Comparative Management Control Systems in Three Companies

CHAPTER 1: INTRODUCTION

1.1       Background

The interplay between management control systems and organizations’ information systems is the subject of this research. This is becoming an increasingly important area of study as the view that, management control systems must ‘fit’ in the firm’s overall business strategy and that, the firm’s management systems follow from the underlying rationales of strategy, which were developed through a formal and rational process, is increasingly been seen as outdated. Instead, recent research shows that, new technologies have a significant influence on the way in which firms enact their strategies (Bhimani, 2006; Prahalad & Krishnan, 2002, Weill et al., 2002). Given the acknowledged paucity of research in this area (Dechow et al., 2007a, b), the purpose of the study is to examine the management control system in three companies in Saudi Arabia with focus on information technology and planning.

For quite some time, there have been many debates on whether or not to the merging of the principles of strategic management, management control processes, and the IT technology is important and integrally connected to the longevity, success, and stability of any businesses or corporate organization. The intent of this paper is geared toward putting this case to rest. 

This paper takes an initiative to ascertain the lucidity of the matter whether there is an intricate relationship among strategic planning, management control processes and IT connectivity and services, by comparing the degree of organizational development and success. This is carried out by comparing three levels of infrastructural development in the IT sector- the United States, Saudi Arabia, and an intermediary of the two. To this effect, the three levels are represented by the United States-based American Halliburton, the Saudi SABIC, and Saudi Aramco, respectively. Additionally, former research discoveries on the relationship between IT connectivity, business, and corporate success are considered and extrapolated to determine the reality.

A firm’s competitive strategy is defined by its theme-based and weighted-value proposition, but management (Forgang, 2004) cannot mandate the execution of the strategy. Instead, strategy-specific decisions make operational a firm’s value proposition, and the practice of strategy-specific decision-making occurs through ongoing management control systems. For this reason, management control systems are exceedingly important, both in the industrial sector and in other areas of business. Management control systems ultimately ensure that managers make decisions that coincide with the desires of the owners and stakeholders (Rajan, 1992). This is a scenario in which the agency problems that are common between an organization’s management and its shareholders have been reduced. The management in this case takes the necessary steps to increase shareholders’ wealth as opposed to using the company’s resources to continuously accumulate and amassing their personal wealth.

Anthony and Govindarajan (1995) define management control as a process of motivating managers to perform actions and activities in line with the goals and strategies of the organization. According to this definition, an organization is ‘under control’ when its members do, what the management wants them to do. Management control is comprised of various tasks, which include (Anthony and Govindarajan, 1995):

• Planning the future activities of the organization;

• Coordinating the activities of the various members of the organization;

• Communicating and disseminating information to various stakeholders;

• Evaluating this information;

• Deciding on the actions to be taken; and

• Influencing people to adapt their behavior according to the company goals. This is what is generally referred to as leadership in an organizational context.

From the above definition, it follows that management control plays a central role in the management of the company’s performance and the implementation of its short term and long term strategies. It is therefore of vital importance that management behavior, which is stimulated by the management control system, is consistent with the strategy to be implemented (the so-called ‘intended strategy’). However, this view that (1) control systems must ‘fit’ the firm’s strategy, (2) strategy is developed through a formal and rational process, and (3) the firm’s management systems follow from the underlying rationales of strategy, is increasingly been seen as outdated (Simons, 2000). Instead, the situation is that new technologies significantly influence the way in which firms enact their strategies (Prahalad & Krishnan, 2002, Weill et al., 2002, Bhimani, 2006: 69):

Organizational strategies for growth and the structuring of the entire industries are predicated on technological changes in many areas of business and across different economic platforms. Comparatively, United States-based firms tend to enjoy the full benefit of advanced information technology as compared to their Saudi Arabian counterparts.

In line with this, more technologies for management control are offered to firms who therefore need tools and ways to think about corporate ‘information management’ (Dechow et al., 2007b, Hagel and Brown, 2001, Applegate, 1988). This research is therefore important in determining the extent to which firms in Saudi Arabia can constantly upgrade the management control process through integration of information systems. The interplay between management control and organizations’ information systems is the subject of this research.

1.2 Problem Statement

Many organizations are experiencing disharmony between their management control processes, strategic planning and information technology. Essentially, various organizations are either adopting or lagging behind in adopting the best practices in these areas. The most likely reason for these varied management control behaviour is either from the management career preparedness or from the general organizational culture. Even if managers are recruited at trainee level, they will still face various challenges in the business environment advancing their processes, planning and technology. Thus, most organizations are struggling in identifying the relation between all these faces. This draws back their business mission achievements. The first problem for this study will be enabling managers identify these gaps and propose how they can be explored to the able competitive advantage of organizations in Saudi Arabia. This study identified this area as a key gap that need follow up to serve both academic and organizational purposes.

