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School of Accounting
Seminar – Session 2, 2010
The Emergence and Utilisation of Management
Control Systems in a High Growth Firm
Ralph Kober
Department of Accounting and Finance
Monash University
Date: Friday 22nd
October
Time: 3:00 to 4:30 pm
Venue: Room 2093 Quad.
1
The emergence and utilisation of management control
systems in a high growth firm
Chris Akroyda and Ralph Koberb
Draft: 19 October 2010
Please do not quote without authors’ permission
a Department of Accounting and Finance
The University of Auckland Business School Private Bag 92019 Auckland, New Zealand Email: [email protected] Telephone: +64 9 373 7599 extension 87194
b Department of Accounting and Finance
Monash University PO Box 197 Caulfield East, Victoria, 3145, Australia Email: [email protected] Telephone: +61 3 9903 4541
Acknowledgements
Financial support for this project from research grants provided by the Accounting and Finance Association of Australia and New Zealand, The University of Auckland Business School, and Monash University Faculty of Business and Economics is gratefully acknowledged. We wish to thank seminar participants at the Global Organizational and Accounting Change conference (Melbourne, July 2008), European Network for Research in Organisational and Accounting Change conference (Dundee, June 2009), Accounting and Finance Association of Australia and New Zealand conference (Christchurch, July 2010), Deakin University, Kobe University, Kyoto University, Monash University, The University of Auckland, and The University of West Australia for their comments. We also wish to thank professors Ann Lillis and Philip Brown for their feedback and suggestions for improvement.
2
The emergence and utilisation of management control systems in a high growth firm
Abstract
In this paper we examine the emergence and utilisation of management control systems
(MCS) by a high growth firm. We investigate at what stage in the firm’s life-cycle a high
growth firm introduces various control mechanisms, the manner in which these mechanisms
are used, the reason for the introduction, and the impact that this has upon firm growth.
We undertake a retrospective longitudinal case study spanning five years from start-up in
March 2003, until the end of 2007. We found that the high growth firm did not introduce
MCS in accordance with prior MCS-based research or experience-based models which
argued that firms have informal control and strong internal controls. Instead, we found a
strong reliance on formal belief systems, with these systems being the first management
controls introduced. Unexpectedly, these belief systems were employed within the firm’s first
month and were then constantly reinforced and strengthened throughout the first five years of
the firm’s life. During the growth stage, the belief systems were supplemented with
diagnostic controls, boundary systems, and interactive controls, which when introduced were
done in a manner to support the belief systems. We argue that these finding can be explained
using the contingency based literature which has examined the relationship between MCS
and various contextual variables.
Key words: contingency research, corporate life cycle, firm growth, high growth, levers of
control, management control systems, start up firms, young firms
3
1. Introduction
“There is no risk in growing as long as you grow” (Director of HRV)
“The only time previously the word “control” had been used in this business was in
relation to our revenues being out of control.” (Director of HRV)
The aim of this paper is to gain an understanding of the emergence and utilisation of
management control systems (MCS) by high growth firms.1 We investigate at what stage in a
firm’s life-cycle a high growth firm introduces various control mechanisms, the manner in
which these mechanisms are used, the reason for the introduction, and the impact that this has
upon firm growth. The need for such research was acknowledged by Chenhall (2003), who
noted that the role of MCS in firms who experience rapid growth has yet to be explored.
As noted by Davila and Foster (2007) the adoption of MCS in a start-up company is an
important stage in their development and could have major implications for the future success
of the firm. Literature has argued that MCS facilitates the growth of firms (Davila, 2005;
Davila et al., 2007; Simons, 1995). However, the manner in which MCS are implemented and
the effect they have on firm growth is still unclear. In particular there is little known about the
effect that different control mechanisms have on the rate of firm growth and whether growth
may be impacted by the implementation (or non implementation) of certain controls.
The little research that has been conducted to date has consistently found internal controls
and diagnostic financial controls to be the first control categories adopted by young firms
(e.g., Davila & Foster, 2005; Davila et al., 2007; Moores & Yuen, 2001; Sandino, 2007;
Simons, 1995). Given that contingency based research has long advocated that there is no one
best uniform control system for all firms, and that a firm’s MCS should be matched to suit the
contextual variables faced by the firm (e.g., strategy, environmental uncertainty, task
uncertainty, organisational structure, and size), it is somewhat surprising that prior research
has found such uniform results. Based on a contingency perspective it would be expected
that the initial controls (and the timing and nature of subsequent controls) adopted by young
1 Consistent with the literature, we consider high growth as revenue growth in excess of 20 percent for three or more consecutive years (Fischer & Reuber, 2003; O'Regan, Ghobadian, & Gallear, 2006).
4
firms would be dependent on the firm’s contextual variables. That is, form a contingency
perspective it would be unlikely that it would be appropriate for all firms to implement
financial controls as the first formal control.
One reason for the consistent finding across studies is that the majority of research into the
adoption of MCS in young firms has been cross-sectional, which due to the research design
washes out the unique differences across firms and establishes findings based on the average
firm. Given the predominance of cross sectional research, there have been calls made for
more case study research to help gain an understanding of the process of MCS emergence
(e.g., Davila, 2005).
Consequently, undertake a longitudinal case study of a New Zealand company, HRV (which
is an acronym for heat recovery ventilation), operating in the home ventilation industry that
experienced growth in excess of 100 percent per annum from 2003 to 2008. HRV sells and
installs a ventilation system which they developed that is functionally different to the other
ventilation systems on the market. Our research approach draws on the descriptive strengths
of case study research outlined in Ahrens and Dent (1998) to gain a deeper understanding of
when various MCS are introduced and their impact on the firm.
Our results contrast markedly with prior MCS-based research and experience-based models
that found internal controls and diagnostic financial controls to be the first control categories
adopted by young firms (e.g., Davila & Foster, 2005; Davila et al., 2007; Moores & Yuen,
2001; Sandino, 2007; Simons, 1995). Instead, we find formal belief systems (Simons, 1995)
to be the first control system to be implemented and to be constantly reinforced and built
upon throughout the start-up and growth stages of the firm we study. We also find that during
the growth stage, HRV implemented other controls (a revenue management system, a
boundary system, and interactive controls) to further support the belief systems. We
conclude that the belief systems appear to be the primary MCS used by this high growth firm
to facilitate its rapid expansion.
This paper contributes to the MCS literature in the following ways. First, it adds to the
growing body of literature on the adaption of MCS in early-stage firms, by focusing solely on
a high-growth firm; a unique subset of early stage firms. Second, the paper highlights how
firms pursuing a high-growth strategy may require a different staged implementation of MCS
5
than that suggested by experience based models (Flamholtz & Randle, 2000; Simons, 1995)
and prior MCS research (Davila, 2005; Davila et al., 2007; Granlund et al., 2005). This
finding is not surprising given that contingency research has found that to enhance
performance firms pursuing different strategies require a different suite of MCS (Fiegner,
1994; Govindarajan & Shank, 1992; Kober, Ng, & Paul, 2003; Miller & Friesen, 1982; 1983;
1984; Simons, 1987). Besides contributing to the academic literature we hope that this paper
can also assist entrepreneurs and practitioners engaged with start-up firms by highlighting the
importance of selecting appropriate MCS for firms pursuing a high growth strategy.
The remainder of this paper is structured as follows: The next section reviews the literature
on MCS, with particular reference to Simons (1995) levers of control. Section 3 then
integrates the MCS literature with the experience based life-cycle literature and develops
some expectations about how a firm would introduce MCS. Section 4 presents our research
method while section 5 gives an overview of the HRV’s background as well as providing a
detailed description of the staged introduction of MCS during the start-up and growth phases
within the firm. Section 6 concludes the paper with a discussion of our findings, limitations
of the research, and avenues for future research.
