Davila, Foster and Jia (2010) indicate the need for timely MCS development, ensuring its match to the phasing of the company’s growth. Accordingly, informal management styles suffice in the company’s inaugural days where all activities can be directly observed and direct communication with employees remains feasible (Davila, Foster & Jia, 2010). However, due to exponentially increasing information processing needs (Miller & Friesen, 1984) informal controls become insufficient, requiring formalised MCS. Findings suggest that growth invokes MCS formalisation (Granlund & Taipaleenmäki, 2005; Moores & Yuen, 2001) and formal MCS to facilitate continued company growth (Davila & Foster, 2005; Sandino, 2007; Greiner, 1998). Davila (2005) found a need for formalised control systems to emerge between 40 and 100 employees, suggesting relative absence of them in smaller firms. Davila, Foster and Li (2009) described six reasons for MCS adoption in start-ups, which are presented in Table 1.

Table 1

Reasons for adopting management systems

Reason type Reason Description

Proactive

Manager background

When managers’ past experience in more established firms drives them to adopt MCS tools they are acquainted with.

Need to focus

When managers’ find that the adoption of MCS can be employed to facilitate growth and improve

communication and control in the organisation.

Reactive

Chaos

When in the face of unexpected or negative outcomes MCS are adopted to avoid similar problems in the future.

Learning

When MCS are adopted to formalize knowledge in the company, spread it and minimize dependency on individuals with tacit knowledge.

External

Legitimize When MCS are adopted to communicate professionalism towards external parties.

Contracting When MCS are adopted to meet regulations.

Note. Adopted from Davila, Foster and Li (2009).

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explicitly define and address informal controls. The framework presented in the previous section aims to alleviate this concern.

Organisational Actors and Management Control Systems Development

MCSs have long been described to fulfil two complementary and interdependent roles. Finding its origin in Weick’s (1979) notion of loose and tight coupling, MCSs are employed to exert control over the attainment of organisational goals whilst enabling employees to find opportunities and solve problems (Ahrens & Chapman, 2004; Simons, 1995). Enabling bureaucracies “enhance the users’ capabilities and leverage their skills and intelligence” in contrast to coercive bureaucracies designed with “a fool-proofing and deskilling rationale” (Adler & Borys, 1996, p. 68). For entrepreneurs of growing companies this tension is particularly apparent due to the multitude of functions to be fulfilled by a limited workforce. Mundy (2010), indicates a need to simultaneously balance the enabling and controlling functions of MCS. In turn, stating internal consistency and logical progression to be requirements for a balanced control package. Thus, the development of MCS requires careful deliberation in growing companies, in consideration of their dynamic nature and resultant tensions.

Organisational control literature provides a compelling categorisation of control types and their respective benefits and limitations. Though, a diverse array of control mechanisms exists, Jung-Gehling and Strauss (2018) argue for a threefold classification encompassing behavioural, output and self-controls. Behavioural and output controls best suit simple situations where employees’ values are incongruent with desired organisational goals. Conversely, the notion of self-control comprises employee’s self-management and is argued to best suit complex situations where employees’ values are congruent with the desired organisational goals. Shared values can be created by means of socialisation processes and by ensuring a fit in the hiring process, which turn fosters goal congruency. Jung-Gehling and Strauss (2018) argue that self-controls empower employees by enhancing autonomy. Moreover, participative decision making enhances leader-member exchanges, which positively affects job performance (Choy, McCormack, & Djurkovic, 2016). The quality of leader member exchanges positively affects job performance, which is enhanced by participative decision making. In entrepreneurial companies, resources are often limited and managers must rely on social capital (Choy, et al., 2016) and according informal controls, characterized by direct interaction (Davila et al., 2010). Indicating that interpersonal relationships are essential for effective control system use in entrepreneurial companies.

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be reluctant to MCS adoption in fear of bureaucracy and change, indicating MCS adoption to require discipline.

The Process of Management Control Systems Development

MCS emerge over time and are therefore best understood as a process (Cardinal et al., 2004). Weick’s (1979) conceptualisation of sensemaking provides a fruitful lens for understanding the emergence of MCS. Weick (1979) argued that organisational processes consist of interactions between actors who pursue to understand their unpredictable environments, comprising the enactment, selection and retention of information. In the context of MCS the process entails experimentation with various MCS alternatives, the selection of the at that moment most appropriate MCS and the development of mechanisms retaining the chosen alternative (Davila, 2005). The sensemaking process articulates the temporal and iterative aspect of MCS development as MCS develop collectively and evolve over time. Considering growing small businesses’ exposure to uncertain environments, the development of a shared understanding of organisational objectives is imperative to continued growth.