Furthermore, most senior managers believe that the solution to this problem would be to hire the more capable human resource expatriates from the developed world to manage their organizations. Consequently, the same organizations end up incurring huge wage bills, which could source cheaper, if they used the local labour. This trend is common when international organizations establish their businesses in Saudi Arabia. The key weakness areas that these organizations have identified are the managerial skills to use IT for a successful management process, planning and for establishing a competitive advantage over its competitors. Consequently, this study identified some gaps as far as manager’s role in management control; risk management and business continuity are concerned. Indeed, there are very few recent studies in these areas. However, a majority of the lesson learnt from these studies cannot be implemented in Saudi Arabia because of the differences in technological advancement between Saudi Arabia and the other country in which the other study was conducted. The application of recommendation from a study conducted in a different area is likely to result into undesired consequences. This study seeks to cover not only the theoretical aspects of the roles but also the conceptual knowledge in these areas. The recommendation drawn from the study can be implemented in the country and will help in boosting the managerial approaches to the accomplishment of managerial roles of control, risk management and business continuity.

Every organization has its own experiences concerning its managers’ interaction with the employees and customers when they execute their management control strategy. However, few organizations perform management audits to ascertain the management’s ability to effectiveness control it information technology and align it to the highest required standards. This study, in the preliminary literature section reports that no earlier researcher could get significant case studies of organizations in Saudi Arabia that had audited and published any such reports and experiences. Certainly, many organizations justify their lack of peer reviews to some business confidentiality clauses and agreements that exist in their memorandum of association. However, the consequences of failing to implement peer reviews and management audits are disastrous for their business’ sustainability and continuity. This study has cited this problem as a major gap to be investigated for and adequate benchmarks developed against which the company’s performance can be compared. The study also intends to analyze different case studies where the underperforming organizations can learn from their mistakes and become the best in the various industries which they serve the best.

Within Saudi Arabia, Information Technology is viewed differently by different organizations. These differences in the perception of Information Technology are even further away from each other across the stakeholders from managers, employees and customers who feel that there are many business opportunities for their organizations. Even though each of these stakeholders tends to have deeper views depending on their actual engagement within the business or the business’ applications of information technology, there are limited studies that provide proper theoretical information on the same. This study, having identified this gap, has used the survey instrument to explore these views further and see how the local Saudi Arabia managed organizations perform as compared to the foreign or expatriate managed peers in the same industry players. It is for this reason that the American company Halliburton has been included in the study. Its performance is to be compared with that of the Saudi Arabia based companies which are SABIC and Aramco. The findings are good for gathering the primary views of each of these stakeholders and proposing next steps that should be taken to improve the uptake of high level of information technology in Saudi Arabia.

The biggest challenge facing most organizations in Saudi Arabia is their inability to evaluate and manage of risks across their business portfolios. The problem is partly worsened by the company’s lack of IT trained personnel and partly on organization work policies. Whereas some organizations may remedy the situation by employing managers and employees who are already educated in IT principles and operations, other may opt to conduct extensive in-house trainings of its employees to cover these gaps in information technology that is evident in these companies. This study in the preliminary literature section discovered very narrow information for prospective organizations to hire IT trained managers. Thus, a preliminary survey was accomplished by this study to determine the level of educational achievement in these companies, which is the proclivity of their preparedness to adopt and implement Information Technology for controlled business continuity and growth. Furthermore, this study was keen on establishing any ground to believe whether or not the views of the managers, employees and customers are normally captured and implemented in the process of risk management and business sustainability strategies. Information Technology has the best opportunity for capturing this information continuously and is the most cost effective among all the other available methods. However, there are limited studies that have explored the qualitative and quantitative gains on the same. This study attempted to investigate how different Saudi Arabia organizations adopt the managers, employees and customers’ views to bolster their risk management and business continuity. It attempted at establishing the processes that the organizations involved even the lowest employees in the running of the organization.

Over the decade, many studies have been conducted in other different parts of the world in order to discover how the proper use of information systems can boost these organizations management control systems and assist their quest to gain a competitive advantage over their competitors. The problem with most of these studies is that a larger proportion of them tended to proceed from a more general to specific problems for these achievements making their recommendations predictable. Furthermore, information systems have been undergoing rapid development, just like the specific challenges facing the respective organizations. This study, in the preliminary investigations established that many organizations, upon implementation a successful of an information technology, face a gradual misalignment because of the failure of the respective organizations to audit and review the established information systems. Consequently, this study will seek to recommend how organizations can keep abreast with information system in their management control systems and how they can propel to competitive advantage.