2. MCS
We define MCS as “the mix of formal and informal procedures used by management to
facilitate the attainment of their goals and those of the organisation” (Kober, Ng, & Paul,
2007: 426). This definition of MCS is similar to the concept of MCS advocated by Chenhall
(2003) and Ferriera and Otley (2009). In that we recognise that MCS are broad in nature and
are not solely based on formal controls, but also incorporate the equally important informal
controls. Similar to Ferriera and Otley (2009), the definition of MCS by Kober et al. (2007)
also recognises that procedures may be used to attain either organisational or managerial
goals, i.e., these are not always in alignment. As noted by Abernethy and Chua (1996)
objectives are set by the dominant coalition and that these goals are not always congruent
with those of the broader organisation.
Simons' (1995) levers of control provide a structure for understanding the ways in which
managers use control to manage strategy implementation and have been used in prior MCS
literature (e.g., Collier, 2005; Frow, Marginson, & Ogden, 2005; Widener, 2007). Simons
(1995) asserts that control must balance autonomy and constraint, empowerment and
6
responsibility, top-down direction and bottom-up contribution, and experimentation and
efficiency. To bring about a successful balance of these critical tensions, Simons (1995)
proposed four basic levers to transmit and process information; beliefs systems, boundary
systems, diagnostic control systems, and interactive control systems.
Each of Simons’ (1995) levers has a unique function and benefits the firm in different ways.
Beliefs and boundary systems are formal control systems that guide search activities in firms.
According to Simons (1995: 34) belief systems are an “explicit set of organization definitions
that senior managers communicate formally and reinforced systematically to provide basic
values, purpose and direction for the organization.” Belief systems show how the firm creates
value, the desired level of performance, and how to manage internal and external
relationships (Simons, 1995). Belief systems primary purpose is to communicate the firm’s
core values to inspire and motivate employees and to guide organisational search and
discovery (Simons, 1995; Widener, 2007). Common examples include company mission
statements, vision statements, statements of purpose, and core values.
Boundary systems, on the other hand, limit the domain of search activities for employees
based on defined business risks. Boundary systems are said to “delineate the acceptable
domain of activity for organizational participants…they establish limits, based on defined
business risks, to opportunity seeking” (Simons, 1995: 39). That is, boundary systems
communicate actions that employees should avoid, and act in opposition to the belief systems
(Widener, 2007). The purpose of the boundary systems are to establish clear limits on
employee behaviour and as allow employees freedom to innovate and make decisions within
these clearly defined limits (Simons, 1995; Widener, 2007). An example of a boundary
system would be a code of conduct. Belief and boundary systems work in conjunction to
motivate employees to undertake appropriate organisation search activities. Belief systems do
this through a positive inspirational manner, while the boundary systems do so in a negative
constraining manner, reeling in the expansiveness of all possible business opportunities to a
prescribed set.
Diagnostic control systems measure a firm’s critical success factors and are designed to
encourage goal congruence between employees and the organisation through the attainment
of preset goals. These systems “are the formal information systems that managers use to
monitor organizational outcomes and correct deviations from preset standards of
7
performance” (Simons, 1995: 59). As noted by Simons (1995) the three distinguishing
features of a diagnostic control system are: (1) the ability to measure the outputs; (2) the
existence of predetermined standards against which actual performance can be evaluated; and
(3) the ability to take corrective action when deviations from the preset standards occur.
Diagnostic control systems assist firms in pursuing intended strategies by focusing
employees’ attention on the underlying success factors (Kober et al., 2007; Widener, 2007).
Diagnostic control systems, like boundary systems, are constraints on employee behaviour
(Simons, 2000). An example of a diagnostic control system would be management by
exception, or budgetary variance analysis.
Interactive control systems, which focus attention on strategic uncertainties, are formal
information systems that managers use to personally involve themselves regularly in the
decision activities of subordinates (Simons, 1994). An interactive system is not a unique type
of control; rather, it is any control that top managers choose to use interactively to direct
attention. As stated in Simons (1995: 97) an interactive control system has the following
“four defining characteristics:
1. Information generated by the system is an important and recurring agenda addressed
by the highest levels of management.
2. The interactive control system demands frequent and regular attention from operating
managers at all levels of the organization.
3. Data generated by the system are interpreted and discussed in face-to-face meetings of
superiors, subordinates, and peers.
4. The system is a catalyst for continual challenge and debate of underlying data,
assumptions, and action plans.”
Along with these four levers of control Simons (1995, 2000) also argues that internal controls
are an important part of MCS. Internal controls are “designed to safeguard assets from
misappropriation and ensure reliable accounting records and information systems” (Simons,
1995: 84). Internal control is important as it safeguards the accounting information used by
diagnostic control systems and ensures that the data reported is complete (Simons, 1995).
Simons (1995) argues that the four levers of control together with internal controls can help
managers to successfully manage a business. The tools to reconcile the conflict between
creativity and control are the belief systems that communicate core values and inspire all
8
participants to commit to the firm's purpose, whereas, boundary systems establish rules and
close loopholes. Diagnostic control systems and internal controls attempt to measure outputs
that represent important performance features of a given strategy. Interactive controls provide
a framework for debate, and motive information gathering outside normal paths. Simons
(1995) argues that the power of control levers does not lie in how each is used separately but
rather in how they complement each other when used together.
3. Organisation Life Cycle and MCS
There is an extensive organisation literature which shows that firms change in relation to
different life cycle stages (e.g. Greiner, 1998; Kazanjian, 1988; Miller et al., 1983, 1984;
Quinn & Cameron, 1983). These stages are given many different names but commonly
include start-up/birth, growth, maturity, revival and decline. See figure 1 below for an
overview of the characteristics of the start-up and growth stages (Miller et al., 1984). Simons
(1995) argues that the implementation of the right type of control at the right time in a firms
life cycle is essential to achieve sustainable growth of a business.
Insert Figure 1 here
It is only recently that the MCS literature began to consider the emergence of MCS during the
initial phases of a firm’s life cycle. Moores & Yuen (2001) find that MCS formality changes
to complement a firms characteristics across its life-cycle stages. Their results indicate that it
is during the growth stage that firms pay particular attention to increasing the formality of
their MCS. Md. Auzair and Langfield-Smith (2005) examine a range of control variables in
service organisations and find that life cycle stages have an influence on MCS design. Davila
(2005) examines the human resource management function in small growing firms and based
on cross-sectional field observations identifies several variables as drivers of the emergence
of MCS including the size of the organisation, its age, the replacement of the founder as
CEO, and the existence of outside investors. Davila (Davila, 2005) argues that the adoption
of MCS is a key element in managing the conflict that growth imposes on growing firms.
Granlund and Taipaleenmäki (2005), who examine MCS in new economy firms, find that due
to time pressures these firms often prioritise planning over control. It is not until there is
outside pressure that these firms develop formal MCS. Sandino (2007) identifies four
categories of initial MCS (Basic MCS, Cost MCS, Revenue MCS, Risk MCS) and finds that
9
the choice among these categories reflects the firms' strategy, and that the firms that choose
initial MCS better suited to their strategy achieve superior business performance.
3.1 Expectations based on prior research
Based on the prior cross-sectional empirical research (Davila, 2005; Davila et al., 2007;
Granlund et al., 2005; Moores et al., 2001) and experience based models (Flamholtz et al.,
2000; Simons, 1995, 2000) we highlight how firms pursuing a high-growth strategy would be
expected to implement their MCS at the start-up and growth stages of the their life cycles.
3.1.1 Start-up stage
Given the small size of firms during the start-up stage with employees in frequent face-to-
face communication with each other, and the fact that owners play a dominant role, firms
would be expected to rely on informal controls (Moores et al., 2001; Simons, 1995, 2000).