Malmi and Brown (2008) infer that MCS should be studied as a package of systems, rather than in isolation. The development of each individual MCS affects the package’s other components and is subject to perpetually changing internal and external environments, portraying a highly dynamic composition of variables that change both intentionally and unintentionally. Abernethy and Chua (1996) claim that MCS to operate as a package if they are internally consistent. In turn, implicating that component MCS are designed to achieve similar goals. Sandelin (2008) found two control system configurations to display equifinality, implying that though component MCS contrasted they provided equally good outcomes. Sandelin’s (2008) findings suggest internal consistency of MCS to be a prerequisite to achieve equifinality. As such, the functionality of a formal control system is dependent on the linkages between system elements (Sandelin, 2008). Consequently, MCS ought to develop gradually and in a manner compatible to established systems in order to achieve a stable MCS package.

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Methodology

Research Design

As indicated in the literature section there is an extensive knowledge gap encompassing the emergence of MCS in entrepreneurial companies. Research in the field predominantly investigated the development of control systems in companies that surpassed initial growth phases. As suggested by the literature a transition ensues between formal and informal methods of control. However, to study the intersection of formal and informal MCS detailed process-oriented research is required (Cardinal et al., 2004). To comply to this call, a comprehensive investigation is required and accordingly a qualitative research method befits the study (Eisenhardt, 1989). The present study is designed as a multiple-case study, a social science research method involving close examination of topics, people or issues (Hays, 2004; Yin, 2013). Case studies are particularly well suited to provide in-depth descriptions in a short period of time (Hays, 2004). The method of multiple-case studies in particular is considered both robust and reliable (Baxter and Jack, 2008) and favours the exchange of knowledge between researcher and practitioner (Rynes, Bartunek and Daft, 2001). Addressing the practical and idiosyncratic nature of the entrepreneurial context. Moreover, this approach answers Malmi and Brown’s (2008) call for case study research on MCS.

Research Context

In order to select case companies for the study several conditions are defined. The goal of these criteria is to select companies that are small and growing but have not yet developed clearly specified control systems, the selection criteria are presented in table 2. The selection process yielded two Dutch companies. During introductory interviews with their entrepreneurs it was determined that both companies are currently developing control systems and are subject to the growing pains of this process. The unit of analysis for this study is the company level, comprising for each case entrepreneurs, employees and the processes within the company enlisted to communicate the entrepreneur’s vision. Fictitious names are constructed to ensure confidentiality of the case companies.

Table 2

Selection criteria for case selection

Selection criterion Requirements

Entrepreneurial orientation

The company’s founder has control over the firm and is currently working in the firm

Size The company currently employs fewer than 50 people

Growth aspiration

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Organisation 1: WebChat. WebChat is a company originally active in building and maintaining

websites for small businesses and the provision of services enhancing companies’ on-line presence. The company recently acquired a web-chat service department since growth proved challenging in its preceding segment. The company is currently internalizing the acquired department and growing its chat-client portfolio whilst reducing the website-building portfolio. There are currently working 22 employees and the company is currently growing its employee count to keep pace with the growing customer portfolio. Due to the changes in the organisation formalised controls are scarce despite the founders’ experience in small business development. As such, the company provides a fruitful insight into the initial development of control systems in a growing business.

Organisation 2: WholeSaleBV. WholeSaleBV is a wholesale company active in the distribution of

durable consumer goods. The company’s founder gradually developed the business’ scope and size by increasingly internalizing steps in the value chain and establishing a firm position in its segment. Current activities encompass the purchasing, warehousing and sale of goods via various distribution channels. The founding entrepreneur is currently predominantly involved in operational activities, leaving sparse time for strategically oriented activities. He aims to shift his personal role from operational activities towards a more strategically oriented function. As such, the company is currently active in the initial development of MCS by the entrepreneur, providing useful environment to study MCS emergence.

Data Collection

Triangulation can be referred to as the use of several data collection methods (Eisenhardt, 1989). To arrive at the data set for the multiple-case study, several data collection methods are employed. The method is chosen to provide a substantiated and detailed understanding of findings, enabling internal and external validity. First, semi-structured interviews constitute the primary method of data collection. Second, observational data is used to provide insight into the actual representation of statements in the interviews. Third, for each case employees are interviewed in addition to the entrepreneur in order to explore multiple perspectives.

Semi-structured interviews. Semi-structured interviews are a particularly useful tool to gather

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The interview protocols for both entrepreneurs and employees consist of two components. First, questions are asked relating to delegation processes and corresponding control mechanisms. Second, questions are asked regarding the enhanced Malmi and Brown (2008) framework, both regarding its initial emergence and current developments. During the interview constructs are discussed such that they can be understood in the interviewee’s context. Interview protocols of entrepreneurs and employees are presented in Appendix A and B respectively.

