The Emergence of Management Control Systems – - opus4 ...

Erik Strauß

The Emergence of Management Control Systems – A Governance Perspective

Dissertation, Wissenschaftliche Hochschule für Unternehmensführung (WHU) – Otto Beisheim School of Management; Vallendar 2011.

The Emergence of Management Control Systems – A Governance Perspective Alle Rechte vorbehalten. © 2011 Erik Strauß Das Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwer-tung außerhalb der Grenzen des Urheberrechts ist ohne vorherige schriftliche Zustim-mung des Autors unzulässig und strafbar. Das gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elekt-ronischen Systemen.

Vorwort

Die vorliegende Arbeit entstand im Rahmen eines Dissertationsprojektes an der WHU – Otto Beisheim School of Management in Vallendar und wurde im Februar 2011 angenommen. Bis zur Fertigstellung dieser Thesis war es ein langer Weg, auf dem ich von vielen Personen be-gleitet wurde.

Zuerst gilt mein Dank meinem Erstbetreuer, Doktorvater und akademischen Mentor Prof. Dr. Dr. h.c. Jürgen Weber. Durch sein entgegengebrachtes Vertrauen, seine doktorväterli-che Gelassenheit und sein Wissen sowie seine Forschungserfahrung hat er nicht nur zum Gelin-gen des Dissertationsprojektes, sondern auch zu meiner Begeisterung an der Forschung einen unschätzbaren Beitrag geleistet.

Des Weiteren möchte ich Herrn Prof. Dr. Utz Schäffer für die Übernahme des Zweit-gutachtens danken. Er war nicht „nur“ ein Zweitgutachter, sondern vielmehr ein „zweiter Dok-torvater“. Neben seinen konstruktiven Anmerkungen hat er es vor allem durch sein kritisches Hinterfragen stets geschafft, dass ich meine Argumente schärfte und das Dissertationsprojekt als solches in einen größeren Kontext einordnete.

Ein ganz herzlicher Dank gilt meinen ehemaligen und aktuellen Kollegen, welche die Zeit der Dissertation um so viel mehr als nur um fachliche Aspekte ergänzt haben und mit de-nen wunderbare Freundschaften entstanden sind. Besonders möchte ich mich an dieser Stelle bei Dominik Breiter, Dr. Christian Broser, Tina Goldau, Lukas Goretzki, Heiko Icks, Dr. Sebastian Kempf, Stephan Kramer, Andreas Linnenlücke, Dr. Matthias Mahlendorf, Prof. Dr. Pascal Nevries, Anton Preis und Dr. Andreas Veit bedanken.

Zudem bin ich auch Evelyn Busch, Beata Kobylarz-Winn, Fotini Noutsia und Sabine Petrakakis für die hervorragende Organisation des Institutsbetriebes zu Dank verpflichtet. Gera-de die so häufig unsichtbaren Tätigkeiten im Hintergrund und die nicht selbstverständlichen, aber wichtigen Kleinigkeiten am Rande haben ihren Teil zum Gelingen dieser Arbeit beigetra-gen.

Der größte Dank gebührt meiner Familie. Meine Eltern haben mich immer in allen mei-nen Entscheidungen bestärkt, unterstützt und nie an mir gezweifelt. Ohne den elterlichen Ort der Zuflucht, ihren ungeheuren Rückhalt und ihre Liebe, wäre diese Arbeit nicht entstanden. Als wichtigster Person, nicht nur in der Promotionszeit, gilt mein Dank Katharina. Sie hat mir im-mer wieder aufs Neue gezeigt, was die wirklich wichtigen Dinge im Leben sind. Ihre unglaubli-che Geduld, ihr grenzenloses Verständnis und ihre tiefe Liebe haben mir stets die Kraft gege-ben, auch in schwierigen Zeiten nie den Mut und die Zuversicht zu verlieren. Ohne sie wäre nichts denkbar gewesen.

Meiner ganzen Familie ist diese Arbeit gewidmet.

Erik Strauß


VI

Content Overview

Content Overview ......................................................................................................... VI

Table of Contents ........................................................................................................ VII

List of Tables .................................................................................................................. X

List of Figures ............................................................................................................... XI

List of Abbreviations .................................................................................................. XII

A Introduction .............................................................................................................. 1

B Management Control Systems – A Textbook Review ........................................ 12

C The Emergence of Management Control Systems – A Resource Dependency

Perspective .............................................................................................................. 40

D Survival and Growth – A Strategic Institutional Perspective ........................... 82

E Concluding Remarks ........................................................................................... 125

F References ............................................................................................................. 136

Appendices .................................................................................................................. 154


VII

Table of Contents

Content Overview ......................................................................................................... VI

Table of Contents ........................................................................................................ VII

List of Tables .................................................................................................................. X

List of Figures ............................................................................................................... XI

List of Abbreviations .................................................................................................. XII

A Introduction .............................................................................................................. 1

A.1 Motivation ...................................................................................................................... 1

A.2 Research objectives ....................................................................................................... 3

A.2.1 Research objective one: Identification of the understanding of MCS ..................... 3

A.2.2 Research objective two: Identification of the reasons for introducing MCS .......... 3

A.2.3 Research objective three: Management of legitimacy ............................................. 4

A.3 Research approach ........................................................................................................ 5

A.4 Organization of the dissertation ................................................................................ 10

B Management Control Systems – A Textbook Review ........................................ 12

B.1 Introduction ................................................................................................................. 13

B.2 The starting point of modern MCS ........................................................................... 16

B.3 Research design ........................................................................................................... 19

B.4 Results of the accounting academics survey ............................................................. 21

B.5 MCS according to the three top-ranked textbooks .................................................. 26

B.5.1 Understanding and defining MCS ......................................................................... 26

B.5.2 Types of MCS ........................................................................................................ 31

B.5.3 Excursus: the role of Harvard Business School on management control systems

textbooks ................................................................................................................ 37

B.6 Discussion ..................................................................................................................... 38


VIII

C The Emergence of Management Control Systems – A Resource Dependency

Perspective ..................................................................................................................... 40

C.1 Introduction ................................................................................................................. 41

C.2 Prior Research on the Emergence of MCS ............................................................... 45

C.3 Resource Dependency Theory ................................................................................... 49

C.4 Research Method and Case Setting ........................................................................... 51

C.5 Results .......................................................................................................................... 54

C.5.1 Reasons for introducing MCS ............................................................................... 55

C.5.1.1 Financial planning ........................................................................................................ 55

C.5.1.2 Human resource planning ............................................................................................. 57

C.5.1.3 Human resource evaluation .......................................................................................... 59

C.5.1.4 Financial evaluation ...................................................................................................... 62

C.5.1.5 Product development management ............................................................................... 64

C.5.1.6 Sales/marketing management ....................................................................................... 68

C.5.1.7 Strategic planning management .................................................................................... 70

C.5.2 Reciprocal influences and the balance of management control systems ............... 71

C.5.3 Future orientation of management control system introduction ............................ 75

C.6 Discussion ..................................................................................................................... 77

D Survival and Growth – A Strategic Institutional Perspective ........................... 82

D.1 Introduction ................................................................................................................. 83

D.2 Organization’s Emergence, Growth and Legitimacy .............................................. 87

D.2.1 Emerging organizations and legitimacy ................................................................ 87

D.2.2 The legitimacy management approach by Suchman ............................................. 91

D.3 Research Method and Case Setting ........................................................................... 98

D.4 Results ........................................................................................................................ 102

D.4.1 Pre-start-up and start-up phase ............................................................................ 102

D.4.2 Growth phase ....................................................................................................... 108

D.5 Discussion ................................................................................................................... 121


IX

E Concluding Remarks ........................................................................................... 125

E.1 General conclusions .................................................................................................. 125

E.1.1 Research objective one ......................................................................................... 126

E.1.2 Research objective two ........................................................................................ 126

E.1.3 Research objective three ...................................................................................... 129

E.2 General limitations .................................................................................................... 131

E.3 Future Research ........................................................................................................ 132

F References ............................................................................................................. 136

Appendices .................................................................................................................. 154


X

List of Tables

Table A-1: Comparison of institutional and resource dependency perspective ............ 7

Table B-1: Review protocol ........................................................................................ 19

Table B-2: Results from the e-mail survey .................................................................. 22

Table B-3: Textbooks recommended in syllabi for courses covering MCS and

containing the word “control” in their titles .............................................. 25

Table B-4: Solved control problems by different types of MCS (adapted from

Merchant and Van der Stede, 2003, p. 84) ................................................ 33

Table C-1: List of participating firms .......................................................................... 54

Table D-1: Legitimation strategies by Suchman (1995) .............................................. 97

Table D-2: Participating organizations ........................................................................ 99

Table D-3: Organizational activities for gaining and maintaining legitimacy .......... 119


XI

List of Figures

Figure A-1: Research objectives of the dissertation ....................................................... 5

Figure B-1: The formal control process (Anthony and Govindarajan, 2007, p. 105) .. 28

Figure B-2: Framework for strategy implementation (Anthony and Govindarajan,

2007, p. 8) .................................................................................................. 29

Figure B-3: Levers of control framework (Simons, 1995, p. 7) ................................... 34

Figure B-4: Comparison of the three top-ranked textbooks ......................................... 37

Figure C-1: Reciprocity between informal controls and MCS ..................................... 75


XII

List of Abbreviations

B2B business to business

BoD board of directors

CEO chief executive officer

CFO chief financial officer

COO chief operating officer

CTO chief technology officer

IPO initial public offering

MAS management accounting systems

MCS management control systems

RDT resource dependency theory

TMT top management team

VC venture capitalist

Part A Introduction

1

A Introduction

A.1 Motivation

“Even really large organizations started small, usually, but the abso-lute miracle of their creation does not seem to interest most organi-zation theorists. It should. Without understanding why and how new social units emerge, we miss the connection between the on-going creative ferment in human societies and the particular realizations of it in organizations.” (Aldrich, 1999, p. 1)

Although this statement is older than 10 years, it still holds true today. Researchers fo-

cus on large established firms for several reasons but mainly because of easier data access and

large firms’ relatively strong influences on the economy. However, in Germany, for example,

more than 416,000 new firms were founded in 2010.1 In 2005, more than 99.8% of all European

firms had less than 250 employees and these companies employed 67.1% of all employees in

the European Union. They generated 3.090 bn EUR turnover in 2005, which is 57.6% of the

overall European added value; 2 and every year new firms emerge.

Accordingly, new small firms3 are an integral part of economic growth (1934), although the

start-up of a small firm is challenging because of its “liability of newness” (Stinchcombe, 1965).

Entrepreneurs develop a new idea and have to acquire resources that are necessary to realize this

idea (e.g., Aldrich and Fiol, 1994; Lounsbury and Glynn, 2001; M. A. Zimmerman and Zeitz,

2002; Zott and Huy, 2007). Yet, nascent organizations have no prior history, actions or perfor-

mance that can be evaluated by the potential constituents of the firm such as financiers or cus-

tomers. Although this information asymmetry between the start-up4 and its constituents might

restrict access to resources necessary to survive and to grow (e.g., Amit, Brander, and Zott,

1998), every year entrepreneurs are able to found new ventures and acquire sufficient resources

from society.

1 Retrieved from http://www.ifm-bonn.org. 2 Statistics retrieved from http://ec.europa.eu/eurostat. 3 I define small firms as firms with less than 250 employees. 4 According to prior research (e.g., Amason, Shrader, and Tompson, 2006; J. N. Baron, Hannan, and Burton, 1999,

2001; Jennings, Jennings, and Greenwood, 2009; Shrader, 2001; K. G. Smith, Baum, and Locke, 2001), I define a start-up as a firm of limited operational history, i.e. less than 10 years.

Part A Introduction

2

However, most young organizations die within their first two years (Small Business

Administration, 1999), which means that they were not able to handle the challenges of keeping

a firm alive. Although start-ups and young growing organizations are an important factor for the

economy, little is known about how entrepreneurs can control their firms to survive and grow

(M. A. Zimmerman and Zeitz, 2002) because most research on management control and man-

agement control systems (MCS5) focuses on well-established firms (Langfield-Smith, 1997;

Luft and Shields, 2003; Sine, Mitsuhashi, and Kirsch, 2006).

However, MCS also play a significant role in young entrepreneurial and start-up firms because

these systems determine a firm’s ability to handle future growth and success (Davila, 2005) as

well as organizational learning (Cohen and Levinthal, 1990; Ditillo, 2004; Henri, 2006;

Widener, 2004). These systems also support start-up’s survival and growth. Moreover, transi-

tioning from informal control mechanisms such as personal supervision to MCS is vital for dy-

namically growing firms (Davila, 2005; Sandino, 2007) because the lack of adequate MCS can

result in failed start-ups (Granlund and Taipaleenmäki, 2005). These MCS also influence the

subsequent potential and ability of firms to act successfully because they unburden management

from routine tasks and enable them to focus on strategic issues (Davila and Foster, 2005).

Furthermore, since every large organization started as a small start-up, prior research has found

empirical evidence for the path dependency of MCS: it was found that MCS that are already in-

troduced will influence the introduction of MCS in the future (Nelson and Winter, 1982; Davila,

2005). Accordingly, the investigation into the emergence of MCS has two main contributions.

First, it will enhance our understanding of how and why organizational structures such as MCS

are introduced and how they contribute to a firm’s development. Second, the investigation has

an impact on our understanding of established firms’ MCS because one can completely under-

stand the status quo only if the prior history is known. Although the overall introduction of

5 MCS are defined as “formal, information-based routines and procedures managers use to maintain or alter pat-

terns in organizational activities“ (Simons, 1995). The definition of Simons is used because of two reasons. First, studying the transition from informal to formal controls requires a MCS definition that focuses on formal con-trols, otherwise a separation of formal and informal controls would not be possible. Second, the MCS definition and the underlying MCS understanding should allow to investigate the process formalization of informal controls.

Part A Introduction

3

MCS is a pivotal step in start-ups’ growth and is also highly relevant for established firms, our

knowledge is still scarce.

A.2 Research objectives Therefore, the purpose of this dissertation is to deepen the insights into the development

of start-ups to business organizations by analyzing the reasons for introducing MCS and the

roles of participants in the introduction process. Moreover, the dissertation aims to explain the

phenomenon from two different perspectives. On the one hand, a strategic approach6 is chosen

that investigates the emergence of MCS from the perspective of the organization moving into

the environment. On the other hand, applying a strategic institutional approach7 demonstrates

the opposite perspective from the society into the firm. The combination of both perspectives

should complement the overall understanding of the investigated phenomenon.

A.2.1 Research objective one: Identification of the understanding of MCS To investigate the phenomenon of the emergence of MCS from a governance perspec-

tive, it is necessary to know what concepts dominate the understanding of MCS in the field. As

founders of firms are primarily young actors who, due to a lack of experience in business organ-

ization, base their knowledge almost exclusively on their education (see also my interview data

in Part C and Part D) and because the content within textbooks reflects the dominating view of

academia (Hoffjan and Wömpener, 2006), this dissertation will investigate the concepts of MCS

in the educational literature, i.e., in textbooks. Accordingly, it is particularly important to an-

swer the first question: what understandings of MCS are firstly presented to future practitioners

and academics?

A.2.2 Research objective two: Identification of the reasons for introducing MCS As abovementioned, our knowledge about the emergence of MCS is still scarce. Prior

research has been dominated by investigating which MCS will be introduced at the beginning of

6 The strategic approach assumes that organizations have a high level of control over their environment and the

process of how external parties perceive and treat the organization (Ashforth and Gibbs, 1990; Dowling and Pfeffer, 1975).

7 The institutional legitimacy approach assumes that organizations will be interpenetrated by external institutions, which results in a – at least – very low influence of the organization on the environment (DiMaggio and Powell, 1983; Meyer and Rowan, 1991).

Part A Introduction

4

a firm (e.g., Davila and Foster, 2005, 2007; Sandino, 2007) and which sequence this MCS in-

troduction follows (Davila, 2005). To accomplish descriptive and timely studies, the second re-

search objective is to deepen the insights into the potential reasons for introducing MCS

(Davila, Foster, and Li, 2009). Therefore, this dissertation will answer a second question: why

do MCS emerge? Answering this question will require an analysis of the whole range of MCS

categories8 (financial planning, financial evaluation, human resource planning, human resource

evaluation, product development, sales/marketing management and strategic planning) within

young growing firms because the reasons and purposes of MCS emergence seem to be inter-

connected (Davila, 2005) and MCS are interpreted as packages (Malmi and Brown, 2008;

Otley, 1999). In addition, this dissertation will use an almost complete set of members of the or-

ganizational governance to identify not only the reasons for introducing MCS but also the role

each participant of the organizational governance plays in this introduction because single indi-

viduals at the top level of the organization seem to have a strong influence on its (control) struc-

ture (Davila et al., 2009; Hambrick and Mason, 1984). Owing to the resource constraints of

start-ups and their dependence on external resource gatekeepers (Clarysse, Knockaert, and

Lockett, 2007), the underlying theory will be resource dependency theory (RDT; Pfeffer and

Salancik, 1978). Consequently, this dissertation follows for research objective 2 a strategic ap-

proach as it is assumed that even start-ups are able to influence the environment, at least by their

emergence.

A.2.3 Research objective three: Management of legitimacy Whereas the second research objective is devoted to a strategic approach of investigat-

ing the emergence of MCS, i.e., it was assumed that the firm is able to and will perform actions

to influence its environment, the third research objective is focused on a more institutional ap-

proach: this dissertation will also analyze the emergence of MCS from a strategic institutional

perspective (Suchman, 1995), which means it is assumed that young organizations will perform

actions not only to influence their environment but also to conform to the beliefs, values and

8 These categories are adopted from Davila and Foster (2005, 2007).

Part A Introduction

5

norms of the environment. Consequently, this dissertation will answer a third question: how do

young growing firms manage legitimacy?

Figure 1 visualizes the different research objectives of this dissertation. Moreover, the

figure illustrates the different underlying theoretical approaches by showing that the firm will

strategically influence the environment (2; strategic approach) but the environment will also in-

fluence the firm (3; strategic institutional approach).

Figure A-1: Research objectives of the dissertation

A.3 Research approach To address the different research objectives, different datasets are required and different

methods have to be used. Research objective one requires conducting a systematic review

(Tranfield, Denyer, and Smart, 2003). With the purpose of assessing the relevance and the

amount of the literature, this dissertation conducted scoping studies. Moreover, prior to conduct-

ing the review, a review protocol was composed. This document contained a description of the

review process and the search strategy as well as the criteria for the inclusion and exclusion of

sources. Because a comprehensive, impartial and balanced search is essential for a systematic

review, the data were collected in two stages (Hoffjan and Wömpener, 2006). First, an e-mail

survey about MCS textbooks among accounting academics was conducted. Second, an online

search for syllabi designed for courses covering MCS to enhance the reliability of the survey re-

sults was performed (ibid).

Part A Introduction

6

To address research objectives two and three, a cross-sectional field study (Lillis and

Mundy, 2005) was conducted. This methodological approach is in between surveys and single

case studies concerning the breadth and depth of the study. Accordingly, this dissertation fol-

lows the management accounting research’s request (e.g., Foster and Young, 1997; Otley, 1994;

Spicer, 1992) that researchers have to return to the field to understand focused phenomena in

their real-life contexts.

The underlying theoretical strategic and strategic institutional approaches postulate that the firm

will influence the environmental constituents and that the environmental structures will influ-

ence firms’ behavior. As start-ups depend on several actors, such as customers, institutional in-

vestors and employees, several perspectives on the phenomena of introducing MCS have to be

adopted, and these phenomena cause multiple research sites. The selection of the case firms fol-

lowed two criteria: First, start-ups should have reached a size of 15 or more employees. This

criterion was derived from prior empirical evidence that start-ups begin to introduce their first

sets of MCS at a headcount of 15-20 employees (Davila, 2005). Aside from empirical reasons,

the theoretical necessity of introducing MCS will only occur if the firm size and the correspond-

ing headcount cannot be informally controlled (e.g., Aldrich, 1999). The second criterion was

the investment of a venture capitalist (VC) in the start-up because these firms adopt MCS faster

and to a greater extent (Davila and Foster, 2005, 2007). VCs specialize in the investment in nas-

cent firms and start-ups. In return for their invested capital, VCs receive a certain amount of

shares in the firm. Consequently, the overall return of the VCs will depend on the future corpo-

rate value of the invested start-up. Therefore, VCs force their start-ups to follow a growth strat-

egy because growth is one of the main corporate value drivers (e.g., Ross, 2007). Accordingly,

the presence of a VC would not only support the chance of observing a transitioning firm from

informal to formal control but also would capture a main driver of MCS emergence, i.e., the VC

itself because they represent one of the main constituents of start-ups.9 The database

“www.deutschestartups.de” and the business school’s alumni network were used to identify

firms that matched these two criteria. The targeted interviewees in every firm were the chief ex-

9 Therefore, I did not interview the same VC for different firms – I was able to select firms with different VCs.

Part A Introduction

7

ecutive officer (CEO), chief financial officer (CFO) or chief technology officer (CTO), one non-

executive member of the board of directors (BoD) and an investment manager of the corre-

sponding VC. The planned interview time was 60 minutes. In addition to the interviews and in

order to triangulate the data, alternative data sources such as firm websites or analyst reports

were used. The data were coded by using the computer software atlas.ti. A manual for the cod-

ing procedure was written to ensure intercoder reliability10. Qualitative data analysis ran simul-

taneously to the data collection, and initial ideas or reflections on the data’s meanings were

stored during the entire data collection and analysis phase in a research diary. For qualitative

analysis, data matrices (Miles and Huberman, 1994) were used.11 Mapping the respondents

against the codes or labels that were identified in the previous manual coding procedures created

these matrices and this allowed me to identify topics by each respondent.

The different foci of research objectives two and three had also to be reflected in the un-

derlying theories. Research objective two emphasizes the strategic actions of the firm itself and,

consequently, assumes a relatively high degree of choice of the start-up, i.e. that the start-up as

an agent can influence its environmental structures. Research objective three focuses on the en-

vironmental structural influences on the start-up and its responsive behavior to these structures

and, consequently, assumes a lower organizational degree of choice in comparison to research

objective two. Accordingly, the two theories used had not only to differ in the underlying as-

sumptions about the degree of choice on the subject of the organizational choice but they also

had to be compatible and reflect the debate about structure versus agency.12 To investigate re-

search objective two, RDT was used and to study research objective three a strategic approach

of institutional theory was used. The reasons for and the applicability of the two theories are ar-

gued as followed:

Both theories share several commonalties but show some differences as to their understanding

of the context and motives of the organizations (Oliver, 1991). With regard to the commonal-

10 Additionally, an intercoder reliability test was performed after the first coding round. More than 90% of the codes

were identically made by the researchers at the first attempt. In the remaining 10%, the researchers agreed after intensive discussions.

11 For an example of these matrices, see Appendix E. 12 For more details concerning the debate on “agency versus structure” see, for example, Giddens (1982, 1984),

Heugens and Lander (2009), Sewell (1992) or Zietsma and Lawrende (2010).

Part A Introduction

8

ties, both RDT and institutional theory assume in terms of the organizational context that organ-

ization’s choice is limited by numerous external pressures (Friedland and Alford, 1991; Meyer,

Scott, and Deal, 1983; Pfeffer and Salancik, 1978) and that the (organizational) environments

are interconnected and collective (DiMaggio and Powell, 1983; Pfeffer and Salancik, 1978;

Powell, 1988). However, organizations have to respond to the various external demands and ex-

pectations, i.e. the different pressures, in order to survive in the perspective of RDT and institu-

tional theory (Meyer and Rowan, 1977; Pfeffer and Salancik, 1978). In addition, both RDT and

institutional theory suggest with regard to the organizational motives that organizations strive

for stability and legitimacy13, and that organization’s behavior is interest driven (DiMaggio,

1988; DiMaggio and Powell, 1983; Dowling and Pfeffer, 1975; Meyer and Rowan, 1983;

Pfeffer and Salancik, 1978; Zucker, 1986). However it is worth noting that the self-interest of

organizations is not only based on agency, but it can also be institutionally defined or socially

constructed from an institutional theory perspective (Hinnings and Greenwood, 1988; W. R.

Scott, 1987a).

Apart from these commonalties, RDT and institutional theory differ in a few theoretical aspects.

RDT emphasizes the organizational confrontation with various and often incompatible demands

from different external actors (Pfeffer, 1982; Pfeffer and Salancik, 1978). Even though institu-

tional theory addresses task (or technical) and institutional pressures, its focus is more on the

pressure and constraints of the institutional environments (Oliver, 1991), which consist of insti-

tutional constituents such as the state, professions, interest groups, and public opinion

(DiMaggio and Powell, 1983; Meyer and Rowan, 1977; Meyer and Scott, 1983; W. R. Scott,

1987b; Zucker, 1987). Although RDT also addresses the social environment of organizations

and the effect of state pressure on organizations (Pfeffer, 1972; Pfeffer and Salancik, 1978; Sa-

lancik, 1979), this theory emphasizes the task environment. These differences lead to the two

theories drawing different conclusion about the possible choices in reaction to the environmen-

tal pressures. RDT highlights organizations’ requirement of coping with potentially conflicting

13 Although both theories emphasize the importance of gaining legitimacy, RDT highlights the instrumental aspect

of legitimacy, i.e. RDT uses legitimacy only as a vehicle for getting resources (Suchman, 1995).

Part A Introduction

9

interdependencies, adapting to environmental uncertainty, and managing scarce resources

(Pfeffer and Salancik, 1978). Institutional theory places emphasis on conformity and organiza-

tional adherence to external rules and norms (DiMaggio and Powell, 1983; Meyer and Rowan,

1977). Consequently, both theories vary mainly in the “degree of choice, awareness, and self-

interest that organizations posses for handling external constraints” (Oliver, 1991, p. 148). RDT

focuses on various options that organizations have in order to influence and manipulate the ex-

ternal dependencies or the allocation of critical resources (Pfeffer and Salancik, 1978; W. R.

Scott, 1987b; Thompson, 1967), i.e. on agency. Institutional theory tends to limit the potential

organizational responses to structural or procedural conformity and it is also capable of non-

choice behavior (W. R. Scott, 1987b). Accordingly, institutional theory focuses on activities of

reproduction or imitation of organizational routines, structures and activities in response to the

expectations and pressures of collective norms of the institutional environment (DiMaggio and

Powell, 1983; Zucker, 1977). By comparison, RDT claims that organizations achieve stability

by exercising power, controlling, or negotiating interdependencies for purposes of a stable in-

flow of vital resources and the reduction of environmental uncertainty (Pfeffer and Salancik,

1978). Overall, it can be summarized that RDT and institutional theory differ in the assumed

degree of organizational choice. However, their main assumptions and views are compatible and

complement each other (see Table A-1; Oliver, 1991).

Part A Introduction

10

Table A-1: Comparison of institutional and resource dependency perspective

A.4 Organization of the dissertation This dissertation encompasses three core parts (parts B to D), which are related but self-

contained parts. Although each part contributes to the overall topic of the dissertation, it focuses

on one research objective. As a consequence of the different foci, the reader might recognize

some differences in literature, structure, theory, language, methodology and other aspects

among the different parts. In particular, Part C and Part D partake in the discussion of different

academic communities (i.e., in Part C the management accounting and control community and

Part D the entrepreneurship community), which causes differences between the two parts in re-

lation to the used language: while Part C uses terms such as “the introduction of MCS”, Part D

uses terms like “the operationalization and professionalization organizational processes”.

Part B investigates the concepts of MCS used in the educational literature, i.e., in textbooks. By

means of a systematic review (Tranfield et al., 2003), a comprehensive review that focuses on

MCS textbook approaches is provided. The three top-ranked textbooks will be compared and

differences and similarities between them highlighted. Accordingly, this part contributes to the

management control literature by presenting a systematic review of analytical concepts of MCS

in a systematic manner by following a transparent and thorough process. By doing this, it com-

plements prior not primarily objective reviews. In addition, this part investigates the variation of

Part A Introduction

11

MCS understandings in academe and practice because it shows the variances in MCS under-

standings in the textbooks used for educating future researchers and practitioners.

Part C is focused on the reasons for introducing MCS. To shed light on these reasons, a qualita-

tive cross-sectional field study is presented. The results of this part will complement previous

quantitative studies on the sequence of the emergence of MCS because they investigate the rea-

sons for introducing MCS from a resource dependency perspective.

Part D investigates the survival and growth of young firms from a strategic institutional per-

spective. Therefore, this part investigates the activities of successfully founded and growing or-

ganizations to gain insights into their legitimizing behavior. A qualitative field study with young

firms that have already started to grow successfully will be presented in this part. The results

will show how nascent organizations gain initial legitimacy, what kind of legitimacy they gain

and how they act to maintain legitimacy.

The last part, Part E, summarizes the main findings and contributions of this dissertation.

Moreover, it shows the limitations of the chosen approach and develops ideas for future re-

search.

Part B Management Control Systems – A Textbook Review

12

B Management Control Systems – A Textbook Review

Abstract

The purpose of this part is to illustrate and compare the analytical concepts of MCS developed

in the educational literature and used for educating future practitioners. By means of a systemat-

ic review (Tranfield et al., 2003), a comprehensive review that focuses on MCS textbook ap-

proaches is provided. For the selection of textbooks a survey among accounting researchers

(n=74) and a syllabus search were conducted (Hoffjan and Wömpener, 2006). Merchant and

Van der Stede (2003), Anthony and Govindarajan (2007) and Simons (2000) were found to be

the three top-ranked textbooks. As a result, this part contributes to understanding of MCS con-

cepts by identifying the concepts that are used for educating future practitioners. Moreover it

contributes to the management control literature by presenting a systematic review of the analyt-

ical concepts of MCS in a systematic manner, i.e., it follows a transparent and thorough process

and, by doing so, complements prior not primarily objective reviews. In addition, this part sheds

some light on the variation of MCS understanding in practice because it shows variances in

MCS understanding in the textbooks used for educating future practitioners such as entrepre-

neurs.


13

B.1 Introduction The field of management accounting and control research has a long research tradition

but has experienced new dynamics in the current research in terms of new analytical concepts of

MCS. A diverse set of recently published frameworks, such as the performance management

and control framework (Ferreira and Otley, 2005, 2009) or the MCS package (Malmi and

Brown, 2008), exemplifies this development. Two issues that seem symptomatic of MCS re-

search have motivated each framework. First, contemporary management control frameworks

are requested periodically because “[…] the control needs of the current environment are signif-

icantly different from those developed in an earlier period […]” (Nixon and Burns, 2005,

p. 260). In particular, recent research has suggested that none of the extant concepts fulfills the

current needs to accommodate the perspectives of a wide range of actors. Second, the lack of a

consistent concept of MCS has impeded precise academic debate in the field (Berry, Coad,

Harris, Otley, and Stringer, 2009; Eilon, 1962; J. G. Fisher, 1998; Fleming, 1972; Machin,

1983; Merchant and Otley, 2007; Merchant and Van der Stede, 2003; Otley, Broadbent, and

Berry, 1995). Consequently, “building a cumulative body of knowledge about the design and

use of MCS becomes difficult without well-articulated definitions and purposes of MCS”

(Malmi and Brown, 2008, p. 289).

However, different attempts to improve the concepts of MCS and to overcome existing

inconsistencies have not yet been successful. Because it seems too difficult to overcome the in-

consistencies in the current status of MCS research, it might be worth studying the beginning of

the diverging understandings – but not in an historical sense: researchers and practitioners are

strongly influenced by the history of their careers and the individuals they have met within their

developments. Accordingly, it seems particularly important to investigate the beginning of the

diverging understandings of MCS in the field, i.e., the differences between not only practition-

ers but also academics. Therefore, I identified and systematically reviewed the most frequently

used textbooks for teaching MCS because the textbooks will lay the basis of researchers and

practitioners’ MCS understandings given that they influence the minds of young individuals at a


14

very early point in their lives. The data conducted for and reported in Part C and Part D validate

this argument as the following quotations illustrate:

Some of the concepts are adapted from our university know-how. For exam-ple, the code ownership idea is based on one textbook that I have read during my master studies. I realized that my experience was very limited and, conse-quently, I needed the experience and know-how of other people. Therefore, I started to read the textbooks on my shelf again… [CTO, firm 2]

I perceived the theoretical concepts such as organizational evolution stages in my master studies as very abstract…and to some extent ‘stupid’ because I thought that this could never happen in real life but than I started my business and the reality hit me roughly: I didn’t realize that my business had reached a first evolutionary stage but after the first problems I realized that the abstract concept of evolution stages is true…and than I started to think more about my academic knowledge. [CFO, firm 16]

The young entrepreneurs are fascinated by business plans. They learned to write these business plans in the university and they know what to do…and they were told that this is the way it works. [BoD, firm 5]

From my point of view, such a systematic review (Tranfield et al., 2003) can provide a better

understanding of the fragmented field of management accounting and control and might ad-

vance the coherence of the field as well as it allow an investigation into the underlying MCS

concepts in the field.

