This paper aims to analyse how a multinational organisation uses technocratic and socio-ideological controls to manage tensions arising when integrating its international subsidiaries.
Through interviews and company documentation, the authors analyse how a global German family business firm integrates its international subsidiaries into the corporate context.
The findings suggest that technocratic and socio-ideological controls in combination help the firm manage three tensions – vertical vs lateral relations, standardisation vs differentiation of practices and centralisation vs decentralisation of decision-making – arising in the course of internationalisation. These results have important analytical implications for the understanding of how a high level of compliance to technocratic control initiatives is achieved. Prior work has, in the main, focussed on the resistance to technocratic controls without paying much attention to compliance. Specifically, the authors show how managers can use socio-ideological control to achieve a high level of compliance among employees when implementing technocratic controls.
The results suggest that managers in multinational firms need to pay careful attention to the tensions that are created when they internationalise and to apply a combination of technocratic and socio-ideological controls to manage these tensions.
There is limited knowledge of how managers use socio-ideological control to enact a particular form of experience for their employees and to create a highly valued sense of purpose. The findings suggest that these controls, in combination with technocratic ones, serve important roles when organisations expand internationally.
Carlsson-Wall, M., Hirner, P., Kraus, K. and Lewinski, A. (2019), "The role of technocratic and socio-ideological controls in managing tensions when integrating international subsidiaries", Qualitative Research in Accounting & Management, Vol. 16 No. 3, pp. 434-455. https://doi.org/10.1108/QRAM-05-2018-0032
Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited
The phenomenon of doing business internationally is no longer an option, but a necessity for many corporations to enable them to stay competitive. Along with growing multinational organisations (MNOs) comes the question of the role of management controls in facilitating the integration of international subsidiaries into the corporate context (Busco et al., 2006, 2008; Cooper and Ezzamel, 2013; Cruz et al., 2009, 2011; Dossi and Patelli, 2008; Mouritsen, 1995; Quattrone and Hopper, 2005). Busco et al. (2008), for instance, found that performance management systems helped manage three tensions – vertical vs lateral relations, standardisation vs differentiation of practices and centralisation vs decentralisation of decision-making – arising in the course of MNO integration. Prior research has provided valuable knowledge of how technocratic controls manage these three tensions (Busco et al., 2008; Cruz et al., 2009, 2011). While we acknowledge the importance of technocratic controls in this context, we argue that attention needs to be given to how both technocratic and socio-ideological controls are designed and used to manage the aforementioned tensions. We pose the following research question: How does an MNO use technocratic and socio-ideological controls to manage the tensions arising when integrating its international subsidiaries?
We analyse TransFo, a medium-sized German manufacturer of power transformers. Our study contributes to the literature in two ways: First, we examine the role of management controls in integrating MNOs by highlighting the importance of socio-ideological controls and their interplay with the technocratic controls implemented when managing the tensions arising when integrating foreign subsidiaries. These results have important analytical implications for our understanding of how a high level of compliance to technocratic control initiatives is achieved. Prior work has, in the main, focussed on the resistance to technocratic controls without paying much attention to compliance (Cooper and Ezzamel, 2013; Quattrone and Hopper, 2005). Specifically, we show how managers can use socio-ideological control to achieve a high level of compliance among employees when implementing technocratic controls. Second, an explicit focus on socio-ideological control is consistent with the emerging accounting research on the “expressive dimensions” of organisational life (Ahrens and Mollona, 2007; Baxter et al., 2019; Boedker and Chua, 2013; Chenhall et al., 2017). This literature has analysed the influence of subcultures on technocratic controls and how these controls play an active role in the expression of values, but there is limited knowledge of how managers use socio-ideological controls to enact a particular form of experience for their employees and to create a highly valued sense of purpose (Alvesson and Willmott, 2002; Kraus et al., 2017; Nørreklit, 2017).
The remaining paper is structured as follows. In Section 2, we review previous research on tensions that arise in the integration of MNOs and the role of management controls in managing these tensions, and discuss the interplay between technocratic and socio-ideological control. Section 3 presents the research methods, and Section 4 introduces the case company and empirical findings. Section 5 provides an analysis of the empirical findings, after which Section 6 summarises the main contributions of the study before finally pointing to areas of interest for further research.
2. Theoretical development
2.1 Tensions arising when integrating multinational organisations
Internationalisation is a natural accompaniment to increasing the size and scope of businesses as a result of which, the coordination and integration of subsidiaries is becoming more complex (Birkinshaw et al., 2000). With the attempts to align the local, inherent business conduct with their internationalisation process, many companies have been facing tensions (Moss Kanter, 2008). In a case study of Nestlé Waters, Busco et al. (2008) identified three types of tensions that emerge when integrating international subsidiaries: vertical vs lateral relations, standardisation vs differentiation of practices and centralisation vs decentralisation of decision-making. First, the vertical relations between the headquarters (HQ) and the subsidiaries and the lateral relations among subsidiaries inevitably give rise to tensions. Vertical relations are the classical channel through which the HQ can govern its international entities, but research has documented variable intensity and different perceptions of the vertical relations, mainly depending on local culture (Cruz et al., 2009, 2011). In addition, changing business environments create a need for more flexibility and individual responsibility, which paves the way for more lateral relations among the subsidiaries (Busco et al., 2008; Cruz et al., 2009, 2011).
With respect to the second tension, a global organisation is reliant on the existence of common practices, for instance in terms of communication, business behaviour and corporate learning (Quattrone and Hopper, 2005). Typically, the HQ’s practices are transferred to the subsidiaries for local application, with the result that there is a high degree of standardisation and the benefit of economies of scale. This approach however often neglects local differences that stem from features of the national business culture where the subsidiaries are located, making coordination less efficient and missing out on local opportunities (Cruz et al., 2009, 2011). To deal with this phenomenon, often referred to as the dilemma between global integration and local responsiveness, a firm has to balance the tension of standardisation vs differentiation of practices (Busco et al., 2008, p. 106). Third, an organisation needs to find a balance between the centralisation and decentralisation of decision-making (Cooper and Ezzamel, 2013). Within a centralised company, all decision-making power emanates from the HQ, in contrast to which, a decentralised company delegates power to subsidiaries and allows them greater flexibility in steering their own paths. Again the MNO is confronted with a tension between leveraging competitive advantage throughout the organisation (through centralisation) and gaining from local opportunities (through decentralisation) (Busco et al., 2008).
