Effect of dominant control system on activation of ERP capabilities

Dr S Kumar

Associate Professor

Operations Management and Information Systems

XLRI Jamshedpur

Contact Address:

Dr S Kumar

Associate professor

Operations Management and Information Systems

XLRI Jamshedpur

Jharkhand

India -831001

Phones : 91-0657-2225506 ext 302, 91-09431131610 (m)

Fax : 91 – 0657-2227814

Email :

Effect of dominant control system onactivation of ERP capabilities

Introduction:

ERP systems are being implemented by most organizations for streamlining the flow of information to support the business processes of the organization. This paper highlights the effect of ‘dominant control system’ on the activation of ERP systems capabilities. The dominant control system influences the perception of information needs of the manager, and these perceived needs influence the capabilities of the ERP system which are activated during implementation. These capabilities affected by the dominant control system, relate to the measurement of performance and automatic application of rules, which are implemented through the ERP system.

The objective of the study was to study the difference in the implementation of two culturally diverse companies, to assess the impact of dominant control system, on the activation of the capabilities of the ERP system.

Literature review and framework development

Brief Introduction to Organizational Control Systems[1]:

Merton ( as cited in Lawler (1976) ) has argued that “ Control Systems develop out of management’s attempts to obtain control over behavior of members of the organization, as the organization grows larger and more complex”. However the concept of control systems as discussed here also refers to the cybernetic control of processes – technical and business processes.

Ouchi ( 1979,1980) has argued that there are primarily, three types of control mechanisms, namely market control, bureaucratic control and clan control; and that each of these control mechanisms is simultaneously present in any given organization, to a larger or lesser extent. Clan control refers to the control of behavior through shared values, kinship and tacit societal norms. There are no written rules governing behavior. The group’s values and norms are supposed to be internalized by the new members and appropriate behaviors are expected to follow. Bureaucratic control refers to the control of behavior through a complex set of rules. These rules are supposed to cover all contingent situations that may arise. However in case of doubt, the matter is referred to the next upward level of hierarchy, for a more informed decision. Market control refers to the control of entities through financial measures like ROI and prices (set by markets).

At the top management level, since rules are often created here, there is a predominance of clan control. At the operational level, there may be a predominance of either clan control or bureaucratic control. Similarly plants, strategic business units and product units may be run largely through market control mechanisms, while inside the plant, either bureaucratic or clan control mechanism may be predominant.

Thus, while all three control mechanisms seem to exist simultaneously, one type of control mechanism dominates inside any organization. This control mechanism seems to influence all the other management systems like recruitment, promotion, performance appraisal,etc.

Daft (1998, pg 354) has proposed a contingency model of the dominant control mechanism, based on four factors, namely technology, environment, organizational size and structure. TableA1presents a modified summary of the proposed model.

Table A1 : Influence of contingent factors on dominant control system

Factor / Clan emphasis / Bureaucratic emphasis
Technology / Non-routine / Routine
Environment / Unstable / Stable
Organization size / Small / Large
Structure / Horizontal / Functional

The objective of this research is not to investigate the factors that influence the dominance of any particular type of control mechanism. The objective is to identify the dominant control mechanism, identify the salient characteristics of the control system, and to investigate it’s effects on I.S[2]. implementation and IS related practices, and thus on the activation of capabilities of the ERP system.Since inside the plant, it is expected that either Bureaucratic control system or Clan control system will be the dominant control system, therefore the focus of this study is on these two control mechanisms only.

A number of studies have highlighted the effects of ‘culture’ (Chwen S. et al (2003), Krumbholz M (2002)) and ‘organizational best practices of parent company’ (Huang S, 2004) on the implementation of ERP systems and the effectiveness of implementation. Other studies (Gefen D., 2004) have highlighted the role of trust in implementation of the ERP systems. This paper also studies the concept of ‘dominant organizational control system’ as a major factor affecting the activation of ERP system capabilities.

Identification of characteristics of organizational control systems:

The characteristics of these organizational control mechanisms were identified on the basis of six different dimensions related to the control systems. The papers used to identify the characteristics of control systems were Lawler E E (1976), Ouchi (1979, 1980), Lebas and Weigenstein (1986), Hofstede (1978); Daft (1998), Crozier (1967) etc.

These dimensions identified from research papers cited here, are as follows:

  • links to reward systems
  • measures of performance
  • nature of technology
  • social requirements
  • informational requirements and
  • people processing.

A table was drawn up for the expectedorganizational characteristics for each dimension identified, using direct verifiable quotes from the original papers of the authors cited, and these were then summarized as given below. This method of identification was repeated by two independent assessors, and any disputed characteristic was removed from the list. This methodology was adopted, to maintain complete transparency, as to the inferencesregarding characteristics of the control mechanism. The main author’s cited are Lawler (1976), and Ouchi (1979,1980).