Observations. According to Yin (2013), observations provide a powerful tool to gather detailed

insights into real world scenarios. As such they complement interviews with information regarding actual practices. In WebChat a weekly meeting is joined to provide insight into the interaction between the founders and the operational director. Furthermore, during company visits notes are taken regarding interactions between entrepreneurs and employees in both companies.

Data analysis. The method of analysis for this research is drawn from works of Eisenhardt (1989),

Patton (2002) and Yin (2013). With the permission of the interviewees all interviews are recorded and afterwards either summarized, transcribed or a combination of both, this process is supported with archival data and observations. The transcription process employed deductive coding in consideration of the idiosyncrasies of the entrepreneurial context and the exploratory nature of the study.

After processing all obtained data case analysis will be presented (Eisenhardt, 1989) in the following section. The aim of which is to discover the ways in which entrepreneurs develop control systems and to identify the difficulties they face in this process. The presentation of multiple cases allows to form a more complete theoretical picture by utilizing replication and extension (Eisenhardt, 1991). Additionally, the presentation of multiple cases allows for the prediction of similar or contrasting results (Yin, 2013). Finally, results of this study are compared to existing literature to augment internal validity.

Results

The results are inferred from 13 semi-structured interviews with the entrepreneurs and multiple employees, differing in department, age, gender and general function, of WebChat and WholeSaleBV. The list of all conducted interviews and their details are presented in Appendix C. Findings are supplemented with observational data. Each company will be addressed separately and findings will be consolidated in the discussion section, the results regarding current MCS and MCS in regards to growth will be summarized in figures at the end of their respective sections.

WebChat

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experienced a significant business transformation is currently operating in multiple sectors. WebChat’s founders and operational director can be classified as serial entrepreneurs, having developed multiple businesses from the ground up. The entrepreneurs aspire WebChat’s revenues to grow with 50% in the current year and 100% in the next. WebChat is internalizing the processes of the acquired department, subsequently becoming the company’s primary focus. Although the company has only 22 employees, multiple hierarchical layers are present in the company. Both founders, the operational director, the head customer service and the senior agent have been interviewed, the organisational chart in Appendix D1 displays their interrelationships.

The remainder of this section presents both WebChat’s initial MCS package and current developments to it by employing the enhanced Malmi and Brown (2008) framework, distinctions between formal and informal controls are presented in the concluding figures 2 and 3. Next the influence of individual actors on MCS developments is discussed and the section concludes by discussing the process of MCS development in WebChat.

Current management control systems package. Following the business transformation two clans

have developed in WebChat, comprising back office employees and chat agents. The distinction is primarily a result of geographical dispersion, since the former work from WebChat’s office and the latter from home. Company values are stated to fulfil an important role in WebChat, all interviewees indicate that the shared mindset of involvement and responsibility allowed them work more effectively. Correspondingly, a founder stated, “Successful businesses seek motivated, disciplined and flexible employees. It is important to say what you do and do as you say, keeping your promises” (Interview 5). The only use of symbols comprises the office design, which has been developed by employees and resulted in an open office configuration.

WebChat employs little planning in its operations. Regarding action planning the senior agent stated, “We have just finished fully reorganising the company and everything still has fall into place. We are primarily learning, which makes planning ahead challenging” (Interview 13). Long term planning is solely performed by WebChat’s founders and only afterwards discussed with the operational director, who indicates: “Even I do not like to think ahead too much, if the business changes its course, I need to be able to adapt immediately. Hence, I rely on the founders for long term planning” (Interview 7).

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chat agents’ performance. Performance figures mainly originate from a hybrid measurement system, the business intelligence (BI) system Tableau. Nevertheless, a founder indicated a dilemma associated to Tableau, “The system can provide us all the information we could want. However, programming it is time consuming, making it expensive for a small company” (Interview 1). WebChat’s entrepreneurs indicate that their cybernetic control systems facilitate transparency of performance, providing them the necessary tools to guide strategy and operations effectively. Additionally, employees indicate that cybernetic controls provide a helpful feedback loop of performance.

Rewards and compensation are organised deliberately and with care in WebChat. The operational director indicated the need to balance rewards stating, “To reward employees a balance of four factors is of importance, namely money, career, personal attention and love for the workplace” (Interview 7).