Technocratic controls have been found to play an important role in managing tensions when companies pursue global alignment and integrate subsidiaries (Busco et al., 2008; Cruz et al., 2009, 2011; Dossi and Patelli, 2008). Busco et al. (2008) found that performance management systems enabled firms to achieve global unity while providing space for local adaptation. Technocratic controls monitored performance, supported strategic decision-making and improved communication and learning. As such, technocratic controls not only measure the current business and justified managerial actions, but also influence the commitment and motivation of employees by giving clear direction and a good understanding of the firm’s global strategic plan (see also Dossi and Patelli, 2008).
Research has also analysed the role of Enterprise Resource Planning (ERP) systems in multinational companies (Quattrone and Hopper, 2005). In terms of the tension between the centralisation and decentralisation of decision-making, an ERP system can help to alter the distance between HQ and its subsidiaries. While ERP can be used to eliminate distance almost completely, it can also be designed to maintain distance, in which case it supports prevailing reporting practices, yet leaves space for local adaptation (Busco et al., 2008). In addition, when ERP supports ad hoc reporting, it can become a source of conflict when measures seem to be detached from the overall company objectives (Busco et al., 2006). On a related note, Cruz et al. (2009, 2011), studying a joint venture operating in the hospitality industry in Portugal, found that heterogeneous local management control practices emerged out of the homogenising tendencies of global management control systems. The subsidiaries were able to develop a local control system, which was composed of some elements linked to the demands of HQ, and other elements derived from local adaptations of the global control system.
To summarise, the literature review showed that, in the main, accounting scholarship has focussed on the use of technocratic controls when analysing the tensions that arise when MNOs integrate. Top managers, however, can also use a broad range of socio-ideological controls to enact a particular form of experience for their employees and to create a highly valued sense of purpose (Alvesson and Kärreman, 2004; Kraus et al., 2017). In this paper, therefore, we seek to analyse the complexities intrinsic to the role of management control in integrating foreign subsidiaries by drawing on the theoretical concepts of technocratic and socio-ideological controls (Alvesson and Kärreman, 2004).
2.2 The role of technocratic and socio-ideological controls in managing tensions arising when integrating multinational organisations
Technocratic controls specify, monitor and evaluate individual and collective action by focussing on worker behaviour and/or output (Alvesson and Kärreman, 2004). These controls might be attempts to govern worker behaviour directly through rules, business policies and value statements (Simons, 1995), and/or they could take the form of measureable outputs through key performance indicators such as profit, cash flow and various non-financial metrics. Integrated ERP systems and the use of multi-dimensional control tools, such as the Balanced Scorecard, often serve as helpful devices for maintaining control (Dossi and Patelli, 2008; Kaplan, 1984; Otley, 1999; Simons, 1995; Tessier and Otley, 2012). But as noted by Alvesson and Willmott (2002), conceptualisations of technocratic control have tended to emphasise the impersonal and behaviour-related features in isolation, with scant regard for how meaning and ideology are articulated in organisations.
Socio-ideological controls, on the other hand, target employee mind-sets through norms, emotions, beliefs and values and are intended to affect behaviour indirectly (Kraus et al., 2017). With this form of control, managers seek to enact a particular form of organisational experience for others. As Alvesson and Kärreman (2004, p. 426) define socio-ideological control, it refers to: “efforts [by managers] to persuade people to adapt to certain values, norms and ideas about what is good, important, praiseworthy, etc. in terms of work and organizational life.” These ideologies are deeply held, and managers engaged in socio-ideological control efforts generally try to gain employees’ acceptance of the values and ideals that they (the managers) consciously and systematically hold. In this paper we propose that socio-ideological controls may play an important role in MNOs efforts to integrate foreign subsidiaries. With the help of socio-ideological controls, top managers aim to encourage employees’ personal attachment to the firm, thereby increasing employee motivation and loyalty (Kraus et al., 2017).
As emphasised by Alvesson and Kärreman (2004) and Kraus et al. (2017) analytical attention to socio-ideological control does not imply a neglect of technocratic controls. On the contrary, a case can be made for understanding both technocratic and socio-ideological control as simultaneous processes, at least in reasonably complex organisations such as MNOs (Alvesson and Kärreman, 2004). We follow an approach whereby technocratic and socio-ideological control may be linked to, and support and sustain, one another, rather than being suppressed and marginalised by a dominant form of control (Alvesson and Willmott, 2002; Alvesson and Kärreman, 2004; Kraus et al., 2017; Nørreklit, 2017).
To summarise, as Busco et al. (2008) discuss, three main tensions arise when integrating MNOs: vertical vs lateral relations; standardisation vs differentiation of practices; centralisation vs decentralisation of decision-making. To manage these tensions, previous research has demonstrated that multinational firms primarily use technocratic controls, oftentimes supported by ERP systems (Busco et al., 2008; Cruz et al., 2009, 2011; Dossi and Patelli, 2008; Quattrone and Hopper, 2005). However, the combined use of technocratic and socio-ideological controls to manage tensions when integrating international subsidiaries has not yet been investigated in detail. This also has important analytical implications for our understanding of how a high level of compliance to technocratic control initiatives is achieved in MNOs. Prior work has, in the main, focussed on the resistance to technocratic controls (Cooper and Ezzamel, 2013; Quattrone and Hopper, 2005), without paying much attention to compliance. Specifically, we address how managers in MNOs can use socio-ideological control to achieve a high level of compliance among employees when implementing technocratic controls. In the following, this will be investigated by means of a case study of a German family business (FB), but first, the research methods are presented.
3. Research methods
We chose to investigate TransFo, a German family owned and run enterprise. FBs have gradually attracted more attention within the accounting research community (Moilanen, 2008; special issue in QRAM edited by Roberts and Gnan, 2017; Schäffer et al., 2015; Senftlechner and Hiebl, 2015; Uddin, 2009). To grow further and to battle global competition, expansion is on the agenda of most FBs (Wen-Ting, 2012; Kontinen and Ojala, 2010). This research has shown that top managers in FBs are likely to make use of a broad range of socio-ideological controls (El Masri et al., 2017; Speckbacher and Wentges, 2012; Stergiou et al., 2013; Tsamenyi et al., 2008) and TransFo is, therefore, seen as an appropriate case organisation given the aim of the study.
