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.

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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Please do not quote without authors’ permission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: c.akroyd@auckland.ac.nz Telephone: +64 9 373 7599 extension 87194

b Department of Accounting and Finance

Monash University PO Box 197 Caulfield East, Victoria, 3145, Australia Email: ralph.kober@buseco.monash.edu.au 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.

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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

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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).

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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.

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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.

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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.

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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.

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“[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.”

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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.”

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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

37

Figure 2: HRV’s Vision Statement

* Revenue figure not revealed ue to confidentiality reasons

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.