WebChat’s governance structure is characterized by direct communication, where lines of authority accord to the company’s organisational structure. On a daily basis communication ensues uninhibitedly between employees and entrepreneurs, which is supported by recurring personal meetings. Moreover, organisational structure is deliberately deployed as a control measure in WebChat. The operational director was appointed as the face of the company to ensure operational performance and thereby, enabling the founders to focus on strategy. Accordingly, the operational director stated, “It is difficult to see the bigger picture when you also have endless operational issues to resolve” (Interview 3). Documentation of policies and procedures is limited in WebChat, the head customer service said, “We have to figure things out as we go” (Interview 12). Both employees indicated that the company relies on their individual knowledge. Though, a knowledge base exists for agents to draw from during chats.

Figure 2. The enhanced Malmi and Brown (2008) framework, providing a visual summary of WebChat’s current

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Management control systems and growth. Company values play a vital role for WebChat in the

facilitation of cooperation. WebChat’s entrepreneurs indicate that to develop a culture of autonomous and involved employees the development of company values requires continuous attention. WebChat’s approach to achieve this is twofold. Firstly, the hiring of interns provides the entrepreneurs an assessment period of employee fit. Secondly, by continuously challenging employees, those are sought out that potentially befit management roles whilst providing employees opportunities for development. One employee expressed adversity to this approach, respectively, the operational director indicated this employee’s growth limits in WebChat. Whereas another employee recently requested an expansion of responsibilities and received corresponding opportunities.

By means of transitioning towards a companywide task management system action planning is currently developed. However, adoption issues arose initially as planning was previously primarily performed by the entrepreneurs and its communication was direct and personal. Nevertheless, the employees indicated to benefit from the increased transparency of planning as it enhanced their autonomy.

All interviewees indicate to significantly benefit from WebChat’s cybernetic control systems, extending to the endorsement of its development. Nevertheless, developments prove challenging as many control systems were adopted as part of the acquisition, a founder indicates, “We either have to rebuild the systems or hand pick useful information. However, assessing the information’s integrity is quite challenging. However, we do not want to develop a flawed foundation” (Interview 1). A founder is developing a comprehensive BI system and checking the integrity of the acquired systems.

Productivity bonuses are developed for the chat agents, aiming to continuously align the agents’ development with strategic goals. A founder stated, “Employees may be deeply intrinsically motivated, however, you cannot expect them to be aware of all of the company’s interests” (Interview 6). The first iteration of bonuses was met with resistance. However, the negative perception was dissuaded by communication initiatives of the senior agent, eventually transforming it into personal development objectives.

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Organisational actors and management control systems development. Two recurring attitudes

regarding MCS developments were expressed by all interviewees. First, regardless of opinions regarding specific MCS changes, a feeling of shared responsibility for WebChat’s development was expressed. Suggesting that all interviewees aspire to act in WebChat’s best interest if they are able to. Second, clear communication of the purpose of MCS change is crucial to its adoption. Several examples indicated that a mutual understanding of the purpose of MCS facilitated its acceptance.

Both employees indicated contrasting attitudes regarding MCS developments. The senior agent indicated that MCS provide her the necessary tools to autonomously direct employees and critically reflect on herself. Accordingly, she perceived the MCS developments as opportunities to augment current operations. She only expressed resistance regarding instances where MCS limited flexibility. The head customer service indicated to view MCS as procedures necessary to ensure operational performance. He indicated that formalised control systems create burdening forces to adhere to, hampering other activities. Nonetheless, he indicated that by allowing him to conduct his work with limited supervision, MCS also provide him freedom.

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As the founders are uninhibited by the details of operational affairs, yet, impeded by limited exposure to information. Hence, the operational director serves to facilitate consolidation of strategy and operations, this function became especially apparent during the observed meeting.

The process of management control systems development. By employing the two founders and

the operational director WebChat has invested in management functions from the firm’s offset. A founder explained, “From the start we have chosen to be quite top heavy in terms of management. Because of it we have been able to continuously develop strategy and MCS without inhibiting operational activities” (Interview 6). MCS development in WebChat is explained to be realized through two processes.

The first process comprises a bottom up approach where employees’ personal ambition to develop MCS is assessed and subsequently acted upon. The development of guidebooks provides an example of such a case. The senior agent indicated she would benefit from guidebooks and that she would be willing to develop them. The entrepreneurs agreed that guidebooks were needed and provided her the time to develop them. The required adaptability was facilitated by her flexible schedule, as previous successful projects allowed her to allocate resources to development projects. A contrary example was provided by the head of customer services. He expressed no ambition for management or development activities and consequently maintains a schedule filled of operational responsibilities.