The main tool for data collection was the use of semi-structured interviews. A total of 19 interviews were conducted with 17 different individuals at TransFo. In any study investigating the relations between a company’s HQ and subsidiaries, it is crucial to include interviewees from different locations. We therefore conducted interviews with employees not only from the firm’s head office in Germany, but also from subsidiaries in Sweden, South Africa, Canada, the USA and Brazil. The interviewees intentionally represented a broad range of hierarchical levels and functional backgrounds with the aim of capturing diverse points of view (De Massis and Kotlar, 2014). More specifically, we interviewed the CEO, CFO, and other managers, experts in the Finance division, and managers and non-managerial employees in functions such as sales, HR and production. Prior to the interviews, a series of questions were prepared. The average interview length was close to 60 min and the interviews were recorded with the permission of the interviewees, which gave the interviewers the opportunity to listen to the interviews again and summarise the main findings in a database for later use. A detailed summary of the interviewees and their positions can be found in the Appendix.
Company documentation served as another important source of information. There were three main categories of documentation used:
publicly available sources such as the company webpage, flyers and newspaper articles about the company and its management;
internal presentations (around 100 ppt slides) designed for “public” presentation such as a presentation of the company, a HR presentation prepared for a lecture at a university and “stories of success” found in the corporate intranet; and
strictly confidential material, for instance, documentation about the budgeting process, especially for subsidiaries, and the calculation of bonuses of sales employees and local P&Ls for the subsidiaries.
When analysing the data, we constructed a database and followed a process where we reduced, displayed, categorised and contextualised the data to ensure that it was analysed systematically (De Massis and Kotlar, 2014). When reading company documentation and interview transcripts, we selected relevant information (data reduction), organised and compressed it to form a standardised text (data display); decomposed information by aggregating it into specific topics such as technocratic and socio-ideological controls, and tensions (data categorisation); and finally assembled the information collected and identified links within it and connections to previous research (data contextualisation). We were able to identify a broad range of controls used by the management of TransFo to integrate their foreign subsidiaries. In the final discussion we contrasted the case findings with previous research and developed an understanding of how a combined use of technocratic and socio-ideological controls were used to manage tensions when integrating international subsidiaries. In turn, this allowed us to formulate our main contributions and indicate fruitful avenues for further research.
4. Case analysis
4.1 The case company – TransFo
The case company, TransFo, operates within the core market of power transformers and is a key global player with regional market shares of often more than 50 per cent. The majority of sales are generated abroad even though more than 80 per cent of the global staff are still working at the German HQ or at domestic production sites. With around 3,000 employees in total, the firm generates annual revenues of around 650 M EUR (2013). Like many other FBs in Germany, TransFo has neither long-term bank loans nor any other major financial obligation. Its core operations comprise the production and sales of high voltage devices and the provision of after-sales services. Today, TransFo as a group comprises six production factories and twenty-six sales-and-service subsidiaries in eighteen countries.
TransFo can look back on a company history of around 150 years. Since its foundation, TransFo has been under the control of the founding family, now into the fifth generation, and the top executive positions are held by family members. TransFo is a typical case of a German medium-sized manufacturer that was able to benefit from the post-war boom after the Second World War. By investing in production facilities and qualified staff early on, TransFo focussed on offering quality products that require a continuous innovative process. Therefore, steady infrastructure and R&D investments are the pillars of the business model. The majority of staff have an engineering background and work within production, R&D and sales.
During the past 30 years, TransFo has experienced substantial growth. Diversification, both geographical and product-related, has led to a steady increase in operations. In the early 1980s, the firm started to acquire and establish subsidiaries abroad. Jumping on the bandwagon as firms globalised, TransFo gradually increased its foreign commitment, entered new markets and thus experienced substantial growth in its international operations. As its first international step, the firm opened a production site in Brazil and a sales office in Australia. After several static years, the firm increased the pace of internationalisation and established production sites in the USA, China and India. Facilities in North America and Asia represent important pillars of manufacturing activities. Furthermore, TransFo gradually established a worldwide network of sales-and-after-sales-service subsidiaries. Today, the group consists of twenty-six international subsidiaries and is present worldwide. The majority of foreign staff have an engineering background and are employed in sales and after sales operations. The majority of sales are now generated outside Germany. Figure 1 shows TransFo’s international expansion.
As a consequence of this international expansion, the organisation of TransFo developed from a purely functional structure towards a more complex matrix-like structure with an emphasis on business units and global regions (Figure 2). Sales, Marketing, Technology and Production form the main business processes, supported by five corporate services such as Finance or Quality Management. Nevertheless, TransFo has remained quite a centralised organisation. More than 80 per cent of the staff are employed in Germany. At the top management level, the CEO is a member of the family. All of the people located at HQ hold first and second level management positions. Furthermore, the majority of employees working in corporate services are located at the home base. Importantly, Controlling (as a subsection of Finance) and Sales are closely linked to HQ, both geographically and operationally. Foreign subsidiaries are mostly sales and service units managed by Area Sales Managers (Managing Directors) that represent third level managers and are either locals or German expatriates. Only a small group of foreign staff is concerned with sales-supporting tasks (Finance, HR, Marketing). Other than sales and service activities, foreign production units are mainly concerned with manufacturing activities. Most of the R&D competence is concentrated at HQ or in business units located in Germany.
4.2 Tensions and the combined use of technocratic and socio-ideological controls at TransFo
TransFo has five values: sicher (safety/security), zuverlässig (reliability), kompetent (competence/professionalism), vernetzt (connectedness) and fortschrittlich (being modern/forward-looking). When asked whether these values are typical FB values, the CEO’s answer was “no”. He even added that, in his opinion, “connectedness” and “being modern” were not even typical German values. He explained: “The characteristic feature of us as a family business is the seriousness with which we live the company values.” The term “successful” was often used by both managers and employees when describing TransFo. Thus, TransFo was perceived by both managers and employees to be a well-functioning MNO in spite of the substantial growth. One explanation for this perceived “success” is the combined use of technocratic and socio-ideological controls to manage the three tensions that growing MNOs face (Busco et al., 2008). TransFo top managers systematically used a combination of technocratic controls (the annual budgeting process (ABP), the TOP10 Navigator, periodic employee evaluation) and socio-ideological controls. The latter comprised encouragement of a “give-and-take” mentality, boosting informal information exchange, and encouragement of cultural and managerial flexibility. This is elaborated next.