Internal controls would be required to ensure that assets are secure and accounting
information is reliable (Simons, 1995).
3.1.2 Growth stage
During the growth stage, when a firm increases in size, and potentially undergoes geographic
expansion, more decision-making authority is delegated to lower level managers (Miller et
al., 1984). Consequently, firms should start to rely more on formal controls (Moores et al.,
2001; Simons, 1995). Given the growth in the firm a broader array and greater amount of
information is required for decision-making during this stage (Miller et al., 1984). As a result,
formal, verifiable targets and the monitoring of participants’ behaviours becomes
increasingly necessary and formal diagnostic control systems should be implemented to meet
the information and control needs of top management (Simons, 1995). Prior experienced
based research has highlighted the importance of budgets at this stage of a firm’s life cycle
and it has been argued and shown that these are the first formal control systems introduced
(Davila, 2005; Davila et al., 2007; Granlund et al., 2005; Moores et al., 2001; Sandino, 2007).
Furthermore, Davila and Foster (2005) found higher growth companies were associated with
a quicker adoption of operating budgets. Thus for a firm pursuing a high growth strategy,
budgets should be adopted very early in its life cycle.
Sandino (2007) finds that young firms pursuing different strategies implement a different set
of MCS. All firms were found to implement financial controls first, but the control that was
10
next implemented varied based on the firm’s strategy. Firms pursuing a growth strategy were
found to implement management controls focused on revenue, such as marketing databases
and sales productivity measures.
Simons (1995) contends that during the growth stage business conduct boundary systems are
also set up to ensure that the business is protected. Then, as the firm commences to operate in
multiple markets and/or locations, beliefs systems are used to keep organisation members
focused on the firm’s mission and vision (Simons, 1995). At this time, managers also put in
place strategic boundary systems to declare certain activities off-limits (Simons, 1995).
In summary based on prior cross sectional research and experience-based models we would
expect the MCS of a high-growth firm would develop in the following chronological order
during the start-up and growth stage of its life cycle: 1) informal controls, 2) internal controls,
3) budgets 4) revenue management system 5) business conduct boundaries, 6) belief systems,
and 7) strategic boundary systems.
3.2 A contingency perspective
Contingency based research offers a contrasting perspective as to how the controls of a firm
may emerge over time. Given that contingency based research posits that the optimal MCS
for a firm is contingent on the contextual variables it faces (e.g., strategy, environmental
uncertainty, task uncertainty, size), it would be expected that similarly the manner in which
MCSs emerge for firms would be dependent on these contextual variables. As such, under a
contingency perspective it is unlikely that it would be in the interests of all firms to
commence the formal control process through the implementation of internal controls and
budgets.
Specifically it may be expected that a firm following a high growth strategy would place less
emphasis on budgets and cost controls than firms adopting a more conservative growth
strategy (Chenhall and Morris, 1995; Dent 1990; Van der Stede 2000). Instead there may be
a reliance on more broad scoped planning information (Guilding, 1999). Consequently, it
may not be appropriate for a firm focusing on a high growth strategy to introduce budgets as
one of its first formal controls, but instead a more broad scoped data collection and planning
system that could enhance the attainment of the firm’s high growth strategy. Likewise
11
subsequent controls would vary based on the strategy and other contextual variables faced by
the firm.
4. Research Method
To gain an understanding of the implementation MCS in a high growth firm we undertook a
case study of the MCS practises of one of New Zealand’s fastest growing companies. A case
study was seen as the most suitable research method as this would allow us to examine in-
depth at what stage a high growth firm implemented controls and the reasons as to why these
controls were implemented at that stage of the firm’s life cycle.
The research design involved data triangulation (Modell, 2005) collecting a wide variety of
evidence, including interviews, company documents, business press articles, and
observations. Collecting data across such a wide spectrum of methods enhances the reliability
of the data collected and allows us to understand and interpret our findings in a more
meaningful context (Kober et al., 2007; Modell, 2005; Yin, 2003). The study commenced
with a meeting with the general manager and the financial controller of HRV. This meeting,
which lasted three hours, provided us with an understanding of the transformation that HRV
had undergone and the strategic direction the firm was pursuing. To enhance our
understanding of the organisational context, we were then given a tour of HRV’s main offices
and warehouse facilities.
Based on the initial meeting and tour of the firm’s operations we developed questions that
formed the basis of our semi-structured interviews (see Table 1 below for the interview plan).
These semi-structured interviews were the primary information source for examining the
introduction of MCS within the company. In total we interviewed 13 people, being one
director, the general manager, the chief financial officer, two franchisees and eight middle
and lower level managers (see Table 2 below).
Insert tables 1 and 2 here
Managers from different organisation levels were targeted so as to gain multiple perspectives
on the MCS and the relationship between the MCS and the company’s growth. Further
perspectives were gained through interviewing managers who were promoted from within the
firm and consequently had an understanding of what the firm had gone through. Other
12
managers interviewed had recently joined the company, and as such could provide a
newcomers perspective on the use of MCS. The participation of managers from various levels
and of different tenures with the firm helps ensure the robustness of the research. These
interviews were supplemented with observations of the business, a review of internal
documents collected at the firm, and articles from the business press.
The interview data was transcribed, analysed and categorised by the authors according to
Simons (1995) levers of control. The results of this analysis were then linked to the
documents and observations during our time in HRV.
The stages of HRV’s life cycle which we analyse in the next section are the start-up stage and
the growth stage. We use the Miller & Friesen (1984) framework of firm characteristics to
divide our interview data on HRV into the two life cycle stages (see Figure 1). While we
acknowledge that these stages are to some extent arbitrary, they do help us understand the
changing nature of the firm and the reasons for the change in MCS.
5. HRV
HRV sells and installs home ventilation systems which pump filtered air from the roof cavity
into the home and is 100 percent owned by the parent company Cristal Air International,
which is owned by the two founders of HRV. The firm started in 2003 and by the end of 2007
had 19 franchises across New Zealand. Over these five years HRV has experienced growth of
over 100 percent per annum and expanded into all regions of New Zealand, as well has
having commenced operations in Australia, with four franchises in Melbourne. HRV’s high
growth was recognised publically when it was awarded the Deloitte “Fast 50” prize in 2006
as the fastest growing firm in New Zealand, with revenue growth of 732 percent from 2004 to
2006.2 In 2008 HRV came 22nd in the Deloitte “Fast 50” with 261 percent revenue growth for
the years 2006-2008 (from NZ$5.67 million in 2006 to NZS19 million in 2008). 3
Interestingly, NRG Electrical, which is 100 percent owned by Cristal Air International and
was established in July 2004 to install the HRV systems for 16 of the 19 franchises and do
general electrical work came fourth in the 2008 Deloitte “Fast 50” prize with two-year
2 http://www.deloitte.com/dtt/article/0,1002,cid%253D132764,00.html ( accessed 05/07/2008) 3 http://unlimited.co.nz/unlimited.nsf/default/2886A5DF51035D4ACC2574EB006AB151 and http://unlimited.co.nz/unlimited.nsf/default/06104AEED5A2F029CC2574EB00711ADD (accessed 13/02/2009)
13
revenue growth of 575 percent.4 An example of the effects of HRV’s high growth can be seen
in the numerous times HRV have had to relocate head offices. In 2007 HRV moved to a
purpose built premise; however, given the company’s rapid growth, by the end of 2008, this
location was already too small and the directors started to consider moving again to even
bigger purpose built premises.
The ventilation system HRV installs is claimed to have two major benefits, which HRV
promotes. First, it is a cheap and energy efficient method of heating a house in winter and
cooling a house in summer. The air in the roof cavity, which is warmer than the air in the
house during a winter day, is filtered and purified and then circulated throughout a house,
thus heating a house during winter. During summer the ventilation systems helps cool a
house, as on summer nights the air in the roof cavity is cooler than the air in the house, and it
is this air which is circulated throughout the house. This method of circulating air though a
house is extremely energy efficient, and is estimated to only cost 10 cents New Zealand a day
to operate.