The second process constitutes a top down approach for those MCS developments considered imperative by entrepreneurs, but for which suitable employees are absent. The development of the cybernetic control system presents an example. Since, in absence of employees with the required skills and ambition to take up this project, a founder and the operational director took this project upon themselves. Commonly one founder will take a MCS development project upon himself, which will be supported by the operational director. A founder explained the underlying reasoning stating, “The excessive amount of management allows us to develop MCS even in absence of the required talented employees, providing us a strong infrastructure to expand upon. Notwithstanding, we are constantly on the lookout for such employees” (Interview 5). Indicating that not everyone is suited to develop control systems and workarounds are needed in the inaugural stages to establish the groundwork for future growth.

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WholeSaleBV

WholeSaleBV is a wholesaling business whose primary activities encompass the importing, warehousing and distribution of durable goods and its clients comprise both businesses and consumers. In accommodation to the company’s growth WholeSaleBV internalized many processes of their products’ value chain, ranging from production to various retailing channels. WholeSaleBV comprises multiple wholesale and retail branches. The main warehouse and office amount to 21 employees whereas the various branches each have significantly fewer employees. Interviewees have been selected from the main warehouse and office, due to its centralized function. Though, the company displayed notable and continuous growth, a limited amount of managerial functions has been developed. Since founding the company, the entrepreneur has performed the dual function of both managing daily operations and developing the company’s strategy. Focussing on the latter, however, became increasingly difficult as the company grew and operational needs increased. To facilitate WholeSaleBV’s continued growth the founder aims to gradually transform his dual role into a primarily strategically function. The founder, the head of purchasing and sales and two employees have been interviewed, the organisational chart in Appendix D2 displays their interrelationships.

Equivalently to WebChat, the remainder of this section presents both WholeSaleBV’s initial MCS package and current developments to it are presented and summarized in figures 4 and 5. Furthermore, the influence of individual actors on MCS developments is addressed and the section concludes by discussing the process of MCS development in WholeSaleBV.

Current management control systems package. All interviewees indicate an absence of clans

within WholeSaleBV’s main branch. Nevertheless, a distinction exists between the central wholesale branch and associated branches due to a combination of functional and geographical separation. A coherent composition of values is expressed by all interviewees revolving around transparency and honesty, creates a helpful environment where people flexibly assist one another in achieving goals. Furthermore, deliberate use of symbols is absent in WholeSaleBV.

WholeSaleBV does not explicitly employ companywide planning. Moreover, employees develop their personal schedules in regard to which an employee stated, “Everyone knows their responsibilities, absence of planning supports our flexibility in helping each other out” (Interview 9). All employees indicate to plan ahead no more than two months and to rely on the founder for long term planning. The founder indicated an issue in this regard, “I always have goals in mind, however, I have yet to allow myself the time to draw up and explicitly communicate a plan” (Interview 8).

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Consequently, budgets are not employed as funds are immediately used when available. Financial measures are analysed daily to assess company performance, however, they are not yet applied to individual performance. Non-financial measures are used only in regard to timeliness and hybrid control systems are absent.

Besides standard wages, autonomy is the sole rewards and compensation control employed in WholeSaleBV. All employees indicate to feel empowered both in motivation and in the execution of their work due to the freedom they experience.

The governance structure of WholeSaleBV reflects its organisational structure, as information and questions are directly relayed to the entrepreneur, incidentally passing the head of sales and purchasing. Exchanges of information unfold through daily informal contact or irregular project meetings. The founder indicated, “Currently nearly all information passes me, somewhat haphazardly. Therefore, I need to remain constantly focussed on operations” (Interview 8). All employees indicate the founder to be approachable, allowing recurring contact to function as the primary mode of control. Policies and procedures are nearly absent in WholeSaleBV, an employee indicated, “Everyone has their ways of working, still, people can fill in for each other. So, I think operations are not yet so complex we have to formally document them” (Interview 10).

Figure 4. The enhanced Malmi and Brown (2008) framework, providing a visual summary of WholeSaleBV’s current

MCS package.

Management control systems and growth. Central to WholeSaleBV’s MCS development efforts is

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which is hard to imagine looking at how much the company has grown. However, once I develop goals, I think the whole company will become far more effective” (Interview 8). Accordingly, explicit companywide goals are being developed and subsequently related to individual goals and performance. Additionally, corresponding companywide long-term planning and individual action planning are being developed. Nevertheless, all employees indicate to favour direct communication with the founder and express reluctance to formalised planning.

WholeSaleBV is developing cybernetic control systems in order to facilitate the entrepreneur’s transition to a strategical function, as cybernetic controls are perceived to efficiently convey the needed information. Recently a BI system has been constructed that allows for the aggregation of revenue streams to specific customers and employees. Moreover, the founder indicated that the explication of long-term strategy is intended to be enhanced with associated budgets. However, two employees expressed aversion to budgets as instances of financial decision making currently provides opportunities for feedback.