4.2.1 The annual budgeting process and encouraging cultural and managerial flexibility.
All employees stress that an important technocratic control for supporting vertical relations, standardisation of practices and centralisation of decision-making is TransFo’s ABP in September and October. The Group CFO masterminds the annual budget preparation, execution and implementation and is responsible for its results (see Figure 3).
The core components that are planned in this process are sales (revenue and sales quantity), costs (material and other operating expenses), manpower (head-count and cost) and investment activities (capital expenditure and depreciation/amortisation). The granularity of the finished budget is quite detailed, with an individual monthly target being specified for all subsidiaries.
According to the Group CFO, the planning related to the ABP has grown in complexity as the number of international subsidiaries increased from 3 to 26 over the past two decades. This growth process necessitated a clear structure for the ABP to keep it on schedule and make sure that it would be reliable and helpful for the upcoming year. HQ controllers translate the current macro-economic circumstances, expectations surrounding major projects and the current strategic focus into high level revenue and EBIT targets for the three business units and the five global regions in an early stage of the ABP. As the CEO put it:
We as management use input from our marketing cockpit about markets and macroeconomic data and combine them with our expectations for key and strategic projects. This way we already start setting top-down targets during the summer […] Usually top-down targets are always a bit higher than bottom-up, but that is just the nature of things. We place a carrot above them that can be reached with some effort. If the discrepancy is less than 5 per cent, that is totally OK for us.
Generally, the targets set by top management are respected by employees and perceived to provide an understandable and reasonable guideline. The Director Sales Middle East India Africa: “They don’t come up with a utopia but also rely on what people around them say.” In addition, top managers systematically link their use and discussion of the ABP to a particular socio-ideological control: encouraging cultural and managerial flexibility. The employees stress the top management’s acceptance of diverse cultural and managerial practices, and they refer to this as cultural and managerial flexibility. International subsidiaries are entitled to a great deal of independence. The CEO:
We want them [the international subsidiaries] to feel like entrepreneurs rather than employees of a company. We give them a framework to work within, but how they control and do their business, is up to them.
Similarly, the HR Manager International explained:
The question is: do we want to build up a lot of small TransFos or do we want to leave them as they are? In the acquisition in Luxembourg for instance we changed nothing other than the name on the door and conducted some training. When they are successful with their practices and ways of working we do not come and tell them how to work.
Divergent forms of management throughout the organisation are fostered by employing international managers who possess a high degree of entrepreneurial spirit. Furthermore, successful long-term divergence is sustained by long-term orientation in terms of financial planning, internal support and clear communication of expectations by HQ. As the Manager Controlling the Middle East, India and Africa put it:
We always try to make all subsidiaries local; it’s their own market, so it should not be the Germans in the long run who are in the driving seat. We don’t want to be the Germans invading other countries. Success makes them independent. If they perform, they can act freely.
More specifically, parallel to the work with the ABP, the regional controllers start with their bottom-up process, which is intended to support a degree of decentralisation of decision-making. According to the financial controller in the Brazilian subsidiary in Sao Paulo, local sales people are talking to customers and trying to estimate next year’s likely demand. At the same time, the HQ supports the subsidiaries in their planning process with, for example, planning expenditures being set in accordance with expected revenues, and advises them on what is reasonable. Furthermore, the HQ controllers ensure that all corporate and audit requirements are fulfilled in the ABP and that data is integrated into the corporate reporting. The Manager Controlling the Middle East, India and Africa explained:
The bottom-up process and the top-down process are started simultaneously in the regions by sales teams with the support of headquarter’s controllers. It’s an interactive process in which it is the regional managers’ task to translate business expectations into figures. We check the plausibility, for instance, to determine if the staff planning correlates with expected revenues, and we make critical comments. There is a lot of discussion; it is an intense communication process.
The regional managing directors take this process as an opportunity to discuss their ideas and business expectations with their local controllers and the finance department in the HQ. As the Managing Director for USA said:
The key is: I try to be honest, not only simplify and get away with it. Improvements can be made to the tensions if both sides try to make any deviations understandable.
Similarly, as the Head of Controlling Regions explained:
There is a great honesty in the planning process. That’s why it goes smoothly. The country managers understand that the top management is not demanding something impossible, so they also perform reasonable bottom-up planning.
Another effect of the top managers’ systematic use of socio-ideological control, in the form of encouraging cultural and managerial flexibility, is the so-called “Ex-budget request”. This enables top management to amend the subsidiaries’ budgets during the year when unforeseen circumstances demand it. This is used for expenses that are not covered in the budget, such as additional employees, the replacement of large machinery and other unanticipated purchases. Under such a situation, the local managing directors ask their controller in the HQ to approve the extra budget. After screening, evaluating and deciding on the importance of the proposal, the controller presents the request to the CFO who decides whether additional funds should be allocated or not. All parties interviewed emphasised that this process is rapid, demonstrating that cultural and managerial flexibility is important. This short-term reactivity was highlighted as a competitive advantage of TransFo.
4.2.2 The TOP10 Navigator and boosting informal information exchange.
In addition to the ABP, another technocratic control is the TOP10 Navigator comprised of TransFo’s most important performance measures. The requisite numbers are collected on a monthly basis for all divisions and regions and compared against the previous year’s values. The TOP10 Navigator is then presented to the top executive committee and used by the management as an instrument for identifying deviations and deciding on managerial actions. The CEO explained:
My CFO collects monthly data from all operations here at the headquarters and from the foreign subsidiaries as well. They are put together in our TOP10 Navigator. The traffic light system shows us where there are large deviations from our expectations and where we potentially have to intervene. This way we can achieve a continuous improvement process.
The TOP10 Navigator, illustrated in Figure 4, consists of the following six key areas with a total of ten different indicators: market position (incoming orders, acquired gross revenue, acquired net revenue), innovation (relative R&D expenditures, revenue with new products), productivity (manufacturing productivity, revenue per employee), attractiveness (number of employees) and liquidity/profitability (gross profit, operating income).