This part contributes to the management control literature by presenting a review of the

analytical concepts of MCS used for educating future practitioners. Prior reviews on these MCS

primarily covered empirical research, either structured historically (e.g., Bedeian and Giglioni,

1974) or within the different theoretical lenses of management control such as contingency the-

ory14 or agency theory15 (e.g., Merchant and Simons, 1986) but neglected the importance of

14 Rooted in organizational theory, contingency theory gained popularity in the early 1960s and – applied to man-

agement control – was used to explain how the effectiveness of MCS depends on the specification of certain con-textual variables (Chenhall, 2003). In other words, contingency theory claims that ‘no size fits it all’ (Merchant and Otley, 2007; L.D. Parker, 1986). Organizations were perceived as open social systems with distinct features (Sisaye, 1998). The context-specific factors encompass, for instance, environmental uncertainty, competition, technology, organizational structure, size, strategy and culture. The vast majority of contingency-based studies analyze survey data (Chenhall, 2003; Merchant and Simons, 1986; Sisaye, 1998). However, it was not until the early 1980s that contingency theory became a popular approach in MCS research (Chenhall, 2003). Although many studies with a contingency approach have been conducted, a common shortcoming is their lack of advice for designing effective MCS (Merchant and Otley, 2007; Merchant and Simons, 1986).

15 Agency theory has its foundations in microeconomic theory and basically applies these principles to issues of management control (Merchant and Otley, 2007; Merchant and Simons, 1986). Relying on the basic assumptions of asymmetric information and self-interested individuals, agency theory is concerned with the optimal design of incentive contracts between principals and agents. Thus, an agency relationship implies that a principal delegates a task to an agent. Consequently, organizations form the aggregates of all principal–agent relationships across hi-


15

textbooks for influencing an academic field (Zeff, 2008). I address this gap by contrasting and

comparing the analytical concepts of MCS in different categories such as definitions, purposes

and types.

I attempt to overcome inconsistencies in the concepts of MCS by identifying and ana-

lyzing the educational roots of future MCS researchers and practitioners that implement as well

as use MCS by reviewing the most commonly used textbooks. Moreover, I contribute to the lit-

erature by conducting a systematic review according to the guidelines by Tranfield et al. (2003).

Consequently, my review follows a transparent and thorough process aimed at enhancing scien-

tific rigor and developing a reliable stock of knowledge. The essential part of assessing the rele-

vant conceptual literature on MCS is a textbook survey among accounting academics, since

textbooks convey the predominating view on what is considered fundamental knowledge

(Hoffjan and Wömpener, 2006). Furthermore, textbooks are an essential means for disseminat-

ing the analytical concepts of MCS to future practitioners and researchers (Zeff, 2008). Accord-

ing to the survey results, the three top-ranked MCS textbooks are those by Merchant and Van

der Stede (2003), Anthony and Govindarajan (2007) and Simons (2000).

The remainder of this part is organized as follows. Section B.2 discusses Anthony’s

(1965) seminal work as the starting point of modern management control theory. My research

design is outlined in Section B.3. The results of my textbook survey, syllabus search as well as

literature review are presented in Section B.4. In Section B.5, I analyze and evaluate the analyti-

cal conceptions of MCS in the top-ranked textbooks. Section B.6 finishes the part with a discus-

sion of the results and some ideas for future research.

erarchies. By developing agency models, researchers examine how agency costs can be minimized under differ-ent conditions to ensure that the agent acts appropriately in the principal’s interests. Among the variables speci-fied in such models are the risk preferences of the two actors, the cost of monitoring the agent’s behavior and the degree of information asymmetry. Although some empirical research based on agency theory has been conducted, most studies are analytical in nature. A commonly cited criticism of those studies refers to their unrealistic as-sumptions in addition to their disregard of contextual factors. Nevertheless, some valuable insights have been generated into the design of reward and compensation systems (Chenhall, 2003; Merchant and Otley, 2007; Merchant and Simons, 1986).


16

B.2 The starting point of modern MCS Anthony’s (1965) work is essential for understanding more recent developments in

management control theory. For several reasons, it is regarded as the starting point of modern

MCS research (Herath, 2007; Machin, 1983; Otley et al., 1995). First, Anthony established

management control as a topic by discussing it separately from other fields of study (Merchant

and Otley, 2007; Zeff, 2008). Second, Anthony was the first who emphasized the use of ac-

counting information for management control over techniques for gathering such information

efficiently (Anthony, 1965; Zeff, 2008). Zeff (2008, p. 43) noted that “Robert Anthony and oth-

ers struck the chord that the chief raison d’être of accounting was to facilitate management

planning and control.” Finally, at the beginning of the 1960s, contingency theory emerged, i.e.,

the recognition of the interdependency between organizations and their environments. Contin-

gency theory implies the impossibility of defining a universally applicable set of management

controls. Rather, the design of management controls must fit the respective organizational cir-

cumstances and particularly an organization’s strategy (Otley et al., 1995). For these reasons,

Anthony’s (1965) work will be outlined and discussed in the remainder of this part.16

To put Anthony’s (1965) framework in context, it should be noted that his primary aim

was to cater to the needs of researchers. Anthony stressed that a clear definition of the topic is

crucial to drawing valid conclusions, which means that the definition should allow management

control to be distinguished from other organizational processes. Thus, management control is

defined as “the process by which managers assure that resources are obtained and used effec-

tively and efficiently in the accomplishment of the organization’s objectives” (1965, p. 17). Ac-

cording to Machin (1983), this definition has met researchers’ demands:

That definition of ‘management control systems’ was helpful to researchers. It was clear enough so that when you were researching in an employing organization you could recognize what you were looking for and, having found it, could find where it started and finished. (p. 24)

16 For a review of management control concepts before 1965, see Bedeian and Giglioni (1974), who traced the de-

velopment of management control theory to the early 1900s. Similarly, Parker (1986) examined the conceptual development of management control from 1900 until 1979. The evolution of management control from 1908 until 1980 at HBS as well as at the Massachusetts Institute of Technology and at the University of Chicago was dis-cussed in a historical study by Zeff (2008). Parker (1986, Appendix A) provided an overview of control-related sections in 21 management accounting texts.


17

However, the same author passed some criticism on Anthony’s (1965) definition of MCS, espe-

cially the lack of advice for designing effective and efficient MCS:

The definition also has the merit that it leaves scope for academics to disagree violently whilst still perceiv-ing themselves to be studying the same thing. In particular it does not touch on the purpose of such systems and thus gives little direction as to how better ones may be developed. (Machin, 1983, p. 24)

Regarding the concept of MCS, Anthony (1965) divided planning and control systems

into three discrete processes of strategic planning, management control and operational control.

These processes relate to the organizational hierarchy in such a manner that they indicate the re-

spective managerial levels. Strategic planning is defined as “the process of deciding on objec-

tives of the organization, on changes in these objectives, and on the policies that are to govern

the acquisition, use, and disposition of these resources” (Anthony, 1965, p. 16). Strategic plan-

ning activities encompass the setting of long-term goals and objectives as well as the formula-

tion of long-range plans and policies for the whole organization. By contrast, operational control

“is the process of assuring that specific tasks are carried out effectively and efficiently”

(Anthony, 1965, p. 18). Activities related to operational control involve particular tasks and

transactions whose accomplishments can be objectively evaluated. The process that connects

strategic planning and operational control is termed management control. Within the boundaries

set by strategic planning, overall long-term goals are broken down into the respective shorter-

term subgoals for an organization’s business units. Compared with operational control, the fo-

cus of management control lies on the entire set of everyday activities. These activities have to

be coordinated to ensure that all organizational participants behave in a goal-congruent manner.

Therefore, MCS should not be isolated systems rather MCS should be integrated and coordinat-

ed systems, i.e., they should consist of a collection of reconcilable subsystems. In addition to

planning and coordinating, management control has a monitoring and feedback function, which

enables taking corrective actions if the achievement of preset goals is endangered. As Anthony

(1965) noted, the distinction between those three processes can be difficult as, in fact, the pro-

cesses overlap and are interconnected in real world settings. He argued, however, that the dif-

ferentiation is made primarily for didactic reasons and to allow researchers to conduct theoreti-

cal investigation and analysis.


18

Over time, many management control researchers have expressed their discontent with

this framework. Anthony (1965) has been criticized for its narrow emphasis on financial and ac-

counting-based controls (Emmanuel, Merchant, and Otley, 1990; Merchant and Otley, 2007;

Otley et al., 1995). Nevertheless, accounting still forms an essential element of management

control theory since other fields, e.g., operations research, seem less adequate for integrating the

whole range of organizational activities (Otley et al., 1995). Another point of criticism refers to

the separation of management control from strategic and operational control. As employees in

lower hierarchical levels became more and more involved in activities of strategic planning or at

least of strategic importance, this differentiation no longer seemed appropriate (Langfield-

Smith, 1997; Otley, 1994). Moreover, Anthony’s (1965) avoidance of strategic issues as well as

its disregard of different types of operational controls in different technological environments

was deemed problematic (Merchant and Otley, 2007; Otley et al., 1995). In fact, Otley (1994)

indicated that management control was purposefully defined as a “middle range process”

(p. 289) to reduce complexities arising from certain operating controls. In addition, the possibil-

ity that strategies can emerge and evolve over time as well as the dynamic role of MCS in for-

mulating strategies was not considered by Anthony (Otley, 1994; Speklé, 2001). Additionally, it

has also been suggested that the boundaries of Anthony’s (1965) framework make it difficult to

analyze the interdependencies between the different forms of control (Modell, 1995). Finally,

although Anthony (1965) claimed that behavioral science was the basis for the study of control,

a lack of behavioral aspects in the framework was later criticized (Otley, 1994; Whitley, 1999).

As a consequence of the scope and complexity of the topic as well as of the growing

discontent with Anthony’s (1965) approach, the need for more contemporary and broader ana-

lytical concepts of MCS became apparent. Therefore, many authors advanced their own con-

cepts to facilitate and stimulate research on MCS (Merchant and Otley, 2007) and used these

concepts to educate future practitioners and researchers. This development laid and is still lay-

ing the basis for a fragmentation of the MCS research field. To identify the beginning of this di-

versification, I focus on MCS textbooks. A systematic review of the textbooks requires first an

identification of the relevant literature. This process is described in the following section.


19

B.3 Research design To identify all potentially relevant textbooks that have contributed to the concept of

MCS, I followed the guidelines proposed by Tranfield et al. (2003) for conducting systematic

reviews. At first, with the purpose of assessing the relevance and the amount of the literature, I

conducted scoping studies. Moreover, prior to conducting the review, a review protocol was

composed (Table B-1). This document contained a description of the review process and the

search strategy as well as the criteria for the inclusion and exclusion of sources.

Table B-1: Review protocol

Because a comprehensive, impartial and balanced search is essential for a systematic re-

view, I decided to collect my data in two stages. First, I conducted an e-mail survey about MCS

textbooks among accounting academics (Hoffjan and Wömpener, 2006). Next, I searched online


20

for syllabi designed for courses covering MCS to enhance the reliability of the survey results

(ibid). In the following, both parts are explained in detail.

With respect to the e-mail survey among accounting academics, the e-mail addresses

were generated from Hasselback’s Accounting Faculty and Research Directory (2005-2006). I

restricted the survey to those academics who had at least one of the following areas of speciali-

zation: cost accounting, managerial accounting or controllership.17 In cases when no full profes-

sor was registered in those areas, I contacted associate professors or alternatively assistant pro-

fessors at these schools. I asked the participants to name and rank the three textbooks that they

considered most relevant concerning MCS and to provide a rationale for their selection. The

survey was conducted in September and October 2008. Two weeks after the initial contact, a

reminder was sent.

Initially, I contacted 1,062 accounting researchers. Some forwarded my e-mail to their

colleagues, increasing my original sample size by 35 to 1,097 accounting scholars. Of those,

158 claimed that MCS do not fall into their areas of expertise because, for instance, they had re-

tired or had never taught MCS. Further, 180 e-mail addresses were incorrect or no longer exist-

ed, resulting in an adjusted sample size of 759 academic accountants. I received feedback from

74 respondents, equivalent to a response rate of 9.75%. This response rate is only moderate and

can be seen as a typical result of the decreasing overall response rate of surveys (Larson, 2005;

Van der Stede, Young, and Chen, 2005).18

Regarding syllabi for courses covering MCS, I generated a search algorithm for the In-

ternet search engine Google. In doing so, I searched for the terms management control system

and syllabus. Additionally, I limited my search to universities and colleges in English-speaking

countries, i.e., in the UK, the US, Canada, Ireland, Australia and New Zealand. This yielded 75

17 Hoffjan and Wömpener (2006) focused on management accounting professors and lecturers since their aim was

to identify textbooks on strategic management accounting. By contrast, I extended the population to individuals in the areas of controllership and cost accounting to account for the broader scope of the term MCS (Merchant and Otley, 2007). However, I limited the respondents to professors and assistant professors, although lectures play an important role in educating students. The reason for excluding lectures is the limited data access to lectur-ers e-mail addresses (e.g., they are not listed in the Hasselback directory).

18 It is interesting to note that more and more studies with response rate of less than 10% are published in peer-reviewed journals see, for example, Marginson and Bui (2009) or Hwang et al. (2009)


21

syllabi.19 However, to gather course syllabi with distinct emphases on MCS, I further limited

my search to those courses containing the word “control” in their title. In total, my search yield-

ed 27 syllabi. Almost 52% of the syllabi originated from the US, 30% from the UK, about 11%

from Canada and more than 7% from Australia. None originated from Ireland or New Zealand.

B.4 Results of the accounting academics survey The results of the e-mail survey are shown in Table B-2. I assigned three points to each

textbook ranked first; two points to textbooks ranked second and one point to those ranked

third. Respondents considered Merchant and Van der Stede (2003) as the most relevant text-

book concerning MCS, followed by Anthony and Govindarajan (2007) and Simons (2000).

Since the differences between these three and the rest of the textbooks is notable, there is a clear

indication that Anthony and Govindarajan (2007), Merchant and Van der Stede (2003) and Si-

mons (2000) form the basis of any MCS-related textbook analysis.

19 A possible reason for the few identified syllabi is maybe that only few universities offer courses focused on man-

agement control and that only few universities show their university calendars publicly.


22

Table B-2: Results from the e-mail survey

In addition to the top three ranks, a number of different managerial and cost accounting text-

books were selected. These focus on performance measurement or management information

systems, revealing the variety of topics that draw on notions of management control. Of course,

Experts Total1st rank 2nd rank 3rd rank Points Rank

Merchant and Van der Stede

Management Control Systems2nd 2003 18 14 2 84 1

Anthony and Govindarajan

Management Control Systems12th 2007 18 9 7 79 2

Simons Performance Measurement and Control Systems for Implementing Strategy

1st 2000 12 11 7 65 3

Horngren, Foster, Datar, Rajan, and Ittner

Cost Accounting13th 2008 4 1 2 16 4

Zimmerman Accounting for Decision Making and Control 6th 2008 2 2 1 11 5

Emmanuel, Merchant, and Otley

Accounting for Management Control 2nd 1990 1 3 1 10 6

Atkinson, Kaplan, Matsumura and Young

Management Accounting 5th 2007 1 3 0 9 7

Demski Managerial Uses of Accounting Information 2nd 2008 2 0 0 6 8

Macintosh Management Accounting and Control Systems 1st 1995 1 1 0 5 9

Hilton Managerial Accounting 6th 2008 1 0 1 4 10Merchant Modern Management Control

Systems 1st 1997 1 0 1 4 10

Anthony Planning and Control Systems 1st 1965 1 0 0 3 11Dorf and Bishop Modern Control Systems 11th 2007 1 0 0 3 11Ewert and Wagenhofer Interne Unternehmensrechnung 7th 2008 1 0 0 3 11Gordon Managerial Accounting 6th 2005 1 0 0 3 11Hopper, Northcott, and Scapens

Issues in Management Accounting3rd 2007 0 1 1 3 11

Sandoe, Corbitt, and Boykin

Enterprise Integration1st 2001 1 0 0 3 11

Solomons Divisional Performance 1st 1965 1 0 0 3 11Vancil What Kind of Management

Control Do You Need? 1st 1973 1 0 0 3 11

Allen, Brownlee, Haskins, Lynch, and Rotch

Cases in Management Accounting and Control Systems 4th 2004 0 1 0 2 12

Anderson and Post Management Information Systems4th 2005 0 1 0 2 12

Anthony and Young Management Control in Nonprofit Organizations 7th 2003 0 0 2 2 12

Senge The Fifth Discipline 1st 2006 0 1 0 2 12Anthony, Hawkins, and Merchant

Accounting: Texts and Cases12th 2006 0 0 1 1 13

Christensen and Feltham Economics of Accounting1st 2005 0 0 1 1 13

Garrison, Noreen, and Brewer

Managerial Accounting12th 2007 0 0 1 1 13

Maciariello and Kirby Management Control Systems 2nd 1994 0 0 1 1 13Maher, Weil, and Stickney

Managerial Accounting10th 2007 0 0 1 1 13

Merchant Rewarding Results 1st 1989 0 0 1 1 13

Shank and Govindarajan Strategic Cost Management1st 1993 0 0 1 1 13

Smith Performance Measurement and Management 1st 2005 0 0 1 1 13

Turban, Aronson, Liang, and Sharda

Decision Support and Business Intelligence Systems 8th 2008 0 0 1 1 13

Author(s) Title Ed. Year


23

I have to mention that the focus on accounting-based books is because of my sample of (ac-

counting) academics.

Regarding the reasons provided by respondents for selecting a certain MCS textbook,

the majority of participants justified their choices with content-related reasons, the comprehen-

sibility to students or with the perceived quality of the cases.20 Thus, the rationales given were

broadly in line with the selection criteria that Smith and DeRidder (1997) observed for account-

ing textbooks.

More importantly, these reasons also indicate the factors that accounting scholars recog-

nize as essential for a concept of MCS. Many respondents underlined the “broad,” “holistic” or

“in-depth” coverage or the “exhaustive” manner in which management controls are described in

the three top-ranked textbooks. In particular, respondents who selected one of those textbooks

thought that other texts overemphasized accounting. In their minds, “accounting takes a narrow

focus” and MCS are “not just something which can be understood from an accounting point of

view.”

Another noticeable result refers to the reasons provided for selecting the textbook by

Anthony and Govindarajan (2007). Respondents pointed to Anthony’s long experience in the

field that gave credibility to the textbook content. Specifically, Anthony as “the godfather of

management control” authored a textbook that “is the ‘original’ and keeps the subject area

somewhat ‘anchored’." Consistent with Zeff (2008), a respondent remarked that “Bob Anthony

and the folks at Harvard Business School [HBS] really defined the discipline." Although not ex-

plicitly mentioned by respondents, their comments suggest that Anthony’s (1965) approach is

still relevant for more recent concepts of MCS.

Finally, a couple of participants pointed to the difficulty of finding a consistent defini-

tion of management control. The term MCS seems to be used differently in different communi-

ties since “in the US accounting academicians tend to use the term ‘managerial (or manage-

ment) accounting’ to include what most accounting academicians in Europe call ‘management

control’." Similarly, a respondent noted that “Anglo-Saxon researchers have tended to use man-

20 All comments are listed in Appendix A.


24

agement control to indicate a broader approach to control than just management accounting."

This might also explain why several respondents selected an accounting textbook. It further

means that accounting textbooks cannot be completely disregarded despite their lower ranks.

Therefore, I also looked at those textbooks to assess their coverage of MCS. Although they typ-

ically include a section on MCS, accounting textbooks cover this topic rather marginally, with

some even referring to one of the three top-ranked textbooks. For instance, Horngren et al.

(2008) provide a brief description of MCS and discuss issues of transfer pricing and multina-

tional considerations in the same chapter. In the next chapter, Simons’ (1995) levers of control

are presented. Similarly, Atkinson et al. (2007) address the topic rather concisely, but cover

characteristics of MCS more extensively. However, later the authors also refer to Simons

(1995). Conversely, Zimmerman (2008) avoids the term MCS completely and instead introduc-

es the concept of organizational architecture. Nevertheless, his text is focused on (cost) account-

ing issues. In summary, these textbooks seem not to contribute to the concept of MCS. While

recognizing the impact of accounting textbooks on certain communities, I thus decided to ex-

clude them from my analysis.

In addition to these different understandings, one respondent highlighted the diversity of

theoretical perspectives adopted in MCS research. Another issue refers to the difficulties of

drawing boundaries, for instance “between planning, strategy, operations and control." Never-

theless, this respondent recognized that MCS researchers focused rather on “aspects of control”

than on the development of “an all embracing control theory that included say marketing, opera-

tions etc.”

Concerning the syllabus search, 27 syllabi might seem a rather small number compared

with the 125 management accounting course syllabi that Hoffjan and Wömpener (2006) identi-

fied. However, I did not include German-speaking countries, which accounted for more than

one-fifth of the syllabi in the management accounting course sample (Hoffjan and Wömpener,

2006). Because management accounting is a core topic in any undergraduate business program,

there might exist per se more management accounting than MCS courses. Moreover, 75 syllabi


25

were initially identified but I decided to focus on those courses with a distinct emphasis on con-

trol, and thereby on MCS.

The MCS textbooks recommended in syllabi are to a large extent similar to those men-

tioned in the e-mail survey. While Anthony and Govindarajan (2007) is the most frequently rec-

ommended textbook, Merchant and Van der Stede (2003) are ranked second, although far be-

hind Anthony and Govindarajan (2007). These two textbooks represent almost three-quarters

(74%) of all results. The remainder, which includes Simons (2000) and all other textbooks that

were found only once, is close to negligible. Table B-3 contains the results of the syllabus

search.

Table B-3: Textbooks recommended in syllabi for courses covering MCS and containing the word “control” in their titles

Overall, the e-mail survey and the syllabus search suggest that Anthony and Govindarajan

(2007), Merchant and Van der Stede (2003) and Simons (2000) are the most important text-

books on MCS.

So far I have described how I collected my database for a review of MCS concepts in

textbooks. In addition to the presentation of the results from the survey and syllabus search, I

have explained how I interpreted and considered the rationales provided by respondents. Now I

turn my attention to the contents of the relevant literature. Thus, in the following section, the

textbook contents are described and compared.

Author(s) Title Ed. Year Syllabi RankAnthony and Govindarajan Management Control Systems 12th 2007 16 1Merchant and Van der Stede Management Control Systems 2nd 2003 4 2Anthony and Young Management Control in Nonprofit

Organizations 7th 2003 1 3

Atkinson, Kaplan, Matsumura, and Young

Management Accounting 5th 2007 1 3

Berry, Broadbent, and Otley Management Control 2nd 2005 1 3Emmanuel, Merchant, and Otley

Accounting for Management Control2nd 1990 1 3

Hilton Managerial Accounting 6th 2008 1 3Malone The Future of Work 1st 2004 1 3Simons Performance Measurement and Control

Systems for Implementing Strategy 1st 2000 1 3

Total 27 -


26

B.5 MCS according to the three top-ranked textbooks A comparison of the three top-ranked textbooks by Merchant and Van der Stede (2003),

Anthony and Govindarajan (2007) and Simons (2000) requires first a description of the underly-

ing schools of thought. Therefore, Section B.5.1 presents the understanding and definition of

MCS according to the respective authors. Subsequently, different types of controls and MCS are

described and analyzed in Section B.5.2.

B.5.1 Understanding and defining MCS The first ranked book by Merchant and Van der Stede (2003) builds on an object-of-

control framework (p. X). Within that framework, MCS are based on the objects of control,

which encompass results, actions and personnel/culture (Merchant and Van der Stede, 2003,

p. X). These objects have to be controlled because of the three main management problems of

personnel limitations, motivational problems and lack of direction. Lack of direction means that

some employees perform poorly because they do not know what they are expected to do. Alt-

hough it is assumed that most employees know what to do, they sometimes – if not always –

behave in a self-interested manner, which means that the personal goals of employees are not

congruent with the organizational ones. Personnel limitations mean that people know what to do

and are motivated to act in that way but they are not able to reach the required performance be-

cause of certain limitations.

Accordingly, the reason for and, therefore, the overall objective of control in the frame-

work of Merchant and Van der Stede (2003) is human behavior, which has to be controlled to

avoid divergence from set objectives – which means that they follow the classical command and

control understanding of MCS (Simons, 1995). Their MCS understanding also determines the

positioning of MCS within the management process. The first step in the general management

process is objective setting. Objectives are a necessary requirement for the design of MCS be-

cause employees need an understanding of what the organization is trying to reach. Therefore,

objectives need to be elaborated before any MCS can be designed. Strategies were seen by Mer-

chant and Van der Stede (2003) as ways resources should be used to meet the firm’s objectives,

which classes them as second step in the general management process. The third and last gen-


27

eral management process step is management control. MCS address the behavior of employees,

because “[…] it is people in the organization who make things happen” (Merchant and Van der

Stede, 2003, p. 7). Management control – and so MCS – would be redundant if employees were

always able and willing to act in the organization’s interest. Therefore, management control

“[…] includes all the devices or systems managers use to ensure that behaviors and decisions of

their employees are consistent with the organization’s objectives and strategies” (p. 4). Conse-

quently, systems that ensure congruence between the organization and its employees in objec-

tives and strategies are called MCS. It is important to note that this understanding and definition

of MCS explicitly encompasses informal controls.

Anthony and Govindarajan’s (2007) second-ranked textbook is based on the seminal

work of Anthony (1965) and uses his trichotomy of strategic formulation, management control

and task control. This hierarchical differentiation reflects Anthony and Govindarajan’s (2007)

understanding of management control, which is defined as “[…] the process by which managers

influence other members of the organization to implement the organization’s strategies” (p. 17).

Management control’s task is the implementation of the set organizational strategies, which

means that divergences have to be controlled. Thus, the “[…] system used by management to

control the activities of an organization is called the management control system” (p. 17). This

command and control understanding is similar to Merchant and Van der Stede (2003), and is

well reflected in Anthony and Govindarajan’s (2007) formal control process (Figure B-1).


28

Figure B-1: The formal control process (Anthony and Govindarajan, 2007, p. 105)

All the MCS in Figure B-2 are used as feedback and/or feedforward controls, which is charac-

teristic of a cybernetic approach21. But it is important to note that Anthony and Govindarajan

(2007):

[…] focus primarily on the systematic (i.e., formal) aspects of the control function. One can describe in considerable depth the various steps in the formal system, the information that is collected and used in each step, and the principles that govern the system’s operation as a whole. But it is very difficult, except in gen-eral terms, to describe the appropriate actions for managers encountering situations not contemplated in the formal systems (p. 6).

This understanding excludes all informal control mechanisms (e.g., personnel and cultural con-

trols) as parts of MCS and cause that MCS are just one tool for implementing strategy and inter-

act with the organizational structure, culture and human resource management of the firm

(Figure B-2).

21 Cybernetic theory is a popular theory in management control research. In fact, the cybernetic idea is prevalent in

the earliest discussions of management control (Bedeian and Giglioni, 1974). Among others, this first category of approaches is concerned with communication and control processes in social systems (Merchant and Otley, 2007). Cybernetic philosophy is based on the following assumptions: (a) there is a standard, corresponding to the effective and efficient accomplishment of the organization’s objectives; (b) actual accomplishment can be meas-ured; (c) when standard and measurement are compared and variance information is fed back, this information can be used to intervene in the process to eliminate unwanted differences between measurement and standard for the next round (see also Hofstede, 1978). The cybernetic approach implies that the management control process is comparable to processes in the natural sciences, such as physics (Merchant and Simons, 1986; Lee D. Parker, 1986).

Goals and Strategies

RulesOther

Information

Strategic Planning Budgeting

Responsi-bility Center Performance

Report Actual

versus Plan

Is Performance Satisfactory?

Measure-ment

Reward (Feedback)

Cor

rect

ive

Act

ion

Rev

ise

Rev

ise

FeedbackCommunication


29

Figure B-2: Framework for strategy implementation (Anthony and Govindarajan, 2007, p. 8)

In contrast to Anthony and Govindarajan’s (2007) focus on formal controls, Simons’

(1995, 2000)22 understanding of MCS is wider because he recognizes even more explicitly the

fact that organizational control can be achieved by adopting different forms of control such as

direct monitoring or social and cultural control. In addition, his understanding of MCS differs

from the command and control perspective in the way that in his approach a feedback mecha-

nism between goals and actions and business strategy is integrated. This bottom-up perspec-

tive23 explicitly allows strategies to emerge out of patterns of action (Simons, 2000, p. 34), and,

accordingly, allows MCS to re-influence strategy. Therefore, his understanding can be de-

scribed as innovation and control (Simons, 1995, p. 4). However, Simons’ (1995, 2000) posi-

tioning of MCS in general management is affected by a strong hierarchical understanding be-

cause he develops a hierarchically structured process of formulating and implementing business

strategy. Thereby, the business strategy reflects competitive market dynamics, firm-specific re-

sources and capabilities as well as the firm’s mission. From this business strategy, performance

goals and measures are derived, which, in turn, determine the firm’s actions (Simons, 2000,

p. 18). Thus, MCS do not form an explicit part of this process, but serve as ‘levers’ for imple-

22 Simons’ (2000) textbook is essentially based on his monograph (Simons, 1995) that, in turn, elaborates on his

conceptual ‘levers of control’ model based upon several empirical studies (Simons, 1987, 1990, 1991, 1994). To comprehensively review Simons’ model, references are sometimes made to his earlier publications.

23 This bottom-up perspective was inspired by Simons’ PhD supervisor Henry Mintzberg, who differentiated be-tween emergent and planned strategies (cf. Mintzberg and Waters, 1985).

Strategy Organization Structure

Human Resource

Management

Management Controls

Culture

Implementation Mechanisms

Perfor-mance


30

menting business strategy and achieving profit goals. Accordingly, strategy formulation is be-

yond the scope of MCS and takes place before MCS can be designed.

However, Simons’ (1995, 2000) focus is on informational issues, i.e., how information

is generated, communicated and used by the organization’s top managers. This becomes clear

when MCS are defined as “[…] the formal, information-based routines and procedures manag-

ers use to maintain or alter patterns in organizational activities” (Simons, 1995, p. 5). According

to Simons (1995), four attributes of his definition have to be highlighted and explained in great-

er detail. First, Simons’ focus is on formal routines and procedures, such as planning and moni-

toring systems. This element is in line with the approach by Anthony and Govindarajan (2007).

Next, as outlined above, an emphasis is placed on informational aspects, i.e., the purposes for

which and the ways managers use MCS. Then, the maintaining or altering of patterns does not

only refer to goal-oriented activities but also to the search for new opportunities and innovations

that can stimulate emergent strategies. Finally, Simons concentrates on top managers’ uses of

MCS and is not concerned with managers and control systems at lower levels in the organiza-

tional hierarchy, which was criticized by several authors (Ferreira and Otley, 2005, 2009;

Langfield-Smith, 1997).

Another distinctive feature of Simons’ (Simons, 1995, 2000) approach is the omission of

informal controls, as he described in his early work on the interplay of strategy and MCS:

“Within the domain of interest implied by this definition are planning systems, reporting sys-

tems, and monitoring procedures which are based on information use; excluded (somewhat arbi-

trarily) from this analysis are informal control mechanisms […]” (Simons, 1987, p. 358). At

first, this statement seems contradictory since Simons (Simons, 1995, 2000) explicitly incorpo-

rates values and beliefs as informal aspects in his framework. However, values and beliefs only

become a part of Simons’ (1995, 2000) model if they are formalized. That means they have to

be written down, for instance, in an organization’s mission statement. In this regard, Simons’

(1995, 2000) framework differs from Anthony and Govindarajan’s (2007) approach as they do

not consider social and cultural controls at all.


31

Overall, it can be summarized that Anthony and Govindarajan (2007) have a narrower

understanding of MCS than Merchant and Van der Stede (2003) but both follow the “command

and control” MCS perspective. Simons (1995, 2000), however, has a narrower MCS under-

standing than Merchant and Van der Stede (2003) but a wider one than Anthony and Govindara-

jan (2007) because of the integration of cultural controls. Additionally, Simons (1995, 2000)

endeavors to leave the path chosen by the other authors and follows an “innovation and control”

understanding of MCS, which results in the ability of MCS to influence strategy.

B.5.2 Types of MCS

Within their object-of-control framework, Merchant and Van der Stede (2003, pp. 23-

11) distinguish between results controls, action controls, personnel controls and cultural controls

as four types of MCS. The first type of MCS, i.e., results controls, influences “actions because

they cause employees to be concerned about the consequences of their actions they take”

(p. 23). That means that the outcome of an employee’s behavior is the objective of MCS. Typi-

cally, results controls create meritocracies in which the highest reward is given to the person (or

business unit) with the highest results. However, results controls like every other type of MCS

cannot be used in every situation. A necessary requirement is that the results can be controlled

by those whose actions influence the results, i.e., the controllability principle, and where the re-

sults can be measured effectively. Nevertheless, these requirements are fulfilled in many organi-

zational situations and hierarchy levels, and nearly all managers in the firm can potentially use

results controls. Concerning the three identified control problems of Merchant and Van der

Stede (2003), results controls are particularly effective at addressing motivational problems be-

cause they “induce employees to behave so as to maximize their chances of producing the re-

sults the organizations desires” (p. 26) – without upper-level manager supervision. The second

MCS type is devoted to action controls. These controls “are the most direct form of manage-

ment control because they involve taking steps to ensure that employees act in the organiza-

tion’s best interest by making their actions themselves the focus of control” (p. 67). Action con-

trols can have different forms, such as behavioral constraints, pre-action reviews, action ac-

countability or redundancy. All of these different alternatives address different control problems


32

to a certain degree. Behavioral constraints address solely motivational problems, whereas pre-

action reviews and action accountability address all three control problems – apart from motiva-

tional problems, lack of direction and personnel limitations. At least, redundancy can solve mo-

tivational and personnel problems. The third and fourth types of control are personnel and cul-

tural controls. These two types are strongly related because cultural controls are an accumulated

form of personnel controls. Personnel controls are based on “employees’ natural tendencies to

control and/or motivate themselves” (p. 74). They can solve each of the control problems by in-

troducing a self-monitoring mentality within each employee. However, personnel controls are

the type of controls that are especially suitable in the case of lack-of-direction-problems because

they clarify expectations through inter-employee communication and organizational activities

that are focused on sharing organizational information. For the successful implementation of

personnel controls, the main challenge is to find the right people who are self-motivated by their

own goals that are congruent with the firm’s overall objectives. Cultural controls allow a certain

(minimal) deviation from the abovementioned internal goal congruence of the employees. Cul-

tural controls “are designed to encourage mutual monitoring, a powerful form of group pressure

on individuals who deviate from the group norms and values” (p. 77). Therefore, cultural con-

trols work effectively in groups with high emotional ties and/or a high degree of reciprocal de-

pendency. A summary of the solved control problems by all types of MCS is provided in Table

B-4.


