The Effect of Contextual Factors on the Design of Management Control Systems

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Introduction This paper determines the effects contextual factors have on the design of Management Control Systems. The paper firstly discusses what is meant by “Management Control Systems” and what is expected of “Management Control Systems”. Contingency-based research is outlined and five key contextual variables are identified for discussion. The five factors (external environment, technology, structure and size, strategy and national culture) are assessed to determine their impact on design and implementation of management control systems. Management Control Systems and Contingency-Based Research Management Control Systems are systems that are put into place within organisations to help ensure that managers within organisation’s act…show more content…
Tight or rigid control systems may be detrimental to performance if the technology requires fast responses or new innovative solutions. In contrast a control system that is loose and open to encourage innovation and communication may work against the organisation if the use of technology requires standard responses and is used in a rigid fashion. The way that technology is used must be considered when regarding the management control system within the organisation. External Environment This is the environment in which the organisation operates. This external environment is unable to be controlled by the organisation and is influenced by a number of factors. Levels of uncertainty, market competitiveness, political and legislative factors as well as economic factors are all considered within this factor. Findings such as “the more uncertain the external environment the more open and externally focused the MCS” (Chenhall 2003) and “the more hostile and turbulent the external environment the greater the reliance in formal controls and emphasis on traditional budgets” (Chenhall 2003) show that management control systems are tailored to the environmental context. Chenhall’s idea is that uncertainty pushes organisations towards tighter control systems with a strong focus on budgets and meeting targets, but with some flexibility so that figures can be manipulated (2003). In markets where the environment is less uncertain, there is a

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