Second, and of growing importance, is the claimed health benefits of these ventilation
systems. Due to New Zealand’s high rainfall and also being a country at the forefront of
environmental measures, new homes are built to be weather tight, so as to stop the ingress of
water and the loss of heat. However, it appears that this weather sealing of houses may have
lead to the unintended problem of ‘sick homes’. This has occurred due to the house becoming
so airtight that it limits airflow through the house, resulting in: (1) mould due to a build-up of
moisture;5 (2) a build-up of airborne dust mite waste;6 and (3) high levels of airborne volatile
organic compounds.7 Mould spoors, dust mite waste and volatile organic compounds have
been linked with various illnesses and medical conditions. HRV claims that their ventilation
systems can help alleviate these problems by better ventilating houses and as such decreasing
the build up of mould spoors, dust mite waste and volatile organic compounds. They argue
that this is possible due to the HRV system pumping enough air into the average house to
4 http://unlimited.co.nz/unlimited.nsf/default/2886A5DF51035D4ACC2574EB006AB151 (accessed 13/02/2009) 5 Moisture within a house comes from people (it is estimated the average adult releases two litres of moisture into the atmosphere daily), cooking cleaning, gas heaters, and tumble dryers. 6 This is due to a combination of the increased moisture within a house as well as the increased levels of dust from human skin and hair and decaying textiles. 7 These come from come from household chemicals (e.g., air freshener, glass cleaners, bathroom cleaners, kitchen cleaners, etc), paint, and cigarette smoke.
14
change the air every two hours and their high “medical grade” quality air filters which are
used to clean the air coming from the room cavity.8
5.1 Start-up stage
HRV’s start-up stage began when the firm was formed in March 2003. At this time the two
directors (who still own the business) bought a struggling ventilation firm and re-named it
HRV (an abbreviation for Heat Recovery Ventilation). As explained by one of the directors;
“I got the phone call. At the time I was a very highly paid executive with a
commercial and corporate sales team. I had enormous budgets and no
accountability. It was fabulous. So there I was, very cushy, and to have a call
from [director] saying, ‘hey would you like to start all over again and knock on
doors in the rain in Ranui [a suburb of Auckland]?’ [It] was very, very tough but
I can certainly tell you now I’m very glad I did that, very glad indeed.
Otherwise, I’d still be on what I was on, which is a fraction of what I earn from
one of my many businesses now.”
When the directors first decided to buy HRV they hired a business coach who helped them
develop a vision of what the business would be and how it would evolve. They believed that
a vision would help them to stay focused and give their strategy direction.
“In the early stages they were two guys operating out of the garage. I worked
with them getting the foundations in their business nice and strong, which is
obviously the introduction of a vision”
The vision9 (see Figure 2) the directors developed had clear ideas on how they saw the firm
structure, revenue expectations, customers, alliances and employees. As can be seen from
Figure 3, the vision included the following eight elements: 1) a desire to be an international
franchise business with revenues over XX10 million dollars a year with a commitment to
customers; 2) the desire to produce a premium product which would help the firm dominate
the market by creating healthier more comfortable homes; 3) a plan to grow the business
8 http://www.hrv.com.au/demo_housediagram.aspx?3 (accessed 18/03/2009) 9 Paraphrased from the HRV vision document 2/10/2006. 10 Actual revenue figure not revealed for confidentiality reasons.
15
through key alliances which supported the vales of the firm and that added value to the
business; 4) a professional, friendly team which would be given support and training so that
they could be productive; 5) a desire that all employees understand the importance of
delivering quality solutions to customers; 6) an aim that everyone in the organisation would
take responsibility for their actions and contribute to the success of the business; 7)
encouragement for all employees to make the most of the opportunities they are afforded to
grow themselves and the business; and 8) the firm aimed to cultivate a genuine interest in all
stakeholders as the success of the firm would be measured by how successful it made others.
Insert figure 2 here
The vision was designed to include some very specific goals as well as some general ideals.
“On the one hand we’ve been fairly specific in some areas of our vision and
other we’ve been fairly open.”
At the same time the directors, with the help of their business coach, also created three other
documents which were directly linked to the vision. The first was called the “Company
Purpose” which was focused on two key areas for the business 1) creating healthier homes
and 2) building long term successful and profitable relationships. The second document was
a list of “Core Values” (see Figure 3) which is posted on the wall at all HRV franchises.
Finally there was a document which showed employees how to be successful in their jobs and
in life in general. This was called the “Eight Steps to Success” and was on the wall in many
of the meeting rooms at HRV.11
Insert Figure 3 here
When the directors purchased HRV it was in financial distress, due to the low quality of the
product. Because of this the directors hired an engineer to refine the product based on the
feedback from current customers.
“We decided to start to design the product based on the customer’s feedback, not the
engineers. Because the engineers were good at making our ventilation system but the
11Due to proprietary reasons we are unable to reveal the eight steps.
16
customers were good at designing a product; a saleable, marketable product. So we
trusted our customers more than we trusted the engineers. We told the engineers to do
what the customers asked, not the other way round. That gave us a very saleable
product. People ask us who designed it and me and [other director] always say the
customers.”
From this early stage the two directors invested substantial time and effort into research and
development to ensure the product was the best on the market. As explained by one of the
managers;
“Before [the directors] really went into the product, they researched it, they did
everything they could and they still are researching it and researching where we
can maybe get better [components] right throughout the world.”
Once the directors had set out their vision for the business and when they were sure the HRV
product was good enough they spent their days installing the product, and their evenings out
selling the product door-to-door.
“We put overalls on in the morning and screwed up the units and plugged in the
bits.... I remember [director] spending a day in the roof and getting out and
having a shower and then putting on a suit and then going out and selling.”
At this early stage in the firm’s life cycle the business was really just made up of the two
directors who ran the business out of a garage. According to one of the directors;
“So there was the villa [a small house] and that was it. We battled there. We
did have a garage as a storeroom, a strategy, a vision, and eight steps to
success.”
As one of the directors had prior experience working in and then managing call centres, it
was decided that HRV would start using direct marketing techniques as this would be a more
efficient usage of time compared to relying solely on door-to-door selling and would allow
the firm to reach more potential customers.
17
“I saw an ad ‘let your fingers do the walking’ and I thought that’s what I’ll do.
Cause letting my feet do the walking is very, very difficult, and I didn’t reach as
many homes as I desired”
Consequently, HRV set up a direct marketing call centre within the firm to set up in-home
appointments and positioned HRV as a direct marketing firm.
“I’d done telemarketing before...for about a year and a half...doing about [XX]
grand a day so it was a very, very good call centre. So I backed myself to do it”
The call centre started with only a copy of the White Pages and some Post-It-Notes as that is
all that was available at the time.
“It all started with Post-It Notes and the White Pages...We actually couldn’t find
a master copy of the White Pages and Telecom couldn’t get us one for months.
So we actually went online to White Pages free of charge and typed in Jones, Te
Atatu [a suburb of Auckland] and then printed out six Jones’ and then you get
those and you get used to saying “Hello Mr Jones. How’s Te Atatu today?”, and
you can have. And that’s how we managed the campaign, and it was really,
really tough.”
However, the directors also continued to knock on doors and visit homes. Subsequently, the
directors recognised that they needed more people to make phone calls and increased the size
of the call centre, so as to expand the coverage of potential customers.