33

Table B-4: Solved control problems by different types of MCS (adapted from Merchant and Van der Stede, 2003, p. 84)

After the introduction of the different types of MCS, Merchant and Van der Stede

(2003) explicate that each type can be used more tightly or loosely, i.e., can vary in its level of

control tightness (or looseness). The main tasks of MCS are that they will or should lead to a

higher probability that organizational objectives will be achieved. This benefit can define the

control tightness of MCS, since “a tighter MCS should provide a high(er) degree of certainty

that employees will act as the organization wishes” (2003, p. 124). That means that the degrees

of freedom or the fault tolerance will be minimized if MCS are tight.

In comparison to Merchant and Van der Stede (2003), Anthony and Govindarajan

(2007) do not classify different types of MCS. They further base their differentiation of MCS on

their general management process (Figure B-1). The different MCS in the management process

show the strict formal understanding of Anthony and Govindarajan (2007). Merchant and Van

der Stede (2003) might classify the majority of the listed MCS as results controls. However, the

classification by Merchant and Van der Stede (2003) cannot disjunctly be applied to Anthony

Lack of Direction Motivational Problems Personal Limitations

Result Controls

Results Accountability x x

Action Control

Behavioral Constraints x

Preaction Reviews x x x

Action Accountability x x x

Redundancy x

Personnel/Cultural Controls

Selection and Placement x x x

Training x x

Provision of Necessary Resources x

Creation of a Strong Organizational Culture x x

Group-based Rewards x x

Control Types Control Problems


34

and Govindarajan’s (2007) types of MCS because of the narrower focus on MCS by Anthony

and Govindarajan (2007), i.e., the exclusion of informal controls from MCS.

Simons’ (1995, 2000) classification of MCS types is again different. Business strategy

represents the core of the analysis. Four key constructs form the next level of analysis as critical

indicators for a successful implementation of business strategy: core values, risks to be avoided,

critical performance variables and strategic uncertainties. Consequently, beliefs, boundary, in-

teractive and diagnostic control systems as the four levers of control each address one of these

key constructs (Figure B-3).

Figure B-3: Levers of control framework (Simons, 1995, p. 7)

Before each lever of control is explained in detail, Simons (1995, 2000) distinguishes between

positive and negative forces, which signifies his thinking of MCS:

These four levers create the opposing forces – the yin and yang – of effective strategy implementation. In Chinese philosophy, positive and negative forces are opposing principles into which creative energy divides and whose fusion creates the world as we know it. Two of these control levers-beliefs systems and interac-tive control systems – create positive and inspirational forces. These are the yang: forces representing sun, warmth, and light. The other two levers boundary systems and diagnostic control systems – create con-straints and ensure compliance with orders. These are the yin: forces representing darkness and cold. (Simons, 1995, pp. 7-8)

Business Strategy

Core Values

Risks to Be avoided

Strategic Uncertainties

Critical Performance

Variables

BELIEFS SYSTEMS

BOUNDARY SYSTEMS

INTERACTIVE CONTROL SYSTEMS

DIAGNOSTIC CONTROL SYSTEMS


35

Thus, the need to balance opposing forces and to integrate different kinds of controls is an es-

sential element of Simons’ (1995, 2000) philosophy. The first types of MCS that Simons (1995,

2000) present are so-called beliefs systems which “are the explicit set of organizational defini-

tions that senior managers communicate formally and reinforce systematically to provide basic

values, purpose, and direction for the organization” (Simons, 2000, p. 276).

Accordingly, belief systems encompass mission and vision statements, credos and

statements of purpose. Management creates and communicates the organization’s values

through these systems to provide momentum and direct individual opportunity-seeking (Simons,

1995). “Beliefs systems appeal to the innate desires of organizational participants to belong and

contribute to purposive organizations” (Simons, 2000, p. 303). Although Simons (1995, 2000)

focuses this belief system on formal procedures, he also recognizes the importance of (informal)

beliefs and values for MCS. The second category encompasses boundary systems as “explicit

statements embedded in formal information systems that define and communicate specific risks

to be avoided” (Simons, 2000, p. 764). Although these systems represent negative forces and set

limits on the search for (strategic) opportunities, their purpose is to stimulate the creativity of

individual organizational participants within predefined boundaries. Boundary systems include

codes of business conduct, strategic planning systems, asset acquisition systems and operational

guidelines. When the organization’s reputation is crucial or when excessive opportunity-seeking

behavior endangers an organization’s resources, the use of boundary systems is recommended

by Simons (1995).

Diagnostic control systems, the next category, play a crucial role in the process of trans-

forming intended into realized strategies since, for instance, they are used for defining goals and

monitoring initiated actions. Diagnostic control systems are defined as “the formal information

systems that managers use to monitor organizational outcomes and correct deviations from pre-

set standards of performance” (Simons, 2000, p. 209). Examples of diagnostic control systems

include budgets and project monitoring systems. In general, diagnostic control systems allow an

effective resource allocation by directing management attention to critical performance varia-

bles and imply the activities of standard setting, performance measurement and the design of


36

goal-congruent incentive systems. Preconditions for the use of diagnostic control systems are,

therefore, the possibility to set standards and measure performance variables as well as the pos-

sibility to use feedback information to take corrective actions (Simons, 1995).

In contrast to diagnostic control systems, interactive control systems are essential for the reali-

zation of emergent strategies: “Interactive control systems are the formal information systems

that managers use to personally involve themselves in the decision activities of subordinates”

(Simons, 2000, p. 216). Since interactive control systems focus organizational attention on stra-

tegic uncertainties and stimulate the emergence of new strategic initiatives, they can be used at

each point in time and are not restricted to particular situations. One precondition for an interac-

tive use is the regular discussion of the data generated by the systems to ensure attention is con-

stantly paid to strategic uncertainties. Examples for systems that can be used interactively are

project and profit planning systems (Simons, 2000). It is important to note that management de-

cides which systems should be used interactively and which should be used diagnostically.

However, recently, the possibility of using certain systems both diagnostically and interactively

has been discussed (Besson, Löning, and Mendoza, 2008). A distinctive characteristic of Si-

mon’s (1995, 2000) types of MCS is that he assumes and highlights the interconnectedness of

the four types. A firm has to establish and balance all four types of MCS to successfully control

the organization:

The power of these levers in implementing strategy does not lie in how each is used alone, but rather in how they complement each other when used together. The interplay of positive and negative forces creates a dy-namic tension between opportunistic innovation and predictable goal achievement that is necessary to stim-ulate and control profitable growth. (Simons, 2000, p. 301)

The main insights from the textbooks are summarized in Figure B-4. As shown, all three

textbooks define MCS in a similar but not identical way. They especially differ in the funda-

mental MCS understandings and in the wideness of their MCS definitions. The variance of this

core literature will be the basis for an even wider variability of understandings and definitions in

other publications because of the practice variation in academe.


37

Figure B-4: Comparison of the three top-ranked textbooks

B.5.3 Excursus: the role of Harvard Business School on management control sys-tems textbooks After the identification of the three top-ranked textbooks by the survey results and re-

ceiving a comment from one of the respondents, I analyzed the authors of those textbooks in

more detail to uncover any relationships. Looking at the different authors, I found that all spent

(or still spending) a significant period at HBS. Robert Anthony joined HBS as an MBA student

after graduating from Colby College in 1938. He earned his degree two years later and became a

research assistant to Professor Walker, a well-known pioneer in management control. From that

point on, Anthony was an active member at HBS until his retirement in 1982. However, he con-

tinued to be an active figure at the school for more than 10 years thereafter, supporting his dis-

ciples and colleagues, such as Richard Vancil. Kenneth Merchant spent the first 12 years of his

academic career, 1978 to 1990, at the HBS faculty. Therefore, he had the opportunity to absorb

the HBS philosophy on MCS. Robert Simons has been at the HBS faculty since obtaining his

PhD at McGill University in 1984 and, therefore, has also been exposed at length to the HBS

culture. Moreover, I found that Govindarajan (a HBS doctoral graduate in 1978), Merchant and

Simons were all at HBS during their formative years. Only Wim Van der Stede was not at HBS.

Merchant and Van der Stede (2003)

Action controls, results controls, personnel/cultural controls

Anthony and Govindarajan(2007)

Strategic planning, budgeting, responsibility center, report Actual

versus plan etc.

Simons (1995, 2000)

Belief systems, interactive control systems, boundary systems, diagnostic control systems

Informal controls, explicitly

integrated

Informal controls,

not explicitly integrated

Command and control

Innovation and control


38

B.6 Discussion This paper was motivated by heterogeneity and the new dynamic of MCS concepts in

the field. Although new integrative MCS concepts have been developed, the field of MCS re-

search is still fragmented in terms of definitions, concepts and theoretical perspectives (Berry et

al., 2009). Moreover, these inconsistent concepts are likely to persist because they are used to

educate future researchers and practitioners (Zeff, 2008). To shed some light on the differences,

this paper focuses on the educational literature that influences young practitioners and forms the

basis of their MCS understandings. The essential contents of the top-ranked textbooks, i.e., ex-

isting understandings, definitions and types of MCS, have been discussed. This broad discussion

is the basis for understanding the full continuum of MCS in academe. First, the seminal work by

Anthony (1965) was illustrated as it represents the origin of modern management control con-

cepts. Although Anthony’s (1965) concept of management control as a distinct process in be-

tween strategic planning and operational control was perceived useful as a starting point, it

failed to meet the changing demands of the academic community (Machin, 1983). As a result,

different researchers developed different concepts and adopted different perspectives, but this

made it difficult to interpret and integrate research findings (Malmi and Brown, 2008).

The point of departure for my database was the identification of the most commonly

used textbooks on MCS, since these textbooks are likely to be most influential for students,

young practitioners and researchers. The three most important textbooks on MCS identified

were those by Merchant and Van der Stede (2003), Anthony and Govindarajan (2007) and Si-

mons (2000). While a comparison showed both similarities and differences, their most signifi-

cant difference was the range of activities covered by MCS. Anthony and Govindarajan (2007)

explicitly excluded informal controls, Simons (2000) included formalized informal controls and

Merchant and Van der Stede (2003) included all informal controls. Additionally, different

viewpoints became apparent, since Anthony and Govindarajan (2007) delineated management

control hierarchically from strategic and operational/task control. Essentially, they described

MCS from a process point of view. By contrast, Merchant and Van der Stede (2003) concentrat-

ed on different objects of control, whereas Simons (2000) focused on the use of MCS. If we


39

take the exclusion or integration of informal controls into account while we analyze the variety

of MCS understandings in the (academic) field, we might find that this dimension of MCS is a

main driver for MCS understanding.

Despite the contributions, my study is subject to some limitations. First, I focused only

on textbooks and did not integrate journal articles into my study, which might have biased the

results because textbooks cannot immediately integrate all new insights into state-of-the-art re-

search. Second, my moderate response rate of 9.75% might reduce the representativeness of the

findings. Third, I focused on professors and assistant professors due to limited data access and

did not include lecturers. Forth, I focused my study on textbooks written in English because of

the increasing dominance of the English language in education. However, lecturers might prefer

to use textbooks in the national language and these textbooks would not be recognized by my

study.

Accordingly, I suggest that further research could classify current MCS research (and

the broadness of the concept) into the three top-ranked textbooks to overcome these inconsist-

encies. Moreover, future studies could analyze and compare existing MCS frameworks in the

academic literature because these frameworks are conceptual structures for categorizing and

systematizing complex information. In addition, it could be worth studying the backgrounds of

and relationships among the main authors of the MCS literature. As I have pointed out in my

excursus, HBS plays an important role in the most commonly used textbooks. However, many

relationships among various authors could exist, and this could help to shed more light on the

variances in academic MCS understanding.

Part C The Emergence of Management Control Systems – A Resource Dependency Perspective

40

C The Emergence of Management Control Systems – A Resource De-pendency Perspective

Abstract

The introduction of MCS is a fundamental advance in young entrepreneurial firms’ develop-

ment. The concept has been shown to influence start-ups’ (future) performance and their organi-

zational learning. However, little is known about the reasons for selecting which management

control mechanisms are introduced first in that life cycle stage. Moreover, these reasons are cru-

cial to understand the design and use of these MCS, two characteristics of MCS that are central

to considering their impacts on organizations. To shed light on the reasons for introducing

MCS, this part applies a qualitative cross-sectional field study approach. RDT is used to explain

the reasons for MCS introduction. My results show that financial and human resource MCS are

frequently the first introduced because start-ups have to acquire two main resources, capital and

employees. Additionally, complementing previous quantitative studies on the sequence of the

emergence of MCS this part offers the first evidence that MCS are introduced with varying de-

grees of future orientation, i.e., not only the timing of MCS introduction is important but also

their current or future relevance. Some MCS are introduced as empty shells to accommodate fu-

ture needs. Finally, I find evidence that start-ups are aware of the reciprocity of MCS introduc-

tion and informal controls.


41

C.1 Introduction Most research on MCS focuses on systems in well-established firms (Langfield-Smith,

1997; Luft and Shields, 2003; Sine et al., 2006). However, MCS also play a significant role in

young entrepreneurial and start-up firms because they determine a firm’s ability to handle future

growth and success (Davila, 2005) as well as organizational learning (Cohen and Levinthal,

1990; Ditillo, 2004; Henri, 2006; Widener, 2004). Moreover, transitioning from informal con-

trol mechanisms such personal supervision to MCS is vital for dynamically growing firms

(Davila, 2005; Sandino, 2007), and the lack of adequate MCS might result in failure (Granlund

and Taipaleenmäki, 2005). Recent studies on the emergence of MCS have mostly described

their timing (e.g., Davila and Foster, 2005, 2007). However, because the introduction of MCS

can be costly (Merchant and Van der Stede, 2003, p. XX) and start-ups have limited resources,

young firms also introduce their first MCS selectively (Granlund and Taipaleenmäki, 2005;

Sandino, 2007). Thus, it is paramount to identify which MCS will be introduced initially and to

understand the reasons for introducing these initial MCS.

At their inceptions, start-ups are small firms typically run by the initial founders (Granlund and

Taipaleenmäki, 2005). Start-ups dominantly use informal control mechanisms such as a "we

culture" (Collier, 2005; Lukka and Granlund, 2003), shared beliefs (Granlund and Tai-

paleenmäki, 2005) and a self-motivating fun culture (Mouritsen and Kreiner, 2003). Founders

tend to combine these informal control mechanisms with a highly centralized power structure

(Cardinal, Sitkin, and Long, 2004; Granlund and Taipaleenmäki, 2005). In this phase of a start-

up’s life, the control structure is more similar to an “organized anarchy” (Cooper, Hayes, and

Wolf, 1981) than to a business organization, and the corporate culture is designed to foster flex-

ibility and creativity (Granlund and Taipaleenmäki, 2005; Lukka and Granlund, 2003). Many

decisions are made for the first time and the decision-making style is highly intuitive (Moores

and Yuen, 2001) or at least not routinized. As the young entrepreneurial firm grows and hires

the first non-founding employees, the style of control remains informal. If the firm grows fur-

ther, the span of control will become too broad and informal control mechanisms will become


42

too time-consuming (Davila, 2005; Ouchi, 1979).24 Additionally, direct and informal communi-

cation as well as information dissemination within the firm becomes inefficient because it takes

too long to inform all organizational members. Consequently, this situation drives start-ups to

adopt their first MCS.

Institutional investors such as VCs pressure young entrepreneurial firms to be aware of their (fi-

nancial) situations (Davila, 2000, 2005). The VCs requirements and the start-ups general need

to react to capital market pressure – especially after the new economy bubble burst (Lukka and

Granlund, 2003) – are additional drivers for MCS introduction. However, the capital market

pressure pushes not only the adoption of MCS but also creates tensions within the firm (Lukka

and Granlund, 2003). These tensions exist between the start-up’s requirement for flexibility and

creativity and its need to handle growth, i.e., increasing costs of control and reacting to capital

market pressure. Another driver of MCS emergence, which is also linked to handing growth, is

the replacement of (one of) the founder(s) by an outside and experienced CEO (Davila, 2005;

Davila and Foster, 2005). Start-ups hire experienced outside managers to bring enough man-

agement competence into the firm and handle the challenges of a growing organization (Lukka

and Granlund, 2003).

All these drivers influence start-ups and lead to the introduction of MCS; however, start-ups

will selectively adopt their first MCS because of the introduction costs as well as the conse-

quences on the informal control culture (Lukka and Granlund, 2003; Sandino, 2007). Davila and

Foster (2005), for example, investigated the time-to-adoption of operating budgets and the per-

formance of start-ups and found a significant positive effect. Furthermore, this selectivity means

that start-ups will not simultaneously introduce MCS for every organizational activity such as

marketing or sales management. Davila and Foster (2007) investigated the timely sequence of

MCS introduction of different MCS categories.25 Their results indicated that financial planning

seems to be the first and most widely adopted MCS in early-stage firms. The secondly intro-

24 Davila (2005) calculated that for N employees the number of potential direct, i.e. one-to-one, interactions is

N*(N–1)/2. 25 Davila and Foster (2005, 2007) used the following MCS categories: financial planning, financial evaluation, hu-

man resource planning, human resource evaluation, strategic planning, product development management, sales/marketing management and partnership management.


43

duced systems belong to the categories of human resource planning and strategic planning. The-

se findings are in line with the argument that start-ups prefer planning over control because of

their extreme short-term orientation due to their dynamic environments (Granlund and Tai-

paleenmäki, 2005). Additionally, Sandino (2007) investigated the introduction of MCS types

and found that depending on the start-up’s strategy, a different set of MCS will be introduced.

Start-ups with a low-cost strategy tend to introduce cost and risk MCS, whereas start-ups fol-

lowing differentiation strategies tend to introduce revenue MCS.

Although the overall introduction of MCS is a pivotal advance for start-ups, just one study has

explained why MCS emerge, i.e., the start-ups’ reasons for introducing the selected MCS. Davi-

la et al. (2009) investigated the wide field of potential reasons for introducing MCS. They fo-

cused on the introduction of product development systems in young entrepreneurial firms. Their

results indicated that a manager’s background and operational breakdown (“chaos”) are the two

main reasons for introducing MCS. However, many other aspects of MCS in start-ups have not

yet been examined such as the influence of the start-up’s resource dependency on external fi-

nanciers and internal resource gatekeepers such as the members of the founding team. Addition-

ally, as the abovementioned results e.g., from Sandino (2007) indicate, focusing on one single

MCS category might underestimate the facts that MCS have to be balanced (Mundy, 2009) and

the introduction of one MCS could influence the introduction of another (Davila, 2005; Nelson

and Winter, 1982). However, this reciprocity of MCS is also an under-researched area (Collier,

2005).

Therefore, the purpose of this part is to deepen the insights into the potential reasons for

introducing MCS by analyzing the whole range of MCS categories26 within young growing

firms from a resource dependency perspective (Pfeffer and Salancik, 1978). To this end, a cross-

sectional field study (Lillis and Mundy, 2005) was conducted. The sample contains 20 German

start-ups (of which 18 are venture capital-backed). All members of the BoD have been inter-

viewed, resulting in 74 interviews. A total of 27% of the interviewees were CEOs, 29%

26 I adopted the categories used by Davila and Foster (2005, 2007). For more details see Appendix C.


44

CTOs/CFOs/COOs27, 21% non-executive members of the BoD and 23% VCs. The results were

in line with prior research because they showed that human resource planning and evaluation as

well as financial planning and financial evaluation are the first (and probably the most im-

portant) MCS introduced. The reason for introducing these categories can be found in the acqui-

sition of vital resources: start-ups need to acquire capital and employees to survive and grow.

Additionally, I found evidence for reciprocal influences between the introduction of MCS and

informal control mechanisms. Top management teams recognize and weigh up the reasons and

consequences of introducing formal control mechanisms such as MCS. Finally, the cross-

sectional field study showed evidence that MCS will be introduced with a certain degree of fu-

ture orientation.

Therefore, this part contributes to the literature in several ways: (1) virtually the com-

plete range of MCS categories in a start-up is observed to distinguish the time-to-adoption be-

tween the different categories and find the reason(s) for these differences; (2) this study contrib-

utes to the renaissance (Katila, Rosenberger, and Eisenhardt, 2008) of RDT, by applying it to

explain the reasons for MCS introduction in the observed order and design; (3) the study offers

evidence that MCS will be introduced with some future orientation; (4) it captures a unique set

of participants; and (5) as a summary, it contributes a complementary view to existing quantita-

tive studies that focused on the sequence of emerging MCS by detailing the reasons for the first

MCS introduced in start-ups.

The remainder of the part is organized as follows. The next section, Section C.2, will

provide an overview of the existing research. Before the research method and case settings are

presented in Section C.4, Section C.3 provides an overview of RDT. Section C.5 shows the re-

sults of this study. The last section, Section C.6, will discuss these results as well as the limita-

tions of this study and identify some options for future research.

27 COO is the abbreviation of chief operating officer.


45

C.2 Prior Research on the Emergence of MCS When a firm is “born” its activities are dominated by the creative developing of (first)

products and creating or identifying the market that will be targeted (Greiner, 1972, 1998). Em-

ployees communicate often, informally and face-to-face. Formal control mechanisms such as

MCS are not necessary in that phase because the young firm’s direction and control are deter-

mined by the founder’s motivating ideas and the possibility of direct supervision (Cardinal et

al., 2004; Greiner, 1972, 1998). Additionally, the founders are sophisticated storytellers

(Lounsbury and Glynn, 2001) who motivate young employees by employing a “we culture”

(Lukka and Granlund, 2003, p. 241) and build up employee trust in the firm because these early

employees view the future of their jobs in a new population with “skepticism and distrust”

(Aldrich, 1999, p. 231). Start-ups cannot use their prior track records to build trust in the firm’s

future success or legitimize its existence. Therefore, using the instrument of storytelling is char-

acteristic of a firm that are part of a “dream society” (Jensen, 1999, p. VII), i.e., a society that

consists of future beliefs more than current outcomes. Moreover, storytelling can be used for le-

gitimizing firms if they tell stories about how they live in a functional and institutionalized

world (Granlund and Lukka, 1998; Lounsbury and Glynn, 2001). Consequently, the use of in-

formal control mechanisms is efficient at this stage. Moreover, Holmberg and Ridderstrâle

(2000) found that start-ups in the new economy use sensational leadership28 and foster creative

development instead of control systems. A start-up founder’s style for identifying and solving

problems is intuitive, i.e., not routinized; decision-making is not primarily driven by financial

goals. Young entrepreneurial firms do not want to implement nor use formal control systems

such as accounting because of two main reasons at this life cycle stage (Lukka and Granlund,

2003). First, start-ups suggest that MCS will conflict with the more important targets of the

young firm such as creative product development. Second, “symbolic absence,” which means,

for example, cost accounting is seen as a symbol of a structure or practice that young start-ups

try to avoid.

28 Sensational leadership is a special leadership approach that suggests controlling people by “AID-ing” them

(Holmberg and Ridderstrâle, 2000), which means to appeal to their affection, intuition and desire.


46

However, if start-ups grow, the increasing number of employees and increasing production ca-

pacities challenge the founder’s style of leadership because the span of control becomes too

large (Davila, 2005) and decision-making based on direct personal information becomes almost

impossible (Davila and Foster, 2005).29 Whereas informal information infrastructures are effi-

cient at the beginning, with growing headcount more and more formal information systems are

necessary to fulfill management’s information demands, and international operations might be

associated with the faster adoption of MCS because these operations increase the complexity

due to the distance between the operations’ participants (Davila and Foster, 2005). Moreover,

the creation of transparency seems to play a major role in start-ups (Granlund and Tai-

paleenmäki, 2005): as start-ups develop, their employees develop as well and the start-ups need

more “advanced employees"30. However, the acquisition of these advanced employees is a chal-

lenge for start-ups (Hornsby and Kuratko, 1990; Rutherford and Buller, 2007) because they are

motivated by a more transparent evaluation style, for example, through formal incentive sys-

tems. Additionally, transparency is required to diffuse all relevant information throughout the

entire firm. Therefore, the role of MCS in start-ups encompasses the diffusion of information as

well (Davila and Foster, 2007). Moreover, the introduction of MCS plays a role in signaling the

transition of the firm into a business organization and the transition of the firm’s leaders to real

managers. Aside from signaling and transparency, size also drives the need for coding and doc-

umenting organizational learning (Cohen and Levinthal, 1990; Ditillo, 2004; Levitt and March,

1988). Another driver of MCS emergence, age of the firm, increases the experiences of man-

agement. Through experimentation and adaptation, older firms have learned how to manage

their employees and activities. Owing to repetition over time, MCS emerge for codifying and

documenting the processes of repetitive tasks. However, founders tend to be technical-oriented

or entrepreneurial people who have low preferences for and only little knowledge about man-

agement techniques (Mintzberg, 1973; O'Gorman, Bourke, and Murray, 2005). Nevertheless, if

29 Of course, legal requirements influence the introduction of MCS, too. As these requirements vary between differ-

ent legal forms and countries, I do not focus my study on them. However, I have considered legal influences in my analysis of MCS introduction reasons.

30 Advanced employees are understood as employees who have made work experience in business organizations (Davila, 2005).


47

young managers do not change their ways of leading the firms, they will consequently run into a

“crisis of leadership” (Greiner, 1972, p. 42; 1998, p. 60). This crisis can be solved by the found-

ers themselves if they transition the basis of their leadership style from informal controls to

formal controls (e.g., Moores and Yuen, 2001) or it can be solved by replacing the founders

with an experienced manager who favors formal control mechanisms (Daily and Dalton, 1992;

Greiner, 1972, 1998). Replacement seems to be the common approach because founders do not

want to become managers (Mintzberg, 1973) and are probably not suited to be managers

(Greiner, 1972, 1998). Consequently, Moores and Yuen (2001) found that management ac-

counting systems’ (MAS31) configurations significantly differ between different life cycle stages

by applying the life cycle model of Miller and Friesen (1984). They found that firms place a

higher emphasis on formal MAS when they transition from the birth to growth phases. In par-

ticular, the authors found the largest differences between the importance of formal and informal

MAS in P&L statements and monthly balance sheets and a reliance on financial performance

evaluation. This behavior results from a firm’s tendency to supplement (formal) MAS with in-

formal information systems if the environment is increasingly uncertain (see also Emmanuel et

al., 1990). The reason for this supplementing behavior is that firms can adopt informal controls

faster than formal controls, if new controls are needed, because formalization or routinization

take time.

Hence, “[t]he central paradox in the management and control of [start-ups] thus is how to com-

bine rebellious creativity, unlimited individual freedom, and the pursuit of ultimate flexibility

with the ‘normal’ demands of business organizations” (Lukka and Granlund, 2003, p. 244). In

particular, young firms that have not yet fixed their products, could use formal control mecha-

nisms such as accounting as a “window back to reality” (Lukka and Granlund, 2003, p. 245) as

those controls require entrepreneurs to rationalize their behavior and (dream-) targets. Formal

management control can be in contrast to flexibility. The intrafirm demands for formal controls

will be accompanied by external pressure from VCs or institutional requirements such as public

listing rules (e.g., Davila, 2005; Kallunki and Silvola, 2007; Silvola, 2008). On the one hand,

31 Management accounting systems can be interpreted as subsystems of MCS (Davila and Foster, 2005).


48

VCs facilitate access to a network of knowledge and resources (Robbie, Wright, and Chiplin,

1997; Sapienza, Manigart, and Vermeir, 1996) and share their own specific knowledge, both ac-

tivities that support the emergence of MCS. On the other hand, the information and disclosure

demands of VCs will require start-ups to introduce controls, especially financial. Prior to ven-

ture capital investment, there is typically no external need for MCS because one of the main

purposes of MCS is to reduce agency costs that result from the separation of ownership and

control (Baiman, 1982) but without external financing there is no such separation. In line with

these arguments, Davila and Foster (2005) found that VC-backed firms introduce more and

even faster their first MCS than non-VC-backed firms. Additionally, not only VCs stipulate the

emergence of MCS, the capital market in general requires start-ups to introduce their first for-

mal controls (Granlund and Taipaleenmäki, 2005). Owing to this external pressure, formal con-

trol mechanisms can be interpreted as schemes or mediators between different professionals’

frames (Giddens, 1984; Macintosh and Scapens, 1990). A scheme such as accounting systems

can facilitate organizational learning and provide a basis for a new culture that can be produced

and reproduced (Dent, 1991; Giddens, 1984).

Concerning the reasons for introducing MCS, our knowledge is still scarce. Davila et al.

(2009) is the only study that has focused on the reasons for MCS emergence.32 Davila et al.

identified six possible reasons for introducing product development systems in early-stage en-

trepreneurial firms. The first reason is that firms tend to introduce product development systems

to legitimize the firm’s existence vis-á-vis external institutions (Carruthers, 1995; Singh,

Tucker, and House, 1986; Zott and Huy, 2007). The second reason is contracting with external

parties to meet the expectations of interorganizational collaborations. Aside from the first two

reasons, which were externally oriented, Davila et al. also identified some internally oriented

reasons for introducing product development systems. First, firms that hire experienced manag-

ers introduce product development systems because of a manager’s background, i.e., his or her

experiences concerning the necessity of certain MCS. Similar to manager’s background, the se-

32 Davila et al.’s study is the only one that focuses on structural variables. Studies by Reid and Smith (2000) or Col-

lier (2005) focused on event variables such as cash flow crises, a shortfall of finance for strategic purposes, the implementation of best innovations or a financial crisis.


49

cond reason – “need to focus” – is that managers perceive the need to introduce a product de-

velopment system, regardless of a real objective. On the contrary, the next reason for introduc-

ing a product development system is to react to real and already emerged problems such as op-

erational breakdowns in production. The last two reasons concern firms’ reactions to current ex-

periences. On the one hand, firms have faced problems that have lead to chaotic reactions.

Therefore, firms introduced formal structures to solve the recurring problems. On the other

hand, firms learn how to react in certain situations – routines emerge out of actions and will not

be planned by managers.

C.3 Resource Dependency Theory “How managers go about ensuring their organization’s survival is what this book is

about” (Pfeffer and Salancik, 1978, p. 2) is the beginning of Pfeffer and Salancik’s seminal

work that describes the core of RDT. The theory follows an open systems understanding33 and

questions the often taken-for-granted survival of firms. RDT tries to understand firms’ own be-

havior but assumes that they strongly depend on internal and external resources as well as on

the relationship of the firm with actors, who control the required resources (Pfeffer and

Salancik, 1978). Consequently, RDT focuses on the processes and actions of organizations to

handle resource dependency. Therefore, the main assumption of RDT is that firms – understood

as coalitions – have to be effective at managing the demands of organization’s interest groups

because those interest groups control limited resources and decide the firms’ survival.

The firm will be secured if it is able to secure and maintain the inflow of vital resources

but “[r]esources can be almost everything that is perceived as valuable – from building contracts

to press exposure to control over systems analysis” (Pfeffer, 1992, p. 87). This resource defini-

tion reflects the broad understanding of a firm’s environment and environmental uncertainty

within RDT (Ulrich and Barney, 1984). Accordingly, RDT concentrates on the resource ex-

change processes between a firm and its “enacted environment” (Pfeffer and Salancik, 1978, p.

33 The term open systems means that organizations are interpreted “[...] as open systems, open to external environ-

mental influence as well as internal factors, receiving inputs and trans-forming them into outputs, engaged in a process of continuous adjustment to environmental changes and regulating their activities with a view to achiev-ing a state of dynamic equilibrium […].” (L.D. Parker, 1986, p. 147).


50

89) whereupon the enactment “is largely determined by the existing organizational and informa-

tional structures of the organization” (Pfeffer and Salancik, 1978, p. 89) because resources are

not controlled by the organization itself – they are controlled by other interest groups of the

firm. Therefore, resources – apart from “classical” resources such as commodities – can also be

the supply of the job market or external financing. Additionally, because of the broad under-

standing of resources within the RDT perspective, the firms’ legitimacy for stakeholders or in-

terest groups would also be a resource.