A comparative approach enables managers to compare, analyze, and measure standards and performances across firms for the benefit of their respective firms. There is a need to determine if the different approaches to management control system foretell the performance of a firm, as far as management control is concerned. Specifically, whether firms that incorporate information systems in their management control systems, have a competitive advantage over firms that do not. This topic is worth studying because firms involved in the same, or similar industries, tend to apply similar management control tactics. It is always easier to compare firms that operate in the same industry because a majority of the factor and challenges that both of them face are similar. This allows the ability to implement the results obtained from a single firm to be implemented in improving the running of the other firm. The research will aid in deciding whether firms in related businesses need to borrow management strategies from one another or do away with other for the sake of quality performance. Management control process ensures that the relationships of both the employees and clients are well managed for the benefit of the firms. With increased competition in the business environment, a strategic management control process can aid a firm to establish a competitive advantage.

The management control process enables a company’s management to accurately identify its mistakes in time and correct them before they affect the overall running of the organizational affairs. This research will be of great benefit to different management practitioners as well as management academicians. The study will provide the management practitioners with the knowledge required for the development of an appropriate management control in the firms while the management scholars will be accorded an opportunity to pass the knowledge to other junior academic colleagues while using real life practical examples.

All management systems are dependent upon information, and information technology (IT) coordinates the activities and the workings of the diverse parts of an organization by availing the required information as and when required. The accounting systems offer one of the means through which accounting  data are collected and disseminated to all the departments operating in an organization, and the timely access to information can be both a management control and a coordination effort and is a vital element in the  implementation of  a firm’s strategy. For example, a firm’s ability to gain a relative advantage based upon process quality may be dependent upon its customer service representatives possessing immediate access to client data. A firm’s information system (IS) is also a key ingredient in its ability to monitor the effectiveness of the execution of its strategy and to diagnose problems. The sets of measurements in sequence from interim performance measurements to outcome and feedback measurements are crucial to guide decision-making. However, having the ability to assemble this data in a timely manner is a result of the firm’s Information System, and its ability to design and continuously manage a successful strategy-specific Information System which is a source of competitive advantage (Mouritsen, 2005, Forgang, 2004).

Management control is very important in employee relations. However, very few companies take the time to ask their employees whether or not they are satisfied with the positions which they hold in the organization and their ability to effectively use the available Information System in achieving the requirements imposed on them by their positions in order to achieve the overall organizational objectives. Employees can offer a great deal of information to the company about what is going on if management would simply stop and listen to these employees. Some will always suggest more money and better hours, but these are not the only things that employees want. Many employees may have a lot of trouble meeting the needs imposed on them by the positions that they hold in the organization and suggest the most effective ways in which the organization’s Information Systems could be aligned to provide them with a more conducive environment to pursue the objectives of their positions. They are the ones who are always aware of the ways in which a relevant Information System could be implemented in the organization. They are at the best position to comprehend the effect of outdated Information Systems on the jobs within the organization. If the computer terminal that they work on is extremely slow or if an internet connection that they need in order to deal with customers is extremely slow not only lowers the company’s reputation in the eyes of its customers but it also embarrasses the respective employees who must tirelessly stand there and wait while the computer performs its core duty in the organization- that of providing an interface that allows rapid information among the company’s stakeholders.

Management control is also important for customer relationship management. The increasing importance of the service sector in all world economies, the worldwide deregulation of previously highly regulated industries, and the integration of national economies and markets have all led to the rebirth of a new marketplace. For this reason, the internally oriented traditional control is increasingly irrelevant (Johnson, 1992). Instead, Kullvén and Mattsson (1994: 16) argue, “the prime task of management control becomes that of gauging the ambiguity emanating from intensive customer interactions.” This means more attention needs pay to a management control process that “make[s] visible the activities aimed at customer satisfaction” (Kullvén and Mattsson, 1994: 17), which means that more information needs to be gathered on the customer’s interaction with the firm.

Management control and information management is necessary in any organization where decentralization exists (Prahalad and Krishnan, 2002, Weill et al., 2002). Managers who do not understand the fundamentals of control techniques and their underlying technologies will be at a strategic disadvantage since management control is increasingly about technology management (Simons, 2000, Alter, 1976). However, several accounting scholars seem to consider Information Technology only as an uninteresting add-on to accounting. This argument is bolstered by a recent review of the literature conducted by Efendi et al. (2006), whose analysis of four top-ranked American academic accounting journals showed that articles considering modern Information Technology were almost totally absent from these journals. This research takes issue with this, arguing that studying the interface between management control and Information Technology is important in its own right. This study thus agrees with Dechow and Mouritsen’s (2005: 691) conclusion when they stated that “control cannot be studied apart from technology and context because one will never get to understand the underlying ‘infrastructure’ — the meeting point of many technologies and many types of control.”