Once more in-home appointments were being scheduled than the directors could undertake
they commenced hiring a team of sales people. The directors were still very hands on at this
stage; they would still make calls and coordinate with the sales people who would go out and
visit homes to sell the product. According to one of the directors;
“I would arrive in the morning and I was the sales manager collecting up all the
leads and distributing them and doing the sales meeting. Then I would do the
telemarketing myself. That was the first thing we did, that’s how the
appointments started.
18
Many of the new employees were family members and acquaintances of the directors. The
reason for this was that these employees could be quickly immersed into the HRV culture.
“[We started by] hiring family and friends. Personal recruiting has been very,
very successful for us. There’s always apprehension inviting people [into the
firm] unless you’ve got a pure environment that can deliver on the promises and
expectations that you set. So first we had to ensure that that was the case. You
bring in brother, mother, cousin, friend, best friend.
To make sure that the sales people all understood what was expected of them at HRV the
directors set up regular sales meetings.
“[We have] three sales meetings per week. Unheard of! [At my previous place
of employment] I used to have one sales meeting a month that I would perhaps
attend.”
These sales meetings were seen as a very important exercise in the firm as this was where the
beliefs of the firm were emphasised. In each meeting room in HRV are the “eight steps to
success” as well as a list of the “five core values” which also originated from the firm’s
vision statement.
“Culture’s really important for us and I need to know that as a manger that
you’re keeping the culture strong with your team. Now this could be at team
meetings...reviewing the five [core values] and the eight [steps to success].
“Whenever we have a management meeting the vision or the 5 and 8 steps are often
bought up”
From the very beginning the remuneration for sales people and direct marketers were on a
commission only basis. These were linked to individual performance and team efforts. Again
as with other controls in HRV the reason for remuneration being on a commission only basis
was that it linked to the firm’s beliefs.
19
“[We pay] commission only for sales…these values [beliefs] and these
disciplines just don’t exist anywhere…so, you know, when you have these
values and you stick to them, the controls, the formal controls and so forth aren’t
as necessary.”
As other administrative functions were set up it was clear that they were only there to support
the firms’ sales objectives.
“The salespeople they create our revenues. They have respect for the
administrators but the administrators have a vast amount of respect for my
salespeople as well because I’m pretty sure without salespeople they don’t have
a job.”
The use of a diagnostic control system, in the form of revenue management was the second
system established at HRV. At the later part of the start-up stage there was a direct focus on
managing the revenues and a conscious decision not to concentrate on costs.
“I think that we have resisted the temptation to be cost focused and we’ve been
revenue focused. We were aware that there were holes in the bucket but we’re
also aware that the time it would take to stop to fill those holes would have
meant the bucket would have emptied at a greater rate than a small leak.”
“To get the best out of our people we manage via the results. The design of the
system is built purposely to manage by the results.”
All work at HRV was linked to its key objective, which was making a sale. Everyone was
aware of the importance of sales at HRV.
“It’s a sales driven business. We’ve got benchmarks through the group so we can
compare against the group. We look at figures. We’ve just got to focus on sales.
If we sell more, everything else looks after itself.”
Even when managers used controls diagnostically they always supported them with the firms’
vision which would reinforce the importance of the belief systems. This worked because the
20
vision document developed by the directors of HRV at its birth was posted on the wall at
HRV, and also the intranet, so that each employee understood how his/her work was linked.
“The processes and tasks have changed as they will do as the business evolves,
but we have not changed direction. No way. We are stuck on our vision and
we’ve been true to that all the time, all the way along and still to this day and
will continue to be…. Everything that we’ve developed supports that vision.”
Also during the start-up stage HRV started to invest in training to support its tight sales focus.
This focus on training, though, was also an important part of its vision which was to support a
learning environment so that all employees could contribute to the performance of the firm.
There was an awareness, even at this early stage, that achieving sales results (which were
checked diagnostically) were dependent on the competence, innovation, and productivity of
the work force (which were key parts of HRV’s belief system).
“We’ve got great training. We’ve got a formal ‘educate to motivate’ [part of the
HRV vision] sales training programme. We, talk to everyone in my organisation
every day about it. People get very passionate about our business, it’s because
we inject a lot of passion. The people drive the growth, it is all about the passion
the people have for the product and the [HRV] way about how we do things.
Educating our people makes sure they’ve got all the tools they need to be
successful.”
This was also important for the direct marketing group as these were the people who would
first come into contact with customers.
“The first thing we did...was to get a direct marketing manager training set up.
They come here [to HRV] for three days no matter where they are from and it’s
all about immersion. They simply are immersed in the [HRV] culture.”
Achievement was recognised and rewarded at HRV. Managers constantly looked for
opportunities to celebrate success. These celebrations were also connected to the firms’
beliefs, which they called culture.
21
“Culture’s really important for us and I need to know that as a manager that
you’re keeping the culture strong with your team. [For example] the person of
the month’ award is a way of acknowledging somebody’s good doings. That’s a
reinforcement of the culture, the culture of success, by reporting and talking
about it.”
During the start-up stage it was clear that the passion displayed by the two directors
influenced everyone at HRV. The messages from directors were delivered through their
actions. Everything they did at HRV supported the beliefs set out in the vision statement. The
firms’ success was defined by the vision and everyone at HRV was constantly working
towards it.
“One of the reasons why we’ve been so good with controlling this monster is
that we didn’t actually need anybody else at the start… the real control has
come from [one of the directors] personality. That’s what controls this business.
He’s stoic and brave and uncompromising. It’s easy to control everybody else
when you have an example like that.”
In conclusion it can been seen that during the start-up stage the vision, core values and steps
to success all combined to be a powerful belief system at HRV.
“I used to bang our culture into people’s heads, like put it on a stake and slug it
through their cranium.”
This belief system was supplemented with the introduction of a revenue management system,
which was specifically established to promote revenue growth.
5.2 Growth stage12
In early 2004 HRV began to franchise the business around New Zealand. By 2006 the firm
had 14 franchises operating across New Zealand, which had expanded to 19 franchises by the
12 While it is difficult to set a precise date for when the growth stage started at HRV this date has been selected as this is when HRV commenced franchising the business, which corresponds to the Growth stage as per Miller and Friesen’s (1984) life cycle model. Furthermore, HRV, won the Deloitte Fast 50 Award for New Zealand’s fastest growing firm for the period 2004 to 2006, which provides a good indicator that the Growth stage had commenced by 2004.
22
end of 2007. HRV has stopped franchising the business within New Zealand as it considers
19 franchises as being at capacity to serve the New Zealand market. The initial franchises
were mainly sold to current employees of the business with each given a different
geographical territory of New Zealand, so that the various franchises would not directly
compete with each other.
We have “19 business owners, some of them brand new some of them are
not...all of them repaid their businesses within five to ten months”
The main role of these franchises was to sell the product directly to home owners. The
franchising of HRV was as part of the original business plan and was the first point in the
vision statement (Figure 2) that the directors developed at the birth of the firm (i.e., Cristal
Air is first and foremost an international franchise organisation ...).
At this point the directors began to realise that culture/beliefs were necessary but not
sufficient to manage the expanded business. Consequently, the firms’ structure was
formalised (Miller & Friesen, 1984) through what is known in the firm as the “HRV Way”.
This document was directly linked to the vision statement but it drilled down further into
important operational areas for the firm.
“The HRV Way [includes the] company background, philosophy, corporate
identity, legal, administration, accounting, business plan, personnel training,
health and safety, franchisees, support sales, administration, independent
commissions. This is basically how an HRV business needs to work.”
“It’s what we call the HRV way. And the HRV way relates to our operations
manual.... It’s bloody big, it takes you through everything from how we answer
the phones here, through to how do we sell here, our franchise operations.”
During 2004 HRV started to build a customer relationship management (CRM) system to
support the management of their direct marketing and sales approach. This allowed the
performance of employees to be tracked in real time and a dialogue about performance
management across the firm was constantly promoted. Desired performance was fostered and
23
rewarded; poor performance was not tolerated. All possible policies and practices were put in
place to support sustained high performance.