Summary of identified characteristicsof Clan Control System

The main characteristics of clan control system identified are :

  1. No direct link to rewards, as rewards based on non performance based criteria.
  2. Direct Measurement of performance – considered impolite and indicative of lack of trust in internalization of values, and effort of individual. This leads to a bias towards under-measurement of variables, which may be used to measure performance of members.
  3. Internal motivation model as the core motivation mechanism.
  4. Process technology requirements of measures of performance similar to clan control i.e. difficult to measure individual contribution, or set objective standards for individual performance.
  5. High commitment and deep level of common agreement required between the members, leading to consultation for common approach to an issue before action.
  6. Not many rules to build into the information system, as traditions are implicit in nature, and are subject to multiple interpretations.

Summary of identified characteristicsof Bureaucratic Control System

The main characteristics of bureaucratic control systems are :

  1. Performance measurement is crucial for rewards expectation as extrinsic motivation model underlies this Bureaucratic Control Systems.
  2. Targets determine direction of efforts, and measures of performance (with rewards linkage), helps channel the effort in the direction of target achievement.
  3. Information system helps to automate some rule application and reduces administrative overhead and delay in use of rules.
  4. Mass production technology, measures of performance requirements similar to Bureaucratic Control Systems. Since technological requirements match control system, rules are clear and cab be built into information system.
  5. Within range of applicable rules, rules are applied impersonally. Only exceptions are referred up the hierarchy, for resolution.
  6. Information access at lower levels of hierarchy is restricted, and access increases as one rises in hierarchy.

Cause – effect relations in organizational control systems view

The role of ERP systems envisioned in this view is limited to measurement of outputs (outputs of processes, and of activities of individual managers), and the automatic application of rules. ERP systems provide a range of capabilities related to the measurement of performance and feedback, thus operationalizing the ‘cybernetic concept’ of control systems (Hofstede, 1978).

In this view, the dominant control system influences the perception of information needs and requirements of the managers. A strongly Bureaucratic Control System places strong emphasis on information related to targets and performance against targets, which results in very focused and short term oriented information needs. Also in a Bureaucratic Control Systems, the use of rules governs decision making at the operational level, so the knowledge of a set of applicable rules applicable in a situation, forms an essential part of the required information (and knowledge). The effort to gather information, to measure values of defined parameters, so that rules can be applied, also affects the perception of information needs. Decision making in Bureaucratic control systems is through the impersonal application of rules. There are supposed to be rules for every situation, and in case of doubt, the issue is referred up the hierarchy, for a more informed solution to the issue.

In a clan control system, there are no quantitative targets, and overall contribution to the company is used as a broad (all inclusive and qualitative) measure of performance. The information needs for this broad measure (contribution to company) are more diffused and long term oriented. In Clan Control Systems, conventions and traditions govern decision making. These traditions are implicit rules, and are not easily coded into the ERP system. This implicit nature of ‘traditions’, leads to intensive consultations with colleagues and seniors, for their ‘interpretation’, in the case of application to particular contexts. This need for consultation affects the perception of information needs.

Figure A. Cause effect relations in Organizational Control Systems View

These information needs influence the capabilities of the ERP system, which are activated during implementation. The degree to which these capabilities are activated, determines the degree to which the benefits from the information is perceived by the respondents. Automation of operational rules, allows increased system reliability and responsiveness specially at the Product unit and Plant level. Decision making in Clan control systems is affected through consultation. Since internationalization of company values is a treasured objective, junior executives are encouraged to learn more about the reasons for a decision. These consultations are used to reinforce company values and vision. The effort is to develop a common viewpoint and approach to a problem, and the suitable decision is expected to emerge from this common approach.

Framework for expected I S related practices due to effect of dominant control system:

The dominant control system effects are visualized through the activation or non-activation (including non-use) of certain ERP capabilities, and the resulting I S practice which may reflect this non-activation. (This non-activation happens during the customization process, when processes are being configured into the system, and non-use during the post implementation period) Since information enabling of business processes and workflow are integral parts of the ERP system, the effects of dominant control system are also perceived here. These effects are shown in tables APP3 and APP4 in Appendix. The control system effect on decision making and on automatic application of rules is discussed below under three heads:

  1. Effect on variables relating to measurement of performance
  2. Effect on decision making and information sharing across levels.
  3. Effect on automatic of application of rules.