Rewards and compensation systems are established as augmentation to the development of goals. However, careful consideration is taken in the process, addressing the dilemma presented by the following statement of an employee: “Currently I am able to give unbiased advice to clients, but rewards would motivate me to approach new customers more fervently” (Interview 10).

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Figure 5. The enhanced Malmi and Brown (2008) framework, providing a visual summary of current developments

to WholeSaleBV’s MCS package.

Organisational actors and management control systems development. Two attitudes regarding

MCS developments emerged from the interviews. First, all interviewees express a strong personal bond with WholeSaleBV and its founder, as described by an employee, “It is our company, not only the founder’s, we care for it and develop it together” (Interview 10). Indicating a desire to act in WholeSaleBV’s best interest, though, they may not always know how to do so. Second, all employees indicate to depend on the founder’s continuous feedback in fulfilling their personal responsibilities. The employees treasure current communication methods and express reluctance to formal MCS developments which may inhibit direct contact with the founder. Indicating that the attitudes may conflict in regard to specific MCS developments.

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The founder intends to transition his own role to primarily focus on strategy. WholeSaleBV’s primary MCS development objective is to delineate clear goals, identify the means by which to achieve them and determine the roles of individual employees in achieving them. However, the founder recognized difficulties in doing so resulting from the initial MCS package configuration. The founder only limitedly involved employees in managerial activities resulting in continuous need of his attention in operations a scant managerial experience of his employees. The founder stated, “I won’t be able to keep up with everything if our growth continues. Currently I get too many questions, for which I think I shouldn’t personally be needed, which obstruct my focus on the bigger picture” (Interview 8). However, employees believe the entrepreneur values their continuous input and consequently discard the need for MCS. The founder’s reticence in discussing managerial topics is apparent in all interviews.

The process of management control systems development. MCS development had not received

any deliberate consideration in WholeSaleBV until the previous half year. The founder indicated that the firm had expanded in previous year, which was facilitated by ambidexterity, addressing operations and strategy simultaneously and continuous personal involvement. However, due to WholeSaleBV’s increasing size this approach remained no longer viable. The founder stated, “I noticed I needed to transition towards a coaching style of management and for the last three years I have been longing for the necessary time, now I have to actually realize it” (Interview 8). The founder is currently organising this transition. However, the transitioning process proves complicated due to WholeSaleBV’s founder dependency and negative employee perception of MCS development.

Previously, MCS development did not follow any process, as management and corresponding MCSs had been attended to solely by the founder and on a reactive basis. Consequently, employees remained uninformed on the subject of MCS. Moreover, due to the focus on operational efficiency employees lacked the time and resources to concern themselves with managerial activities. As an initial solution the founder intended for the head of purchasing and sales to assume a managerial role. However, the fulfilment of the role remains wanting due to the employee’s managerial inexperience and ambiguity regarding his responsibilities. The former being a result of employees’ limited exposure to managerial topics. The latter resulting from the founder’s cautious method of delegating responsibilities, as he attempts to refrain from forcing unwanted changes upon employees. Demonstrating the challenges regarding expeditious development of managerial functions.

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control systems as restrictive and indicative of the founder’s distrust, they cherish the founder’s involvement in operational activities and regard it as a source of motivation. Employees expressed concerns regarding the founder’s ambition to distance himself from operational activities, the accounting and human resources employee stated, “If I have to say something, I will directly tell the founder myself. We do not need more systems, everybody is already sufficiently informed” (Interview 9).

The current process of MCSs development fully accords to the actions of WholeSaleBV’s founder. Solutions to urgent operational needs are reactively established to suit the individual case at hand. This process is enabled by direct communication methods and employee flexibility. However, by delineating goals and plans to achieve them, the founder aims to create an environment that allows for an infrastructure can be established that can scale matching WholeSaleBV’s continued growth. The goal of this infrastructure is to be able to develop MCS proactively, and thus, in anticipation of the company’s future needs. The founder expressed a challenge in needing to: “Flip the switch” (Interview 8), whilst ensuring a gradual transition to allow employees to accustom to the new situation.

Discussion

The present study examined the emergence of MCS in growing early stage entrepreneurial businesses. To provide a comprehensive account four aspects of MCS emergence have been investigated. Firstly, the initially emerging MCS package has been reviewed. Secondly, the developments to MCS in reaction to or anticipation of growth have been studied. Thirdly, organisational actors’ dispositions to MCS developments have been explored. Lastly, the processes of MCS development have been inspected. The remainder of this section will discuss the results of this study.