“If you took the direct marketing KPI’s, this all comes down to the reports that
we have. This is a report based on appointment results by a direct marketer. We
can tell you how many good call appointments you’ve made, total appointments
you’ve made. We can get a breakdown of your performance. We can get
percentage ratings. We can get a national review. It’s all those things that are
designed to measure your performance on a day by day basis. These figures are
live, so at any stage if I’m meeting with you today, then I’ll go to our CRM
system and I’ll produce your performance for the last three sales periods, or
whatever the case may be, and we can track your performance from that point of
view.”
The numbers in the CRM system were open to all the managers so they could examine the
performance of their own sales people as well as others across the firm.
“All the country’s figures go out at the end of every sales period. So every four
weeks all the figures go out with what everyone sold, what revenue per
household, our territory, how many sales people we’ve got on, [and] our
conversions rates. So we all know what each other business in the group is
doing.”
Diagnostic control systems were set up to measure output variables that represented
important performance dimensions of HRV’s pursuit for high growth.
“We have KPIs. Everybody knows the expectations… a bonus structure goes on
their number of sales. It’s all about consistency of good performance.”
“As I mentioned before I do some ratio analysis and so I just use the P&L. I have GP
margin, MP margin, return on investment. You know, the standard business ratios.
But what I try to do is just keep them all onto one page and then just give them,
highlight the difference from the month before.”
24
Because all sales to customers were cash sales and all payment to the direct marketing and
sales people was on commission there was no need for a complex accounting system.
“Accounting and financial [is] basically just simple administration stuff.”
Following the implementation of the CRM system two formal boundary systems were
established: business conduct boundaries and strategic boundary systems. This was important
as reputation lost in any one region was likely to adversely affect the whole firm.
Performance pressures also influenced the imposition of formal business conduct boundaries.
HRV believed in a high level of customer service which was incorporated into its operational
manual. Regular audits were carried to ensure that the rules that had been established were
being adhered to.
“We have quality control in audits and accountability and consistency and no
compromises. What control we’ve benefited from the most [at that time] is
boundaries. They are expectations and standards. We launched a franchise
agreement and a franchise operations manual to the franchisors as they came on
board. One year ago I unofficially appointed myself as [HRV] protector. My
main role was to protect the [HRV] network of businesses from their owners.”
Managers, though, also wanted to motivate creative search behaviour, but unfocused search
can waste financial capital and management attention. Like other norms of behaviour,
boundary systems cannot be effective without credible sanctions (Coleman, 1990). At HRV
sanctions were clear and credible. One example of this was a sales person who did not follow
the HRV Way.
“Someone gave the customer an unrealistic expectation. That person who had
the problem with the way we market our products, was the one that was actually
breaking the rules. We audit every single one of our [salespeople]. (We) actually
get rid of very high yielding salespeople that are breaching our culture, our
values.”
25
Following the introduction of business conduct and strategic boundaries the firm started to
think about the need for internal controls.
“Our lack of [internal] controls up until, maybe, the last twelve months,
[November 2006 to November 2007] has been through fear of messing with the
recipe. The cake just kept on coming out fabulous. It just kept on coming out
exactly as we wanted it to.”
The focus on this area of internal control came about because of recent thefts of HRV
products.
“That’s because we got a boxed HRV delivered to us by the Police. They found
it in the back of a stolen car. The guy was stealing cars and HRV’s.
“Now there’s apparently a black market for HRV’s. So if you’re in the market
at [$X] installed, not bad despite the fact I sell them for [$Y] installed and what
have we done for that?
The internal controls now implemented at HRV include better control of assets such as
warehouse stock.
“We're just getting a better inventory control going that will record receipting
and issues of stock and then eventually we will be using scanners.”
Well we’ve put third eye monitored software. I can tell when, where, record
stations, motion detectors on the gates so there’s a photo of every van and truck
that goes past.”
Even the introduction of internal controls was linked back to the belief systems via one
of the director’s address to a conference of franchise owners. During his address the
director emphasised the positives out of the thefts, highlighting that this indicated what
a good product HRV was selling:
26
“When I was required to tell our conference about that stolen system, I could
have ranted about security, inventory controls and so forth. I summarised that
stuff, had them understand that we were aware of it and now the processes were
underway to fix it but I also took the opportunity to promote the positive from
that negative and the positive is that we now have a product worth stealing.
People will put their jobs or their freedom on the line to have an HRV fan and
filter and controller for their home and that has to be a pretty hot item, excuse
the pun, to be willing to buy anything on the black market, you know? You
can’t get a black market anything unless it’s good. I mean I bet you 1,000
bucks there’s heaps of black market iPods because it’s a cool product, you
know? And soon we’ll probably be replicated illegally. Great! Isn’t that what
all businesses should aspire to? So we will take that positive from that as well.”
Recently managers at HRV’s head office have started to encourage continuous search
activities and created information networks inside the firm to scan and report critical business
changes. The use of these interactive control systems shows how managers deal with strategic
uncertainties in the business. To help facilitate knowledge transfer and learning within HRV
the firm set up franchise conferences.
“There’s an agenda set in the conference. The [directors] always set the theme
up. We’ll talk about our benchmark and the figures of the business. It’s always
an open forum. You bring up a contentious issue we didn’t agree with it so we
talked through it. We end up with an agreement which we’re all happy with.”
“Nothing’s is fixed in concrete in [HRV], if we don’t have it right or you come
up with a better idea, put your hand up and let us know.”
An important part of the franchisee conference was for franchise owners to get together with
the top managers of HRV to discuss critical business issues. The franchisee owners
understand that they need to contribute to the knowledge of the firm through their
experiences.
“The processes have had to change where you’ve now got different people doing
different roles... I called up [the GM] and said, hey this is happening. Why are
27
we doing this? Do we need to do this? And he’s like ‘well no actually you’re
right.’ So he came over here and I had my customer service guy and we sat here
for a couple of hours and mapped out a new process, to make it better.”
It is about learning through the experiences of other as that is how the firm as a whole
benefits.
“It’s just about doing the best we can. If someone’s doing something really well,
I want to know what they’re doing and I’ll ring them up. Whenever we need to,
they’re available there to talk to.”
Interactive control systems thus provided the formal information passage which transmits
learning through the firm and captures the benefits for the entire organisation.
Even with the addition of new control systems used in both diagnostic and interactive ways,
the firm always ensured that the new controls linked to the initially established belief
systems. This was due to the fact that the directors believed that the belief systems formed
the base of a strong and unique culture which played a critical role in the growth and success
of HRV.
Interviewer – “Do you think the [high growth] strategy of HRV has changed?”
Manager – “The processes and tasks have changed as they will do as the
business evolved, from that point of view. But from the point of view of have
we changed direction? No way! We are stuck on our vision and we’ve been
true to that all the time. All the way along and still to this day, and will continue
to.”
Interviewer – “So that’s one of the main links to growth?”
Manager – “Yep, That’s our vision. XX13 million dollars of revenue and those
[other] systems simply support that vision.”
13 Specific revenue figure not revealed for reasons of confidentiality.
28
Interviewer – “Do you believe the growth rate will be sustainable?”
Manager – “Yes, it has to be. It’s part of our mission at the top of the food chain
to keep the juices running...and it will come down to our ability to provide our
franchisees with more value added sales opportunities and if you read our vision
you will find there what we’re working towards.”
6. Discussion
The preceding case description highlights the changes that occurred to HRVs business
processes, organisational structures, and MCS. These changes have been summarised in the
timelines presented in Figures 4, 5, 6, and 7, which depict the major events (Figure 4), the
extent of HRVs growth (Figure 5), changes in organisational structures and business
processes (Figure 6), and the introduction of MCS (Figure 7).