IT tools are enabling mechanisms for the TOP10 Navigator. Within TransFo, the ERP system plays an important role, and according to the Head of HR, it has strengthened the vertical relations between the HQ and the subsidiaries. In the company’s finance organisation, in particular, the ERP system is used as an important control and integration tool, and one that it is expected will be rolled out further in the coming years. In this respect, the Head of Controlling Regions explained:
Generally all subsidiaries have SAP [a particular ERP system] information access: however, only the large subsidiaries are fully integrated in the system at this point. Smaller or newer subsidiaries such as Dubai use local software; and then we upload their data to the group SAP reporting. Integration is a continuous rollout process, so new subsidiaries should be integrated in the long run. In the end, we want to have 100% ERP coverage inside the organisation.
The HQ of TransFo sees clear advantages in ERP system applications. The belief is that having the same conditions apply to all subsidiaries simplifies the calculation of performance measures in the TOP10 Navigator and thus simplifies comparisons of the subsidiaries’ performance. Another IT tool is the customer relationship management (CRM) tool used by the sales organisation. The Director of Sales in the Middle East, India and Africa sees benefits for his sales teams in the permanent accessibility to updated information about clients, current tender processes and the activities of sales staff in all regions. In addition, as the supervisor of several area sales managers, he can use the CRM system to track and steer sales activities if he feels it to be necessary.
Although the TOP10 Navigator is, in principle, applied in all subsidiaries, the Head of Controlling Regions acknowledged that the performance measurement system is very complex, and that adaptations are occasionally made because subsidiaries differ in sizes. In addition, the responsible managers in the subsidiaries view the performance scorecard with ambivalence. While it certainly shows them the general and strategic direction of TransFo, the scorecard still cannot be applied directly in any subsidiary without some modification. The Managing Director for Brazil clarified this as follows:
I see the KPIs [key performance indicators] given by the headquarters as a general path that we as a group are traveling, but to control my own people, other kinds of tools are needed. We translate headquarters KPIs to our needs (e.g. overtime hours, kilometres of company cars) and thus have our local KPI system in Brazil.
To handle the potential difficulties with the standardised information exchange that is supported by the TOP10 Navigator, TransFo top managers systematically use socio-ideological control in the form of boosting informal information exchange. In general, informal information exchange at TransFo happens both among subsidiaries and between subsidiaries and HQ. The top management at TransFo encourages such informal information exchange between subsidiaries. A great deal of information is exchanged between key actors of foreign subsidiaries without the involvement of HQ or the existence of formal guidelines. As the Managing Director for South Africa put it: “We have close contact with other subsidiaries, especially the American and Australian ones. There is very open communication between the managing directors”. Inter-regional information exchange and support outside the scope of centralised and formalised routines is prevalent especially between subsidiaries in proximity, but it takes place throughout the whole network of foreign operations in cases of technical or customer-related questions. The Managing Director for Sweden explained: “It is a direct relationship and we have a good exchange of information. For example, we have often supported colleagues in China with technical questions or customer requests.” Similarly, the Managing Director for Brazil said:
We three managing directors from the American subsidiaries have monthly calls with the purpose of discussing the economic situation of the region, and [we] also have frequent email exchanges, without involvement of HQ. There is also contact between us and for example Italy or China. Most of the time, this is a direct connection, which is encouraged by HQ.
In addition, informal information exchanges are also encouraged between subsidiaries and the HQ. One aspect of this is that the local and organisational affiliation of the sales and controlling department became an important tool: After a period of growth, the sales and controlling staff were re-located to HQ and placed together there. This re-location relates to a certain understanding of the role of controlling, as the Executive Director of Finance explained: “Controlling is a partner to sales; they bring the necessary financial understanding to assess the effects of sales activities.” This approach towards the role of controlling requires a close collaboration between the two departments. Their re-location was intended to achieve this by enabling exchange of information to take place without establishing formal meetings or working procedures. Information exchange has been fostered on a daily basis taking it outside the scope of formal processes, and thereby facilitating mutual support. The Sales Director of the Middle East, India and Africa explained the benefit as follows: “Some years ago the controlling unit was moved close to the sales organization […] Now, they can directly support us, for example, in tender and bidding processes.” The business-oriented role of controlling that is supported by local consolidation with sales fosters the integration of subsidiaries. As a partner of sales, control staff are involved in the exchange of information between sales managers at HQ and key actors at the subsidiaries. In turn this involvement creates proximity between the controlling staff and the staff in the subsidiaries, as supported by controllers’ regular visits to foreign facilities. The close relationship between the controlling staff and the key actors in the subsidiaries was emphasised by the interviewees, who said that it facilitated the informal exchange of information and the creation of a spirit of mutual support. Furthermore, it enables the control staff to act as mediators between the top management and the subsidiaries. The Manager Controlling the Middle East, India and Africa explained:
We as controllers are quite deeply involved in the real business, which is probably a bit atypical. We are not the typical controllers but we rather support the business with our figures. I was in South Africa last week. The local management there made clear that their growth is so rapid that they need to expand, including their office facilities. I emailed the CEO to get access to a high six digit-Euro-extra budget to take part in a bidding process for real estate this week. I had direct contact with the CEO and got his reply quickly, in this case, with a “go” for extra budget without a major approval process being required.
Informal communication between HQ and the subsidiaries is also prevalent without the mediation of the controlling department. In general, an important contributing factor to the informal information exchange is flexibility with regard to inter-hierarchical communication. As the CEO put it: “There is also an informal exchange between hierarchies. If somebody wants to talk to me, he or she can just come by and doesn’t need an appointment or involve the respective manager.” Similarly, the Manager Finance and HR, South Africa said: “I’m meeting the Head of HR about twice a year, whenever I’m in Germany. I appreciate having the chance to have close contact even with the top managers of the firm. That is something special about TransFo.” It was also emphasised by the interviewees that expatriate employees from the HQ were sent to the subsidiaries with the purpose of transferring knowledge, implementing strategy and improving business processes. According to the HR Manager International, a head office manager has lately been sent to the subsidiary in China to help the local management:
If there are processes that do not work as expected then someone will be sent there, always with the aim of finding someone local to hand over to. We send someone to clean up and then to instruct someone local. In this case, we would send someone who, ideally, has been learning and working here at the headquarters for a long time and is thus tied very closely to TransFo.
