Control : Organizational and Economic Approaches By Kathleen M. Eisenhardt

1. Control: Organizational and Economic ApproachesBy Kathleen M. Eisenhardt BADM 546, Group #1 Meredith Blumthal Wooje Cho, Barclay James Kumar Sarangee)

2. Focus of the article • Organizational Control as a design mechanism in organizations. • 1st Portion: Describes, compares and integrates organizational and agency perspectives on control. Result is a model that relates task characteristics, information systems, rewards and uncertainty. • 2nd Portion: An empirical examination of a retailing model. • 3rd Portion: Discusses a broader framework for designing organizations using control mechanisms.

3. Organizational Theory

4. Organizational Theory • Two underlying control strategies that are interrelated: • Performance Evaluation • Cooperation among organizational members • Key insights of organizational approach to control: • Role of task characteristics, especially task programmability in the choice of control strategy through impact on measurement costs. • Social control as an alternative to control based on performance evaluation.

5. Agency Theory • Agency Relationship: Principal delegates work to agent. • Agency Problem: Determine the optimal contract for agent’s service efforts. 2 Situations: • Complete Information: Behavior-based contract • Incomplete Information: Problem of shirking by agent if behavior based contract is followed by principal without confirmation of agent’s behaviors 2 Options: • Reward behaviors after confirmation with information systems and surveillance mechanisms like cost accounting measures and budgeting systems. • Reward based on outcomes (e.g., profitability). Treat outcomes as surrogate measures of behavior.

6. Agency Theory

7. Agency Theory In Summary: • Agency Theory suggests two underlying strategies of control both of which rely on performance evaluation: 1. Behavior based, and 2. Outcome based Key Insights: • Role of uncertainty in the choice of control strategy through its impact on risk sharing costs. • Role of information systems in maintaining behavior control as an alternative to outcome control when information about the agents behavior is otherwise incomplete.

8. Comparison of Organization and Agency Approaches

9. Complementarity Organizational and agency approaches are complementary: • Organizational approach emphasizes: (1) Importance of task characteristics, especially task programmability, to the choice of control strategy. (2) Existence of “people” or social control as an alternative to control through performance evaluation. • Agency theory adds to the organizational approach more explicit emphasis on: - information systems, uncertainty, costs and rewards.

10. Model

11. Hypotheses H1: As task programmability increases, behavior based control is more likely. H2: As behavior measurement increases, behavior based control is more likely. H3: As the cost of outcome measurement increases, behavior based control is more likely. H4: As outcome uncertainty increases, behavior based control is more likely

12. Methodology Sampling: • 95 specialty stores (<8000 sq feet of selling space) in a suburban Bay Area shopping center. Mean selling space = 2014 sq Feet, Mean no of employees = 8.1 • Around 1 store manager and 1-3 assistant managers. • 25% are private/family owned stores • Size of store ranges from 1 local store to 948 nationwide stores. • Mean age of salespeople – 25.3 years, 40% women. • Range of merchandise – wear, cameras, toys, shoes etc • Focus – Control practices for store salespersons. Methods: • Questionnaire – Survey of Retail Store Managers. • Principal informant – store managers • Secondary informant – two salespeople designated by store manager • 21-3 informant stores, 22-2 informant stores and 11-1 informant stores

13. Measures • Task Programmability – Focus on the amount of service in selling 1. Set of commonly used categories of service offered to customers. 2. Set of commonly used categories of customer effort. 3. Time the salesperson spends with a typical customer 4. Length of the training period. • Behavior Measurement – Focus on physical limitations on the observation of sales people 1. Selling space square footage of the store. 2. Total number of store employees. 3. Number of sales people per store supervisor (i.e., managers and assistant managers).

14. Measures • Outcome uncertainty 1. Number of competitors in the San Francisco SMSA by merchandise category. 2. Failure rates in 1975 by merchandise category. 3. Failure rates in 1979 by merchandise category. • Cost of outcome measurement 1. Number of stores in the store chain. 2. Ownership variable – private/family owned vs. public corporation. • Control 1. Outcome based awards – commission, commission vs. draw and salary+ commission. 2. Behavior based awards – pay plans in which pay is salary or hourly rate.

15. Results • Non-significant correlation between independent variables. • Positive correlation between cost of outcome measurement and the use of behavior measures. • Neither sex nor price of merchandise is a significant predictor of control. • High R-square – theoretical model is relatively accurate. • High ability of model to separate the commission stores from salary ones. 83% of stores correctly classified by the discriminant function. • All hypotheses supported. • Programmability (H1) is the single most important predictor. • Behavior measures (H2), and cost of outcome measures (H3) are also significant predictors. • Outcome uncertainty (H4) is the least important predictor.

16. Implications and Conclusions • Support for hypothesized linkages between task characteristics, information systems and reward structures in context of uncertainty. • Specialty retailers use policies that are contrary to humanistic-attributionist prescriptions that salient extrinsic reward diminishes intrinsic motivation. • Responsibility need not match controllability in retailing. A framework of control strategies: • Design a very simple routine job such that behaviors are easily observed and to reward based on behaviors. • Design a more complex, interesting job, invest in information systems to track behavior and to reward based on behaviors. • Design a more complex, interesting job but use a much simpler evaluation scheme (profitability) and to reward based on these outcomes and results of evaluation. • Employ people whose preferences match with those of management.