The degree of resource dependency will be determined by three factors. First, the im-

portance of the resource for the firm, i.e., the “[…] relative magnitude of the exchange and the

criticality of the resource.” (Pfeffer and Salancik, 1978, p. 46) Second, discretion over resource

allocation and use, i.e., possession, access to a resource, actual use and who controls the use,

ability to make rules and control possession (Pfeffer and Salancik, 1978, pp. 47-51). Third, the

concentration of the control of the resources, i.e., if alternative sources of vital resources exist

the concentration of control will be lower than if just one alternative exists. Pfeffer and Salancik

offer two ways of dealing with dependency. First, firms can try to exchange a resource that is

vital for the owners of resources that are needed by the firms. Second, firms can try to create a

cooptation34 with the resource owner, i.e., they can try to influence the owner. For cooptation

firms can use, for example, an interlocking BoD. The commitment of resources by using a BoD

is of course not as in the case of joint ventures, but using interlocking boards will facilitate the

interaction between organizations over time. It is important to note that Pfeffer and Salancik fo-

cused their understanding of cooptation only on competitors and financial markets. However,

interlocking BoDs are a possible form of managing the environment by appointing important

external representatives because this a strategy of acquiring resources, getting information, de-

veloping interorganizational commitments and establishing legitimacy (Pfeffer and Salancik,

1978, p. 161). Small firms, for example, can appoint people with managerial skills to provide

34 “Cooptation describes a situation in which a person or set of persons is appointed to a board of directors, advisory

committee, policy making or influencing group, or some other organizational body that has at least the appear-ance of making influences decisions. Such appointment may occur either by means of an election or by direct in-vitation. Through providing at least the appearance of participating in organizational decisions, cooptation tends to increase support for the organization by those coopted” (Pfeffer and Salancik, 1978, p. 162-163).


51

the organization with such skills. Start-ups permit VCs to become a board member to legitimate

their own behavior. Additionally, they acquire important resources from the VC and interlock

this “inflow” of resources with the board position.

The situation of start-ups is primarily characterized by a high environmental uncertainty

and a high dependency on external resources. This status makes RDT a reasonable theory for

investigating the reasons of MCS introduction. Additionally, the main ideas of RDT are not on-

ly applicable to an interorganizational but also to an intraorganizational context (Medcof, 2001;

Ulrich and Barney, 1984) at least because “in general, organizations will tend to be influenced

by those who control the resources they require” (Pfeffer and Salancik, 1978, p. 44). A start-

up’s main goal is to survive by acquiring vital resources. Therefore, I use RDT to formulate the

following proposition that guides my study.

Proposition: start-ups introduce MCS to acquire and maintain vital resources.

C.4 Research Method and Case Setting To gain new insight into the emergence of MCS and to understand the reasons for MCS

introduction, I obtained the main participants’ perceptions directly and conducted a cross-

sectional field study (Lillis and Mundy, 2005). This methodological approach is in between sur-

veys and single case studies concerning the breadth and depth of the study. I follow the man-

agement accounting research’s request (e.g., Foster and Young, 1997; Otley, 1994; Spicer,

1992) that researchers have to return to the field to understand focused phenomena in their real-

life contexts. Moreover, prior research on MCS emergence has lacked theoretical foundation or

used experienced-based models. Therefore, my study is the first to be grounded in theory, i.e.,

RDT. However, this theory will be applied to the emergence of MCS for the first time, which

creates doubts about the theoretical outcome. RDT postulates that the actors who control access

to limited resources will influence a firm’s behavior but a firm is also able to influence its en-

acted environment. Because start-ups depend on several actors, such as customers, institutional

investors and employees, several perspectives on the phenomena of introducing MCS have to be

adopted and these perspectives cause multiple research sites. In selecting my case firms, I used


52

two key criteria. First, start-ups should have reached a size of more than 15 employees. This cri-

terion was derived from prior empirical evidence that start-ups begin to introduce their first sets

of MCS at a headcount of more than 15 employees (Davila, 2005). Aside from empirical rea-

sons, the theoretical necessity of introducing MCS will only occur if the firm size and the corre-

sponding headcount cannot be informally controlled (e.g., Aldrich, 1999). My second criterion

was the investment of a VC in the start-up because these firms adopt MCS faster and to a great-

er extent (Davila and Foster, 2005, 2007).35 The presence of a VC would not only support the

chance of investigating a transitioning firm from informal to formal but also would capture a

main driver of MCS emergence, i.e., the VC itself.36 I used the database

“www.deutschestartups.de” and the business school’s alumni network to identify firms that

matched my criteria. Overall, 21 firms were identified. I was able to collect data within 20 of

these 21 firms, which results in a “response rate” of 95% and can be seen as an indicator of the

importance of the research focus. My interviewees in every firm were the CEO, CFO or CTO,

one non-executive member of the BoD and an investment manager of the corresponding VC. A

total of 74 interviews were conducted in 20 firms located in Germany. Each interview lasted on

average one hour. I conducted my semi-structured37 interviews from November 2008 until

March 2010 (see Appendix D for more details). Table 1 provides an overview of the case firms.

I received permission to record 73 interviews and detailed notes were made during and especial-

ly after the remaining one interview. A summary of the key points of the study was sent to all

participants to confirm or add missed aspects. Additionally, field notes were taken and execu-

tive summaries of each interview written. Aside from triangulating data by using different re-

search sites, alternative data sources such as firm websites and analyst reports were used. After

reading and re-reading the transcripts, the data were coded by using the computer software at-

las.ti. A manual for the coding procedure was written to ensure intercoder reliability38. To stay

35 I also integrated two firms without venture capital financing to gain deeper insights into the influences of the VC

on the emergence of MCS in start-ups. 36 Therefore, I did not interview the same VC for different firms – I was able to select firms with different VCs. 37 For an excerpt of the asked questions, see Appendix D. 38 Additionally, an intercoder reliability test was performed after the first coding round. More than 90% of the codes

were identically made by the researchers at the first attempt. In the remaining 10%, the researchers agreed after intensive discussions.


53

close to the data, the 73 interview tapes were simultaneously listened to, the transcripts read and

re-read, the executive summaries consulted and the alternative data sources regularly checked.

Qualitative data analysis ran simultaneously to the data collection, and initial ideas or reflec-

tions on the data’s meanings were stored during the entire data collection and analysis phase in

a research diary. For qualitative analysis, data matrices (Miles and Huberman, 1994) were

used.39 Mapping the respondents against the codes or labels identified in the previous manual

coding procedures created these matrices and this allowed me to identify themes by each re-

spondent. My sample consisted of 20 German start-ups that were founded up to 10 years ago40

(Table C-1). The firms had 67 employees on average. All firms received venture capital except

two, which were privately financed or used another form of institutional capital. The majority of

the firms can be classified as service industry firms.

39 For an example of these matrices, see Appendix B. 40 Except one firm that was originally founded 13 years ago but this firm was restructured and “re-founded” nine

years ago. After the intensive analysis of the main topics of my study, I used the re-founding date as the founding date.


54

Table C-1: List of participating firms

C.5 Results The results of the cross-sectional field study will now be presented to explain the rea-

sons for introducing41 the different categories of MCS, i.e., financial planning, human resource

planning, human resource evaluation, financial evaluation, product development management

and sales/marketing management. Moreover, other topics emerged during the study, which are

closely related to the introduction of MCS but were not anticipated before. These topics encom-

pass reciprocity and the balance of MCS as well as the future orientations of MCS.

41 “Introduced” is understood as (1) having a documented process and/or as (2) periodically and purposefully exe-

cuting the process.


55

C.5.1 Reasons for introducing MCS

To interview the start-ups on the emergence of MCS, I applied the abovementioned

eight categories. All categories of MCS were found in the different start-ups except partnership

management. MCS that are part of partnership management such as a partnership development

program and a policy for partnerships seem to remain informal. I used an open question not on-

ly for the overall introduction of MCS but also for each category of MCS to investigate which

MCS were introduced first, why they were introduced and to make use of the respondents’ an-

swers as a first proxy of MCS relevance. The first answers and examples mostly concerned fi-

nancial planning systems. The second most mentioned MCS category was human resource

planning. The order of the other mentioned MCS in my study was the following: human re-

source evaluation, financial evaluation, product development management, sales/marketing

management and strategic planning. This sequence of MCS introduction slightly differs from

prior empirical evidence (cf. Davila and Foster, 2005, 2007) because in my sample strategic sys-

tems are introduced later than the early strategic planning introduction in Davila and Foster’s

sample. This difference might be grounded in my multiple research sites and different methods.

My sample of respondents for each firm offered the option to triangulate the data and the under-

standing of “introduced” between the different interviewees. The interpretation of the term in-

troduced significantly differed among the various respondents. Therefore, I explained the term

to each interviewee in detail. This additional explanation generated a better understanding and

resulted in more precise ratings of whether MCS had already been introduced or not.

C.5.1.1 Financial planning

The MCS category financial planning includes systems such as operating budget or

sales projections. In general, start-ups introduce these kinds of MCS first; in many cases, young

firms have already introduced financial systems before the firm was really started. The reason

for introducing financial planning systems is to acquire capital. Founders know that they have

to obtain financing within the entrepreneurship process, which is “opportunities to bring into ex-

istence ‘future’ goods and services are discovered, created and exploited” (Venkataraman, 1997,

p. 120). Before founders start their businesses, they make a business plan to calculate the risk


56

and resources needed to carry out their business ideas. This “blueprint” of the firm will be used

by founders to acquire capital because potential investors have access to less information than

the founders themselves (e.g., Shane and Cable, 2002). Founders have to reduce this infor-

mation asymmetry to acquire capital in the form of institutional investors such as banks or – and

even more common in the start-up setting – venture capital.

We had a lot of experiences concerning MCS in the cooperation with venture capital-ist. Our internal need for all these reporting and monitoring systems was and is very limited because we could actually control our firm with a few simple numbers. […] But if you want to receive capital from institutional investors or directly from the capital market, you need more advanced MCS. If you begin to raise money from ven-ture capitalists, they will ask you for many things – at least during the due diligence. If you cannot answer the questions of the VC guys in the due diligence, they will move – even if they love your idea or product, they will move. (CEO, firm 3)

Internally, we began to develop a business plan in order to see how the business should develop in the future. We derived key performance indicators from this busi-ness plan, which we would like to use for controlling our firm; after that, we used the key performance indicators for building up our reporting because we preferred an easy reconciliation between the target and actual key performance indicators for an easy variance analysis. We have used these indicators for internal control purposes and for attracting external investors. You need good information – you need the right key performance indicators to show the potential investors how your business is de-veloping. (CFO, firm 9)

The second quotation shows that experienced executives – such as the CFO of firm 9 –tend to

anticipate the requirements of the VCs and implement the financial planning MCS for internal

control objectives already.

If the VC has invested its capital in a young firm, a second phase of MCS introduction

begins because the VC requires more detailed information on a regular basis. The direct reason

for the second phase of MCS introduction is to retain capital because VCs want to know in

which activities their money will be invested and if the already financed activities are perform-

ing well. VCs combine, for example, the operating budget with hurdle rates to monitor and con-

trol the spending activities of the start-up. Moreover, VCs themselves have to report to their

funds. Therefore, they require detailed information about their portfolio firms. Both reasons for

introducing MCS out of the financial planning systems category, i.e., acquiring and retaining

capital, can be explained by RDT and the evaluation of start-ups’ resource dependencies

(Pfeffer and Salancik, 1978, pp. 45-51) on venture capital. First, for start-ups external capital is


57

a vital resource at the beginning of their founding processes (Hellmann and Puri, 2002). VCs

have absolute discretion over resource allocation and use, because start-ups represent high-risk

investments that will only acquire venture capital but rarely different external capital (Davila,

Foster, and Gupta, 2003). Therefore, the concentration of resource control is extremely high. In

addition, whereas the investment of the VC can be seen as a positive signal to the market (e.g.,

Hellmann and Puri, 2002), a non-investment can be seen, in turn, as a negative signal to the

market. Start-ups mentioned that VCs are well embedded in their relevant networks and will

know if another VC has already neglected to invest – that, in turn, increases the concentration of

resource control by the entire VC industry.42

It is to secure the follow-up financing, which does not necessarily mean that we do the follow-up financing. The probability that we will find a co-investor is much higher than the start-up would search for a co-investor just by itself, because we have the better network. If we ask other VCs and tell them ‘we made the due diligence and this start-up is a good deal – we will work together for the next 20 years so you can trust me’ they trust us. We only use our finance network for start-ups if we believe; I mean really believe, in that start-up. Of course, a chance of failure is still given but I would never cheat my long-term partners. Our partners anticipate this behavior and they will prioritize our offer. Our network and the consequences of it are in my opinion the most value adding aspects of VC. In particular, follow-up financing is hard to get without the right credibility. (VC, firm 13)

C.5.1.2 Human resource planning The next category of MCS introduced by start-ups is human resource planning systems

such as a mission statement, organizational chart or written job description. Although young

entrepreneurial firms rely heavily on informal controls and informal human resource mecha-

nisms, they introduce these basic human resource planning systems to acquire employees.

We reached the point where we realized that MCS such as an organizational chart would be necessary after one year. The reason was not an internal de-mand of the management to get an overview of the firm; the organizational chart was needed as an instrument for communicating our responsibilities and workflow processes to our employees. (CEO, firm 17)

42 Especially, I collected my data in Germany where the venture capital market is much smaller than in, for exam-

ple, the USA, which might have increased the concentration of resource control drastically.


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At the very beginning, a “we culture” dominates the human resource aspects and mainly

young risk-inclined people will apply. If start-ups want to grow and advance, they have to ac-

quire more employees. Consequently, additional and even more experienced people have to be

attracted by the start-ups, but such employees want and require different forms of human re-

source systems, which are also required by VCs but only at a very basic level.

We require a business plan, a budget, a cash flow forecast and some kind of headcount planning – and maybe an investment planning...but we do not give templates to the start-ups, we just give them our requirements and some ad-vice concerning how to design an investor information package. Of course, the result is that every start-up produces a different investor package but the main information is mostly the same. Moreover, we won’t directly influence whether the start-up planning process is more top-down or bottom-up. We give in that case, like in most other areas of our cooperation with the start-up, advice in which direction the planning process could be organized but we won’t force the start-up. Our advice depends mostly on the experiences of the top management team and the ‘mature’ employees. (VC, firm 3)

[W]e experimented with unclear organizational structures, i.e., we emphasize self-responsibility and self-organization. The main idea of fostering self-organization is great but we also realize that people want to have clear struc-tures and clear responsibilities. My prior job experience (I was a consultant) helped bring structures into the firm but I think that I overemphasized clear formal structures in my first days. As a consequence, we try to find nowadays a balance between clear formal structures and responsibilities and between self-organization and self-responsibility. […] We use very basic things such as an organization chart with detailed job descriptions. (CFO, firm 18)

Therefore, start-ups introduce MCS such as written job descriptions to attract more ex-

perienced people because those employees need formal controls to evaluate the job’s attractive-

ness and quality. Additionally, start-ups will not only introduce such human resource planning

systems to acquire people but also to retain those employees. Many start-ups introduce job titles

and career paths in combination with their first organizational charts. Those systems should

keep employees motivated by announcing possible job promotions. Moreover, such systems se-

cure an efficient allocation of the human resource. If young firms are growing, founders will not

be able to supervise every action and have to delegate more authority to employees. To avoid

jobs being done twice without the supervision and coordination of the founders, MCS such as

organizational charts and written job descriptions will be introduced. Moreover, employees

want more self-responsibility, which can only be realized if the firms set the boundaries for self-


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responsibility by introducing MCS. Thus, the acquisition of human capital is a reason for intro-

ducing human resource planning systems. The resource dependency of start-ups on the labor

market – as the collective of potential employees – is high because start-ups cannot show a long

firm history, the environment is highly uncertain, start-ups cannot guarantee survival and cannot

pay competitive salaries. Consequently, the majority of possible employees on the labor market

will not apply to such a firm and the concentration of resource control of the remaining employ-

ees increases. People that apply for start-up jobs and that will be hired, have, of course, absolute

discretion over their personnel labor power allocation and use. The importance of employees for

the start-ups is unquestioned for two aspects. First, without employees the entrepreneurs cannot

run the business. Second, a growing headcount is in many cases a requirement of the VCs for

future financing and, thus, acquiring capital.

In good times, the VC pushes a growth strategy and supports the start-up with money without seriously questioning the purposes of the needed extra money. And this behavior is dangerous not only for the VC but also for the start-up because the importance of internal organizational structures will dramatically change if money ‘is no problem’ at that time. I strictly warn the start-ups that I support as member of the board of directors about the generosity of VCs in good times and careless use of VC money. The firm which I support at the moment as a member of its board of directors, the VC is careful about invest-ing money and the start-up is prepared for that investing policy. (BoD, firm 5)

Size and scalability are important drivers for multiplies [that are used by the VC for evaluating the start-up]. US start-ups have a multiple of five on their turnovers, whereas European start-ups just have a multiple of two on their turnovers. This drives the evaluation of the firm and the strategy of the firm. The strategy of the start-up will be in many cases triggered by external inter-est groups. (CEO, firm 7)

C.5.1.3 Human resource evaluation The reason for introducing human resource evaluation is closely connected to the reason

for introducing human resource planning: acquiring and retaining human capital. At the begin-

ning, start-ups have to acquire their first employees. These employees play an extremely im-

portant role for three reasons. First, they support the founders in setting up their businesses for

the first time, i.e., the fundamentals of the evolving firm. Second, the start-ups arrange only a

few employees; therefore, every employee has to be better in line with the organizational goals


60

than in larger firms because the consequences of employee dysfunctional behavior would be

worse than in larger firms – in the worst case the start-up would fail. Third, founders dominant-

ly use informal and cultural control at the beginning, which is based on shared beliefs and

norms. Without shared beliefs, for example, cultural control will not work. Consequently,

founders have to first acquire employees that have shared beliefs and norms. Accordingly, start-

ups introduce a formal application procedure to secure the “compatibility” of new employees.

We had not reached the limit. Consequently, the shift in our dominating con-trol mechanisms begun with first employees that needed more ‘control input’ from us than they generated sufficient output because they couldn’t work self-contained enough. That was the event, which caused a rethink of our control systems. After that, we have begun to establish more and more MCS. This process is very systematic because before starting the process, we analyzed the control situation of our firm and made a roadmap for implementing MCS. I was selected by the other top management team members to become the re-sponsible person for that MCS introduction process because I like formal rules and implementing formal rules. One of the first implemented MCS was the human resource planning – we analyzed what kind and how many employ-ees we will need in the future, what is our long-term goal concerning employ-ees and so on… (CEO, firm 17)

After the initial phase, a start-up’s employees develop like the start-up itself. Whereas

employees were young, motivated by the founders’ visions and risk seeking at the beginning of

the start-up, they become more experienced and risk-averse after the initial growth phase. As a

consequence of this change and firm growth as well as the longer firm history, uncertainty about

a firm’s future survival decreases. This, in turn, reduces the pressure on employees and lowers

the efficiency of informal controls, i.e., the “we culture” disappears.

At the beginning, we had a culture that everybody does everything for the start-up without any formal control – e.g., if necessary, employees slept in their offices to finish their tasks. Nowadays things have changed – we use, for example, two MCS to create the same commitment of the employees for their tasks. We use written performance evaluation reports that are accessible and transparent for everybody in the firm. Additionally, we recently began to link performance with some part of the compensation – of course, the portion is still small but it changed people’s behavior dramatically. Moreover, we use clear boundaries of responsibilities between the different departments. Never-theless, we try to reinforce the entrepreneurial drive in our firm but it is and probably will not be the same as in the beginning. (CEO, firm 12)


61

However, cultural and informal controls dominated the firm; both controls were used for

evaluation and, at least, guaranteed employee motivation. Hence, start-ups begin to replace in-

formal control for (formal) human resource evaluation systems to avoid losing control.

We introduced written evaluation reports in combination with a variable in-centive system. The written evaluation report also helped us to make our eval-uation process more transparent and helped us to be better prepared for the target agreements at the end of the year or termination interviews. Before, we had endless meetings in that the employees told us about their performance and when we disagreed, we had long discussions. Today, I can use the written performance reports, which will make the discussion with the employee more efficient, more objective and more transparent. The introduction of those sys-tems was a really good choice that I would remake every time. (CFO, firm 7)

Additionally, the increased size results in less direct communication and supervision be-

tween the founders and employees. Founders can no longer base their employee evaluations on

direct contact and will introduce transparent and formal human resource evaluation systems.

Moreover, experienced employees require such transparent systems. These results are in line

with Davila and Foster’s (2007) findings that human resource evaluation systems have a high

intensity of adoption between a headcount of 40 and 100 employees.

The start-up’s growth will often be accompanied by hiring experienced managers to

bring in sufficient management know-how because ”[founders] are probably unsuited to be

managers“ (Greiner, 1998, p. 61) and to be more independent from the founder. On the one

hand, these managers are hired to introduce more organizational structures (such as MCS) and

turn the start-up into a business organization. Start-ups invest in experienced managers to make

the firm internally ready for a future exit (e.g., initial public offering; IPO), i.e., for acquiring

more or new capital. On the other hand, experienced managers are typically the first outsiders in

the top management team. Whereas founders know the firm right from its beginning and can re-

ly on informal information and control structures, the outside managers cannot and the firm

“need to devote some energy to elaborate socialization and indoctrination procedures” (Pfeffer

and Salancik, 1978, p. 3). Therefore, experienced managers introduce human resource evalua-

tion systems to socialize the entire firm to an advanced level and to keep the firm manageable.

I was inspired by my prior work experience to introduce the written evalua-tion reports and to implement a time slot for evaluation interviews in the


62

schedules of the middle management. Of course, the middle management told me that they do not have enough time for establishing such written reports and for keeping those reports updated but I convinced them that it would not only be necessary for me but also more efficient for their daily work. Overall, they realized that I was right and they implemented those systems. Meanwhile they love their reports and can’t imagine to work without them. (CEO, firm 7)

A final reason for introducing human resource evaluation systems was found in a strate-

gy change from growth to profitability. After founding the business, start-ups follow a growth

strategy that will also be pushed by the VC. After reaching a certain size – that will be accom-

panied in many cases by “burning a certain amount of money” – start-ups change their focuses

towards profitability. This new focus requires more efficient resource allocation – and one of a

start-up’s main resources is its employees. Therefore, start-ups begin to evaluate their employ-

ees and begin to motivate them by introducing MCS such as linking compensation to perfor-

mance or written evaluation reports.

C.5.1.4 Financial evaluation The introduction of financial evaluation systems is twofold.43 On the one hand, the fi-

nancial evaluation systems capital investment approval procedures, operating expenses ap-

proval procedures and routine analysis of financial performance against targets will be intro-

duced within the first two years, whereas the financial evaluation systems product profitability

analysis, customer profitability analysis and customer acquisition cost analysis will be intro-

duced later (normally after the first two years). The diverging time-to-adoption between these

two subgroups of financial evaluation systems are a result of VCs’ influence and the start-ups’

changing strategies. In most cases, VCs integrate covenants in the financing contracts. These

covenants guarantee the VCs rights for approving all relevant expenses, i.e., expenses that ex-

ceed the predefined limits of the start-up. Therefore, a start-up’s resource dependency on the VC

means that they have to introduce capital investment approval procedures and operating ex-

penses approval procedures within the first two years. Additionally, the cash burn rate of start-

ups is especially high at this time. These young firms have to set up their businesses and will

43 This finding is in line with Davila and Foster’s (2007) survey results concerning the emergence of financial eval-

uation systems.


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generate low incomes – if at all. As a consequence, start-ups have a high cash burn rate that has

to be monitored and a routine analysis of financial performance against targets will be intro-

duced.

The later introduction of these other subgroup financial evaluation systems is caused by

a strategic change in focus from growth to profitability. The case firms that were older than two

years reported that they have to generate positive operating cash flows to finance their expenses

and to avoid the necessity for additional venture capital.44 They have to acquire new capital –

positive cash inflows by customers. Therefore, start-ups have to analyze which of their products

or product versions are the most profitable, which customers are the most profitable and how

expensive the acquisition of new customers is. They analyze which resources are the best to ac-

quire and maintain. Consequently, start-ups begin to introduce financial evaluation systems such

as product profitability analysis, customer profitability analysis and customer acquisition cost

analysis.

Additionally, a financial crisis such as cash-out threatens the existence of some firms in

the first years. Because of these events45 and securing the firm’s survival, start-ups introduce fi-

nancial evaluation system to acquire and allocate vital resources more efficiently. For example,

the decision about investments for product marketing campaigns will be made on information

about product profitability or customer acquisition cost analysis. Moreover, hiring an experi-

enced CEO or CFO preempts the introductions of these financial evaluation systems because of

the outsider’s lack of knowledge about the firm and its products, customers and financials. The

incoming CEO does not have the same informal position and connections in the firm as the

founders had. Therefore, he or she cannot base his or her decisions on informal information and

requires formal structures to acquire the relevant facts (see also Parren and Grant, 2000). Fur-

thermore, “mature” outside CEOs use their experiences to anticipate which MCS will be re-

quired in the future – especially by external stakeholders such as the financial market in the case

of an IPO as a possible exit.

44 For reasons for avoiding additional venture capital, see Davila and Foster (2007). 45 Simons (1995) also found that events such as operational breakdown or financial crises drive the adaption and/or

adaptation of MCS.


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Our firm had no need for formal structures at this time, but I knew that we will make an IPO in one and a half years. Therefore, I knew from my prior job that we have to introduce several formal systems to be prepared and be ready for the IPO. As a consequence, we introduced IFRS disclosures quite early in our firm to have enough time to establish such a complex system and that we have enough time to practice those systems in daily business. Otherwise we would have had many problems in the IPO but with our training period we made it. Other start-ups that have no experienced managers within their top manage-ment team, they have to introduce all these systems such as an IFRS disclo-sure, an accounting system or investor relations in a shorter time period – and they make many mistakes because of the time pressure… (CEO, firm 16)

The same reasons as for experienced CEOs/CFOs are valid for the influence of experi-

enced non-executive board members. They cause the introduction of financial evaluation sys-

tems because they are outsiders and need to acquire the relevant facts through formal financial

systems. Non-executive board members are industry or technology experts. They are members

of several boards over time or simultaneously. They try to implement some MCS just because

“every firm has such systems." They know which MCS will be relevant for their own decision-

making and for the firm’s legitimacy46. Accordingly, another reason for introducing MCS is the

acquisition of legitimacy because without legitimacy the firms cannot exist.

C.5.1.5 Product development management

MCS that can be classified as product development management emerge later than the

MCS that can be classified under financial and human resource planning or financial and human

resource evaluation. The reason for the later introduction is that start-ups are only beginning to

develop their products and the products will be permanently modified. Therefore, the entire

product range or product features are not fixed and no repetitive structures can be found. The in-

troduction of MCS would be too costly in that early start-up situation because of the permanent

changes of a possible MCS.

If start-ups’ products are fixed and the start-ups have grown as well as their turnover has

grown the nature of their customers changes. At the beginning, start-ups’ customers are innova-

tors and early adopters whose needs are to consume a new and unique product or service and

46 I understand legitimacy as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, beliefs, and definitions” (Suchman, 1995, p. 574).


65

who will not pay for a perfect, high quality product (Rogers, 2003). As start-ups develop, the

start-ups’ customers develop as well. After the initial growth period, the customers’ natures

change to early majority or late majority (Rogers, 2003), which both prefer mature products

with a high standard of quality. Start-ups adapt to the changed customers and their changed de-

mands and place more emphasis on product or service quality. Consequently, start-ups begin to

introduce product development MCS to fulfill the new demands, i.e., to acquire new customers.

Start-ups introduce MCS such as a product concept testing process or quality assurance proce-

dure.

A founder, who has an idea, tries to launch his or her first release as early as possible to test the idea. This testing is important because the founders or en-trepreneurs have to know to whom they can sell their products. […] At the be-ginning, start-ups sell their products to innovators. Founders have to find de-cision-makers who take risks (because they want to, for example, promote their own careers) and who accept that the product is not finished to 100%. Founders can use the risk-taking and striving-for-newness mentality of these decision-makers to advance their products – this behavior will not only make the product better but also give the risk-taking decision-makers the feeling that they can influence product development. But after a while, your product and firm are more developed and you have to find other customers because the number of risk-taking decision-makers is very limited. Consequently, en-trepreneurs have to address the early majority customers. The challenge is that these customers have different demands than the innovators. The early majority is still risk-taking but to a lower extent than the innovators. Early majority customers require some first business references and require a stable as well as mature product. Therefore, I advise ‘my’ start-ups to introduce ad-equate product development systems quite early – the phase in start-ups’ lives when they develop from start-up customers to ‘normal customers’ is a critical hurdle…and a few don’t clear that hurdle… (BoD, firm 14)

Additionally, some start-ups primarily trade in the business-to-business (B2B) sector

and rely in many cases on key customers who will have a strong influence on the start-up.47 In

those cases, the customers require the start-up to adapt its product development management

strictly to the customer’s demands (e.g., databases for ordering). Therefore, start-ups introduce

their first product development systems to satisfy customer demands and acquire and retain key

customers. Depending on the range of key customer demands, the start-up also has to introduce

47 Additionally, I found in one case the introduction of MCS because of an intensive collaboration between the

start-up and a more established firm. This interorganizational collaboration led to the introduction of product de-velopment systems (Dekker, 2004).


66

and adapt MCS that are classified to other categories such as sales/marketing or strategic plan-

ning.

We make our deals primarily with large well-established firms. We recognized quite fast that we need formal structures to trade with such customers. There-fore, we employed a very experienced CTO who built up the MCS that were required from our key customers. He is a guy who thinks in formal structures and understands our customers perfectly. He developed all the necessary in-terfaces and we can fulfill all customer demands now. (CEO, firm 19)

Aside from changing customer natures, the growing numbers of customers and employ-

ees necessary to handle the growing turnover increases the complexity of the product develop-

ment process. To satisfy customer demands, it is necessary to handle this increasing complexity.

Therefore, start-ups introduce product development MCS such as project team composition

guidelines or product portfolio roadmaps to retain customers.

We allocate one-third of our product development time to OEM topics, one-third to bug fixing and one-third to new product development. We introduced that structure because we have to handle the growing numbers of customers and employees as well as the growing number of product users. We need high customer satisfaction; therefore, we divided the [product development] pro-cess into three equal parts to guarantee satisfied customers and to create great new products. Simultaneously, we introduced a product roadmap to keep these large projects manageable. (CFO, firm 11)

For example, marketing. Our marketing department had – as a first step –many direct contacts with our product developers. After a while and a certain amount of growth, we realized that this structure is not enough to guarantee satisfied customers and high quality products. As a consequence – and as a second step – we introduced project team composition guidelines to secure the right mixture of employees to satisfy all our interest groups. (CTO, firm 1)

The growth of the start-up means that more and more other functional areas such as

marketing or sales require product development resources. The marketing function needs infor-

mation about the possible future product features to know what they can market and the sales

function needs to know if some of the customer demands will be included in the next product

release. Therefore, start-ups introduce product development systems to manage the intraorgani-

zational competition for resources and to reduce the other functions’ resource dependencies on

product development. Moreover, the multisite demands that the product development has to sat-

isfy lead to a reduced freedom of creativity. To keep the entrepreneurial spirit and creativity of

the product developers, start-ups introduce product development systems, which unburden the


67

product developers from routine tasks and enable them to invest more time into creative tasks.

Aside from the resource dependencies of other functions on product development resources, the

entire start-up is in many cases strongly dependent on the know-how and capabilities of the

founder or founder team. My results show that most founders have unique technological or crea-

tive know-how, which is one of the most important resources of the firm. To reduce the depend-

ency on founders know-how, start-ups introduce product development systems to transfer this

knowledge into the firm. Whereas the founder alone uses their implicit knowledge for evaluat-

ing new project ideas, the start-up introduces a project selection process and product portfolio

roadmaps to transfer this implicit knowledge into formal routines. Consequently, the start-up

will be able to use this unique knowledge and implement the founder’s strategy but will, simul-

taneously, reduce the start-up’s dependency on the founder.

This knowledge transfer is in many cases accompanied by the employment of an experi-

enced CEO or CTO. In the case of experienced CEOs, the new outsider managers do not have

the implicit knowledge of the product and technology that the founders have. Accordingly, the

outsider CEOs have to acquire the technology know-how of the firm and the founder by intro-

ducing formal information flows such as project milestones. The new CEOs will replace the

founders, who in some cases become the new CTOs. Although technology-driven founders pre-

fer to work as CTOs, they will still be the face representing the firm; therefore, product devel-

opment systems are introduced to enable the “founder CTO” to represent the firm to the cus-

tomers. In the case of experienced CTOs, they were hired to transfer the founders’ know-how

and creativity into the firm in a way that makes it possible to scale the business without losing

its technological roots. Additionally, experienced CTOs want to construct product development

with a long-term orientation, i.e., the product development’s design will be usable for future

years of a firm’s growth. Both arguments result in the introduction of product development sys-

tems.

Finally, I found that the change in a start-up’s strategy from growth to profitability caus-

es the introduction of product development systems such as reports comparing actual progress

to plan. Aside from satisfying the needs of “early and late majority” customers, the efficiency of


68

product development has to be enhanced to avoid negative cash flows and, consequently, a new

financing round that would result in the loss of equity for the founders (Davila et al., 2009).

We implemented MCS in our product development for several reasons but I think the most important one is that we had to become more careful with spending the time of product developers. At that time, we had already reached a critical size of customers that allowed us to change our strategy focus to profitability because our VC was “satisfied” with that size. This strategic shift led to an introduction of new product development systems and influenced the use of the old one. […] Additionally, I – the official CTO and one of the co-founders – want to leave the firm because I want to finish my Master’s degree. The other co-founders knew this for a long time, as it was one of my prerequi-sites for co-founding the start-up. We had to find a way to “conserve” my knowledge and to implement my “technical intuition” into the firm. In order to compensate me leaving “our big CTO," we introduced more product devel-opment systems such as project milestones etc. (CTO, firm 8)

Start-ups introduce product development MCS to allocate their scarce resources effi-

ciently between different product development activities.