Insert Figures 4, 5, 6 and 7 here
As can be seen in the case data presented, the focus of HRV during the start-up was on
developing strong belief systems for the business to support their high growth strategy. This
started with a clear vision statement about where the firm would be in the future and how it
would get there. The directors then focused on developing a product that would meet
customer needs. To accomplish control they used belief systems at the start-up stage and then
introduced diagnostic systems at the end of this stage. While these diagnostic systems
focused on financial sales/revenue targets, there was still an explicit link back to the belief
systems.
When HRV had their vision and the product in place they started to concentrate on sales
growth through direct marketing and in-house product demonstrations. Once market
penetration had been achieved it needed different controls to keep performance high and to
protect the firm and the brand it had developed. These led to more diagnostic controls in the
form of KPI’s and then business conduct and strategic boundaries which meant that franchise
owners had to follow certain processes – known at the HRV Way. As the growth stage
continued HRV needed to protect its assets and to manage strategic uncertainties. It
29
implemented internal stock control systems to protect its product and then interactive controls
to stimulate learning across the firm.
Table 3 compares the expected order of MCS implementation based on prior research and
experience models with the actual order of the implementation of controls at HRV. Each
control emerged at HRV at a specific stage of the firm’s life-cycle to meet the needs HRV
was facing at that time. However, as can be seen from Table 3, our findings differ
substantially from the expectations based on prior literature and experience models. We did
not find the use internal controls during the start-up stage. Also, budgets were not the first
formal control system introduced. Instead we found that the first control system implemented
was a formal belief system which was used to help the firm support its high growth strategy.
Based on prior research, it would have been expected that such a system should have been
one of the last control systems to be implemented. As expected a revenue management
system was introduced, however this too was introduced earlier that would have been
expected based on prior research. The revenue management system was the second control
system introduced during the initial start-up stage, whereas based on prior research it was
expected to be introduced during the growth stage. Interestingly, as at the point when we
exited the firm, HRV was still not using budgets.
Insert Table 3 here
Consistent with expectations based on Simons (1995) experience model we found that
business conduct boundaries and strategic boundaries were introduced during the growth
stage. However, as mentioned above, contrary to expectations belief systems were not
introduced during this stage, but were the first control implemented used in the start-up stage.
We also found the earlier adoption of interactive controls than would be expected under
Simons (1995) model. We found controls commenced being utilised in an interactive manner
during the growth stage, whereas Simons (1995) model does not expect controls to be used in
such a manner until a firm reaches maturity. We also found that internal controls at HRV
were not implemented until well into the growth stage, as opposed to being the first formal
control to be implemented as would be expected under Simons (1995) experience-based
model.
30
That our findings differ substantially to the prior literature and experience-based models is
consistent with a contingency perspective of MCS implementation. Contingency research
has found that to enhance performance firms pursuing different strategies and facing different
environments require a different suite of MCS (e.g., Fiegner, 1994; Govindarajan et al., 1992;
Kober et al., 2007; Miller et al., 1982; Miller et al., 1984). Thus it would be expected that the
sequencing of the introduction of controls would also be dependent on the firms strategy and
other contextual variables.
The fact that HRV did not implement a budget as one of its first formal controls is consistent
with the findings of Chenhall and Morris (1995), Dent (1990), and Van der Stede (2000) who
find entrepreneurial firms placed less emphasis on budgets and cost controls. As mentioned
during interviews the decision not to focus on costs controls was a conscious decision. The
directors felt the cost of doing so would outweigh the benefits. Instead the first formal
control implemented by HRV was a belief system. The directors believed that emphasis on
the belief system was important in communicating values, motivating employees, and giving
direction to the firm. The emphasis on a belief system was seen as being especially pertinent
given that HRV was effectively adopting a Blue Ocean strategy (Kim & Mauborgne, 2005),
in that there was no established market for the product that the firm had developed. Given
these unique circumstances HRV’s directors believed that to ensure the success of the firm
the belief system had to be given a prominent place in the overall control system. The belief
system was seen as being important in terms of “indoctrinating” employees into the firm’s
culture and inspiring them as to the benefits of the product the company was selling. The
belief systems thus helped the firm to create a market and to position the firm within that
market. By emphasising belief systems early in the process HRV did not have to rely on
other forms of control, but could introduce other control mechanisms when needed as long as
they were clearly linked with the belief system.
The next control system that HRV developed was a revenue management system. This is
consistent with the findings of Guilding (1999) and Mia and Chenhall (1994). Guilding
(1999) finds that firms adopting a build strategy rely more on broad scoped planning
information than do firms following a harvest strategy. Likewise, Mia and Chenhall (1994)
find that as marketing departments used broad scoped information to enhance performance as
they typically faced high task uncertainty. The revenue management system implemented at
HRV was focused on collating data on customer characteristics related to successful sales,
31
thus allowing the firm to better plan future sales strategies. The implementation of such a
control system is also to some extent consistent with prior literature on the evolution of MCS,
in that Sandino (2007) found such systems to be the second control system (after budgets)
implemented by firms adopting a growth strategy.
During the growth stage HRV started to focus on monitoring critical performance variables.
This was done through developing diagnostic control systems such as CRM which was used
to set goals and manage performance of sales staff. Key components of the diagnostic
control system at HRV were the establishment of clear performance expectations and regular
performance appraisals. At HRV, performance expectations for each employee were linked
directly to the desired outcomes set out in the strategic plan. Managers used these control
systems to monitor the implementation of the strategy and to link actions to the achievement
of goals. The performance measures used by the firm were based on information from their
CRM system. The establishment of a rigid control system is consistent with the findings of
Chenhall and Morris (1995) who found entrepreneurial firms adopted tight controls but
mixed these with more organic forms of control. Furthermore it is worth noting that the
introduction of this diagnostic control system was associated with a prior reduction in task
uncertainty in the sales process. All employees underwent considerable training and the sales
approach adopted by HRV had been formalised through the HRV. Given the reduction in
uncertainty in the sales process it was now possible for HRV to introduce a comprehensive
diagnostic performance measurement system such as the CRM system.
During the growth stage boundary systems were introduced to limit opportunity seeking
activities. These systems were used by managers at HRV to set business conduct boundaries
and to punish those that stepped outside the limits. In a competitive business, such as the one
in which HRV operated, setting difficult targets and linking rewards with performance could
create pressures for people to act in ways that superiors would deem inadequate. Thus,
boundary systems warned that some types of behaviour or activities were not tolerated at
HRV.
Internal controls were introduced during the growth stage to safeguard assets. Our analysis
revealed that managers did not want to spend time introducing internal controls during the
start- up stage, as their focus was on revenue generation and they felt the benefit associated
with setting up internal controls was not worth the opportunity cost of lost revenue
32
generation. It was only just prior to the researchers exiting the firm that the managers
believed the benefits of the implementation of internal control systems outweighed the costs.
This was due to the fact that it became apparent that their products were being stolen. While
this late adoption of internal controls is inconsistent with the Simons (1995) model, it is
consistent with a risk management approach that emphasises in deciding what controls to
implement companies need to weigh up the costs of the associated risks and benefits
associated with the implementation of the controls.
Recently, interactive control systems were also introduced to give managers tools to manage
strategic uncertainty. Through these systems managers started to become personally involved
in decision making that related to strategic opportunities in order to learn from the experience
of franchisees and to implement that learning across the firm.
7. Conclusions
In order to gain an understanding of the emergence of MCS in a start-up company this paper
has presented a retrospective longitudinal case study of a high growth firm. Our findings
contrast markedly with prior MCS-based research and experience-based models that found
internal controls and diagnostic financial controls to be the first control categories adopted by
young firms (e.g., Davila & Foster, 2005; Davila et al., 2007; Moores & Yuen, 2001;
Sandino, 2007; Simons, 1995). Instead, we find belief systems to be the first control system
to be implemented and to be constantly reinforced and built upon throughout the start-up and
growth stages.