a.Effect on variables related to measurement of performance

i.Bureaucratic control systems: Since the underlying model for motivation is ‘Extrinsic Motivation Model’ (Lawler, 1976), there is a direct linkage of efforts to the expectation of achievement of performance and of performance to the expectation of commensurate rewards. This makes the measurement of performance crucial to the expectation of rewards and the perception of equity in determining the quantum of rewards.Since this is closely related to the efforts put in by employees, improved measurement of variables related to performance, is expected to lead to higher and more focused efforts by the employees. ERP systems help by allowing better measurement of the variables. For e.g. in one of the companies studied, the company had individual screens (based on roles) for online , real time measurement of performance against targets. i.e. a manager in purchase department handling purchase of about 200 to 300 parts, could see on his screen individual and aggregated measures like Average purchase price, Inventory levels, quality performance (rejects from line), and JIT related variables with skip lots etc (along with a number of other variables), and see his performance on these variables with respect to his targets. Thus the functions of a sensor and comparator were performed by the ERP system.

ii.Clan control systems: In these type of control systems, rewards are not directly linked to performance. The emphasis is on inculcation and internalization of the company values and thus an overall long term composite measure of “contribution to the company” is taken. Small unit size and process based technology make it easier to watch behavior (even outside working hours) as compared to measuring performance against targets. Not only are variables related to performance difficult to measure, but also the link between efforts and performance is weak in these organization. Thus focus is on internalization of company values which is supposed lead to correct behaviors. Direct measurement of performance is considered impolite and indicative of lack of trust in the individual’s desire to internalize the values of the company. This leads to an under-measurement of the variables related to the individual’s performance. Process variables related to individual performance are also effectively under-measured. It is thus expected that information related to these variables would either not be captured or, if captured, would not be put to use through reports etc.

b.Decision making and information sharing across levels

i.Bureaucratic control systems: Decision making is mainly through impersonal application of rules . The maze of rules is supposed to be comprehensive enough to meet most eventualities and in case of doubt, the matter is referred up the hierarchy, for resolution by a more informed superior. Only information relevant to application of rules is needed and thus the information access is restricted at the lower levels of the hierarchy. This access improves as one moves up the hierarchy. The expected IS related practice is that the ERP system will be used to provide differential information to different levels of the hierarchy.

ii.Clan control systems: Decision making is through consultation to converge to a common viewpoint to the issues involved in any problem. A high level of commitment to organizational values is expected and the way to take a decision is to reach a deep level of common agreement on the issues related to the problem and the approach for resolution. The outcome has to be in keeping with these values, and often for mundane issues, the method of document approval is taken as a means of reaching a consensus. The failure of ERP systems to provide a mode of document flow (for approval, and also a mode for discussion) results in the existence of a parallel flow of documents, and the system has to wait while authorization and decision making proceeds on the parallel track.

c.Effect of automatic application of rules by ERP system

i.Bureaucratic control systems: Clear cut application of rules for decision making allows the building in of rules in the ERP system. Automatic application of these rules to various business processes, material and workflow allows large number of rules to be implemented, and the benefits to be perceived by the entire organization.. E.g. In company 1, production of any material could not be booked unless the accompanying entry of back-flushing (this involves deducting inventory from stock when product production is booked, and reduces need for manual data entry) This entry is allowed (by rule application) if the items required for production (using bill of materials) is available in inventory Thus the rule says “No negative stocks”.

Figure B: Dominant Clan Control system and some resulting IS related practices.

Figure C: Dominant Bureaucratic Control system and some resulting IS related practices. (*MOP here stands for measures of performance)

ii.Clan control systems: In Clan control systems, traditions are used instead of rules. Since traditions are subject to multiple interpretations under different circumstances, again intensive consultation is used to ‘interpret’ the rule applicable from the tradition. Thus it is very difficult to build these traditions into the ERP system. (multiple interpretations). So limited number of rules only are implemented through the ERP system.

Methodology:

The methodology involved a study of two companies with diverse cultural profiles and dominant control systems. The companies were selected after detailed interviews with the Plant heads and HR heads about the culture of the company on six basic dimensions as cited in Hofstede (1996). Based on this survey, and on Daft (1998), the two companies chosen had the following characteristics:

Company 1: Large company (approx 2300 executives) in core engineering sector (stable environment)

Company 2: Small company (approx 50 executives) in a process industry (Refractory industry with a large number of new products (major output from new products))

Fig D: Plan of the paper showing the check points where the data is verified

Thus on Hofstede’s six dimensions, the results (given in Table APP1) indicate differing cultures, with Company 2 being more on the “employee oriented” and process based loose control structure with a strong emphasis on ‘Norms’. Company 1 is more Job oriented and professional, with a strong results orientation. Thus the two companies chosen were different in size, business, and cultural orientation.

Semi-structured interviews were conducted at these two companies over a period of 120 days. These interviews were content analyzed using themes as the basic building blocks. Across method triangulation was used with additional data being taken from company documents and in-depth interviews with top level managers in the two companies. Direct observation of information system related practices was also used an independent source of data.