C.5.1.6 Sales/marketing management

MCS that are classified as sales/marketing management systems are introduced later

than the abovementioned MCS because founders place a higher emphasis on product develop-

ment at the beginning. Additionally, the first customers of the start-ups are early adopters that

prefer a new and state-of-the-art product. The know-how for selling the product to that kind of

customer is concentrated on the founders, who have the ability and knowledge to tell the right

stories and to sell the product to early adopters because early adopters seem to have similar psy-

chological characteristics to founders as they seek newness and creativity (Rogers, 2003).

Therefore, formal marketing or sales procedures are not necessary and the informal approach

still dominates. After the first growth phase, not only the number of potential customers in-

creases but also the customers’ natures change to early or late majority customers.

This is really a development. You start with your first sales talks. Then, you realize that it was not an optimal talk and you try to learn as much as possible from this one sales talk. Moreover, every time you get returns from your cli-ents you will and you have to learn something. The problem is that not only do you develop – your customers develop too. Therefore, you have to find a way and the right processes to deal with the increasing demands of your potential


69

and actual customers. We introduced SALESMEN48 to enable our salesmen to know any detail about the customer and their history with our firm. Now, eve-ry salesman can see which products the client has already bought, how many products were returned by the client, how punctually the client pays our bills and so on… (CEO, firm 8)

The large number of customers and the different nature of customers require more for-

mal control systems than before. Therefore, start-ups introduce marketing/sales MCS such as a

sales process manual or customer satisfaction feedback to acquire new customers and keep the

already acquired customers manageable. Additionally, start-ups with a focus on the business-to-

business industry have to integrate their key customers’ marketing/sales systems into their own

systems. This acquisition of customers means that formal sales or marketing procedures will be

introduced.

We had our first large marketing campaign with the participation of some of our key clients. Their participation required that many new marketing systems had to be introduced because our marketing was absolutely not able to fulfill their requirements. Our key customers had large marketing departments; we had two full-time people and one trainee. They needed our marketing cam-paign details two months ahead; we usually knew what we will do exactly only two weeks before the launch. The whole situation led to the introduction of many new marketing systems and meant that we [the top management team, TMT] had to take the time to decide which MCS have to be introduced be-cause before this campaign we hadn’t seen the value of introducing better or more marketing systems. (CEO, firm 17)

The increased size of the firm will also influence its preferred strategy. If the initial

growth phase has finished, the start-ups will change their strategies to profitability to avoid run-

ning out of cash and requiring additional venture capital. This strategic change in addition to the

larger number of employees means that former informal sales/marketing structures have to be

formalized to increase the efficiency of resource allocation.

Another reason, similar to product development management, is that start-ups try to re-

duce their dependencies on their founders’ resources. At the beginning, the majority of market-

ing campaigns and sales are initiated by and focused on the founders. If the number of custom-

ers increases, the founders will not be able to be the centre of the start-ups’ marketing and sales

activities. To transfer the knowledge and prestige of the founder into the firm, marketing/sales

48 SALESMEN is a synonym for a special sales tool that was developed for one start-up by another start-up.


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management MCS will be introduced. This knowledge transfer will be emphasized if experi-

enced sales managers are hired because these outsiders need the founders’ know-how and con-

tacts to do their jobs effectively. Additionally, salespeople are the first employees of start-ups

whose tasks are not focused on internal demands. Salespeople have to interact directly with cus-

tomers and sell the start-ups’ products. Therefore, they need a different incentive structure.

Start-ups recognize the differences between internal-oriented employees and external-oriented

salespeople and introduce sales force compensation systems and sales targets for salespeople.

The introduction of these systems will also influence the introduction of human resource evalua-

tion systems as the linking compensation to performance MCS will be introduced simultaneous-

ly.

C.5.1.7 Strategic planning management

In contrast to prior research (cf., Davila and Foster, 2005), I found strategic planning the

last category of MCS to be introduced. The explanation for this relatively late introduction con-

cerns the limited number of strategic planning users. At the beginning and later on, only the

TMT uses strategic planning tools. The start-ups perceive no necessity to acquire strategic re-

sources, i.e., long-term-oriented resources, because their planning horizons are short and fo-

cused on the short-term survival of the firm. However, the time orientation of start-ups changes

if they have survived the first two years and strategic planning systems become more relevant.

Start-ups begin to plan their futures in advance for more than six months and introduce strategic

planning systems such as a customer development plan (a plan to develop a market) or head-

count/human capital development plan. Additionally, founders try to translate their “implicit

strategic plan in the head” into formal structures such as the definition of strategic (non-

financial) milestones for explicating and transferring their knowledge into the firm.

I supported the start-up by introducing strategic planning, because this would prevent the start-up making the same mistakes I had made in the past. I think that is one of my duties as a board member. For example, I told them that they should introduce a headcount development plan and place more emphasize on important jobs such as an advanced COO. They adapted my suggestions and introduced this headcount development plan. Additionally, I developed to-gether with the founder the customer development plan and we combined that with non-financial strategic milestones. The reason was that he wanted to


71

start a new firm – so we had to find a solution for saving his inspirational strategic ideas… (BoD, firm 12)

The target is now to find someone who can do my job and the other founders’ jobs to disburden our workforce for more highly strategic things. In addition, one of my co-founders is now pregnant and she wants to reduce her workload in the next months. Both aspects meant that we introduced a headcount devel-opment plan and some non-financial strategic milestones in addition to our fi-nancial strategic milestones. In particular, the future leave of Emily [the pregnant co-founder] has to be solved. She is maybe the most creative and strategic person in the top management team – we have to convey her crea-tivity and strategic thoughts into the firm! (CTO, firm 7)

This knowledge translation is necessary to secure the founders’ know-how for the case

of his or her exit and keep employees motivated. At the beginning of a start-up’s life, cultural

controls and face-to-face interactions were used to inform its employees about its strategy and

possible future advances such as future products. After its growth, direct interaction is not pos-

sible and the managers have to implement formal structures that communicate and implement

the firm’s strategy to inform and motivate its employees.

C.5.2 Reciprocal influences and the balance of management control systems Prior research provided the first insight into the phenomenon of reciprocity, which I un-

derstand as the mutual dependencies of MCS to one another, i.e., the introduction of one MCS

influences the perception, relevance and use of existing informal controls and the already intro-

duced MCS. Davila (2005), for example, used time-to-adoption as a proxy for testing if action

controls, personnel controls and result controls are supplementary, complementary or independ-

ent of each other. Davila’s findings indicated that personnel controls supplement each other,

whereas action and result controls seem to be independent of personnel controls. Furthermore,

his results seemed to show that action and personnel controls complement each other. These

empirical findings have to be interpreted with caution because my results show that some MCS

will be introduced without any relevance and the time-to-adoption proxy can only be used as a

weak proxy for explaining possible reciprocity between different MCS. However, the reciproci-

ty of MCS emerged several times during my study and the focus of reciprocity was on the bal-

ance between informal controls and MCS. I deepened that aspect within my interviews and


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found that founders were only aware of and considered the reciprocal influences between in-

formal control mechanism and MCS.

It is a permanent balancing act between formal and informal control struc-tures in our firm. We introduce one formal system and have to be aware of the consequences on 20 informal systems. Moreover, sometimes I think that we have too many formal systems but after a while the informal processes will perfectly “integrate” into the formal systems. […] Today, I introduce more and more formal systems because it is less costly to decrease the efficiency of informal control structures than to risk that one of my employees gets “out of control” (COO, firm 3)

This result is a consequence of the informal controls’ dominance at the beginning of the

firm and that founders prefer informal rather than formal control mechanisms. Additionally, in-

formal controls and the culture of start-ups are reasons for employees to apply for an uncertain,

risky and badly paid job (Aldrich, 1999; Lukka and Granlund, 2003). These early employees

help build up the firm, acquire unique knowledge and will be pillars of the start-up. They prefer

informal control mechanisms like the founders’ and doubtfully evaluate the introduction of

MCS. Consequently, the TMT has to recognize the reciprocal influences of introducing MCS on

informal control mechanisms and cultural control to maintain early employees’ motivation.

Simultaneously, the introduction of MCS is necessary for acquiring new (later) employees be-

cause employees that apply in this phase of a firm’s life need formal control mechanisms. Those

later employees have prior work experience in business organizations and are used to formal

control mechanisms. Consequently, they expect and require formal controls in their new firms

because formal controls are the kinds of controls they interpret as legitimate.

In the early stage, we were all extremely young guys. If you are so young, you won’t get senior people to work for you. They are more skeptical, they have made experience and say ‘become a real business organization, build up the necessary structures and show us your competence…and then, we maybe think about starting to work for you…(CTO, firm 4)

…and the CEO, he was hired last summer. He was a consultant before. Con-sequently, he has the background, he is more used to regular structures than to the irregular start-up world. Therefore, I think that he not only needs such regular structures but also that he values regular structures. (VC, firm 19)


73

Therefore, I use the term of balance to describe the process of equilibrating the different ten-

sions within the start-up (on the idea of balancing competing agendas, see also Ahrens and

Dent, 1998; Evans, 2000).

The reciprocity of informal controls and MCS varies between the different MCS catego-

ries. Whereas the introduction of financial planning MCS has no explicit or direct influence on

informal controls, the introduction of human resource planning and evaluating systems has. The

introduction of organizational charts is a formal symbol of hierarchy and decreases the “we cul-

ture” feeling; people begin to think and act in responsibilities of organizational chart boxes. Ad-

ditionally, the introduction of an organizational chart is often accompanied by the introduction

of written job descriptions. These will increase the employees’ reliance on those systems and

decrease the entrepreneurial drive as well as the cultural intrinsic motivation of the entire start-

up. Thus, the introduction of human resource planning systems can also increase the motivation

of employees if they have a high position in the hierarchy. If, for example, an employee be-

comes vice president, he or she will be motivated and communicate that outside the start-up.

Our organizational culture is very sensitive. The introduction of formal sys-tems, such as organizational charts, can have a tremendous impact on the cul-ture: people start to count the employees who are under their supervision and compare that number with that of their direct colleagues. They have the feel-ing that they might lose influence within the firm and so on. Another example was the introduction of written job descriptions and official job titles. I would never change or introduce job titles in a firm, apart from the first and second level management. We reduced the number of people who were labeled vice presidents, for example, and this was a hard time for me. All people that were previously named vice president grumbled and argued why they needed these titles… It took me weeks to “rebalance” our culture – and in that way, the re-duction of vice presidents was a very expensive project. (CEO, firm 14)

The introduction of MCS in the category product development will strongly influence

the “we culture” because product development systems such as the product selection process

will reduce the degree of freedom for each employee and can limit the access of employees to

the product developer. Although the necessity of introducing product development systems is

understandable for most employees, the first limitation of information and access to colleagues’

resources is an important event in a start-up’s life.


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Many of our employees, especially the initial employees, grumbled about the limitation of information access. They asked us if we don’t trust them any-more. It was hard to explain that; on the one hand, they will be important em-ployees for us and, on the other hand, that this limitation is a necessary step for our future development. (CEO, firm 3)

Additionally introduced MCS have different reciprocal influences than the first MCS,

i.e., I find a variation of reciprocal influences depending on the degree of MCS introduction.

The first introduced MCS will replace informal controls. For example, founders no longer per-

sonally explain to every new employee the details of his or her job – they introduce written job

descriptions and explain only immediate variations to the formal rules because of time con-

straints and the increasing complexity as well as detailing of the job descriptions. As a next step,

additionally introduced MCS will be complemented by informal controls. This means that some

MCS have already been introduced in HR planning, for example, and that informal controls will

not replaced by new MCS, rather the informal controls will complement the aspects that cannot

(or only with an inefficient effort) be controlled by formal controls. For example, if a start-up

has already introduced written job descriptions and an organizational chart, the informal con-

trols such as an advice of senior employees to new employees about the organizational behavior

ensure that a new employee has enough guidance and orientation at the beginning; therefore, the

informal controls complement the already introduced MCS. The more MCS that are introduced,

the less informal controls are complemented by MCS because MCS start to dominate the overall

control package of the start-up. If MCS finally dominate the control approach of the start-up, the

informal controls will promote the additionally introduced MCS. For example, if a firm has al-

ready introduced written job descriptions and an organizational chart and then introduces a new

employee orientation program, the experience of the firm’s participants with the introduction

and use of the first two MCS will promote the introduction of the last one. The introduction of a

new employee orientation program will be promoted, for example, by senior employees in the

way that they highlight the importance of formal structures and how these formal structures

simplify the day-to-day business. This kind of peer-group control can enhance the introduction

of MCS. Figure C-1 illustrates the different control packages of a start-up according to the de-

gree of already introduced MCS.


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Figure C-1: Reciprocity between informal controls and MCS

C.5.3 Future orientation of management control system introduction Prior research has emphasized the importance of time in the field of MCS emergence

(e.g., Davila and Foster, 2005) and used it as proxy for the importance of the MCS; however, it

has not investigated directly the relevance of MCS. During my study I found that many MCS

are introduced with a certain kind of future orientation. I understand future-oriented introduction

as the introduction of MCS without an immediate demand and, consequently, without any im-

mediate relevance. Contrary to my primary proposition – that start-ups will introduce their first

MCS selectively and only introduce MCS that are currently required because of resource con-

straints – I found that some MCS are introduced without any immediate demand. My data show

two reasons for the future-oriented introduction of MCS: low complexity and resource acquisi-

tion.

First, at the beginning of a start-up’s transformation to a business organization, struc-

tures are simple, few different stakeholders have to be managed and the number of employees

who have to be supervised and controlled is limited. I found that experienced founders introduce

under those conditions more MCS than are actually needed because “it is simpler to adapt MCS

than to introduce completely new ones” (CFO, firm 9) or non-executive board members con-

vince inexperienced founders to introduce certain MCS.49 Experienced founders know how fast

the complexity of organizational structures will evolve and which challenges have to be handled

during future processes of organizational development. Therefore, they introduce MCS with

some future orientation. Additionally, non-executive board members have a strong influence on

the future orientations of start-ups because they were selected to bring their experience and

49 This substitution of experience by advice from external experts in entrepreneurial settings is in line with Aldrich

(1999).


76

know-how into the firm. These industry or technology experts use their knowledge of more de-

veloped firms to prepare the start-up for future challenging tasks. Moreover, in some cases I

found that VCs will bring some future orientation into the start-ups but VCs focus their future

orientation on financial requirements for the potential exit.

We have done so many IPOs now that we know what the capital market will expect from young firms. Apart from a great and overwhelming idea, they have to do their homework. That means that every possible and relevant piece of accounting information is perfectly prepared. The founders have to do that job with the greatest possible accuracy but they must still be able to sell com-pellingly a dream. (VC, firm 14)

The low complexity of a start-up’s internal organization is seen as an advantage for the

introduction of MCS that will be needed in the future but are complex and expensive to intro-

duce. I found that start-ups exploit low complexity for introducing MCS in the category human

resource planning.

The second reason for the future-oriented introduction is the acquisition of resources,

i.e., future employees, future customers, and future shareholders. Entrepreneurs found firms to

realize their ideas and, even more importantly, to make money. Therefore, founders have to pre-

pare the firms for their exits to make it possible to leave them without devaluing them (see

DeTienne, 2010 for further information about the exit process of founders). This preparation en-

compasses the introduction of MCS into all categories to transfer the founders’ knowledge into

the firm and have the necessary financial track record for a future exit. As a consequence, start-

ups introduce, for example, a product portfolio roadmap to transfer founders’ future ideas into

the firm or IFRS financial statements to exercise the production of financial information neces-

sary for a potential IPO.

IFRS is necessary for a potential exit, because international financial markets only accept accounting that follows international accounting standards – and to make a disclosure that fits the criteria of IFRS you have to do this stuff for three years in advance. Therefore, we simulate our IFRS accounting at the moment to be prepared for a potential international IPO. (CFO, firm 13)

Additionally, I found that future orientation is based in most cases on pressure or con-

viction. On the one hand, experienced founders or non-executive board members try to convince


77

the (rest of the) TMT members of the future importance of MCS. On the other hand, VCs tend

to pressure the start-ups to introduce certain MCS. Overall, the future-oriented introduction can

be seen as a loose coupling introduction of MCS to avoid firms having to adapt their behavior to

every development in their enacted environment (see Pfeffer and Salancik, 1978, p. 13).

C.6 Discussion This section sought to deepen the understanding of the reasons for MCS emergence in

start-ups. The study confirms my initial proposition, based on RDT, that start-ups introduce dif-

ferent MCS to gain different kinds of resources from different parties. Financial planning sys-

tems are introduced to acquire the original external financing for the young start-up. Human re-

source planning aims to acquire first employees that are compatible with the culture of the firm.

In the next step of MCS introduction, start-ups introduce human resource planning systems to

acquire “advanced” employees and to acquire future capital by introducing all necessary control

mechanisms for the founder’s exit. Another reason for introducing financial evaluation systems

is the acquisition of legitimacy from the field in which the start-up acts. Product development

management and sales/marketing systems are introduced to acquire new (early or late majority)

customers and to transfer the founder’s technology and market know-how into the start-up. In

addition, the change to a profitability strategy is the reason for introducing MCS in product de-

velopment management. Moreover, I found that introduced MCS have reciprocal influences on

each other and on informal controls. These reciprocal influences seem to change depending on

the degree of already introduced formal systems. Whereas informal control will be replaced by

MCS at the beginning of MCS emergence, informal controls will later complement and (when

formal controls dominate) promote the introduction of MCS. An additional result of my study is

that MCS will be introduced with some kind of future orientation, i.e., without immediate rele-

vance.

My results concerning the sequence of MCS introduction are in line with prior research

(e.g., Davila and Foster, 2005, 2007; Davila et al., 2009). I find that financial and human re-

source planning are the two categories of MCS that are first introduced and that product devel-

opment and sales/marketing management are subsequently introduced. Concerning the reasons


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for MCS introduction, my findings are partially contrary to the prior research (cf. Davila et al.,

2009) because I find that the main reason for MCS introduction is the acquisition of vital and

limited resources, which varies among MCS categories. My results show that the vital resources

range from capital, employees, technology or market know-how to information and legitimacy.

Whereas Davila et al. (2009) distinguished their reasons for MCS adoption by using an internal

and external perspective, I find the distinction by resources to be more useful. Contrary to Davi-

la et al. (2009), I investigated the reasons for introducing formal control structures in several

MCS categories and intentionally did not focus my investigation on the reasons for introducing

MCS into a single category. This approach allows me to consider the reciprocal influences of

the different MCS in different categories as well as the influence on informal controls.

My results show that the reasons for MCS introduction vary among the different catego-

ries because the introduction of each MCS category is a result of the resources that have to be

acquired. The acquisition of capital (for founding the start-up, financing future growth and for

the future exit of the founder(s)) causes the introduction of financial planning, financial evalua-

tion and human resource evaluation. The acquisition of first and advanced employees results in

the introduction of human resource planning and evaluation. Therefore, the introduction of

MCS does not only help nascent firms but also young growing start-ups to cope with the chal-

lenge of acquiring (advanced) employees (see also Hornsby and Kuratko, 1990; Rutherford and

Buller, 2007). To acquire customers and transfer know-how into the firm, start-ups introduce

product development and sales/marketing management systems. Financial evaluation systems

will also be introduced to acquire legitimacy from the institutional field of the start-ups.

Moreover, I found that start-ups introduce MCS with some degree of future orientation.

This result extents the first insights of Davila et al. (2009), who found that “managers […] im-

plemented systems because they perceived an emerging need” (p. 338) as a reason for introduc-

ing MCS. My findings indicate that managers do not require a perceived need to introduce

MCS. The experience of a possible future demand within the firm is sufficient to cause a MCS

introduction in advance – irrespective of whether the experience originates from the founder,

non-executive board members or the VCs. This result sheds new light on prior research because


79

in most studies on the emergence of MCS (Davila, 2005; Davila and Foster, 2005, 2007; Davila

et al., 2009), time-to-adoption was used to measure the introduction of MCS. However, if firms

introduce MCS with some degree of future orientation it might be problematic to use the time-

to-adoption construct because it is not possible to distinguish between MCS that are introduced

with an immediate need and MCS that are introduced in advance but without immediate rele-

vance. Therefore, it is necessary to adapt the understanding and measurement of MCS introduc-

tion to include the degree of future orientation and relevance of introduced MCS.

Furthermore, I found that the homogeneity of products and low product complexity will

be leveraged to facilitate MCS introduction. This result contradicts Moores and Yuen’s (2001)

argument that informal controls will be used in the case of low product complexity. My data

suggest that experienced actors of the start-up see an advantage for introducing complex organi-

zational structures such as MCS in a situation where the complexity is low. Additionally, I

found that the introduction of MCS exerts reciprocal influences on established MCS as well as

on informal controls. Moreover, my results indicate that the reciprocal influences of MCS on in-

formal controls change when the degree of a firm’s formality changes. As the first MCS replace

informal controls, more MCS will be complemented by informal controls, and when formal

controls dominate informal controls will promote MCS. These findings provide new insights in-

to the interdependency of different forms of MCS. Davila’s (2005) findings indicated that per-

sonnel controls supplement each other and that action and result controls seem to be independ-

ent of personnel controls. This relationship can be accompanied by mutual influences of infor-

mal controls that have not been taken into account so far.

I applied RDT to investigate the introduction of MCS but extended this theoretical per-

spective. First, I used RDT to explain intraorganizational reasons that cause the introduction of

MCS, which is a relatively new level of analysis for RDT (Medcof, 2001; Ulrich and Barney,

1984). Second, my results suggest that the acquisition of resources will have time effects, i.e.,

firms behave and are structured in the present as they are, not only to acquire resources at the

moment but also to acquire resources in the future. This time aspect within RDT is new because

prior research focused on static power relations and the external influences on the firm.


80

A number of limitations must be recognized. First, a non-random sample of 20 firms

was used to conduct 74 interviews implying that my results might not be representative. Second,

many firms in my sample can be described as new economy firms (see e.g., Granlund and Tai-

paleenmäki, 2005), which might reduce the insights of my study for other industries. Third, my

sample consists entirely of German start-ups; therefore, cultural differences might occur in other

settings. Fourth, my interviewees were asked about the introduction of MCS ex post, which

might have influenced the participants’ rationalizations. Fifth, I used interviews to collect my

data and, thus, the limitations of this method have to be acknowledged (see e.g., Cooper and

Morgan, 2008; Horton, Macve, and Struyven, 2004; Marginson, 2004; M. Smith, 2004). Sixth,

in applying RDT I make the implicit assumption that firms can acquire resources by actively in-

fluencing their environments. This perspective underestimates the importance of passive con-

formity of firms to their environments to acquire resources (Donaldson, 1995; Tornikoski and

Newbert, 2007; Zott and Huy, 2007).

My results suggest opportunities for further research. The future orientation of MCS in-

troduction gives rise to prior research concerning the time aspect of MCS introduction. Future

research could use my results to develop a research design that takes into account future orienta-

tion. Furthermore, I found reciprocal influences among the different categories of MCS and be-

tween MCS and informal controls. This reciprocity might have significant influences on the rea-

sons for introducing MCS, because it might be the case that certain MCS will only be intro-

duced if other MCS have been introduced. For example, written job descriptions seem to be in-

troduced only after or in combination with an organizational chart. Therefore, future research

could try to find empirical evidence for the possible combinations and sequence of the intro-

duced MCS. Aside from the introduction of MCS, a possible reciprocity of MCS could also be

an important research area for established firms with MCS already in place. If firms would like

to change their organizational control systems, they have to be aware of “balancing MCS”

(Mundy, 2009) because MCS are packages (Malmi and Brown, 2008), which in turn is a reason

for the mutual reciprocal influences. Moreover, I found initial evidence that several actors are

involved in the introduction of MCS. Aside from TMT members, VCs and non-executive board


81

members seem to play an important role in the process of designing and implementing the initial

MCS. However, little is known about their specific influence on MCS emergence. This research

opportunity is closely connected to another topic: the emergence of corporate governance. Start-

ups are dominated and primarily owned by founders; therefore, no separation between owner-

ship and control exists. Owing to investment by VCs or other forms of external financing, the

corporate governance system of the firm has to be changed or at least introduced. In times of fi-

nancial crisis and fraud scandals as well as the knowledge that established control structures

will influence future control structures, it is surprising to realize that our knowledge about the

emergence of corporate governance is limited. In addition, further research could refine RDT

regarding the timely aspects of firms’ reactions to external controls. Finally, further research

could accompany the introduction of MCS in the field in a real-time setting to avoid any ex post

rationalization effects.

Part D Survival and Growth – A Strategic Institutional Perspective

82

D Survival and Growth – A Strategic Institutional Perspective

Abstract

New organizations are an integral part of economic growth. Every year many new ventures are

established but few survive and even fewer are able to grow. From a strategic and institutional

perspective, the question of survival and growth are both a question of legitimacy. However,

treating legitimacy as a dichotomous variable seems not to be sufficient for explaining why

some organizations exist and grow and others do not. Therefore, this part investigates the activi-

ties of successfully founded and growing organizations to gain insights in their legitimizing be-

havior. A qualitative field study with 18 young organizations that have already started to grow

successfully was conducted. My empirical results show that nascent organizations gain their ini-

tial legitimacy through the characteristics of the founders. Because this kind of legitimacy is on-

ly low institutionalized, these young organizations try to gain additional and more institutional-

ized legitimacy by performing activities such as recruiting friendly cooptees or formalizing op-

erations. Thus, I found that gaining legitimacy is a necessary but insufficient requirement for

growth. Young organizations have to maintain their already gained legitimacy and gain new le-

gitimacy simultaneously to fulfill the institutional requirements for growth. Finally, I identified

that the BoD plays a significant role that changes over time within the legitimacy acquisition

process of young organizations.


83

D.1 Introduction New organizations50 are an integral part of economic growth (Schumpeter, 1934), alt-

hough their inceptions are challenging because of their “liability of newness” (Stinchcombe,

1965). Entrepreneurs have to build up legitimacy to acquire resources that are necessary for es-

tablishing their nascent organizations and – at least – for realizing their ideas (e.g., Aldrich and 5

Fiol, 1994; Lounsbury and Glynn, 2001; M. A. Zimmerman and Zeitz, 2002; Zott and Huy,

2007). However, legitimacy is socially constructed and refers to “a generalized perception or

assumption that the actions of an entity are desirable, proper, or appropriate within some social-

ly constructed system of norms, beliefs, and definitions” (Suchman, 1995, p. 574) and

“[s]ources of legitimacy are the internal and external audiences who observe organizations and 10

make legitimacy assessments” (Ruef and Scott, 1998). Yet, nascent organizations have no prior

history, actions or performance that can be evaluated as legitimate. Although this information

asymmetry between the audience51 and the start-ups might restrict the latter’s legitimacy and,

consequently, their access to resources that are necessary to survive and grow (e.g., Amit et al.,

1998), every year entrepreneurs are able to found new ventures and acquire sufficient resources 15

from society. However, most young organizations die within their first two years (Small Busi-

ness Administration, 1999), which means that the audience perceives the organization’s perfor-

mance as not sufficient for granting legitimacy (Hirsch and Andrews, 1984), and few of the sur-

viving young organizations are able to grow. Although new ventures and young organizations

are an important factor for the economy, little is known about how entrepreneurs can gain not 20

only sufficient legitimacy for survival but also for growth (M. A. Zimmerman and Zeitz, 2002).

Nascent organizations have to be perceived as legitimate to succeed and come into real

existence as “physical organizations”. Although these new ventures can neither demonstrate a

track record of actions nor a long performance history, they have several options to signal their

legitimacy to be evaluated as “resource allocation worthy”: One way of gaining legitimacy as a 25

50 Organizations are defined as goal-directed, boundary-maintaining and socially constructed systems of human ac-

tivity (Aldrich, 1979). 51 Audience is understood as the observers of the organization, which can have a relationship with the organization.

For example, members of the audience can be customers, suppliers, governance agencies or just local neighbors.


84

nascent organization is determined by the founders’ characteristics. Entrepreneurs gain legiti-

macy before founding the organization through industry status, entrepreneurially relevant de-

mographic factors (such as prior management or entrepreneurial experience) and social capital

(Packalen, 2007). In addition to the founders’ own characteristics, new ventures can try to re-

cruit prestigious affiliates that signal worthiness to other constituents (Higgins and Gulati, 2003; 5

Pollock, Chen, Jackson, and Hambrick, 2010; Stuart, Ha, and Hybels, 1999). For example, Pol-

lock et al. (2010) used a set of 257 software IPOs to test their hypotheses that new organizations

can use prestigious affiliates such as executive directors, VCs and underwriters to convey dif-

ferent signals of IPO worth. Their results showed that every new prestigious executive director

brings additional signal value for the IPO, whereas the addition of more VCs or underwriters 10

seems to be redundant for the IPO, which shows that only the signal of a VC investment is rele-

vant and not necessarily the number of investees. Another possibility that enables a nascent or-

ganization to succeed is the extent to which an organization can conform to the characteristics

of the organizational field52 that will be evaluated as legitimate, and can engage in activities

aimed at convincing external audiences that the organization is operational, i.e., can strategical- 15

ly gain legitimacy (Tornikoski and Newbert, 2007). For example, the nascent organization

could demonstrate adequate business plan techniques (Delmar and Shane, 2003). In general, the

young organization’s chance to show conformity depends on its audience that accord legitima-

cy. Accordingly, another way of becoming legitimate is to select an adequate location and, con-

sequently, audience: if nascent organizations choose geographical areas that are “entrepreneuri- 20

ally friendly" the requirements for gaining legitimacy will probably lower or it will be easier to

be conform to the audience’ generalized perceptions of desirable or appropriate actions (Pouder

and John, 1996). In addition to these strategic options to gain legitimacy, nascent organizations

can perform ad hoc activities such as rent/buy facilities and equipment or form a legal entity to

52 Although the conception and definition of organizational field is work in progress (W. R. Scott, 2008), I use the

narrow definition of DiMaggio and Powell (1983, p. 148): an organizational field constitutes “those organizations that, in the aggregate, constitute a recognized area of institutional life: key suppliers, resource and product con-sumers, regulatory agencies, and other organizations that produce similar services or products.”


85

make their businesses visible to others and be accorded legitimacy (Carter, Gartner, and

Reynolds, 1996).

Aside from those studies that focused on an organization’s (functional-oriented) activi-

ties to acquire resources, Zott and Huy (2007) investigated whether entrepreneurs use symbolic

actions (actions in which the actor displays or tries to draw other people’s attention to the mean- 5

ing of an object or action that goes beyond the object’s or action’s intrinsic content or functional

use), what kind of symbolic management nascent organizations use and how these symbols are

used to acquire resources by gaining legitimacy. The results of Zott and Huy’s study showed

that different symbolic actions can be used to gain different kinds of legitimacy and that it mat-

ters not only what symbolic actions the entrepreneurs perform but also how they perform them. 10

Nascent organizations that skillfully and frequently perform a variety of symbolic actions tend

to attract more resources. According to Zott and Huy (2007), Zimmerman and Zeitz (2002) fo-

cused on the importance of legitimacy for young organizations from a merely “strategic institu-

tional approach”. They conceptually developed a model of legitimacy’s influence on new ven-

ture growth. One of their major assumptions for developing this model was that legitimacy is a 15

resource. This assumption implies that Zimmerman and Zeitz did not interpret legitimacy as a

dichotomous variable – instead they saw legitimacy as a continuous variable. In their strategic

understanding of legitimacy, they argued that nascent organizations have to overcome a certain

legitimacy threshold to grow (see also Rutherford and Buller, 2007). Although Zott and Huy

and Zimmerman and Zeitz investigated the importance of legitimacy for nascent organizations 20

and growing organizations, they focused only on the strategic options of organizations to gain

legitimacy and did not answer the question of which roles functional actions and symbolic ac-

tions play in gaining legitimacy for future growth. Because organizations face:

[…] strategic operational challenges and institutional constitutive pres-sures, it is important to incorporate this duality into a larger picture that 25 highlights both the ways in which legitimacy acts like a manipulable re-source and the ways in which it acts like a taken-for-granted belief system (Suchman, 1995, p. 577).

Moreover, our knowledge concerning temporal aspects such as the sequence of gaining differ-

ent kinds of legitimacy is still scarce. 30


86

Therefore, this part of the dissertation uses a strategic institutional approach (Suchman,

1995) to investigate how entrepreneurs successfully gain sufficient legitimacy to make their or-

ganizations grow. I conducted a qualitative field study with 18 young growing organizations

and interviewed the founders and their partners (i.e., CEOs and CFOs) and the organization’s

main constituents (i.e., non-executive board members and VCs). I found that an organization’s 5

initial legitimacy is personal legitimacy based on the founders’ characteristics. Because this

source of legitimacy is only low institutionalized, young organizations strive for pragmatic,

moral and cognitive legitimacy to be able to grow. They gain pragmatic legitimacy through

their exchange relationships with VCs. Simultaneously, this relationship is a signal to other

members of the audience and enables young organizations to gain moral legitimacy. In addition, 10

I found that cognitive legitimacy is gained last. Although gaining legitimacy is a necessary con-

dition for growth, it is not sufficient. My results demonstrate that young organizations not only

have to gain different types of legitimacy but also maintain the types of legitimacy they have al-

ready been granted. The reason for this is that pragmatic legitimacy is the (minimum) basis for

future moral legitimacy, and moral legitimacy is the (minimum) basis for future cognitive legit- 15

imacy. Finally, I identified not only that the BoD plays different roles but also that these roles

change over the process of gaining and maintaining these different types of legitimacy.

Accordingly, this part of the dissertation contributes to the literature in several ways.