Initial Management Control Systems

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responsibilities between the founders and operational director WebChat separated the responsibilities for strategy and operations. The division of labour was enabled by the information provided by the formalised cybernetic control systems and the abundance of management capacity. Contrarily, WholeSaleBV’s founder fulfils both strategic and operational functions, which is facilitated by his daily direct interaction with employees. The divergent configurations of MCS packages depended on differences between the companies’ entrepreneurs (Davila, Foster & Jia, 2009). Additionally, employee issues regarding a lack of direction, motivational problems or personal limitations (Merchant & van der Stede, 2007) are addressed divergently, as WebChat institutes systems based on structure and WholeSaleBV on interaction. These findings suggest that the path of MCS emergence in a company is influenced by the idiosyncratic traits of entrepreneurs and the resources available to them, resulting in a crystallisation of a unique MCS package that evolves as entrepreneurs develop or resource availability changes.

Management Control Systems and Growth

WebChat and WholeSaleBV both advance their MCS by applying a combination of formal and informal development efforts. The combined development of formal and informal controls signifies a contradiction to prior findings, which primarily suggest growth to invoke formalisation of MCS (Davila, 2005; Moores & Yuen, 2001), that disregard the role of continued informal MCS development. Both cases suggest the need for a combined development effort, which relates to findings of Cardinal et al. (2004), that suggest initial MCS developments to be a result of imbalances between formal and informal controls. In both cases expeditious formalisation of MCS invoked resistance, as exemplified in WebChat’s development of bonuses and WholeSaleBV’s employees’ reluctance to formalisation. Moreover, exclusive reliance on informal MCS overburdened the informal systems, as indicated by WholeSaleBV’s excessive founder dependency. The findings of the present study suggest that MCS do formalise in response to or in anticipation of growth, however, this transition is reliant on gradual phasing and continued development of informal controls.

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predominantly reactive motives for MCS developments. However, The entrepreneurial experience enlisted in WebChat, resulted in proactive MCS adoption. These findings suggest that both actual and anticipated growth may lead to MCS developments, but, that the characteristics of entrepreneurs determine its timing.

Table 3

WebChat’s and WholeSaleBV’s reasons for MCS development.

Companies

Reason type Reason WebChat WholeSaleBV

Proactive Manager background Yes No

Need to focus Yes Yes

Reactive Chaos No Yes

Learning Yes Yes

External Legitimize No No

Contracting No No

Note. Based on Davila, Foster and Li (2009)

Organisational Actors and Management Control System Development

Though, employees of both WebChat and WholeSaleBV indicated to strive to act in the company’s best interest, situations persisted where MCS developments were met with resistance. In both companies adverse responses to MCS developments were associated with the perception of control or coercion and positive responses with experiences of empowerment. Moreover, these responses directly related to the MCS development’s fit with established MCS, as deviant developments were perceived negatively and similar developments positively. The operational director of WebChat reverberated this finding, expressing a balancing need regarding the levels of formalisation of MCS developments. Similarly to Mundy’s (2010) notion of balance, the balancing needs for MCS adoption found in the case companies originated from the need for internal consistency and logical progression of developments. Although, the constructs of controlling and enabling uses of MCS are generally associated with MCS design (Mundy, 2010), the present study finds their functionality to extend to MCS emergence, suggesting it to influence both MCS design and implementation.

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due to the structure provided by them, but impede autonomy in face of informal control systems, due to the resultant ambiguity. These findings echo need for balanced use of controls (Mundy, 2010). The discrepancy between companies can be explained by the hiring and socialisation processes present in both firms, since WebChat’s entrepreneurs actively pursue employees befitting a self-control structure, whereas WholeSaleBV’s founder emphasises value alignment. Consequently, these findings suggest that both employee characteristics and MCS package balance influence the suitability of informal or formal control systems.

The entrepreneurs of both companies significantly differed in entrepreneurial experience. WebChat is founded by two serial entrepreneurs and enlisted an experienced operational director. Contrarily, WholeSaleBV is the sole entrepreneur’s first company. WebChat’s entrepreneurs anticipated the entrepreneurial crisis (Greiner 1972; 1998) and developed scalable systems accordingly (Garlund & Taipaleenmäki, 2005). Contrarily, WholeSaleBV’s founder postponed MCS developments, indicating the need to grant himself the time necessary to gain an understanding of MCS and prepare for MCS developments (Davila et al., 2010), WholeSaleBV’s management style is similar to those informal management styles found by Collier (2005), which are described as completely dependent on one individual. These findings indicate MCS developments to be dependent on entrepreneurial experience, which structure MCS developments to suit the entrepreneurs’ capabilities and preferences.

