The role of strategy and culture in the performance evaluation of international strategic business units

Management Accounting Quarterly, Wntr, 2003 by Priscilla O'Clock, Kevin Devine

WHEN DESIGNING A MANAGEMENT CONTROL SYSTEM FOR A FOREIGN STRATEGIC BUSINESS UNIT (SBU), COMPANIES NEED TO CONSIDER THE JOINT IMPACT OF STRATEGY AND CULTURE TO HELP ENSURE THE SBU'S MANAGERS MAKE DECISIONS THAT ARE ALIGNED WITH CORPORATE OBJECTIVES.

A primary challenge facing many U.S.-based multinational corporations (MNCs) is the evaluation of foreign strategic business units (SBUs). The way an organization evaluates and measures performance determines the motivation behind the decisions and actions of an SBU's managers. Failure to consider the strategic objectives of an SBU or the cultural identity of its management is an error many MNCs commit when they export the evaluation systems of the parent entity to the foreign SBU. This often results in decisions by the SBU's managers that are incongruent with corporate goals and objectives.

The consideration of cultural differences is particularly important when the management of an international SBU is delegated to host country personnel. All too frequently, multinational corporations mistakenly evaluate their performance using return on investment (ROI) or one of its variants, such as residual income (RI) or economic value added (EVA), regardless of the business unit strategy. This can lead to management control systems that result in suboptimal decision making, conflicting corporate and SBU objectives, and a negative impact on morale. Return-based measures play a role in evaluating performance, but, used improperly, they perpetuate a short-term orientation and may be inconsistent with the cultural preferences that motivate the local manager.

When developing control systems to evaluate the performance of an international SBU--and rewarding its managers--companies should design performance measures that consider the impact of business unit strategies and cultural differences. In this article, we will present competing business unit strategies and suggest variants to the control system to compensate for these differences. We also will discuss cultural dimensions as identified by Geert Hofstede and make a case that the impact of these cultural differences needs to be incorporated into the design and implementation of management control systems for foreign SBUs. (1) Finally, we suggest performance measures to emphasize and implementation issues to consider when designing accounting control systems that integrate strategic and cultural differences.

STRATEGIC OBJECTIVES

There is no one-size-fits-all answer for the effective design of control systems. When an SBU manager's reward system is matched with the SBU's strategy, performance will match corporate strategy, and objectives will be enhanced. Failure to match strategy and reward will adversely affect the manager's motivation and efforts. The strategy for an SBU is dependent on its mission and the consideration of environmental opportunities, internal strengths, and the resources available to accomplish its goals and objectives. (2)

Three approaches to control system design that foster goal congruence are: situation specific, universalistic, and contingency. (3) The situation-specific model views each situation as unique, so application of general rules is not possible. Universalists argue that an optimal control system design will be effective in all settings. The contingency approach, which has become the prominent paradigm, is positioned between these two extremes. It suggests that the appropriateness of the control system depends on the business setting (like the situation-specific approach), but generalization (universalistic approach) can be made across similar settings. If the SBU mission or competitive strategy varies across divisions within the organization, the control system must be modified to capture the relevant performance measures and motivate SBU managers accordingly. (4) Strategic mission or business unit strategies are commonly grouped into the following areas: build, hold, harvest, and divest. (5) Competitive strategies include: low cost, differentiation, focus, defender, or prospector. (6)

STRATEGIC MISSION

The mission of an international SBU is related to lifecycle concepts. A build mission implies the goal of increasing market share and typically applies to any SBU with low market share in a high-growth industry. In order to build a competitive advantage, it may be necessary for the manager to sacrifice short-term earnings and/or cash flow. Also, a build strategy implies an increase in production, which results in additional use of the firm's resources. Performance measures that focus mainly on profit or return would be in conflict with the overall mission of the SBU. The manager, therefore, should be evaluated and rewarded primarily on achieving a targeted increase in sales or market share, with profitability measures (with a great deal of slack) a secondary objective.

The hold strategy applies to an SBU with a high market share in a high-growth industry. Though profit-oriented accounting performance measures would be appropriate, nonfinancial measures also should be incorporated, such as customer service, maintaining market share, and quality measures.