First, I applied the strategic institutional approach of legitimacy by Suchman (1995) to the field

of young growing organizations, which enables us to distinguish between different legitimacy 20

strategies and activities and, consequently, deepens our understanding of entrepreneurial activi-

ties. Second, I found that different kinds of legitimacy are necessary for young organizations to

grow. Third, I contributed to Suchman’s approach by investigating the sequence of “legitimacy

gaining” he suggested but complemented the sequence of gaining by the parallel action of “le-

gitimacy maintenance”. Fourth, I made additional insights into the changing role of young or- 25

ganizations’ cooptees (i.e., members of the BoD) and how important cooptees’ support is for

organizational growth.


87

The remainder of this part is organized as follows. After presenting the prior research in

the next section (Section D.2), I explain my research method and case setting in Section D.3. In

Section D.4, I present my results. The paper will end by discussing my results, showing the lim-

itations of my work and giving some advice on further research in Section D.5.

5

D.2 Organization’s Emergence, Growth and Legitimacy

D.2.1 Emerging organizations and legitimacy

Entrepreneurs are able to identify chances for new ventures and try to bridge a market

gap (Aldrich and Ruef, 2006; Venkataraman, 1997). Therefore, they interlock behaviors of in-

dividuals and link them to societal discourse to enact the new organization into a socially con- 10

structed reality (Katz and Gartner, 1988; Weick, 1979). Of course, founding organizations re-

quires resources. Even if entrepreneurs have enough of their own resources to initiate the found-

ing, soon after the early days entrepreneurs will need additional resources – at least from suppli-

ers and customers, i.e., resource gatekeepers (Czarniawska and Wolff, 1998). This situation is a

challenge for entrepreneurs or new ventures. Entrepreneurs or nascent organizations have to 15

convince resource gatekeepers such as VCs that they are worthy of investment, i.e., they have to

gain legitimacy from their audience because they want society’s resources (M. A. Zimmerman

and Zeitz, 2002) and legitimacy comes before resources (Human and Provan, 2000). However,

to signal their legitimacy, new ventures need resources. This problem can be seen as a paradox

(Tornikoski and Newbert, 2007; M. A. Zimmerman and Zeitz, 2002) because new ventures 20

need resources from external resource gatekeepers but these gatekeepers require resources as

proof to grant resources. Established organizations can gain legitimacy through their perfor-

mances, work and activities. New ventures cannot use those ways because they have neither

performance track records nor do new ventures really exist (Ostgaard and Birley, 1996). Alt-

hough every year new organizations are found and consume external resources, this situation 25

indicates that entrepreneurs use different approaches than those typically used by established

organizations to gain sufficient legitimacy. In general, entrepreneurs have two options. They


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can use substantive actions or symbolic actions (Ashforth and Gibbs, 1990). Substantive actions

are actions that cause real, material changes in organizational goals, structures and processes or

socially institutionalized practices, whereas symbolic actions are actions that have the purpose

of controlling or manipulating attributions formed by others (Ashforth and Gibbs, 1990;

Tedeschi and Riess, 1981) through regulating the symbolic communication of the organization 5

(Ashford, Rothbard, Piderit, and Dutton, 1998; Schlenker and Weigold, 1992). As a conse-

quence, managers prefer symbolic actions, especially in situations of high resource constraints,

because they need fewer resources (Ashforth and Gibbs, 1990).

Prior research has identified various possibilities for gaining legitimacy, which can be

used by entrepreneurs in order to be admitted their initial legitimacy (Zott and Huy, 2007). First, 10

the capabilities of the founder team can signal to the nascent organization’s audience the legiti-

macy of the organization because the founder team has a high influence on the organization’s

future success (e.g., Eisenhardt and Schoonhoven, 1990; Goslin and Barge, 1986; Riquelme and

Watson, 2002). Founders’ demographic characteristics such as prior industry, management,

founding or joint venture experience or social capital (such as affiliations with other organiza- 15

tions) play a significant role (Florin, Lubatkin, and Schulze, 2003; Packalen, 2007; Starr and

Macmillan, 1990). A second option, which is closely connected to the first, is the demonstration

of management competencies such as writing an adequate business plan (Delmar and Shane,

2003). Third, new ventures can use prestigious industry experts as affiliates (e.g., board of di-

rector members) (R. S. Rao, Chandy, and Prabhu, 2008; Westphal and Graebner, 2010) and can 20

employ experienced managers (Gulati and Higgins, 2003). Those organizational members or af-

filiates create a reputation for the new ventures, which is sufficient to gain the legitimacy of the

audience. Additionally, in the case of new technologies, the founding team could participate in

certification contests to build up its reputation (H. Rao, 1994). Moreover, entrepreneurs can try

to achieve membership in associations or syndicates, which will create “institutional linkages” 25

(Baum and Oliver, 1991) and promote their perceived legitimacy. Furthermore, young entrepre-

neurs could try to locate their nascent organizations in geographical areas that are “hot spots”

(Pouder and John, 1996) and that enable them to gain legitimacy more easily because these are-


89

as support the new venture with closer connections to the targeted audiences (Eisenhardt and

Schoonhoven, 1990; Allen John Scott, 1988). Aside from legitimacy, nascent organizations can

realize comparative cost advantages because of “economies of agglomeration," i.e., lower costs

for acquiring qualified suppliers, skilled workers or investors (Rauch, 1993; Allen J. Scott,

1992) if they are located in the hot spot. In addition to these general and systematic opportuni- 5

ties for gaining legitimacy, entrepreneurs can perform ad hoc actions (Aldrich, 1999, chapter 4).

They can buy or rent facilities, communicate their active search for investors, develop a proto-

type or cultivate a complementary top management team that is not only based on contacts from

their private networks.

Owing to extreme resource constraints, symbolic actions dominate new ventures’ activi- 10

ties for gaining legitimacy and many organizations “acting as if” (Gartner, Bird, and Starr,

1992) or show an “improvising behavior” (Delmar and Shane, 2004). Because of this improvis-

ing character, these types of activities will not necessarily influence organizations’ operative

performances positively, although the behavior promotes legitimacy and resource support. In-

terestingly, this contradicts the argument that embeddedness in an organizational network en- 15

hances the embedded organization’s performance (Hansen, 1995). Prior empirical results have

shown that start-ups that had written a business plan did not have a higher performance than

those that had not (Karlsson and Honig, 2009). Accordingly, it can be argued that a business

plan has no direct performance function; rather it has a signaling function for the main resource

gatekeepers such as VCs or banks.53 However, recent research has indicated that even this cer- 20

emonial function has no impact on resource gatekeepers’ decisions (Kirsch, Goldfarb, and Gera,

2009). Therefore, one might argue that writing a business plan is just an opportunity to screen

and prove the entrepreneurial skills of the founders and gain initial legitimacy (R. A. Baron and

Shane, 2005; Timmons and Spinelli, 2007). However, this view would create the problem that

individual characteristics are not organizational characteristics and will be abandoned over time 25

(Maguire, Hardy, and Lawrence, 2004).

53 Recent research has indicated that apart from resource gatekeepers, other pressure groups such as universities

force young entrepreneurs to write a business plan (e.g., Brinckmann, Grichnik, and Kapsa, 2010; Honig, 2004).


90

In the case of new ventures54, entrepreneurs face the problem that they must primarily

use symbolic actions for gaining legitimacy. However, those actions will only have a low level

of institutionalization and will gain only short-term legitimacy. Establishing an organization

does also mean that routines have to be implemented, which enable the goal-directed, boundary

maintaining collective system of activities to emerge (Aldrich, 1979). Moreover, organizations 5

can only guarantee reproducibility, which plays a key role in taken-for-grantedness, if they are

able to implement routines. On the one hand, the low level of institutionalization of the organi-

zations’ legitimacy-gaining activities could be a reason for the fact that approximately 80% of

new organizations fail in the first two years (Small Business Administration, 1999). On the oth-

er hand, actively striving for legitimacy is more important than passive conformity (Tornikoski 10

and Newbert, 2007). However, a too high level of legitimacy striving and routine implementa-

tion would threaten young organizations’ existence because new organizations that seek legiti-

macy too strongly will be perceived as manipulative and illegitimate (Ashforth and Gibbs,

1990) and young organizations have to be flexible, which contradicts routines. If gaining legit-

imacy is so challenging but necessary for survival and growth and so many young organizations 15

fail (Singh et al., 1986), it seems to be one of the most crucial but unsolved problems for organ-

izations. As mentioned before, the dominance of symbolic actions could be one reason for that

problem because they have a lower impact on legitimacy granting than substantive actions and

it seems that only the combination of substantive and symbolic actions can guarantee long-term

legitimacy (Berrone, Gelabert, Fosfuri, and Gomez-Mejia, 2008). Accordingly, I derived the 20

following research question: how do young organizations manage legitimacy in order to grow?

Consequently, I investigated the symbolic and substantive actions of young organiza-

tions that are established and still growing. Furthermore, I focused on the sequence of legitima-

cy-gaining activities because prior research gave the first insights that not only the action itself

is important but also when this action is performed (M. A. Zimmerman and Zeitz, 2002). To ad- 25

54 As mentioned above, gaining legitimacy is especially challenging for new ventures because established organiza-

tions can use their prior track records and current performances as sources for legitimacy (Delmar and Shane, 2004). Nevertheless, some organizations exist even though they do not perform well and some organizations do not exist even though they had performed before. This shows that legitimacy is also relevant for established or-ganizations.


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dress this research gap I used the legitimacy-managing approach of Suchman (1995) for several

reasons. First, his approach takes both active striving for legitimacy and passive conformity for

legitimacy into account. Second, Suchman interprets legitimacy as a non-dichotomous variable

and distinguishes between different types of legitimacy. This enables us to investigate the legit-

imacy phenomenon in more detail, which is useful for explaining how young organizations are 5

able to gain and maintain initial legitimacy to survive. Third and as a consequence of Such-

man’s non-dichotomous legitimacy interpretation, Suchman suggests that the different types of

legitimacy have a certain timely sequence and hierarchy, which enables us to separate young

organizations’ activities chronologically.

D.2.2 The legitimacy management approach by Suchman 10

Suchman (1995) investigated how organizations can manage legitimacy.55 He defines

legitimacy as the “[…] generalized perception or assumption that the actions of an entity are de-

sirable, proper, or appropriate within some socially constructed system of norms, values, be-

liefs, and definitions.” (Suchman, 1995, p. 594) According to this definition, an organization

can face three challenges of legitimacy management in general: gain, maintain and repair legit- 15

imacy. For new organizations, it is important to gain legitimacy; once established, the dynamic

environment changes the audience’s criteria for proper or appropriate actions, which results in a

challenge to maintain legitimacy, or an unforeseen crisis of meaning forces the organization to

repair its legitimacy. I focus on gaining and maintaining legitimacy for two reasons. First, the

tasks of repairing legitimacy are similar to the activities for gaining legitimacy in many ways 20

and an empirical differentiation seems almost impossible. Second, repairing legitimacy is

caused in most cases by an unforeseen action. Because I try to find systematic developments of

organizations, the focus on unsystematic actions is beyond my study’s scope.

The organizational “legitimacy target” determines most of the challenges an organization will

face. If an organization only needs legitimacy in the form of the passive acceptance of its audi- 25

ence, it is sufficient for the organization to make sense and that the organizations activities are

55 The arguments of this section are based on Suchman (1995); otherwise, sources were cited.


92

attributable to a socially constructed category of appropriate activities. If an organization strives

for active support from its audience, the organization must not only make sense but also have a

value from the audience’s perspective. The legitimacy requirements of active support are more

stringent and stricter than for passive acceptance.

Suchman distinguishes this general legitimacy into three main types56 of legitimacy:57 5

pragmatic, moral and cognitive legitimacy. Pragmatic legitimacy “[…] rests on the self-

interested calculations of an organization’s most immediate audiences" (p. 578). This type of

legitimacy is characterized by the direct (positive) influence of the organizational activities on

its audience’s welfare (that will transform the audience into constituents). According to the level

of social construction, this type of legitimacy can be subclassified into three subtypes of legiti- 10

macy with an increasing level of social construction: exchange, influence and dispositional le-

gitimacy. The simplest subtype of pragmatic legitimacy is exchange legitimacy because it is

limited to the direct exchange between the organization and its audience. Cultural influence ex-

ists but plays a minor role in the exchange relationship. Influence legitimacy rests on neither a

direct nor indirect exchange relationship. In the case of influence legitimacy, the constituents 15

grant legitimacy because they see the organization as responsive to their own larger interests.

Influence legitimacy emerges, for example, if organizations adopt the constituents’ performance

measures or integrate the constituents in policymaking (e.g., in the BoD). Dispositional legiti-

macy rests on the trend that constituents have started to treat organizations as entities or per-

sons. The constituents grant legitimacy to that entity or person who reflects their own norms and 20

values most adequately. Therefore, organizations that behave like their audiences or have the

same values as their audiences are perceived as legitimate.

The second main type of legitimacy, moral legitimacy, is granted if the audience per-

ceives the activities of the organization as improving societal welfare, as defined by the socially

56 Many other authors have developed their own differentiations but, in many cases, they vary only in the label. For

example, within their seminal work, Meyer and Rowan (1977) distinguished between “rational effectiveness” (i.e. pragmatic legitimacy) and “collectively valued purposes, means, goals, etc.” (i.e., moral legitimacy). See al-so Deephouse and Suchman (2008).

57 Suchman also differentiated between activities that improve the action or essence of organizational legitimacy. However, this difference is too subtle to be identified in real-world settings, which Suchman noted too. There-fore, I will not include this difference in my empirical research.


93

constructed system of norms and values of the audience. Of course, this type of legitimacy is

not free of the audience’s individual self-interests but is clearly dominated by “prosocial logic”

(Suchman, 1995, p. 579). Moral legitimacy will be granted for the outputs and consequences,

techniques and procedures or categories and structures of an organization. In the case of conse-

quential legitimacy, an organization’s audience will evaluate the organization’s accomplish- 5

ments, i.e., if the organization follows the myths of modern order (Meyer and Rowan, 1991).

For evaluation, dimensions such as perceived quality or effectiveness play an important role –

both dimensions reflect the social construction of the modern order (Berger and Luckmann,

1967). In addition to consequential legitimacy, it is also possible for organizations to gain moral

legitimacy if their accomplishments are not clearly measurable. Procedural legitimacy rests on 10

the evaluation of the organization’s procedures independent of its outputs or consequences. This

will be granted if the audience perceives the procedures as socially legitimate. The next subtype

of moral legitimacy, structural legitimacy, is closely connected to procedural legitimacy. Audi-

ences perceive organizations as legitimate if they can classify them by their structures into “tax-

onomic categories” (Suchman, 1995, p. 581). The reason is that organizational structures are an 15

indicator of an organization’s socially constructed capacities to perform (Allen J. Scott, 1992;

B. R. Scott, 1971) and those structures reflect that the organization “[…] is acting on collective-

ly valued purposes in a proper and adequate manner” (Meyer and Rowan, 1991, p. 50). The dif-

ference between procedural and structural legitimacy is the level of analysis. Whereas procedur-

al legitimacy is granted for discrete organizational routines in isolation, structural legitimacy is 20

granted for the consistency of the entire organizational system of activity. Aside from these

primarily organizational properties, organizations are able to gain legitimacy through charis-

matic leaders58. However, this subtype of moral legitimacy has only a low level of institutional-

ization and is special as well as perishable (Zucker, 1991). In particular, the “turnover rate” or

frequency of retirement of entrepreneurs in young growing firms is relatively high (Aldrich, 25

1999).

58 Charismatic leaders are leaders that transform the needs, values and preferences of their followers to motivate

them to make significant personal contributions to the target set by the leader (House, Spangler, and Woycke, 1991; Shamir, Zakay, Breinin, and Popper, 1998; Weber, 1978).


94

The third main type of legitimacy is cognitive legitimacy. Contrary to pragmatic or

moral legitimacy, this type does not rest on evaluation; rather it is based on cognition that re-

sults in a taken-for-grantedness of an organization independent of a positive or negative evalua-

tion (Aldrich and Fiol, 1994). This type of legitimacy has the highest level of institutionalization

and can be separated into two subtypes. First, cognitive legitimacy can be gained if the organi- 5

zation is comprehensible. If the social world is interpreted as chaos (M. B. Scott and Lyman,

1968), participants of the world will try to find explanatory order clusters that help make sense

of it. Accordingly, organizations must be compatible with the larger belief system and the reali-

ty that the audience experiences during everyday life (DiMaggio and Powell, 1991). Second,

cognitive legitimacy can be based on taken-for-grantedness. In contrast to the theoretical under- 10

pinnings of the comprehensibility basis, “[…] partisans of taken-for-granted legitimacy depict a

more sedate scene of cognitive coherence and glacial, integrative change” (Suchman, 1995, p.

583). In this understanding, organizations will not only be a way of explaining chaos and mak-

ing it manageable but they will also give the audience intersubjective givens, which can have

such a high level of institutionalization that an alternative is unthinkable. 15

Before I introduce Suchman’s different strategies for managing legitimacy, it is worth

noting that all three main types exist simultaneously in the real world and can be at odds with

each other. Pragmatic legitimacy is based on the self-interest of the audience, whereas moral

and cognitive legitimacy are not based on self-interest. Therefore, pragmatic legitimacy can be

purchased by directly rewarding the audience, whereas moral and cognitive legitimacy cannot 20

be influenced that directly. Pragmatic and moral legitimacy are based on a discursive evaluation

process of the audience. Of course, the legitimacy striving organization can actively participate

in that discourse but their individual influence is lower than on pragmatic legitimacy in direct

exchange relationships. In contrast to this public discourse, cognitive legitimacy is based on un-

spoken and underlying assumptions that tend to be imperiled by organizational endeavors to in- 25

fluence them. Following this argumentation, Suchman suggested that pragmatic legitimacy is

the first gained and will be followed by moral and then cognitive legitimacy.


95

According to Suchman, one can distinguish three legitimacy-managing strategies in

general: conformity, selection and manipulation. Conformity means the organization will adapt

to the socially constructed values and norms of the audience. Selection means the organization

selects the audience that shares the most similar norms and values so that it does not need to

adapt. The last general strategy is manipulation, which means the organization tries to create 5

new environments with new audiences or new socially constructed norms and values. Each of

these strategies can be used for the two different legitimacy challenges facing organizations,

i.e., gain and maintain legitimacy. I will describe these two challenges by using the three legiti-

macy strategies.

Nascent and young organizations rise to the challenge of gaining pragmatic legitimacy 10

from their audience for the first time. Because of the high dependency of young organizations

on their environments, they tend to conform to the demands of their audiences. More precisely,

they can respond to the needs of their exchange partners or can co-opt constituents by, for ex-

ample, offering them decision-making access such as a directorship on the BoD. Alternatively,

organizations can gain pragmatic legitimacy by building a reputation in related activities (e.g., 15

adding consultancies to their products) or by employing key personnel. Moreover, organizations

can select friendly audiences or co-opt friendly constituents to gain pragmatic legitimacy. Final-

ly, advertising an organization’s product or image can be manipulative activities for gaining

pragmatic legitimacy. To gain moral legitimacy, organizations can conform to ideals by produc-

ing proper outcomes, by embedding themselves in institutions (e.g., co-opting not only ex- 20

change partners but also audience members that rely on the larger organizational picture) or by

offering symbolic displays (e.g., outputs, procedures, structures or personnel). As another strat-

egy for gaining moral legitimacy, organizations can try to select a domain that is closest to their

own current norms, values and beliefs such as a special country or area of activity. In addition,

organizations can persuade the audience by demonstrating success or proselytize it. As a third 25

option, organizations can gain cognitive legitimacy by conforming to models by mimicking

standards, formalizing operations (i.e., codifying informal procedures) or professionalizing op-


96

erations (i.e., linking the organization’s activities to external definitions of authority and compe-

tence).

If an organization has been granted legitimacy once, this status will not remain stable

over time. Anomalies in the organizational environment, imitation failures, innovations or ex-

ternal shocks are all examples of possible legitimacy threats. Additionally to these unsystematic 5

and unpredictable challenges, several other aspects coerce organizations to maintain their legit-

imacy. Organizational environments are typically characterized by heterogeneous audiences but

if organizations become more homogeneous not all the demands of audience members can be

satisfied (Ashforth and Gibbs, 1990; Scheid-Cook, 1992). Moreover, institutional forces such as

isomorphism and taken-for-grantedness promote the organization’s inertia, which in turn leads 10

to a reduced adaptability. However, if the environment is permanently changing and organiza-

tions become more homogeneous and only adapt (too) slowly to changes, excess demand will

be the result. Owing to this demand, outsider organizations gain the chance to enter the envi-

ronment and replace established forms with new ones. Another systematic threat for an organi-

zation’s legitimacy is hostility. If an organization is granted legitimacy by its audience, it will 15

attract interest, which can be hostile. Hostility can be based on a plan to delegitimize an entire

field by attacking its weakest link, an idiosyncrasy against institutionalization or the (negative)

perception of a new competitor (see also Jepperson, 1991). Consequently, organizations have to

maintain their gained legitimacy. To maintain pragmatic legitimacy, they can monitor tastes

through the consultation of opinion leaders or protect exchanges through policing reliability, 20

communicating honestly and stockpiling trust. Moral legitimacy can be maintained by monitor-

ing ethics through continuous consultation with professionals (e.g., organizational members can

participate in external normative discourses) or by protecting propriety through policing respon-

sibility, communicating authoritatively and stockpiling esteem. Finally, organizations can main-

tain cognitive legitimacy by consulting doubters or by protecting its underlying assumptions. 25

All different strategies are summarized in Table D-1. Overall, I derive the following proposi-

tions that guide my study:

Proposition 1: Young organizations use different strategies to manage legitimacy.


97

Proposition 2: Young organizations first gain pragmatic legitimacy, followed by moral and

cognitive legitimacy.

Table D-1: Legitimation strategies by Suchman (1995)


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D.3 Research Method and Case Setting At the beginning of my research project, I discussed several possible expectations with

colleagues. However, I did not formalize any expectation of how successful, young, growing

organizations manage their legitimacy.

I based my research in Germany due to financial constraints. To identify young organi- 5

zations that have already grown successfully, I used the online database

“www.deutschestartups.de” and the alumni network of my business school. I found 21 organi-

zations that I initially contacted by e-mail to explain my research project in general. According

to my research object, the identification and selection criteria were as follows: a) the organiza-

tion should have more than 15 employees, i.e., the organization should have grown successful- 10

ly; b) the founder of the organization should still be part of organization in order to gather in-

formation about the founding process; c) the organization should not be older than 10 years; and

d) the organization should have received venture capital because those organizations have high-

er growth rates in general (Davila et al., 2003). I guaranteed my participants complete confiden-

tiality and absolute anonymity. I used Suchman’s legitimacy understanding and investigated the 15

substantive and symbolic actions of organizations. Consequently, I needed an in-depth under-

standing of the organizations and several intraorganizational interviewees. I intentionally fo-

cused my geographical research on Germany to reduce possible sampling biases by environ-

mental influences such as educational system or sociopolitical context. I received an answer

from all contacted organizations. One out of 21 refused to participate in my research project be- 20

cause it did not meet the criteria. After a positive response, I made an initial appointment with

all of the organizations to explain further details about the research project, especially that it

might involve an extremely high time consumption, and to be sure that they all met my criteria.

Overall, 18 organizations remained. I investigated the organizations’ behavior in real time (ob-

servations) and retrospectively mostly by interviewing the founders and several other key per- 25

sonnel. For every organization, I interviewed the CEO, the CFO or CTO, one main resource

gatekeeper (i.e., VCs) and one non-executive member of the BoD. Owing to my sample gener-

ating procedure, most interviewees held an academic degree such as a Master’s of Science or


99

Ph.D. Consequently, I controlled my sample for human capital aspects such as educational

background, analytical skills, consultancy and managerial experience as well as social capital in

the form of access to special networks. These aspects usually generate certain heterogeneity in

entrepreneurial ventures. Thus, I followed Gartner’s suggestion of reducing heterogeneity in en-

trepreneurial subgroup studies for generating mid-range theories (Gartner, 1985). The 18 organ- 5

izations (Table D-2) are active in many industries but all have a high degree of information

technology. Experienced entrepreneurs (i.e., entrepreneurs who had founded at least one organi-

zation before) founded four of the 18 organizations.

Table D-2: Participating organizations

10


100

My data collection started in November 2008 and ended in March 2010 (for more de-

tails, see Appendix G). The majority of the interviews were conducted between January and

April 2009. In most cases, the interviews were face-to-face, wherever possible at workplaces;

only in seven cases I had telephone interviews. Overall, I was able to interview 18 CEOs, 18

CFOs/CTOs/COOs, 18 VCs and 14 non-executive members of the BoDs. Each interview lasted

about 60 minutes. I received permission to tape-record each interview (with one exception only)

and made, in addition, substantive notes. I started each interview with open-ended questions that

provided me with the main organizational developments (“milestones”) and asked my inter-

viewees for concrete examples to enhance my understanding of each organization. Moreover, I

asked for the role each interviewee played and still plays in the organization’s development. I

asked questions such as “What is your role in the organization as CFO and how has this role

changed over time?” or “What is the role of the VC in the development of this organization,

what is your personal role and how have both roles changed over time?” A summary of the key

points of the study was sent to all participants to confirm or add missed aspects.

To build stronger interpretations, I collected additional data from several sources (Yin,

1989). I visited the organization’s websites on a regular basis and monitored the business press

for articles on them. Moreover, I checked the main entrepreneurship events for presentations of

the organizations.

After reading and re-reading the transcripts, the data were coded by using the software

atlas.ti (Muhr, 1991). A manual for the coding procedure was written to ensure intercoder relia-

bility. This manual was based on the different strategies and types of legitimacy by Suchman

(1995) but the research was also still open to new emerging topics. Additionally, an intercoder

reliability test was performed after the first coding round. More than 90% of the codes were

identically made by the researchers at the first attempt. In the remaining 10%, the researchers

agreed after intensive discussions. I coded, for example, an action as a symbolic action if one of

the following three conditions was fulfilled (Zott and Huy, 2007): a) the interviewee clearly in-

tended the action as symbolic; b) the action was perceived as symbolic by the resource gate-

keeper; or c) I interpreted it as symbolic. To stay close to the data, the 68 interview tapes were


101

simultaneously listened to, the transcripts read and re-read, the executive summaries consulted

and the alternative data sources regularly checked. Qualitative data analysis ran simultaneously

to the data collection, and initial ideas or reflections on the data’s meanings were stored during

the entire data collection and analysis phase in a research diary. For qualitative analysis, data

matrices (Miles and Huberman, 1994) were used.59 Mapping the respondents against the codes

or labels that were identified in the previous manual coding procedures created these matrices

and this allowed us to identify themes by each respondent. I used all of Suchman’s types and

subtypes of legitimacy as well as all of his strategies and substrategies of managing legitimacy.

However, the differences between those subcategories are too small in real-world settings,

which Suchmann (1995) denoted too. Therefore, I focus the presentation of my results on

Suchman’s main categories of legitimacy types and managing strategies.

59 For an example of one of these matrices, see Appendix F.


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D.4 Results To answer my main research question – how do young growing firms manage legitima-

cy – from a strategic institutional perspective, I divide my results into two parts. The first part

covers the pre- and start-up phase of the organization and the second part is focused on the

growth phase of the organization. My separation between the start-up and growth phase is, of

course, artificial and the phases often overlap in reality but I found empirical aspects60 that sug-

gest that this separation is reasonable for analytical purposes.

D.4.1 Pre-start-up and start-up phase

Entrepreneurs identify a chance to satisfy a societal need or solve a societal problem by

offering a corresponding product or service. Frequently, entrepreneurs come up with their ideas

for new products by observing their close environment or facing their own problems.

We were six friends that planned a big party for more than 200 people. For us, it was necessary that every guest pays 10€ to refinance the party. There-fore, we needed some kind of ticketing system, which enables us to organize those things online. While we tried to plan and organize such an event, we realized how difficult it is. Even more importantly, we realized that no ser-vice for solving our problem was available. At that moment, we’ve got our idea to found the firm. [CEO, organization 10]

After the initial idea, founders start to develop the idea more precisely and to evaluate

the chances of the idea. In every case, the founders wrote, as an outcome of the idea’s develop-

ment process, a business plan. The concept of writing a business plan is common in the start-up

community as the following quote illustrates: “you must write a business plan, what else can

you do to plan your idea?” [CEO, organization 1]. In addition and maybe as a reason, the taken-

for-grantedness of a business plan will be promoted by the educational system. All of my inter-

viewees hold (at least) a Master’s degree and in every Master’s program at least one of the

courses covered entrepreneurship (and every course included business plan writing). The entre-

preneurs learn that writing a business plan is an appropriate behavior when you want to found

an organization.

60 The investment of a VC, an organization with more than approximately 15 full-time employees (Davila, 2005) or

the introduction of decentralized structures (Miller and Friesen, 1984) are signals for the organization’s transition from the start-up to the growth phase.


103

I attended a course about entrepreneurship during my university time. The most exciting parts of the course were presentations of experienced founders and the process of how to plan founding a firm – which was more or less a course about writing a business plan. [CTO, organization 14]

Accordingly, founders reproduce socially constructed structures to gain legitimacy. Be-

fore or within the process of writing a business plan, entrepreneurs begin to search additional

founding team members to complement their own knowledge and to allocate the risk to a certain

extent. In many cases, the additional founding team members are part of the “first founder’s”

private network or circle of friends. If the initial founder has prior work experience, his or her

business network will supplement the private network. Accordingly, people who found an or-

ganization often share the same mindset, which results in the same beliefs, norms and values.

After the completion of the founding team development process, the new team members bring

in their knowledge and the entrepreneurial idea will be substantiated. The team starts developing

a (pitch) presentation about their idea and possible products and services, and sometimes, they

also develop a prototype at this stage. The presentation might include more organizational de-

tails such as the name of the new organization. The founders still have other jobs and plan the

project in their spare time. While they advance their idea, they search for possible investors. The

early financing of the idea is based on the founder’s own resources but if they reach a certain

development point such as the real production of a complex prototype, external financing be-

comes necessary. To prepare for potential negotiations with investors, the founding team con-

tacts other successfully financed founders to learn from their experiences. The contacted found-

ers do not have to be successful in an operative sense; it would be sufficient for the founding

team if those people have founded an organization before. The contacted experienced founders

have a second role for the founding team as they will be used a first reference of the idea’s qual-

ity.

We had the chance to meet Mr. Smith [a famous business angel in Germa-ny] after his presentation at our university. We waited the whole evening to get the chance of presenting him our business idea but we got our chance. We made a typical “elevator pitch presentation” and he gave us positive feedback and his business card. We were so proud and happy. His positive comment and our contact to him was our ticket to the “inner circle” of the start-up community. [CEO, organization 5]


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Aside from their private network, the founding team identifies additional experienced

founders to consult by participating in community events such as founder meetings or entrepre-

neurship conferences. Events such as founder conferences do not only enlarge the founder’s

network they also show the nascent organization locations that are new venture friendly, i.e., lo-

cations that are “hot spots” (Pouder and John, 1996) for founding an organization.61 Moreover,

founder conferences and meetings offer nascent organizations the chance to participate in busi-

ness plan contests that evaluate various aspects of entrepreneurship. The juries of those contests

consist of VCs, experienced founders and business angels that evaluate the best idea, best writ-

ten business plan or the best entrepreneurial presentation skills. Owing to their competitive

character, these conferences are a first official external valuation of the founder’s idea and offer

the possibility of gaining a reputation by winning the contest. The criteria of those contests

mostly focus on storytelling elements, i.e., internal coherence of the idea/story is more im-

portant than external validity (W. R. Fisher, 1985), because the majority of the participating or-

ganizations have not been “physically” founded. In particular, potential investors place great

emphasis on the founder’s personality or the complementary personalities of the founding team.

We clearly prefer an excellent and complementary team with a bad idea over an excellent idea with a bad team. The entrepreneurial way is too un-certain and the team has to solve too many unexpected problems, therefore, the team’s quality comes first, anytime. [VC, organization 8]

VCs do not form a part of the start-up contest’s jury for altruistic reasons – they use

such events as an option to identify potential investment opportunities. Consequently, after so-

cializing with their potential audiences and investors, nascent organizations begin to advance

their business plans and presentations if potential investors are interested in their ideas. Typical-

ly, nascent organizations start to adapt (consciously or unconsciously) the audience’s language

because of their direct contact. Accordingly, the founding team integrates the audience language

into its business plan to demonstrate that its members are insiders and that they have the re-

quired skills. Therefore, they revise their business plan by editing their language. Another ad-

61 Therefore, the majority of my sample organizations is located in three German hot spots, although I had not lim-

ited the sampling process to these areas.


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vancement of the business plan is the changing content and structure. Before, the founders fo-

cused their business plan structure and content primarily on the idea itself. The economic evalu-

ation of the idea was, of course, included in the document but only superficially. In addition to

the language, founders also adopt – through their direct contacts to the audience – their ration-

ales, assumptions and evaluation instruments. Founders increase the weighting of the rationali-

zation of their idea by increasing the part of corporate value calculation within the business plan

by integrating forecasts, exit strategies and exit scenarios. Moreover, they use the evaluation

methods recommended by the audience such as the EBIT or multiple turnover method to calcu-

late the organization’s future value.