4.2.3 Periodic employee evaluation and encouragement of a give-and-take philosophy.
A further technocratic control within TransFo is the periodic evaluation of employee performance, which links the bonus component of compensation to individual goal achievement. As the Director of Sales for the Middle East, India and Africa explained, the bonuses his Area Sales Managers receive are tied to attaining agreed sales targets. The CFO added that it is not only the revenue, but also the gross margin that influence the bonus. This helps the sales organisation to avoid the detrimental practice of chasing revenue creation above all else. The system however is not trivial as several markets are interrelated in some way and cannot therefore be seen in isolation. One region’s sales might decline because a globally active original equipment manufacturer had moved sourcing from one country or region to another, but this could be counteracted by growth in the latter area. For TransFo as a whole, such moves might have no effect on sales, but they would affect the individual sales agents greatly. According to the Manager Controlling the Middle East, India and Africa, these complicated situations need to be kept in mind when evaluating employees; as he put it:
This is really not measurable in a standardised way; success and failure always have several ‘fathers’, so how can we correctly allocate success and failure to a specific salesperson? Simply using sales KPIs is not suitable or comparable.
To solve this dilemma in a fair way, an individual assessment also takes sales agents’ actions into account, including figures such as the number of customer visits, the documentation for proposals and the intensity with which sales teams had tried to get involved in new projects. This means that, to make a reasonable evaluation, good knowledge of the regions and personal contact with the sales staff is necessary. For other employee groups, too, target agreements exist with individual goals depending on role. According to the Managing Director in USA, employee satisfaction also influences his personal pay. Generally, HR wants to ensure that only performance measures that an employee can actively influence will determine the individual bonus payment. The Head of HR explained:
It depends of course on the employee’s position. With regard to managing positions abroad, we rely more on fixed salaries in the beginning. This takes into account that things first have to be built up. Later on, we increase the flexible income part to account for the managers’ willingness and ability to create and form sustainable success.
Both top managers and employees stressed that they are aware of the potential risks with short-term financial incentive systems and the top managers systematically used socio-ideological control in the form of encouragement of a “give-and-take” mentality to mitigate these risks. The Sales Director for the Middle East, India and Africa clarified this as follows:
Like many other family businesses, the firm has a “give and take” philosophy, which employees understand and experience. This is a philosophy that grew over more than a century and which is backed up by internal support and great collaboration […] The family, too, gives and takes. If we were a listed company, the returns would be distributed to shareholders. Here we see that the family reinvests and does not only take money out of the firm.
A main premise for the existence of this “give and take” philosophy is the top managers’ policy to promote employees and reward their long-term attachment to the firm. The CEO explained:
The continuity and reliability of colleagues and the firm [is important]. I am a good example, I have been general manager now for 18 years already and will probably be here for another 12 years or longer. Usually you don’t find that anywhere else. This brings continuity. If there were to be a new manager every five years, then things would change all the time. And that also applies for all other hierarchical levels where you can find the same phenomenon.
Interviewees point to this long-term perspective as something that encourages everyone to work towards the long-term success of the firm, rather than the fulfilment of short-sighted targets. The CEO said:
We have a very long time horizon: it is eternity. We don’t care about quarters and annual results. Of course we plan and observe them, but we have the freedom to live with deviations. Deviations are a learning curve for us rather than a problem.
One important part of this long-termism was explained by the Head of HR. At the HQ, it is a typical for three generations of the same family to be working at TransFo at the same time. This, she explains, serves as a special motivation for older employees to work for the success of the company and thus secure jobs and income for their own children. The long-term attachment of employees to the firm is also fostered by the top management by continuously allocating money for training and personal development at every hierarchical level, both at the home base and abroad. Each employee is seen as an “investment and not as cost” (Head of Controlling Regions). This is based on the “give and take” philosophy where the firm gives training and takes their long-term commitment to the firm so that “costs of training pay off” (Managing Director USA). Similarly, the Managing Director of South Africa explained:
When it comes to employees’ attachment to the firm let me quote Richard Branson: You have to “train people well enough so they can leave, but treat them well enough so that they won’t want to”. That is what we do at TransFo
The top managers strongly emphasise the sense of belonging to the firm over the long-term and show attachment to the individual employees. The CEO said: “We don’t say colleague Mr X or Ms Y have to leave because there are budget deviations. No! We have known them for a very long time, and they are part of the family.” Similarly, the Sales Director Middle East India Africa said:
The fact that there is support from every part of the organisation is the outcome of a ‘culture of accepting mistakes’. My people are allowed to make mistakes, they can learn from them […] If something goes wrong, there is always somebody there to help and provide support.
5.1 The combined use of technocratic and socio-ideological controls for managing tensions arising when integrating international subsidiaries
5.1.1 Vertical vs lateral relations: the combined use of technocratic and socio-ideological control.
At TransFo, vertical relations are strongly reliant on technocratic controls. The ABP communicates the following year’s objectives between HQ and the subsidiaries and is important for coordinating tasks within the MNO as a whole. Through the process of delivering top-down objectives to foreign subsidiaries and comparing these objectives with bottom-up plans from the subsidiaries, an intense dialogue is initiated. The monthly follow-ups on key figures implemented through the TOP10 Navigator and the periodic employee evaluation, were both facilitated by the use of the SAP system, further strengthening the vertical relations between HQ and the subsidiaries. As such the technocratic controls allow strategic alignment of TransFo’s subsidiaries by linking key objectives with the strategy, incorporating formal levels of performance, reward systems and feedback loops (Otley, 1999).
Lateral relations within the firm, however, are strongly reliant on socio-ideological controls. This contrasts with the state of affairs Tsai (2002) describes, where greater HQ control over subsidiaries reduces the willingness of subsidiaries to share knowledge with each other, in other words, in centralised organisations information flows are mainly vertically driven and coordination is achieved through the mediation of the HQ. However, in TransFo, the “give and take” philosophy, cultural and managerial flexibility, and in particular top managers’ efforts to boost informal information exchange represent socio-ideological controls that strengthen lateral relations. A lot of information is exchanged between foreign subsidiaries without the involvement of HQ or the existence of formal guidelines. In TransFo there are, for example, long-term relationships between the foreign managers themselves, as well as an HR management, that encourage long-term job tenure. All of these features, according to the interviewees, encourage lateral exchange of knowledge and ideas. TransFo employees help each other and share best practices and experiences. As such, the systematic use of socio-ideological controls is important for the existence of well-functioning lateral relations despite the high degree of HQ dominance at TransFo.