“I keep on coming back to culture [beliefs]. I keep on going away from the
importance of [other] controls.”
We believe that our findings can be explained by taking a contingency perspective of MCS
implementation. Under such a perspective it would be expected that a firm adopting a high
growth strategy would not place emphasis on budgets and cost controls (Chenhall and Morris,
1995; Dent 1990; Van der Stede 2000). Given HRV created a new market for its product the
emphasis on belief systems was a conscious one which helped HRV to create a market and to
position the firm within that market. The implementation of subsequent controls also
revealed an understanding of the firm’s strategy and the contextual variables faced by the
firm.
33
From a practitioner standpoint, the findings of this study show that one possible way to assist
in becoming a high growth firm is to develop good belief systems at the start of the firm life
cycle and then to design other controls around the beliefs.
As this paper is based on a single case study our findings may not be generalisable to other
high growth firms. The case has, though, shown us some reasons why different controls are
used by managers in this setting. It has also been able to show the interaction between
different controls. For example the directors of HRV used belief systems to compensate for
the lack of internal control. It could even be argued that the directors felt that they could trust
belief systems more than written internal control processes. Even when the firm did put in
financial controls and use them in a diagnostic manner, there was still an explicit link back to
belief systems so that the new controls complimented the beliefs but did not replace their
importance in the firm.
Future research could use this study to start developing a contingency based perspective on
the adoption of MCS in start-up firms adopting different strategies and facing different
contextual variables. Such research would prove valuable in gaining a greater understanding
of the role of MCS on firm growth, especially in high growth firms. Future research could
also more specifically focus on seeing whether the results of this case study in relation to the
importance of belief systems are replicated across other high growth firms.
34
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36
Figure 1: Characteristics of different life cycle stages (Miller & Friesen, 1984)
Situation Organisation Innovation and Strategy
Start-up stage - Small firm - Young - Dominated by owner-
manager
- Informal structure - Undifferentiated - - Power highly
concentrated - Crude information
processing and decision making methods
-
- Considerable innovation in product lines
- Niche strategy - Substantial risk taking
Growth stage - Medium sized - Older - Multiple shareholders - More heterogeneous
and competitive environment
- Some formalisation of structure
- Functional basis of organisation
- Moderate differentiation
- Somewhat less centralised
- Initial development of formal information processing and decision making methods
- Broadening of product-market scope into closely related areas
- Incremental innovation in product lines
- Rapid growth
38
Figure 3: HRV’s Core Values
• People
We value our team.
• Honesty
We expect open and direct communication.
• Integrity
We do what we say.
• Commitment
We are committed to achieving our vision.
• Innovation
We are always looking for ways to improve.
• Excellence
Be the best – always.
• Customer Service
Make sure we leave our customers excited!
• Team Work
39
Figure 4: Timeline showing Major Events at HRV
Started to advertise on
different media
Won Deliotte Fast 50 NZ. Revenue growth of
732%
Moved operations to a larger location
Hired family and
friends
Brought in experts to run functional
departments
Moved operations to a larger
location
HRV purchased by the two directors
2003 2004 2005 2006 2007 2008
Made changes to product based on customer feedback
Continuous product improvement
Had a Saleable product
Low quality product – but had
potential
All franchises in NZ sold
Expanded overseas
Started to sell
franchises
#22 Deliotte Fast 50 NZ. Revenue growth of 260%
40
Figure 5: Timeline showing Growth at HRV
Hired a full-time
accountant
Hired Regional Managers
Approximately 100 employees
Used an external accountant.
Approximately 30 employees
Hired a general manager.
Approximately 60 employees
Hired10 employees (sales and direct
marketing)
Two Directors (founders)
2003 2004 2005 2006 2007 2008
$0.5 million NZD in revenue
Continued to expand.
Approximately 20 employees
Consulted financial advisers
$0.8 million NZD in revenue
$ 2 million NZD in revenue
Approximately 200 employees
$ 5.67 million NZD in revenue
$7.6 million NZD in revenue
$19 million NZD in revenue
41
Figure 6: Timeline showing Changes in Organisational Structure and Business Processes at HRV
Set up NRG Electrical (HRV installers) as a separate business
unit
Added middle management layer and regional management layer
Flat structure: directors &
employees (2 layers)
Marketing, inventorying & distribution was all done by a small group of people;
no clear organisational structure
2003 2004 2005 2006 2007 2008
Internal intranet set
up
Internet protocol phone
system
Formalised business processes
Manual operation
Integrated advertising unit into organisational
structure
Headquarters in Auckland with franchises around
NZ
Customer Relationship Management System
42
Figure 7: Timeline showing the Introduction of Management Control Systems at HRV
Sales meetings held three times a
week
Introduced KPI’s for all workers
Formal training process
Culture & value was set from the
top
Monthly management meetings
Two recruiting interviews
Strategy, and Vision were formed
Managers knew
employees personally
Open door
policy
2003
Bonus system for senior
managers
CRM
Ad hoc training carried out
Professional trust, performance measurement & outcome control
Designed remuneration system for sales people & direct marketers
Sales audits carried out
Quality control systems put in place for franchises
Franchise conferences
Written management reports
Financial ratios and key
statistics
2004 2005 2006 2007 2008
Developed dashboard with
key performance indicators
43
Table 1: Interview Plan
Interviewee Details
1. Managerial experience 2. Current position 3. Where in organisation structure 4. How many direct reports 5. Role in HRV 6. Structural change due to growth 7. Strategy 8. Day-to-day job
HRV’s Growth
9. Contributing factors 10. Growth trend 11. Growth sustainability 12. Change in role or activities
Management Controls
13. Ways in which controls are used 14. Formal management controls in HRV 15. Change in management controls over time 16. Use of performance measures or targets
Management Control and Growth
17. Relation between management controls and growth 18. Introduction of new management controls 19. Measurement of success using management controls 20. Management control impact on operations 21. Information flow in the organisation
Outcomes
22. How management controls helped facilitate growth 23. Formal and informal work processes 24. How to facilitate organisational growth 25. Problems caused by growth faced by the organisation
26. Solutions implemented by the firm
44
Table 2: Interview Schedule
August 17, 2007 - Case study overview with GM and CFO (3 hours) August 28, 2007 - CFO interview - GM interview - Franchise support manager interview August 29, 2007 - Communications manager interview - Direct marketing manager interview - Commercial manager interview August 30, 2007 - Warehouse/production manager interview - Accounts manager interview - Installation manager interview - Distribution manager interview September 28, 2007 - Franchisee interview October 11, 2007 - Franchisee interview November 9, 2007
- Director interview
45
Table 3: Control system implementation – Actual versus expected
Expected Actual
Start-up Informal controls Belief systems
Internal controls
Revenue management system (diagnostic)
Growth Budgets (diagnostic) Business conduct boundary systems
Revenue management system (diagnostic) Strategic boundary systems
Business conduct boundary systems Internal controls
Belief systems
Strategic boundary systems
Ralph Kober
Ralph Kober joined the Department of Accounting and Finance at Monash University in May 2008
after three years at The University of Auckland, New Zealand. Prior to this Ralph was at The
University of Western Australia. His research interests are in management accounting and also in the
area of outcome evaluation in the field of intellectual disability. Ralph has published in accounting
journals as well as specialised intellectual disability journals. He is on the editorial board of Applied
Research in Quality of Life and an ad hoc reviewer for Accounting and Finance and Journal of Policy
and Practice in Intellectual Disability. Ralph is a member of CPA Australia and was previously Vice‐
President of the New Zealand branch.