If you have the right multiple, you can sell everything. Within our small start-up community, we calculate not the value itself – in many cases the multiple of the start-up is enough. [VC, organization 18]

However, VCs evaluate not only the business plan but also the complementarity of the

founding team in making their investment decisions. A reason for the great emphasis on the

team is that the new venture will face many challenges such as a full redesign of the product or

service. In particular, the “founder CEO” plays a significant role in the new venture’s future

success because he or she communicates directly with the audience and has to sell the idea to

customers, employees and other financiers. Consequently, I found that nascent organizations

gain initial legitimacy because of the founder or founding team’s personal legitimacy. Interest-

ingly, my results show that members of the audience (i.e., VCs) use socially constructed criteria

such as analytical skills for evaluating the founder’s personal legitimacy, which seem to contra-

dict the creative necessities of starting a new venture, in addition to the founder’s personality.

VCs use the founder’s skills of writing and adapting a formal business plan as indicators of their

ability to plan, adapt and perform successfully in the future.

Of course, we require from every entrepreneur a business plan…and we read those plans. However, more important for us is the way the entrepre-neurs defends their plans and how they argue. The entrepreneur’s ability to convince us with stringent logic and some creativeness are the things that make the deal perfect. [VC, organization 12]


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After acquiring venture capital financing, entrepreneurs start to physically found their

organization. They choose a legal form in consultation with the VC or, if they have found the

organization before getting venture capital, they might change their legal form. The founders

rent their first office and quit their jobs to invest their own human capital completely into the

new organization. Commonly, the VC is a reference for the new organizations; for example,

when young founders who are financially restricted want to rent office space, the VC will be

their reference for the proprietor. This is a typical example of the VC’s additional value. Entre-

preneurs do not receive just external capital if they enter into an exchange relationship with a

VC. Through the VC’s investment, the new venture also receives legitimacy and this, in turn, is

a signal to other members of the new venture’s audience. For example, new ventures are now

able to pay salaries to potential employees and acquire new employees more easily because VC

investment is a strong signal to the labor market. Additionally, access to the VC’s networks en-

ables the new ventures to contact potential customers.

Mr. White, our investment manager at the VC, contacted Mr. Black at Saddias and presented the idea of our start-up to Mr. Black. Without Mr. White it would have been impossible for us to contact someone at Adidas to present our product. We would have failed at the door…[CEO, organization 15]

In the context of the investment, VCs influence the organizational design of the new

venture. VCs advise the entrepreneurs on which jobs and which levels of hierarchy they should

formally introduce because the VCs have experience of the future audience’s requirements. For

example, VCs know what future cooperation partners expect on average from the new ventures

concerning organizational structures. Moreover, VCs require the introduction of reporting and

strategic milestones by the new organization. The purpose of the reporting is twofold. On the

one hand, the new organization can gain legitimacy for its activities by reporting its financial

success to the VC. On the other hand, the VC uses reporting to legitimize its investment into the

new venture to its own fund. Thus, the new organization’s reporting is an activity that gains le-

gitimacy that is not only focused on the VC. Moreover, VCs influence a new venture’s organi-


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zational design by introducing a BoD62 and they include in their financing treaty a clause that

secures one directorship for the VC. Through this directorship, VCs acquire decision-making

access and can directly influence the organization’s activities. Additionally, VCs encourage the

search for external non-executive board members that have the required technical know-how or

who are industry experts in the new organization’s targeted industry. At this stage of the new

organization, both the VC and founding team select experienced non-executive board members

that are well known in the start-up community. VCs encourage external directors to complement

their own financially focused know-how and to positively influence the perceived image of the

new venture. To promote this kind of corporate advertising, the investment of the VC and the

membership of an industry or technology expert will officially be announced by the new ven-

ture (e.g., on the organization’s homepage or on start-up community websites). The experienced

industry or technology experts accept the directorship offers because they contribute to their

own (higher) goals in life and to societal demands. For some experts it is interesting to accept a

directorship and to grant the new organization legitimacy just for the chance to transfer their

knowledge into a new organization, to be part of something new and to eternalize themselves.

Consequently, new organizations are able to convince important members that the organization

is not only pragmatically but also morally legitimate. In addition, new organizations at this de-

velopment stage are young, consist of few employees and have few customers. New organiza-

tions are dominated and represented mainly by the founders, and this status quo means they will

be treated as an individual.63 The VC and non-executive board members contribute human or

social characteristics to the organization such as “talented," “competent," or “moral,” and evalu-

ate the organization as someone who can be supported by them and who shares their own be-

liefs, values and norms.

You need a team that has a certain common basis – a shared moral basis. Without that moral basis, you cannot invest – we would never invest in a start-up without sharing the same beliefs and morals. [VC, organization 14]

62 In Germany, organizations do not have an obligation to introduce a BoD but all of the sample organizations in-

troduced one, perhaps because of the strong influence of the American venture capital industry on the German venture capital industry.

63 The German start-up community is small and few founders exit. Therefore, this effect will be even stronger be-cause each new organization knows each other and the people behind the organization are well known.


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The entire BoD plays another important role for the new organization. In board meet-

ings, the new organizations discuss and have to justify their activities with all board members.

This justification to internalized members of the external audience supports the new organiza-

tion in understanding the audience’s rationales and language. The organization will be prepared

to legitimate its activities to the external audience. New organizations also discuss in board

meetings which market should be addressed. Experienced board members bring their

knowledge into those discussions but the main decision-making factor will be the market’s

openness to new members, i.e., the friendliness of the market.

Our main idea was to enter a niche of the insurance market. However, shortly after our first weeks we realized that this market couldn’t directly be entered with a fresh start-up. Therefore, we changed our strategy. Now, we compare different insurance tariffs and make our money by offering tariffs from various insurance companies. [CEO, organization 17]

At this stage of the start-up phase, new organizations begin to develop or advance their

prototypes, hire more employees and acquire first customers whereupon all of these audience

members have a direct exchange relationship with the organizations. Concerning first customers

it is important to note that these customers are “early adopters” (Rogers, 2003), which means

that they evaluate the newness of a product or service higher than the product’s quality or the

permanence of the service. Owing to the received venture capital, new organizations create their

first advertisements to increase audience attention. Although the financial situation of the new

organization is better than before the injection of venture capital, advertising is often too expen-

sive given the moderate reach of these first advertisements.

D.4.2 Growth phase After the physical founding of the organization and after gaining initial legitimacy for

consuming society resources through the exchange relationship with the VC, initial employees,

and with first customers, young organizations strive for growth. One reason for new organiza-

tions’ striving is the increasing need for operative income to cover the operative expenses and to

service their debt without receiving another financing round. A second reason for the organiza-

tions’ growth ambitions is the VC’s influence on the organizational strategy. The main goal of


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the VC is not to (altruistically) support the start-up; its main goal is to make money from the in-

vestment. However, VCs cannot realize satisfying revenue by absorbing the operative income of

the start-ups. The primary driver for VC revenue is the value of the start-up. Although VCs use

different methods64 to calculate the organization’s value, in most methods the size of the organi-

zation is the main value driver. Consequently, VCs promote and require that the new organiza-

tions grow to increase their own profits. In addition, the founders of the organization will also

be primarily motivated by corporate value and will pursue a strategy of growth. The goal-

congruence between founders and VCs is additionally enhanced by the VCs’ covenants that des-

ignate a simultaneous sale of the VCs and founders’ equity. Although the main stakeholders of

the organization have the same goal and promote the same strategy, the implementation of the

growth strategy seems to be challenging even though the organization has gained first legitima-

cy.

Organizational growth means a growth in the numbers of employees and customers. The

proportion of the organizations’ first early adopter customers is only small in comparison to the

entire population of possible customers. Accordingly, young organizations have to acquire new

types of customers if they want to grow, i.e., they have to convince new audience(s) to enter in-

to an exchange relationship with the new organization. Therefore, new organizations begin to

analyze the expectations and requirements of those new audiences, i.e., they begin to analyze

the requirements for gaining legitimacy. Organizations identify that the quality expectations

vary between the different customer types, and that new customers (“early/late majority cus-

tomers”) tend to have higher quality and performance stability expectations than early adopter

customers do. To motivate the majority of customers to enter into an exchange relationship,

young organizations introduce professional structures such as a formal product development

process and quality assurance. The necessary knowledge for designing and implementing such

professional structures is based on several sources: (a) founders use their knowledge from uni-

versity education; (b) founders get examples or templates from other members of their network;

(c) VCs directly support the organization with their own knowledge and experience or indirectly

64 For an overview of the different corporate value calculation methods, see Ross (2007).


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support the new organizations with their network. For example, VCs organize portfolio firm

events that should provide a platform for portfolio firm interaction and promote the learning

process between the organizations because “older” portfolio organizations are obliged to present

their organizational structures and development to provide the “newer” organization examples.

Those events increase the homogeneity of the VCs’ portfolio organizations concerning their

professional and bureaucratic structures. In particular, this knowledge transfer from the older to

newer organizations is an important technique to socialize the newer organizations and enable

them to interact with various audiences. Moreover, the interaction between the start-ups offers

the chance for new organizations to learn consciously from the actions and experiences of more

advanced organizations and to absorb and copy unconsciously the behavior (such as the lan-

guage) of the more advanced actors. Consequently, the founders do not necessarily realize the

need to introduce such professional structures consciously, rather these permanent interactions

lead to an unconscious adaptation of audience structures.

The targeted new customers represent the majority of the audience’s members and they

expect a value of the organization for the entire audience, i.e., the organizations have to perform

activities that are important for the entire society and not only for audience members that are in

direct exchange relationships with the organizations.

The big deals, I mean the start-ups that grow enormously, solve a societal problem in the best case. A good case is if the organizations solve a problem of a large subcommunity of the society and the rest of the society finds the organization’s service okay. [VC, organization 4]

To successfully grow, new organizations need the support of not only direct exchange

partners but also of the rest of the audience – at least the rest of the audience has to accept the

existence of the new organization. A first activity of the young organizations to be recognized

by the audience and satisfying its needs is to prepare a concrete mission statement. They define

and formulate (in many cases for the first time) the organizational goals and the strategy for

how to reach these goals in an abstract way. Whereas detailed market and technology

knowledge was necessary before, the formulation of the organization’s mission, determining

and compressing the overall goals of the organization in a compact mission statement, enables


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the members of the audience to evaluate the legitimacy of the organization. Consequently, the

possible range of members that are able to evaluate the organization’s legitimacy will be en-

larged and the chance to gain legitimacy increases.

Our strategy to grow was primarily based on a good marketing strategy. When the first journalists called us and asked questions about our main goals and the vision of our start-up, we realized that we were not able to put our idea into nutshell. This was the time we developed our mission state-ment – at least to answer the journalists’ questions adequately and to get good public relations. [CEO, organization 9]

Another organizational activity that should promote the granting of legitimacy by a

broader audience is the selection of an auditing firm. I found, as an extreme case, that one young

organization employed one of the big four auditing organizations even though they had no legal

requirements for choosing such a large (and expensive) firm. The reason behind the selection

was twofold. First, the young organization was one of the main suppliers of a large stock mar-

ket-listed firm and had to fulfill the auditing requirements of those key customers. Second, the

young organization targeted a market in which large listed organizations dominated. Therefore,

they used senior auditing organizations to signal their preparedness to fulfill those higher audit-

ing demands and thereby signaled their preparedness to interact with larger organizations. Aside

from this extreme case, young organizations try to optimize their performance to satisfy the “in-

strumental demands” of the audience and gain legitimacy. However, this behavior is not com-

pulsory for gaining (neither active nor passive) legitimacy apart from direct exchange partners.

Consequently, young organizations try to embed themselves in established networks that are

larger than their primary business contacts. One option is the membership of associations that

are responsible for education. Another option would be gaining a general certificate such as ISO

9001:2008.

Our organization is a member of seven associations. We started with the membership of one association…but then you meet people several times at different events of this association and they ask you, if you might be inter-ested in becoming a member of another important association. Now, we are members of associations that cover a range of topics that represent our in-dustry to fundamental research. [CTO, organization 13]

We started to formalize and standardize internal processes for increasing the quality of our service. In order to make it in a consistent and systematic


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way, we decided to get the DIN ISO 9001:2008 certificate. I think it was a lot of work but in the end, it paid off. [CEO, organization 13]

A third important option for gaining legitimacy from a broader audience is cooptation

within the BoD. As in the start-up phase, young organizations try to recruit directors (friendly

cooptees) that can replace the former directors. Whereas the former non-executive BoD mem-

bers were selected because of their industry or technology know-how, prestige and publicity

now become the most relevant characteristics of the new board members. The internationality of

new members is important as the organizations try to grow in foreign countries. Just as domestic

directorships supported the domestic establishment of the new venture, international director-

ships should support the establishment of the new organization in foreign countries. Conse-

quently, organizations search for an individual that has worked for a large prestigious interna-

tional organization. This person’s background and network should reflect the new organization.

The board composition at the beginning was the following, I think, typical for a German venture capital financed start-up: one member was the Ger-man CEO or sometimes CFO (depends on the agenda), another member was the German VC and the third member was me [German non-executive member, technology expert]. After the first growth phase and our first inter-national subunits, we realized that the board did not think like an interna-tional organization because we were all Germans. We said, okay – the or-ganization has to become international, the board has to become interna-tional too. We started a screening process for interesting international can-didates for our non-executive (non-VC) directorship. Finally, we found Mr. Pink who had worked all over the world and has the best international con-nections for our organization. [CEO, organization 16]

The recruitment of experienced and well-known individuals is not limited to the BoD. In

the growth phase, the young organizations begin to employ experienced top managers for vari-

ous reasons. On the one hand, founders are not able or willing to develop their skills simultane-

ously as the organization (see also Mintzberg, 1973) but the external demands for granting legit-

imacy develop permanently. For example, customers (e.g., well-established organizations) of

young organizations that work in the B2B sector require the introduction of their own profes-

sional structures (such as an ordering tool). Young organizations are forced to implement tools

that are designed for larger international organizations. Customers in business-to-consumer

business expect and demand adequate customer relationship management, which will increase


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the required level of staff and increase the coordination complexity. To acquire these employees

– i.e., start an exchange relationship with them – organizations have to use mechanisms other

than well-established organizations because of their still short history and financial constraints.

Young growing organizations use, for example, career paths that show the potential employees

which future exchange they can get to deemphasize the importance of the organization’s short

history and current job options. The introduction of such professional structures and the increas-

ing complexity of the managerial coordination tasks cause the need for an experienced top man-

ager.

We had grown unbelievably fast and had over 150 employees. It was time to introduce an incentive system for our employees but I hadn’t any idea of how to design or implement such a system. This was another sign for me, that I was not the right guy for the job of being a CEO of a 150 people or-ganization any longer. Consequently, I retired as CEO and became the COO and we found an experienced CEO as a replacement. Mr. Orange was four years the CEO of X-Com [large international firm] and he had the knowledge and experience of how to introduce an incentive system that is adequate not only for 150 employees but also for 1000 employees. [COO, organization 2]

If the employee acquisition has been successful, organizations will face a challenge to

coordinate the new headcount. They will introduce formal structures, i.e., bureaucracy, such as a

second and third level of hierarchy and transparent human resource evaluation processes. The

latter play an important role. In the start-up phase, the founder managers were able to supervise

and evaluate the employees’ performances directly and personally. Owing to organizational

growth, this direct supervision and evaluation is no longer possible. Employees realize this sta-

tus and no longer accept a leadership and evaluation style that is still based on subjective per-

sonal evaluation because they would doubt the manager’s legitimacy to control the organization.

After two years, we realized that some people leave their job on time – in the early days, we worked together the whole night just to get the next release done – but after reaching a certain headcount and becoming more…mature, we also had employees that preferred to work from nine to five. The problem was that we were not used to working together with these kinds of employ-ees and those people exploited our inexperience and reduced their workload dexterously. However, we realized their behavior and that those people “work to rules” and therefore, we introduced the right rules [CEO, organi-zation 8]


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To secure the manager’s ability and legitimacy to control the organization, it introduces

new professional bureaucratic structures – a legitimacy of leadership qua bureaucracy emerges

(see also Weber, 1978). This development can be intensified if the organization has a labor un-

ion or the majority of the organization’s employees are bureaucracy-experienced (i.e., they had

jobs in larger organizations before).

The challenges associated with the growing headcount and introduction of bureaucratic

structures do not fit the skill set of the founding team, and new professional and experienced

managers have to be recruited. Moreover, all new audiences expect after a certain period of or-

ganizational development that a mature individual will be managing the organization – in West-

ern countries this expectation is often expressed by an anticipated age of the person.

For me it was not possible to negotiate with our key customers directly. I sent my older brother to negotiate with some of our key customers because he is older than I am and has gray hair – that is what those people expect. I could make the same offers as my brother does but I would never get the same deals, just because of my youth. [CTO, organization 17]

The mere expectation of the audience is sufficient reason for organizations to hire more

experienced people. Furthermore, the acquisition of experienced top managers and prestigious

non-executive board members is a signal of the organization’s development from a start-up to

an established organization because those experienced individuals would not enter into an ex-

change relationship or cooptation if they did not believe in the organization’s legitimacy. There-

fore, organizations will gain active support and passive acquiescence merely by recruiting expe-

rienced individuals.

Experienced managers are not only a symbol; they also know how important it is to dis-

play the performance, procedures or structures of the organization in an adequate way. Conse-

quently, they promote the external reporting and public relations of the organization. Concern-

ing reporting, the experienced managers use their own knowledge to redesign reports and

change the weighting of the different parts or they use reports of their former employers as a

template for the new organization to demonstrate the audience-adequate transformation of the

reporting. Concerning public relations, experienced managers tend to act contrarily to the

founders and hire experienced public relations managers (founders tend not to value public rela-


115

tions that high that they were willing invest resources). Introducing new structures and display-

ing this development motivates a new kind of employee to apply for a job. Middle managers

and clerks will not be motivated by being a part of something new or getting the chance to be-

come a vice president of a start-up; they will be motivated to apply by the expectation of a se-

cure job in an established organization.

The growth of the organization and the advancement of employees and top managers

cause a need for new information structures that diffuse information within the organization and

that save corporate knowledge.

Our headcount “exploded” and the load of information increased dramati-cally. We hadn’t the time to train every new employee but they needed to know what they have to do and where they can find some help. That was the trigger for introducing our internal Wikipedia. Experienced employees were responsible for describing the work and the underlying processes. Every-body had the right to create new posts or to edit the posts of other people. It worked fantastically – within two months we had a Wiki with more than 20,000 pages. [CTO, organization 3]

The aspect of saving knowledge in the organization is especially relevant for the found-

er’s know-how. Owing to the employment of experienced managers and the increasing bureau-

cratization of the organization, the knowledge of the founders has to be transferred into the or-

ganization to ensure the core technology or service competence is always available.

After my employment, we had to get all the brilliant ideas and the roadmap for future products out of Mr. Brown’s [the founder of the firm] head. He had a precise plan for the next years but never formalized it – why should he, he was the founder and exclusive manager. Consequently, we introduced a formalized strategic planning process and a roadmap for the next years. He documented all his ideas… [COO, organization 11]

If the knowledge of the founders were not transferred, it would be possible that the core

competence for performing a legitimizing action of the organization would be lost and, conse-

quently, the legitimacy would no longer be maintained. Young organizations identify the need

to save the founder’s know-how through the experienced managers’ advice and support the

transfer of the personal legitimacy of the founder to the (moral) legitimacy of the organization.

Because of the employment of experienced managers and employees and the introduction of

various hierarchy levels as well as formal information structures, the organizational culture


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changes and a new language emerges. Whereas every employee was able to receive any infor-

mation in the start-up phase, information access will be restricted and the style of communica-

tion is formalized. In addition, employees address each other formally.65 In many cases, organi-

zations will change their (office) locations because of the increasing headcount. The criteria for

the new locations differ from the location criteria in the start-up phase. Before the growth phase,

it was important to be located in a start-up area to enhance the chances of a friendly environ-

ment, but in the growth phase the size of the new office and its adequacy are more important

factors. Whereas transparency and closeness to the founders were important in the start-up

phase, experienced managers place emphasis on separate office space, which offers privacy and

signal hierarchical as well as bureaucratic structures within the organization. Managers explain

the new office and design criteria by signaling the function of them. New customers expect such

bureaucratic structures and offices and “old” customers perceive directly the advancement of the

start-up organization to a professional organization.

A similar development can be observed in the BoD’s role. In the start-up phase, the

BoD’s role was to support and consult the organization as well as to actively advance it. Now,

the monitoring and critical counterpart role becomes more important. VCs have supported the

development and the replacement of the top management. Accordingly, they expect that the top

management team will act more independently. The VCs and non-executive board members

shift their attention onto the critical counterpart role and challenge the activities of the managers

and the routines within the organization. They will be the institutionalized “doubting Thomases”

(Suchman, 1995) that try to avoid the organization losing its moral legitimacy status because of

missing a change in the audience’s norms, values or beliefs due to organizational routines.

We had a critical period one year ago. Our cash burn rate was okay and we acquired enough new customers but our turnover declined all the time. We were doing all the things we did before but turnover declined. After an in-tensive analysis of our KPIs, we realized that we were not able to keep our customers. New customers bought our product just once and not on a regu-lar basis. We started an online survey to investigate the reasons for our bad

65 In Germany, the change from being on a first-name basis to being on a family-name basis is a clear indicator of a

changing culture.


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re-buyer ratio. The result was that our new customers were not satisfied with our customer service. [CEO, organization 4]

In addition to the VC’s direct influence on the BoD’s role, the difference between the in-

ternal perspectives of the managers and the external perspectives of the non-executive board

members and VCs will be reduced. At the beginning, inexperienced managers were supported

by an external market perspective through the non-executive members and VC. Moreover, they

tried to relativize the overoptimistic targets of the founders. For example, if the founders sug-

gested internationalizing the organization after a few months, the experienced BoD members

would recommend being established in the domestic market first, before moving overseas.

After few month of operation, we [the founders] had the plan to expand our start-up – we wanted to enter other European markets such as Italy or Spain. We suggested that plan to our board…They laughed and finally said: You won’t get a cent from us for entering foreign markets until you have demonstrated the success of your idea in our domestic market. [CTO, or-ganization 18]

Furthermore, in the start-up phase the culture of the board meetings was based on active

discussion because of a “pedagogical function” of the board: the founders should be educated

by the external board members to understand the audience and become a legitimate member of

it. Over time, the inexperienced founders gain experience and/or are replaced by more experi-

enced managers. Because of this personal development, the external BoD members are now

able to reduce their educational function in favor of other tasks. They can shift their attention to,

for example, ensuring that the organization recognizes every change in the audience’s legitima-

cy criteria. The shifting focus will be accompanied by a changing composition of the board.

Prestigious managers will replace the industry and technology experts.

Young growing organizations need more resources to finance their expansions. To ac-

quire resources, some organizations go public. Organizations that take this step will face com-

pletely new challenges because the range of the possible audience enlarges dramatically.

Whereas local requirements and expectations had to be fulfilled, a public organization has to

fulfill international capital market standards. Aside from international financial reporting stand-

ards, the revenue and efficiency criteria of international capital markets are tighter than local re-

quirements, which in turn results in higher requirements for granting legitimacy. Moreover, the


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embeddedness in relevant networks will be reduced, which influences the organization’s chanc-

es of manipulating the audience. In preparation for going public, organizations can greatly bene-

fit from experienced managers who know the capital market criteria and expectations. However,

some founders prepare themselves for going public by joining several analyst conferences to get

in touch with the new audience and learn more about its beliefs, values and norms.

In addition to the abovementioned systematic development, several events signal an in-

sufficient legitimacy status to organization and cause reactions. I found that some organizations

had operative breakdowns because of low customer loyalty. Those organizations were able to

convince members of the audience to enter into an exchange relationship just once but not sev-

eral times. The abandonment of the exchange relationship was caused by a too low customer

orientation at the product design, inefficient internal work structures that resulted in production

problems or a lacking customer service.

Overall, my results show that most organizations’ activities can be subsumed under con-

formity (see Table D-3); only at the beginning of organizations’ lives and at points of major

strategic changes did I observe behavior other than conformity. At the beginning of the new or-

ganization’s life, entrepreneurs do not try to gain legitimacy by using the strategy of conformity;

rather they use manipulation and selection. Those strategies can be interpreted as a signal of the

creativeness that is expected from an entrepreneur and a new organization. In the growth phase,

gaining legitimacy dominates organizational activities. However, in the ongoing growth phase,

maintaining activities will accompany gaining activities and at the end of the growth phase,

maintaining activities dominate organizational activities.


119

Table D-3: Organizational activities for gaining and maintaining legitimacy


120

Table D-3: Organizational activities for gaining and maintaining legitimacy (continued)

These results indicate that new organizations need only to strive for legitimacy if they

want to start a relationship with their audiences (‘organization emerge’), or if they change their

main audience (‘organization growth’ by acquiring a new type of customers). My final observed

organizational activities aim at gaining and maintaining cognitive legitimacy because of the

growing age of the organizations, the building of routines within the organization and the longer

dialog between the audience and the organization. All three of these aspects lead to a higher sta-

bility and institutionalization of the organization and, lastly, to a taken-for-grantedness.

The focus of my study is the transition of organizations from start-up to growth organi-

zations. I found that transitioning organizations face the challenge of gaining and maintaining

legitimacy simultaneously. If organizations are not able to gain more legitimacy, which is re-

quired for growth, they will also lose their already gained legitimacy because the reasons for le-

gitimacy granting are linked to growth. Consequently, I observed the suggested legitimacy-type


121

sequence of Suchman, who assumed that pragmatic legitimacy is gained first, followed by mor-

al legitimacy and cognitive legitimacy. However, it is important to note that I found that no type

of legitimacy could completely replace another type. These results might explain why many

young organizations fail after gaining initial legitimacy: Young organizations might focus on

only one type of legitimacy and do not try to gain the other types that are necessary to survive in

the long run. Moreover, young organizations can neglect maintaining the initial type of legiti-

macy and just focus on gaining another type of legitimacy.

I included substantive actions in my study. Although I applied the same criteria to iden-

tify this type of action, I was not able to separate the organizational activities precisely in sub-

stantive and symbolic actions because young organizations develop over time and actions that

had been symbolic at the beginning became substantive. Consequently, I included substantive

and symbolic actions, but did not separate those actions for analytical purposes.

D.5 Discussion My study tried to answer the question of what successful growing organizations do to

grow from a strategic and legitimacy perspective because so many organizations are neither able

to grow nor to survive in the long run. I understood the failure of organizations as the abandon-

ment of society’s legitimacy for them. To investigate the activities of successful growing organ-

izations, I applied the approach of Suchman (1995). My results, which are based on a sample of

68 interviews and observations, show that nascent organizations gain initial legitimacy primari-

ly through the personality and personal characteristics of the founder or founding team. Owing

to the high dependence on the founders as individuals, this type of legitimacy has low institu-

tionalization. In my sample, all of the organizations received venture capital. The exchange rela-

tionship with the external financiers supported the new organizations with initial pragmatic le-

gitimacy and, consequently, with resources such as capital or employees. As a reason of the ex-

change relationship between the new organizations and the VCs, the young organizations’ strat-

egies were to grow because corporate size is a main driver for corporate value. To reach growth


122

targets, organizations perform actions that support the gain of new types of legitimacy and that

support the maintenance of already gained legitimacy – mostly, those activities can be classified

as conforming activities. It is worth noting that those activities are not consciously performed to

gain or maintain legitimacy. In some cases, they are unconsciously performed because of the in-

teraction within the audience and implicit ongoing process of social construction and influence.

If organizations are able to gain legitimacy from their audience to grow, they will face a new

audience. In this status, the legitimacy that was granted from the prior audience is not sufficient

for survival because the legitimacy of the new audience is necessary for survival. Maintaining

only the legitimacy of the prior audience (VC and first customers) is no alternative because the

legitimacy of this audience is based on the planned growth of the organizations. Consequently,

young organizations have to gain legitimacy, which they have to maintain all the time.

My results contribute to prior research because I applied Suchman’s approach of legiti-

macy to the field of young organizations to answer the question of how young organizations

manage legitimacy to grow. Suchman’s approach enabled me to analyze the organizations’ be-

havior in more detail than just using legitimacy as a dichotomous variable (e.g., Aldrich, 1995).

Therefore, my study does not only contribute field of young organizations but also to the emerg-

ing understanding (Golant and Sillince, 2007; M. A. Zimmerman and Zeitz, 2002) of legitimacy

as non-dichotomous variable. I was able to find preliminary evidence for Suchman’s suggested

sequence of legitimacy types (pragmatic, moral and cognitive). Additionally, the separation of

organizational activities into gaining and maintaining legitimacy offered me the opportunity to

observe that both activities are necessary and have to be performed simultaneously. Conse-

quently, my results show two reasons for the failure of young organizations. First, they are not

able to gain sufficient legitimacy and, second, they are not able to maintain sufficient legitima-

cy. Moreover, I shed new light on the findings from Rutherford and Buller (2007) because I did

not find a legitimacy threshold, rather a continuous development of various activities that led to

different types of legitimacy. Furthermore, I complement the results of Zimmerman and Zeitz

(2002), Packalen (2007) and Zott and Huy (2007) because I neither treat legitimacy as a dichot-

omous variable nor limit my study to symbolic actions – and included both substantive and


123

symbolic actions. However, I was not able to separate symbolic and substantive actions because

organizations develop and what was symbolic before becomes substantive over time. Finally, I

contribute to the current research of the BoD’s role and importance for start-ups and young or-

ganizations (e.g., R. S. Rao et al., 2008; Westphal and Graebner, 2010) because I was able to

observe that the purpose and the composition of the start-up change dramatically between the

start-up and growth phases.

Despite these contributions, my study is subject to some limitations. First, my interviews

started, on average, four years after organizations had been founded, which might cause some

bias. I tried to reduce this bias by basing my interviews not only on the founders as interviewees

but also on some external constituents of the organization. Moreover, the use of a homogeneous

sample of young organizations supports some entrepreneurial aspects but might hide others. I

tried to control for factors that might have a strong influence on organizations such as educa-

tional background or the prior work experience of the founders. The majority of my founder in-

terviewees hold a Master’s degree in business administration from the same university. Conse-

quently, they are subject to the same norms, values, beliefs and knowledge basis. Second, all my

sample organizations received venture capital. This kind of institutional investor has a strong in-

fluence on organizations’ behavior and might reduce the insights from my study for non-venture

capital-backed organizations. Third, my sample consists entirely of German organizations;

therefore, cultural differences might occur in other settings. Fourth, I used interviews to collect

my data and thereby the limitations of this method have to be acknowledged (Marginson, 2004;

Miles and Huberman, 1994).

Future research could investigate both successful growing organizations and organiza-

tions that fail after the start-up phase. The results would offer more insights into the importance

of each performed activity of the organizations. Of course, this research design is challenging

but the research area would greatly benefit from the expected insights. Moreover, a research de-

sign that encompasses growing and non-growing organizations would enable the investigation

of whether organizations manage legitimacy consciously in every case or whether they manage

legitimacy unconsciously in some cases. If the results of such a study suggested that not every


124

legitimacy-managing action is performed consciously, it would be interesting to study the un-

derlying logics of the unconscious behavior and who or what shapes these logics. In particular,

the role of institutional investors such as VCs would be worth studying to create a better under-

standing of external pressure on the unconscious taken-for-granted structures in the area of

young emerging organizations. In addition, because I conducted interviews and observed the

organizations, future research could validate my findings using survey-based methods. In par-

ticular, the sequence of the different types of legitimacy would be worth investigating with

quantitative methods. Accordingly, a longitudinal study that accompanies an organization from

founding to becoming an established taken-for-granted organization could be an option for fu-

ture research. Moreover, the role of the BoD in start-ups and in growing organizations is still an

under-researched area. My study showed how important the role of the BoD can be and how

this role can change over time. Further research could try to investigate the actions, interactions

and outcomes within the boardroom over time. Finally, I applied new institutional theory to in-

vestigate the growing organizations. Although efficiency is recognized as a socially constructed

desirable outcome, new institutional theory underestimates the importance of efficiency within

organizations. Therefore, future research could try to investigate the “hurdle rates of growth”

with a higher emphasis on efficiency.

Part E Concluding Remarks

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E Concluding Remarks

E.1 General conclusions The overall target of this dissertation was to investigate the development from nascent

firms to start-ups, to young growing firms and to business organizations. Because formalization

and routines are interpreted as typical characteristics of a business organization, the focus of this

dissertation was on MCS since they are a form of formalization and routines. In general, the re-

sults show that planning and formalizing activities advance the development of young and crea-

tive firms. Although the entrepreneurial myth of formalization predicts a negative influence of

formalization, this dissertation demonstrates the opposite, namely that introducing MCS sup-

ports firms with resources and enables founders to realize their ideas. Furthermore, to set the

stage for constant creativeness – although the firm will still become more complex – MCS are

introduced to unburden creative individuals from routine tasks. Finally, the introduction of MCS

is necessary acquire resources and to keep the ideas and creativeness of the founders within the

organization even if the founders resign. Consequently, formalization seems to have a negative

influence on creative young firms and individuals only at the first glance – at the second glance,

MCS will be recognized as requirements for creativity within business organizations.

Furthermore, the introduction of MCS is a consequence of new organizations’ responsi-

bilities and accountabilities for consuming the resources of society. Accordingly, the introduc-

tion of MCS illustrates the organizations’ maturation to a (full) member of society because it re-

flects society’s requirements for granting legitimacy to an organization. This organizational

genesis shows the socialization process of becoming a business organization and places empha-

sis on the importance of conforming to societal norms, values and beliefs even if they are not

always technically rational.

In general, this dissertation generates a better understanding of the emergence of MCS.