5.1.2 Standardisation vs differentiation of practices: the combined use of technocratic and socio-ideological control.
The relational context of MNOs also impacts the processes of convergence towards standardisation of multinational practices and the possibilities for local differentiation, which represents the second tension that arises when integrating MNOs (Busco et al., 2008). At TransFo, technocratic controls foster convergence towards a common set of practices. Technocratic controls, the ABP, the TOP10 Navigator and employee evaluation, foster standardisation with regard to planning and evaluation. These three controls are designed for and communicated to each foreign subsidiary, and, interviewees point out, they secure cost savings and improve coordination. Moreover, there is backup for this coordination in the use of IT tools such as SAP and CRM. Furthermore, these systems ease the exchange of ideas and best practices which in turn fosters convergence towards a common set of practices. Beyond these technocratic controls, the use of expatriates fosters convergence throughout the MNO. By using their expertise generated by home-based training and development, their transfer of knowledge, strategy implementation and supervision of foreign business processes is coloured by HQ practices and thus consolidates HQ-like practices at foreign subsidiaries.
Even though technocratic controls foster standardisation of practices at TransFo, the high degree of flexibility afforded foreign managers also results in differentiation. Managing directors of foreign subsidiaries are quite independent from HQ with regard to operational decisions that are within the scope of the annual budgets. The top managers systematically use socio-ideological controls to create differentiation of practices and manage the potential risk of excessive convergence in foreign management styles. These controls bring together key actors even if they represent units that are different, which in turn facilitates value creation through knowledge exchange and reduces risks stemming from convergence (Songini et al., 2013; Salvato and Moores, 2010; Stockmans et al., 2010). In particular, the top management’s encouragement of cultural and managerial flexibility support differentiation of practices among the subsidiaries. The ex-budget request, a flexible and quick tool to get additional budget approved during the year, clearly signals top management support of a differentiation of practices as extra money can be allocated if important unforeseen circumstances arise in a specific subsidiary.
5.1.3 Centralisation vs decentralisation of decision-making: the combined use of technocratic and socio-ideological control.
The third tension is centralisation vs decentralisation of decision-making, and it is determined by the forces that maintain or collapse distance between HQ and the subsidiaries. Distance refers to both geographic distance between the HQ and the subsidiaries and its consequences in terms of the time lags between planning by HQ, execution by subsidiaries and the transfer of feedback (Busco et al., 2008). Our findings suggest that TransFo is a centralised organisation, as seen for instance in the previously outlined organisational structure that concentrates the decision-making authority at HQ. The high degree of centralisation at TransFo is in line with previous research on FBs. The literature suggests that FBs are typically quite centralised organisations, which relates to the strong concentration of decision-influencing power within the family and their high degree of informality (Segaro et al., 2014; Hiebl, 2013; Speckbacher and Wentges, 2012). Considerable centralisation and the existing distance between HQ and the subsidiaries are maintained through the use of technocratic controls. The ABP is based on a top-down approach with key actors at HQ designing this control tool in its entirety. Furthermore, many of the business-support roles at the foreign subsidiaries are held by expatriates, which fosters additional centralised authority through the transfer of home-based knowledge and practices and close relationships between expatriates and key actors at HQ.
However, formalisation and a high degree of centralisation pose certain risks. By maintaining distance between HQ and its subsidiaries, TransFo runs the risk of neglecting the need for local adaptation (Busco et al., 2008; Cruz et al., 2009, 2011). This refers to both a need for a diversity of managerial styles due to different cultural and social environments and a need for freedom to innovate in response to opportunities arising on foreign markets (Ghemawat, 2001; Perlmutter, 1969). TransFo therefore manages these risks through the use of socio-ideological controls. Even though the formalised organisational structure and the set of technocratic controls entail a high degree of centralisation, the set of socio-ideological controls support decentralisation of decision-making. For instance, top managers encourage cultural and managerial flexibility alongside the high HQ dominance, which can be seen in a parallel to the ABP, wherein the regional controllers start with their bottom-up process. Informal information exchange and the existence of a “give and take” philosophy, which are based on long-term personal relations, also enable subsidiaries’ to influence planning and decision-making.
5.2 Explaining compliance
Our findings point to a relatively strict correspondence between, on the one hand, technocratic controls and vertical relations, standardisation of practices, centralisation of decision-making, and on the other hand socio-ideological controls and lateral relations, differentiation of practices, decentralisation of decision-making. This is not in line with prior research which suggests that technocratic controls support both lateral and vertical relations, standardisation and differentiation of practices and centralisation and decentralisation of decision-making. It is evident when comparing our findings with prior work that the degree of sophistication of the technocratic controls in TransFo is lower than in prior work such as Busco et al. (2008) and Quattrone and Hopper (2005). The budget items and the ten different indicators in the TOP10 Navigator are perceived as straightforward and easy to understand by the TransFo employees. In contrast, the budgeting and performance measurement systems in Busco et al.’s (2008) Nestlé Waters are highly sophisticated with numerous overlapping accountabilities between the different subsidiaries. For instance, subsidiary managers are held accountable for total volumes, revenues and profits regardless of what brands have been sold and not for the profit margins of individual international brands.
As such, prior research demonstrates that sophisticated technocratic controls alone can help manage the three tensions outlined in Busco et al. (2008). The potential risk with these highly sophisticated performance measurement systems, however, is that they may “become trapped in the conflicts and complexity that characterise integration within [MNOs]” (Busco et al., 2008, p. 122). Such conflicts have been evident in the accounting literature on the integration of international subsidiaries into the corporate context (Busco et al., 2008; Cooper and Ezzamel, 2013; Quattrone and Hopper, 2005). As detailed in the Busco et al. (2008, p. 118) study with regards to overlapping accountabilities in the performance measurement systems: “Since the distributor is accountable for its overall performance in the local market, and the [business unit] is responsible for the profitability of international brands, conflicts between the objectives of the local and international brands are quite likely to arise.” In this respect, our findings point to the need for a broader discussion of compliance and the absence of resistance towards the implementation of technocratic controls in our case organisation.
As previously mentioned, both top managers and employees explicitly argue that TransFo is “successful”, and state that there was very little resistance. Thus, on the whole, the level of compliance at TransFo is high. Previous research on this topic has, in the main, analysed how and why employees resist the implementation of highly sophisticated technocratic controls in MNOs specifically (Quattrone and Hopper, 2005), as well as in organisations more generally (Carlsson-Wall et al., 2011; Chenhall et al., 2010; Ezzamel et al., 2008). However, recent research has started to analyse why there is a high degree of compliance in certain organisations (Boedker and Chua, 2013; Kraus et al., 2017; Nørreklit, 2017). Boedker and Chua (2013, p. 264), for instance, discussed their findings as follows:
[…] throughout our study, we observed a notable dimension that characterised the case study organisation, namely the compliance of Australian actors […] our paper indicates that forms of resistance were mostly absent.