Management Control System Development Processes

The emergence and development of MCS for WebChat and WholeSaleBV evolved into polarising processes. From the company’s offset WebChat’s entrepreneurs have had a clear delineation of the MCS needed to foster growth, resulting in proactive cultivation of systems that adhere to that perspective. Contrarily, WholeSaleBV’s entrepreneur did not have a predetermined perspective on MCS and consequently developed MCS reactively to emerging issues. WebChat’s focussed approach can be explained by its entrepreneurs’ experience, which reduced uncertainty and directed the processes of enactment, selection and retention of MCS proactively towards a growth enabling MCS package (Weick, 1979). WholeSaleBV, however, experienced more uncertainty due to its single relatively inexperienced entrepreneur and consequently reactively responded to organisational needs and induced a more classical trial and error approach of the enactment, selection and retention of MCS (Davila, 2005; Weick, 1979). These findings suggest that entrepreneurs’ idiosyncrasies set out a course for MCS developments by continued enactment, selection and retention of MCS that suit the entrepreneurs’ preferences.

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package and addresses Abernethy and Chua’s (1996) claim that MCS function as a package if they are internally consistent. However, WholeSaleBV’s reactive approach led to inconsistency of MCS developments, which were in turn received with hesitation. Additionally, both companies experienced negative consequences regarding expeditious MCS developments. Previous findings suggested that the functionality of formal MCS is dependent on the linkages between system elements (Ferreira & Otley, 2005; Sandelin, 2008). However, findings of the present study suggest the role of linkages to extend to informal MCS and that linkages between formal and informal MCS affect system functionality as well.

Cardinal et al. (2004) proposed that in the emergence of MCS, developments ensue as a result of imbalances. The MCS development process of WebChat comprise a perpetual reconsideration and according reconfiguration of MCS, which was accepted by employees. Yet, WholeSaleBV illustrated episodes stability punctuated by moments of alteration, which were met with resistance. Indicating a similar pendulum effect between stability and change, yet, significant differences in its timing. WholeSaleBV’s entrepreneur illustrated a dilemma between issues presented by Cardinal et al. (2004), as the entrepreneur needed to escape competency traps, though, indicated needing to beware of overzealous changes. Consequently, it proved challenging to escape the competency traps. Thus, findings suggest that the both the intervals between MCS developments and the degree of changes inflicted by developments affect their acceptance and that prior usage creates the infrastructure needed for continued developments.

Conclusion

The research question addressed in this study is the following: “How do management control systems

in early stage entrepreneurial businesses develop in reaction to or in anticipation of growth?”. To

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interrelationships between established formal and informal MCS critically influence MCS developments that ensue in view of growth.

Scientific Relevance

Despite the fact that MCS has been intensively studied in the fields of management accounting and management control, the emergence of MCS and its subsequent development have received relatively little attention. Most research on MCS has focussed on companies surpassing their inaugural phases (Merchant & van der Stede, 2007; Simons, 1995). Moreover, numerous studies investigating MCS in entrepreneurial or growing companies predominantly investigate companies that have already achieved the transition from informal MCS to a combination of formal and informal MCS, as illustrated by Davila and Foster’s (2007) and Davila, Foster and Li’s (2009) studies investigating companies employing on average 118 and 119 employees. Furthermore, phase from transitioning predominant usage of informal MCS to a mixed use of formal and informal MCS has received scant attention, though, calls for research have been expressed (Aldrich, 1999; Cardinal et al., 2004). The present study aimed to provide exploratory findings regarding the emergence of MCS in growing entrepreneurial firms, by studying the changing use of MCS. Previous studies have largely refrained from investigating informal MCS, as the field of management control has long been focussed on formal MCS (Simons, 1995). Accordingly, the constructs of formal and informal controls have yet to receive consistent treatment. Also, few studies have combined the fields of entrepreneurial research and management control in pursuit of understanding the illusive intersection of formal and informal controls. Previous research is characterised by cross-sectional methods and contingency approaches (Chenhall, 2003). The present study contributes to the existing literature by presenting an integrative research approach, by enhancing a traditional MCS framework by explicating the distinction between formal and informal controls, whilst taking into account organisational actors and providing general depiction of MCS emergence processes. Moreover, the study identifies the under researched subject of informal MCS and its relation to formalising MCS.

Practical Relevance

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ups comprise a large part of national employment many governments advocate the support for new businesses. However, it might also be important to facilitate continued growth past the few dozen employees, since many companies stumble on the first revolution (Greiner, 1972, 1998).

Limitations and Future Research

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