The use of a strategic and strategic institutional perspective enables us to decode the complex

phenomenon of organizational development. In particular, the combination of the two perspec-

tives illustrates that even a creative genesis such as founding a firm and developing a new prod-

uct is only possible by conforming to societal expectations. The challenges of young firms are


126

dominated by managing the permanently changing dialog between creativeness and bureaucra-

cy. In other words, the organizational development from a nascent organization to a business

organization is a permanent interplay between agency and structure.

E.1.1 Research objective one Identifying the dominating understanding of MCS in the educational field because of the

heterogeneity and the new dynamic in MCS concepts motivated the first research objective.

MCS understandings in research and education are heterogeneous in terms of definitions, con-

cepts and theoretical perspectives (Berry et al., 2009). Moreover, these inconsistent concepts are

likely to persist because they are used to educate future researchers and practitioners (Zeff,

2008). To shed some light on the differences, this section focused on the educational literature

that influences young academics and practitioners and builds the basis of their MCS understand-

ing. The essential content of the top-ranked textbooks, i.e., existing understandings, definitions

and types of MCS, were discussed.

The point of departure for my database was the identification of the most commonly

used textbooks on MCS, since they are likely to be most influential for students, young practi-

tioners and researchers. The three most important textbooks on MCS identified were those by

Merchant and Van der Stede (2003), Anthony and Govindarajan (2007) and Simons (2000).

While a comparison showed both similarities and differences, their most significant difference

was probably the range of activities covered by MCS. Anthony and Govindarajan (2007) explic-

itly excluded informal controls, Simons (2000) included formalized informal controls and Mer-

chant and Van der Stede (2003) included all informal controls. By taking the exclusion or inte-

gration of informal controls into account when analyzing the variety of MCS understandings in

the (academic) field, I found that this dimension of the MCS concept is a main driver for the

MCS understandings’ variety in the field.

E.1.2 Research objective two The second research objective was to deepen the insights into the reasons for MCS

emergence in start-ups. The results confirmed my initial proposition, based on RDT, that start-

ups introduce different MCS to gain different kinds of resources from different parties. Finan-


127

cial planning systems are introduced to acquire first external financing for the young start-up.

Human resource planning aims to acquire first employees that are compatible with the culture of

the firm. In the next step of MCS introduction, start-ups introduce human resource planning sys-

tems to acquire “advanced” employees and future capital by introducing all necessary control

mechanisms for the founder’s exit. Another reason for the introduction of financial evaluation

systems is the acquisition of legitimacy from the field in which the start-up acts. Product devel-

opment management and sales/marketing systems are introduced to acquire new (early or late

majority) customers and to transfer the founder’s technology and market know-how into the

start-up. In addition, a change from a growth to a profitability strategy is the reason for intro-

ducing MCS in product development management. Moreover, I found that introduced MCS

have reciprocal influences on each other and on informal controls. These reciprocal influences

seem to change depending on the degree of introduced formal systems. Whereas informal con-

trols will be replaced by MCS at the beginning of MCS emergence, informal controls will later

complement and finally (when formal controls dominate) promote the introduction of MCS. An

additional result of my study is that MCS are introduced with some kind of future orientation,

i.e., without immediate relevance. This result is surprising because start-ups are extremely fi-

nancially constrained and it was not obvious that they would invest in activities that are not

caused by an immediate need of the firm.

My results concerning the sequence of MCS introduction are in line with prior research

(e.g., Davila and Foster, 2005, 2007; Davila et al., 2009). I found that financial and human re-

source planning are the two categories of MCS that are first introduced followed by product de-

velopment and sales/marketing management. Concerning the reasons for MCS introduction, my

findings are partially contrary to prior research (cf. Davila et al., 2009) because I found that the

main reason for MCS introduction is the acquisition of vital and limited resources, which vary

between MCS categories. My results show that the vital resources range from capital, employ-

ees, technology or market know-how to information and legitimacy. Whereas Davila et al.

(2009) distinguished their reasons for MCS adoption by using internal and external perspec-

tives, I found a distinction by resources more useful. Contrary to Davila et al. (2009), I investi-


128

gated the reasons for introducing the formal control structures of several MCS categories and

intentionally did not focus my investigation of MCS introduction reasons on a single category

of MCS. This approach allowed me to consider the reciprocal influences of the different MCS

in different categories as well as the influence on informal controls. My results show that the

reasons for MCS introduction vary between the different categories because the introduction of

each MCS category is a result of the resources that have to be acquired. The acquisition of capi-

tal (for founding the start-up, financing future growth and for the future exit of the founders)

causes the introduction of financial planning, financial evaluation and human resource evalua-

tion. The acquisition of first and advanced employees results in the introduction of human re-

source planning and evaluation. Therefore, the introduction of MCS does not only help nascent

firms but also young growing start-ups cope with the challenge of acquiring (advanced) em-

ployees (see also Hornsby and Kuratko, 1990; Rutherford and Buller, 2007). To acquire cus-

tomers and transfer know-how into the firm, start-ups introduce product development and

sales/marketing management systems. Financial evaluation systems will also be introduced to

acquire legitimacy from the institutional field of the start-ups.

Moreover, I found that start-ups introduce MCS with some degree of future orientation,

i.e., without the immediate need of introduction but rather (possible) future demand. This result

extents the first insights of Davila et al. (2009), who found that “managers […] implemented

systems because they perceived an emerging need” (p. 338) as reason for introducing MCS. My

findings indicate that managers do not require a perceived need to introduce MCS. The experi-

ence of a possible future demand within the firm is sufficient to cause advance MCS introduc-

tion – irrespective of whether the experience originates from the founder, non-executive board

members or VCs. This result sheds new light on prior research because in most studies on the

emergence of MCS (Davila, 2005; Davila and Foster, 2005, 2007; Davila et al., 2009), the con-

struct of time-to-adoption was used to measure the introduction of MCS. However, if firms in-

troduce MCS with some degree of future orientation it might be problematic to use the time-to-

adoption construct because it is not possible to distinguish between MCS that are introduced

with an immediate need and those introduced in advance but without immediate relevance.


129

Therefore, it is necessary to adapt the understanding and measurement of MCS introduction to

include the degree of future orientation and the relevance of introduced MCS.

Furthermore, I found that the homogeneity of products and low product complexity will

be leveraged to facilitate MCS introduction. This result contradicts Moores and Yuen’s (2001)

argument that informal controls will be used in the case of low product complexity. My data

suggest that experienced actors of the start-up see an advantage in introducing complex organi-

zational structures such as MCS in a situation where complexity is low.

Additionally, I found that the introduction of MCS exerts reciprocal influences on other

(established) MCS as well as on informal controls. Moreover, my results indicate that the recip-

rocal influences of MCS on informal controls change when the degree of a firm’s formality

changes. The first MCS replace informal controls, more MCS will be complemented by infor-

mal controls and when formal controls dominate, informal controls will promote MCS. These

findings offer new insights into the interdependency of different forms of MCS. Davila’s (2005)

findings indicated that personnel controls supplement each other, and action and result controls

seem to be independent of personnel controls. This relationship can be accompanied by mutual

influences of informal controls that have not been taken into account so far and that will change

over the development of the control structure of the firm.

I applied RDT (Pfeffer and Salancik, 1978) to investigate the introduction of MCS and

extended this theoretical perspective on some points. First, I used RDT to explain the intraor-

ganizational reasons that cause the introduction of MCS, which is a relatively new level of anal-

ysis for RDT (Medcof, 2001; Ulrich and Barney, 1984). Second, my results suggest that the ac-

quisition of resources will have time effects, i.e., firms behave and are structured in the present

as they are, not only to acquire resources at the moment but also to acquire resources in the fu-

ture. This time aspect within RDT is new because prior research focused on static power rela-

tions and external influences on the firm.

E.1.3 Research objective three The third research objective was to answer the question of what successful growing or-

ganizations do to grow from a strategic institutional perspective because so many organizations


130

are neither able to grow nor to survive in the long run. I understood the failure of organizations

as the abandonment of society’s legitimacy for an organization. To investigate the activities of

successful growing organizations, I applied the approach of Suchman (1995). My results show

that nascent organizations gain initial legitimacy primarily through the personality and personal

characteristics of the founder or founding team. Owing to the high dependence on the founders

as individuals, this type of legitimacy has a low degree of institutionalization. In addition to the

important personality of the founder, all my sample organizations had a second important con-

stituent: the organizations received venture capital. The exchange relationship with external fi-

nanciers supported the new organizations with initial pragmatic legitimacy and, consequently,

with resources such as capital or employees. As a reason for the exchange relationship between

the new organizations and VCs, the young organizations’ strategies were to grow because cor-

porate size is a main driver of corporate value. To reach the growth targets, organizations per-

form actions that support the gain of new types of legitimacy and that support maintaining

gained legitimacy – mostly, those activities can be classified as conforming activities. It is

worth noting that those activities are not consciously performed to gain or maintain legitimacy.

In some cases, those activities are unconsciously performed because of the interaction within

the audience and the implicit ongoing process of social construction and influence.

If organizations are able to gain legitimacy from their audiences to grow, they will

face a new audience. In this status, the legitimacy that was granted from the prior audience is

not sufficient for survival because the legitimacy of the new audience is necessary for survival.

Maintaining only the legitimacy of the prior audience (VC and first customers) is no alternative

because the legitimacy of this audience is based on the planned growth of the organizations.

Consequently, young organizations have to gain legitimacy, which they have to maintain all the

time.

My results contribute to prior research because I applied Suchman’s approach of legiti-

macy to the field of young organizations to answer the question of how young organizations

manage legitimacy to grow. Suchman’s approach enabled me to analyze the organizations’ be-

havior in more detail than just using legitimacy as a dichotomous variable (e.g., Aldrich, 1995).


131

I was able to find preliminary evidence for Suchman’s suggested sequence of legitimacy types

(pragmatic, moral and cognitive). Additionally, the separation of organizational activities into

gaining and maintaining legitimacy offered me the opportunity to observe that both activities

are necessary and have to be performed simultaneously. Consequently, my results show two

reasons for young organizations’ success. First, they have to be able to gain sufficient legitima-

cy and, second, they have to be able to maintain sufficient legitimacy. Moreover, I shed new

light onto the findings from Rutherford and Buller (2007) because I did not find a legitimacy

threshold, rather a continuous development of various activities that led to different types of le-

gitimacy. Furthermore, I complemented the results of Zimmerman and Zeitz (2002), Packalen

(2007) and Zott and Huy (2007) because I neither treated legitimacy as a dichotomous variable

nor limited my study to symbolic actions – and included both substantive and symbolic actions.

However, I was not explicitly able to separate symbolic and substantive actions because organi-

zations develop and what was symbolic before becomes substantive over time. Finally, I con-

tribute to the current research on the BoD’s role and importance for start-ups and young organi-

zations (e.g., R. S. Rao et al., 2008; Westphal and Graebner, 2010) because I was able to ob-

serve that the purpose and composition of the start-up change dramatically between the start-up

and growth phases.

E.2 General limitations A number of limitations must be recognized. First, a non-random sample of 20 firms

was used to conduct 74 interviews implying that my results might not be representative. Addi-

tionally, many firms of my sample can be described as new economy firms (see e.g., Granlund

and Taipaleenmäki, 2005), which might reduce the insights of my study for other industries.

Moreover, I used a relatively homogeneous sample because it consists only of German start-

ups; therefore, cultural differences might occur in other settings. In addition, the homogeneous

sample of young firms might support entrepreneurial aspects but might hide others. I controlled

for factors that might influence the firms such as educational backgrounds or the prior work ex-


132

perience of the founders. The majority of my founder interviewees hold a Master’s degree in

business administration from the same university. Consequently, they are subject to the same

norms, values, beliefs and knowledge basis. Second, my interviews started, on average, four

years after founding the organizations, which might have influenced the participants’ (ex post)

rationalization. I tried to reduce this bias by basing my interviews not only on the founders as

interviewees but also on some external constituents of the firm. Third, I primarily used inter-

views to collect my main data; therefore, the limitations of this method have to be acknowl-

edged (see e.g., Cooper and Morgan, 2008; Horton et al., 2004; Marginson, 2004; M. Smith,

2004). Fourth, because I applied RDT in Part C I made the implicit assumption that firms can

acquire resources by actively influencing their environments. This perspective underestimates

the importance of the passive conformity of firms to their environments to acquire resources

(Donaldson, 1995; Tornikoski and Newbert, 2007; Zott and Huy, 2007). Fifth, I used new insti-

tutional theory to investigate the legitimacy-managing behavior of young growing firms in Part

D. Consequently, efficiency was recognized as a socially constructed desirable outcome but new

institutional theory underestimates the importance of efficiency for the design and behavior of

organizations.

E.3 Future Research Concerning the first research objective, I suggest that further research could try to classi-

fy current MCS research (and the broadness of the concept) into the three top-ranked textbooks

to overcome current inconsistencies. Moreover, future studies could try to analyze and compare

existing frameworks of MCS because they are conceptual structures for categorizing and sys-

tematizing complex information. In addition, it could be worth studying the background of and

relationship among the main authors of the MCS literature. As pointed out in my excursus, HBS

plays an important role in the most commonly used textbooks. However, many other relation-

ships between various authors could exist, which might shed more light on the variances in aca-

demic MCS understandings. Finally, future conceptual research could evaluate the appropriate-


133

ness of the different MCS understandings for empirical research because it might be that not

every MCS understanding is suited to empirical investigations.

Concerning the second research objective, my results suggest opportunities for further

research. The future orientation of MCS introduction gives rise to prior research concerning the

time aspect of MCS introduction. Aside from investigating the mere sequence of MCS introduc-

tion, future research could use my results to develop a research design that takes the future ori-

entation and relevance of introduced MCS into account. Furthermore, I found reciprocal influ-

ences among the different categories of MCS and between MCS and informal controls. This

reciprocity might have significant influences on the reasons for introducing MCS, because it

might be the case that certain MCS will only be introduced if other MCS are introduced. Aside

from the introduction of MCS, a possible reciprocity of MCS could also be an important re-

search area for established firms with MCS already in place. If firms, for example, would like to

change their organizational control systems, they have to be aware of balancing MCS because

MCS are packages (Malmi and Brown, 2008), which in turn is a reason for the mutual recipro-

cal influences.

Moreover, I found initial evidence that several actors are involved in the introduction of

MCS. Aside from TMT members, VCs and non-executive board members seem to play an im-

portant role in the process of designing and implementing initial MCS. However, little is known

about their specific influences on MCS emergence.

This research opportunity is closely connected to another topic: the emergence of corpo-

rate governance. Start-ups are dominated and primarily owned by founders; therefore, no sepa-

ration between ownership and control exists. Owing to the investment of VCs or other forms of

external financing, the corporate governance system of the firm has to be changed or at least in-

troduced because there is a separation between ownership and control for the first time. In times

of financial crisis and fraud scandals as well as the knowledge that established control structures

will influence future control structures, it is surprising to realize that our knowledge about the

emergence of corporate governance is limited.


134

Finally, further research could try to accompany the introduction of MCS in the field in

a real-time setting to avoid any ex post rationalization effects. In addition to the focus on MCS

over time, future research could investigate the changing roles of the main organizational mem-

bers. At the inception of the firm, the role of the founder is clearly determined. However, the

role of the founder and the managerial requirements of the start-ups’ top managers change.

Whereas a creative actor who prefers operative actions was required at the beginning of the

start-up, an experienced manager with strategic preferences seems to be necessary to lead the

young growing organization. Many of my interviewed founders realized and accepted these

changing managerial requirements but did not want to change themselves or were not able to

change. Consequently, many founders preferred to retreat from the young firm’s CEO position

or top management. Because it can be dangerous for the firm if the founder retires too early or

late, it would be interesting to investigate the antecedents for an optimal change from founder

managers to experienced business managers.

In addition to the changing role of the top management, the VC also plays an important

role in the emergence of MCS that is still an under-researched area. For example, how VCs use

and connect their networks to the founder’s network could be interesting to study. My inter-

viewees placed great emphasis on the contacts of the VCs – in many cases, the network of the

chosen VC was its unique selling point. Consequently, our knowledge about the networks of

VCs and between VCs is still too scarce.

The importance of the BoD and, especially, the (external) non-executive board mem-

bers’ value was identified in this dissertation. Many central questions such as what products will

the firm produce, which kinds of customers should be addressed or which performance

measures should be used for managing the firm will be discussed and answered in these board

meetings. Accordingly, the reality of the firm will be planned and constructed at the board level.

However, the real-life interaction of board members at board meetings was beyond the scope of

this dissertation. Further research could try to investigate the first social constructions of organi-

zational reality in BoD meetings.


135

Concerning the third research objective, future research could try to investigate both

successful growing organizations and organizations that fail after the start-up phase. The results

would gain more insights into the importance of each performed activity of the organizations.

Of course, this research design is challenging but our knowledge in this area would greatly ben-

efit from the expected insights. Moreover, a research design that encompasses growing and non-

growing organizations would enable the investigation of whether organizations manage legiti-

macy consciously in every case or whether they manage legitimacy unconsciously in some cas-

es. If the results of such a study suggested that not every legitimacy-managing action is per-

formed consciously, it would be interesting to study the underlying logics of the unconscious

behavior and who or what shapes these logics. In particular, the role of institutional investors

such as VCs would be worth studying to create a better understanding of external pressure on

the unconscious taken-for-granted structures in the area of young emerging organizations.

Finally, I applied new institutional theory to investigate the growing organizations. Alt-

hough efficiency is recognized as a socially constructed desirable outcome, new institutional

theory tends to underestimate the importance of efficiency within organizations. Therefore, fu-

ture research could try to investigate the “hurdle rates of growth” and place a higher emphasis

on efficiency.

To conclude, the area of start-ups and the introduction of MCS offer a broad range of re-

search opportunities. I hope that future researchers accept the challenge to research the tension

between creativity and a Weberian bureaucracy.

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Appendices

154

Appendices Appendix A: Rationales given for the selection of MCS textbooks:

(a) Merchant and Van der Stede (2003)

“It is very comprehensive and has great cases.”

“Comprehensive coverage and real-world contexts.”

“Comprehensive coverage, up-to-date, well written.”

“[It] is broad and international.”

“I like it because of the depth of cases.”

“I selected the Merchant & Van der Stede book because it covered control systems more broadly than the other texts. This text also had more well-written cases. […] Also, other texts really seem more cost accounting-related and they seem more focused on calculat-ing costs, etc. as the main teaching point.”

“A well-written and well-received book on managerial control systems. This book has a behavior orientation using the framework of actions controls, results controls and peo-ple controls. This book includes cases.”

“Merchant and Van der Stede because it is up to date, not too expensive and has a rea-sonable set of cases.”

“No 2 [after Anthony and Govindarajan 2007], brought in the newer nuances and con-cepts and a bit of easier approach for the students.”

“Merchant gives an appealing framework that is both systematic and exhaustive regard-ing management controls. The book contains many real-life cases. It can be considered the standard work on modern management control systems.”

“What I like about this book is that it has a broader definition of MCS. As the authors explain, they recognize that management controls can sometimes serve other purposes than performance measurement, such as compliance to organizational policies and laws. To me this is much more realistic, because in practice, people can’t always sepa-rate controls between management controls and internal control.”

“My first choice would be Merchant and Van der Stede […] (strong emphasis on moti-vation and reward systems, but incomplete, especially on operations -- good for execu-tive teaching).”

“3. Merchant–Van der Stede. I like this book for its breadth but disagree with its ap-proach.”

“First, in my opinion, Merchant et al. is written in a modern context. Secondly, Mer-chant’s view of MCS systems - everything a manager does to ensure that strategies and plans are carried out, correspond to my own. (perhaps, I should say that I have been in-fluenced by Merchant).”

“Merchant & Van der Stede provide a broad overview of controls, but do not include all accounting supporting decision making into controls as some scholars do (e.g., Chen-hall 2003).”

Appendices

155

“I liked it because he had a view of MCS that coincided with mine.”

(b) Anthony and Govindarajan (2007)

“[I] like the large number, wide variety and generally high quality of the cases in the Anthony & Govindarajan book.”

“While I was teaching the MCS course from the mid-70s to the mid-90s I used Robert Anthony’s text ... the co-authors kept changing over the years, and I never found any re-ally compelling competitors in the field ... Bob Anthony and the folks at HBS really de-fined the discipline, wrote about it interestingly and came up with the cases, both new and classic […].”

“It has reasonable text and good cases.”

“The first one being the earliest one to appear in the market and satisfied many of the things I was looking for. It has good cases, a pretty good mix of theory and quantitative approach.”

“Anthony is the godfather of management control. This book still is the basis of any more in-depth study of management control systems.”

“This book provides a more in-depth coverage of management control systems and can be a book for Master’s level courses.”

“[It] is the ‘original’ and keeps the subject area somewhat ‘anchored’.”

“This book is an evolution of Anthony’s seminal work from 1965. While it is in my opin-ion slightly outdated, it is still very popular. What is nice about this book is its structure, which makes it a good textbook for undergrad courses. My main reservation, however, is its narrow definition of MCS, which hasn’t evolved since the 1960s. It ignores com-pliance-related controls and it separates management controls from strategic and oper-ational controls. While this distinction was useful as a starting point, it is difficult to use in practice.”

“1. It is comprehensive regarding the controllership function. 2. The flow of the control-lership material is logical and easy to follow by graduate students. 3. Many of the cases in the book are excellent materials for learning. They are Harvard Business School cas-es. However, some of the cases in the book are too complicated and too long. 4. The book provides many relevant examples from industry to illustrate key points. 5. The case analyses the publisher provides to adopters are very good.”

“[…] it has good aspects but seems a bit outdated.”

“Anthony’s book is just augmented with strategy considerations.”

“Nice context and cases.”

“I have great confidence in the experience, intelligence and wisdom of (the late) Bob Anthony [...].”

“I like the topic coverage.”

“Anthony has been around for a long time and is getting a little tired even though he has used a joint author.”

Appendices

156

(c) Simons (2000)

“I believe that accounting typically covers operational, diagnostic controls and that students should consider the broader spectrum. I think Simons introduces that broader perspective. Accounting takes a narrow focus. Management tends to ignore control thinking that accounting is going to cover it. There is a need to look at the broad spec-trum of organizational control.”

“The focus on the four ‘levers of control’ is useful to me...though students have not found it as compelling.”

“Great model. Frames the issues very well. Very good cases.”

“Modern techniques, levers of control discussion, well-written, real-world contexts.”

“The Simons text is the one I use in our Management Control Course. While it is not perfect it does have a very good coverage of the major MCS issues. It is a well-organized book and really helps students understand MCS as a holistic area of study (not just something which can be understood from an accounting point of view).”

“Simons’ book is explicitly built around strategy implementation.”

“Simons combines strategy formation with strategy implementation and thus provides a contemporary view on management control systems that goes one step further than Merchant by focusing on innovation.”

“I hesitated before putting this book on my list, because it has many flaws as a textbook. For example, it does not have a user-friendly structure for use in a classroom and it presents well-known concepts such as cost variances in a new way, which is just confus-ing. Also, the four levels could do with more precise definitions, because the levers of control framework can be sometimes confusing. However, it does have interesting ideas on MCS. The interactive use of controls is one of them.”

“This is the book that corresponds most closely with my philosophy.”

“Simons Levers of Control is simple enough and easy to explain to managerial audi-ence. It has also generated quite a lot research.”

“Relevant.”

(d) Other textbooks

“Because I rarely use textbooks, especially management control. If the latter I will refer to Macintosh’s small book because it is insightful and refreshingly non-mainstream; then Emmanuel, Otley & [Merchant] particularly because the cases are good.”

“Many cases in this book [Allen et al. 2004] offer a very practical view on management control systems. I thought it is pretty good supplemental materials. This book [Horngren et al. 2008a] integrates the concept of management control systems into each chapter of the book.”

“Macintosh is strong conceptually and stimulating.”

“[Merchant and Van der Stede 2003, Hopper et al. 2007, Emmanuel et al. 1990:] Com-prehensive coverage, up-to-date, well written.”

“I like [Emmanuel et al. 1990] because of the broad theoretical treatment of the area.”

Appendices

157

“All of these textbooks [Zimmerman 2008, Atkinson et al. 2007, Maher et al. 2007] em-phasize the importance of linking the firm’s strategy to the decisions that are supported by the managerial accounting system from production decisions to customers to em-ployee performance plans and programs.”

“Only this text [Horngren et al. 2008a] does a good job of covering MCS from an ac-counting prospective.”

“It [Horngren et al. 2008a] is comprehensive, up to date, and has excellent problems.”

“I believe it [Horngren et al. 2008a] does a good comprehensive job, covering many areas of Cost/Management Accounting.”

“I do not exactly teach a course on MCS. I do teach a management accounting course that includes as a minor component on management control issues. For that course, I use a textbook by Horngren, Datar and Foster titled ‘Cost accounting: a managerial emphasis’, which is similar to many other books on the subject.”

“The only book I know is Ron Hilton’s, so I really can’t rank.”

“2. Zimmerman. This is not a straight MCS book but has a control / incentive flavor. I use the three-legged stool idea all the time.”

(e) General comments

“My only comments are that in recent years cost texts have begun to sound too much like management texts, rather than accounting texts. Further, problems and cases fail to capture the full complexity of real-world situations.”

“This is a difficult question to answer since there are many different definitions of man-agement control. Therefore, how a book user defines management control will have a major influence on the rating.”

“Keep in mind that in the US accounting academicians tend to use the term ‘managerial (or management) accounting’ to include what most accounting academicians in Europe call ‘management control’.”

“Other than the Harvard case book on Management Control Systems, I can think of few others. Could it be that the topic is larger than is found in one textbook or one disci-pline? That is my view.”

“MCS are all or nothing.”

“You have set yourself a difficult task. Anglo-Saxon researchers have tended to use management control to indicate a broader approach to control than just management accounting. However, there has never been clear boundaries amongst them (The Man-agement Control Workshop members in the early 1980s debating amongst themselves to find a definition of management control without ever achieving a consensus) - though they managed to work well together after. Systems theory and cybernetics was originally an important source but later work drifted more into philosophy and sociology and saw control as power. Another problem was where to draw boundaries, e.g., between plan-ning, strategy, operations and control - we found it difficult to justify any boundaries but we still tended to keep more to aspects of control and not develop an all embracing con-trol theory that included, say, marketing, operations etc. Sorry - but you may never find a common management control definition amongst Anglo-Saxon scholars - perhaps it is a boundary object albeit a useful one. It produced lots of interesting work - do you need a definition? Is it dangerous?”

Appendices

158

Appendix B: Example of a matrix of Miles and Huberman (1994)

Appendices

159

Appendix C: MCS categories adopted from Davila and Foster (2005, 2007) 66

Financial Planning Operating Budget

Cash Flow Projections

Sales Projections

Business Plan

Profit and Loss

Balance Sheet

Financial Evaluation Capital Investment Approval Procedures

Operating Expenses Approval Procedures

Routine Analysis of Financial Performance against Targets

Product Profitability Analysis

Customer Profitability Analysis

Customer Acquisition Cost Analysis

Key Performance Indicator Analysis

Variance Analysis

Accounting

Management Accounting

Human Resource Plan-ning

Core Values

Mission Statement

Organizational Chart

Codes of Conduct

Written Job Descriptions

Orientation Program for New Employees

Company-wide Newsletter

Career Paths

Human Resource Evalua- Written Performance Objectives for Managers

66 Types in italics are newly emerged types

Appendices

160

tion

Written Performance Evaluations Reports

Linking Compensation to Performance

Individual Incentive Programs

Application Procedure

Strategic Planning

Definition of Strategic (non-financial) Milestones

Customer Development Plan (Plan to Develop Market)

Headcount/Human Capital Development Plan

Product Portfolio Plan (Plan About Future Products)

Investment Budget

Product Development Management

Project Milestones

Product Concept Testing Process

Reports Comparing Actual Progress to Plan

Project Selection Process

Product Portfolio Roadmap

Budget for Development Projects

Project Team Composition Guidelines

Quality Assurance

Sales/Marketing Management

Sales Targets for Salespeople

Market Research Projects

Sales Force Compensation System

Sales Force Hiring and Firing Policies

Reports on Open Sales

Customer Satisfaction Feedback

Sales Process Manual

Sales Force Training Program

Marketing Collaboration Policies

Customer Relationship Management System

Partnership Management Partnership Development Program

Appendices

161

Policy for Partnerships

Partnership Milestones

Partner Monitoring Systems

Appendices

162

Appendix D: Excerpt of the questions of the semi-structured interviews

Q: Which “strategic systems” (such as “strategic milestones," “customer development plan,"

headcount/human capital development plan” etc.) have already been introduced and why?

Q: How can you take advantage of your experience with prior management systems when intro-

ducing new management systems?

Q: Which differences regarding the relevance of the abovementioned management systems to

you, the BoD and the VC exist and why?

Appendices

163

Appendix E: Overview of interviews

Firm Position of Interviewee Date Duration (min.)

1 CEO 14.10.08 54

2 BoD 14.10.08 69

2 CEO 23.10.08 27

2 CTO 23.10.08 49

3 COO 23.10.08 60

8 BoD 27.10.08 57

20 BoD 27.10.08 67

5 CEO 28.10.08 58

6 VC 05.11.08 97

12 CEO 09.11.08 56

15 CEO 10.11.08 67

15 CTO 11.11.08 72

7 CEO 17.11.08 45

11 CEO 19.11.08 59

11 CFO 19.11.08 74

13 CEO 19.11.08 66

12 COO 20.11.08 54 telephone

18 VC 24.11.08 64

3 CEO 26.11.08 58

16 CEO 02.12.08 62

1 CFO 08.12.08 56

6 BoD 08.12.08 63

14 CEO 10.12.08 34

3 VC 18.12.08 45

Appendices

164

19 VC 18.12.08 59

10 CEO 14.01.09 70

7 CFO 15.01.09 66

9 CFO 15.01.09 51

7 BoD 19.01.09 53

16 CFO 19.01.09 68

6 CFO 20.01.09 59

9 CEO 20.01.09 64

17 CEO 20.01.09 49

17 CFO 20.01.09 40

8 CEO 27.01.09 61

14 VC 27.01.09 51

1 VC 29.01.09 62

4 COO 30.01.09 40

6 CEO 30.01.09 26

12 VC 02.02.09 49

10 VC 04.02.09 90

9 VC 06.02.09 47

13 CFO 06.02.09 51

5 VC 11.02.09 67

11 VC 13.02.09 62 telephone

13 BoD 13.02.09 46 telephone

19 CEO 16.02.09 53

19 COO 16.02.09 42

13 VC 06.03.09 54

14 CTO 09.03.09 61

Appendices

165

18 CEO 10.03.09 50

15 BoD 13.03.09 67

8 CTO 17.03.09 56

8 VC 18.03.09 53

20 CTO 18.03.09 93

4 CEO 30.03.09 55 telephone

18 BoD 31.03.09 54

18 CFO 01.04.09 34

14 BoD 07.04.09 50

10 BoD 14.04.09 49

20 CEO 17.04.09 47

14 COO 20.04.09 65

17 VC 21.04.09 58

20 VC 20.05.09 59


16 VC 24.08.09 59

4 BoD 03.09.09 56

5 CFO 07.09.09 73


9 BoD 29.09.09 59

11 BoD 19.11.09 68


7 VC 28.01.10 65

17 BoD 14.03.10 52

Appendices

166

Appendix F: Example of a matrix of Miles and Huberman (1994)

Affirmation – Statutoy Declaration

167

Appendix G: Overview of Interviews

Firm Position of Interviewee Date Duration (min.)

1 CEO 14.10.08 54

3 COO 23.10.08 60

8 BoD 27.10.08 57

20 BoD 27.10.08 67

5 CEO 28.10.08 58

6 VC 05.11.08 97

12 CEO 09.11.08 56

7 CEO 17.11.08 45

11 CEO 19.11.08 59

11 CFO 19.11.08 74

13 CEO 19.11.08 66

12 COO 20.11.08 54 telephone

18 VC 24.11.08 64

3 CEO 26.11.08 58

16 CEO 02.12.08 62

1 CFO 08.12.08 56

6 BoD 08.12.08 63

14 CEO 10.12.08 34

3 VC 18.12.08 45

19 VC 18.12.08 59

10 CEO 14.01.09 70

7 CFO 15.01.09 66

9 CFO 15.01.09 51

7 BoD 19.01.09 53


168

16 CFO 19.01.09 68

6 CFO 20.01.09 59

9 CEO 20.01.09 64

17 CEO 20.01.09 49

17 CFO 20.01.09 40

8 CEO 27.01.09 61

14 VC 27.01.09 51

1 VC 29.01.09 62

4 COO 30.01.09 40

6 CEO 30.01.09 26

12 VC 02.02.09 49

10 VC 04.02.09 90

9 VC 06.02.09 47

13 CFO 06.02.09 51

5 VC 11.02.09 67



19 CEO 16.02.09 53

19 COO 16.02.09 42

13 VC 06.03.09 54

14 CTO 09.03.09 61

18 CEO 10.03.09 50

8 CTO 17.03.09 56

8 VC 18.03.09 53

20 CTO 18.03.09 93

4 CEO 30.03.09 55 telephone


169

18 BoD 31.03.09 54

18 CFO 01.04.09 34

14 BoD 07.04.09 50

10 BoD 14.04.09 49

20 CEO 17.04.09 47

14 COO 20.04.09 65

17 VC 21.04.09 58

20 VC 20.05.09 59


16 VC 24.08.09 59

4 BoD 03.09.09 56

5 CFO 07.09.09 73


9 BoD 29.09.09 59

11 BoD 19.11.09 68


7 VC 28.01.10 65

17 BoD 14.03.10 52

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