Previous work’s explanations of compliance related to technocratic controls being able to stimulate enthusiasm and/or increase anxiety (Boedker and Chua, 2013), the top manager’s use of ideological talk (Kraus et al., 2017) and the integration of facts, possibilities and values (Nørreklit, 2017).
Other studies argue that attention to the design characteristics of technocratic controls can help explain compliance (Ahrens and Chapman, 2004; Englund and Gerdin, 2015; Jordan and Messner, 2012). Within this context, our study is complimentary and contributes to the literature by proposing that compliance is related to how relatively simple and straightforward technocratic controls are combined with socio-ideological controls. In TransFo, for instance, technocratic control in the form of less sophisticated budgeting and performance measurement systems and an easy-to-understand periodic evaluation of employee performance was not enough to manage the tensions arising when integrating international subsidiaries. But when combined with the systematic use of socio-ideological controls the tensions were “successfully” managed. In addition, the policy of promoting and rewarding the long-term attachment of the employees to the firm made them “accept” the periodic evaluation and short-term financial compensation scheme. As such, our findings suggest the need to analyse the interplay between technocratic control (including degree of sophistication of these controls) and socio-ideological control to further develop our understanding of what can explain compliance in organisations.
This paper has investigated the role of technocratic and socio-ideological controls in integrating international subsidiaries through a case study of TransFo, a German manufacturing company. Our findings make two contributions to the accounting literature. First, we contribute by highlighting the importance of the combined use of technocratic and socio-ideological controls for managing the tensions arising when integrating foreign subsidiaries. Accounting scholarship has provided valuable knowledge of how technocratic controls manage the three tensions outlined by Busco et al. (2008): vertical vs lateral relations, the standardisation vs differentiation of practices, and the centralisation vs decentralisation of decision-making (Busco et al., 2006, 2008; Cooper and Ezzamel, 2013; Cruz et al., 2009, 2011; Dossi and Patelli, 2008; Mouritsen, 1995; Quattrone and Hopper, 2005). We do not question the importance of such technocratic controls; indeed, TransFo, too, used a number of them in the form of the ABP, the TOP10 Navigator and periodic employee evaluation. However, our findings suggest the importance of understanding how these technocratic controls are combined with socio-ideological ones (a “give and take” philosophy, informal information exchange, and cultural and managerial flexibility) to manage the three tensions. Socio-ideological controls helped, for instance, to foster lateral relations, and enabled the differentiation of practices and decentralisation of decision-making. Our study shows that there is considerable scope for future research to specify and contextualise the interplay between socio-ideological and technocratic controls when companies expand and need to integrate international subsidiaries. Second, there is limited knowledge of how managers use socio-ideological control to enact a particular form of experience for their employees and to create a highly valued sense of purpose (Kraus et al., 2017). Our findings suggest that these controls are important as organisations expand internationally. More generally, we also add to recent research that has analysed a high degree of compliance in organisations (Ahrens and Chapman, 2004; Boedker and Chua, 2013; Englund and Gerdin, 2015; Jordan and Messner, 2012; Kraus et al., 2017; Nørreklit, 2017). We suggest that compliance is related to how technocratic and socio-ideological controls are combined and there is much scope for future research to further analyse such combinations.
List of interviews
|Head of Controlling Regions||9-September-2014||120|
|Managing Director, USA||17-September-2014||60|
|Managing Director, Canada||17-September-2014||45|
|Managing Director, Brazil||17-September-2014||65|
|Manager Controlling, Middle East India Africa||17-September-2014||65|
|Manager Controlling, Middle East India Africa||2-October-2014||60|
|Managing Director, Sweden||15-October-2014||90|
|Production Worker, Sweden||15-October-2014||20|
|Production Manager, Sweden||15-October-2014||30|
|Production Technician, Sweden||15-October-2014||45|
|Director Sales, Middle East India Africa||3-November-2014||60|
|Head of Controlling Regions||3-November-2014||60|
|HR Manager International||3-November-2014||45|
|Head of HR||3-November-2014||70|
|Managing Director, South Africa||5-November-2014||40|
|Manager Finance and HR, South Africa||5-November-2014||55|
|Executive Director Finance (CFO) and Manager Controlling Middle East India Africa||13-November-2014||60|
|General Manager (CEO)||13-November-2014||60|
Technocratic controls specify, monitor and evaluate individual and collective action by focusing on worker behaviour and/or output (Alvesson and Kärreman, 2004). These controls are attempts to govern worker behaviour directly through rules and business policies, and/or they could take the form of measureable outputs through key performance indicators. Socio-ideological controls, on the other hand, target employee mind-sets through norms, emotions and values and are intended to affect behaviour indirectly (Alvesson and Kärreman, 2004; Kraus et al., 2017). With this form of control, managers seek to enact a particular form of organisational experience for others.
‘Technocratic control’ is similar to the term ‘formal MCS’ often referred to in previous accounting literature on integration of international subsidiaries. In this paper we will use the term technocratic control as it is the term used in combination with socio-ideological control by Alvesson and Kärreman (2004) (see the discussion in Footnote 3 on why the term socio-ideological control is appropriate for the purpose of this study).
We acknowledge that the previous accounting literature often uses other related concepts, such as informal control (Busco et al., 2008) and clan control (Ouchi, 1979). There are, however, important differences between informal/clan control and socio-ideological control. Informal/clan control emerges as a result of shared norms and the mutual commitment of (often non-managerial) members within a group or between groups (Ouchi, 1979). In our paper, however, we are concerned with how managers try to persuade people to adapt to certain values and adhere to norms concerning what is good and praiseworthy in terms of work and organisational life; it is this that the term socio-ideological control seeks to capture.
The identities of individuals, and of the organisation itself, have been disguised to preserve anonymity in accordance with our agreement with the organisation.
Getting access to interviewees was very demanding and since the statements from the employees in the international subsidiaries were relatively similar, we decided not to try gaining additional interview access beyond the 19 interviews negotiated with the company.
Internally called “oberster Führungskreis”, a committee of the ten most senior people in the company.
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