Management Control System

A Case Study at Refah Chain Stores Co

 

 

Abstract

Management control systems (MCS) in the retail sector are more likely to assume particular characteristics as within this setting, shared administration with various types of organizations having different objectives and visions. What is at stake is the management of the network of relationships as well as the management of behaviors in the organization that is a part of this network.

The concept of MCS is not new and the exploration of the concept in the retail sector is abundant. This research aims in presenting a way for further researches. A model is based upon a case study of Refah Stores. A detailed explanation of the management control process at Refah Stores is presented. The results found that the cultural barrier is not a major issue within the organization a there are many strategies to combat such a situation. Feedback and opinions are considered to be an important aspect as it will lead to a high level of cooperation amongst employees.

 

Table of Contents

Introduction

Background of Management Control Systems

Refah Chain Stores Co.

Literature review

Management and Control

Management Control Systems

Planning

Cultural Controls

Cybernetic Controls

Administrative Controls

Methodology

Empirical Data

Empirical Material

Management Control Systems (MCSs) at Refah Stores Chain Co

Cultural Controls

Planning Controls

Cybernetic controls

Rewards and Compensations

Analysis

Conclusion

 

 

Introduction

Background of Management Control Systems

The concept of management control system emerged after the Industrial Revolution which provided organizations with the opportunity to expand and grow in their business operations like never before. Most parts of the value chain were located within both new and bigger firms rather than being spread over at different positions within smaller firms or a single person. With the occurrence of these changes, there was a need to consider financial measurement in the form of business ratios  as well as transfer pricing to be very important and this was the point from where various forms of management control systems initiated (Merchant & Van der Stede, 2007; Ax, Johansson & Kullvén, 2007).

Refah Chain Stores Co.

Refah is an Iran-based chain of supermarkets which is currently operating across the country with 160 branches.  Additionally, the company also has branches in Turkey and Iraq. The retailer is engaged in the provision of a wide range of products in the lines of Fresh Produce, Food and Beverages, Electronics and Home Appliances, Cosmetics and Hygiene, Stationaries, Textiles, and Clothing. The slogan for Refah chains is ‘Better quality, lower prices”. The chain of stores is also adequately tapping the online market and customers who order online get it delivered at their doorstep. In association with Hyperstar-owned Carrefour and Shahrvand Supermarket, Refah Chain of Stores caters to the bulk demand of the Iranian retail industry.

The main objective of the study is to asses and determines the management control system at the Refah Chain of Stores. The report will explain how some management control systems are being used at different organizational levels and how every management control system is related with each other.

 

Literature Review

Management and Control

 

Management control is rendered to be the back-end of the management process and is a very critical function within an organization. Failure to implement an adequate management control system can result in huge financial losses, damage to reputation and in many cases ultimate organizational failure as well. Though, it is important; however, too much control also does not always guarantee better controls some management control systems may utilize stifle initiative, innovation, and creativity (Albertini and Muzzi, 2016).

Management

Management is related with the process of organizing the various resources and directing all activities so as to attain organizational goals.

Objective Setting

Understating objectives is a very crucial factor in the designing of a management control system. Objectives do not need to be quantified and may not be even financial. Most of the companies are aware about organizational objectives however; many times employees may not even know these objectives (Chenhall, 2003).

Formulation of Strategies

Strategies tend to define as to how firms will use their resources so that objectives can be effective. Many times employees may take actions that derive in better results than that of formulated strategy thereby, creating a difference between the actual strategy and the formal strategy. Hence, formal strategic statements are not obligatory for formulating MCSs however; it can make the process easier for the management to identify the feasible options available for management control as well as the way through which it can be effectively implemented (Merchant and Van Der Stede, 2007).

Management Control Systems

According to Hared and Abdullah (2013), management control systems are those rules, values, practices as well as other activities which are placed by the management so as to direct the behavior of employees (Malmi and Brown, 2008). According to Merchant and Van der Stede (2007), MCS can either be a single system and it can be a set of control systems as well. MCS is commonly referred to as MCS package as is that different types of MCSs have been applied at different times and for differing purposes (Malmi and Brown, 2008).

The MCS package can be categorized into five distinct groups namely planning, cultural controls, cybernetics controls, administrative controls and rewards, and compensation.

Planning

Planning refers to the way in which goals are set for the company as well as for the various functions of the company. The planning is the major carrier to promote goal similarity amongst the organization and the employees working. Planning can further be categorized into two broader aspects – long-range planning and action planning. Long-range planning has a strategic focus whereas action planning has a tactical focus and is associated with planning for actions and goals which is to incur within 12 months.

 

Cultural Controls

Cultural control is important to control employee behavior in three distinct ways. The first one is that when the company deliberately searches and hire those employees who have certain desired values. These values are linked with the organizational strategy. The second is somewhat the opposite of the first category and in this aspect, the company attempts to change the values of employees. These are also referred to as symbol-based controls which are visually illustrated (Malmi and Brown, 2008). The third category explains to the employees what is expected from them, what values they should possess as well as whether the employees tend to be in agreement with them or not (Merchant and Van der Stede, 2007).

Cybernetic Controls

This is basically the study of controlling in as well as of the system (Malmi and Brown, 2008). In the context of an organization, there is a process which involves a feedback loop and is presented by using standards measuring the performance of the systematic comparison of the performance with the standards, providing feedback about the information related to undesired variances within the system as well as altering the comportment of the system.

Administrative Controls

According to Davila, Foster, and Li (2009), administrative controls monitor employee behavior throughout the organization and holding employees accountable for their behaviour through specifying as to how tasks need to be performed. Administrative controls are further divided into the organizational structure which serves as a tool for management control, policies, and procedures which tends to organize the behavior and processes of the firm and governance structure which involves the formal line of authority and accountability.

Methodology

The aim of this report is to determine the management control process at Refah Chain Stores Co. and how it is implemented within the object organization.

In such cases, qualitative methods are considered to be very helpful to create or develop reasonable structures so to provide an alternate route for the development of theories. These approaches can be used as a part of refining existing literature and theories (Thompson, Gamble and Strickland, 2004).

According to Yin (2008), in-depth analysis helps in examining a phenomenon that includes aspects that are beyond formal instructions and rules therefore, in this report a case study analysis will be undertaken. The different components of the model will be explained and applied in the analyzed case.

The case study is of Refah Chain Stores Co. and the sources from where data is obtained are structured evaluation of events, semi-structured interviews, collection of relevant documents and content analysis.

 

 

 

Empirical Data

History and Facts of Refah Store Chain

Refah Chain Stores Co. was established 24 years ago in 1995 in Iran with the direct support of that time president Ali Akbar Hashemi Rafsanjani. The chain of supermarkets is engaged in providing a wide range of products including Fresh Produce, Food and Beverages, Electronics and Home Appliances, Cosmetics and Hygiene, Stationaries, Textile, and Clothing. The store is operating with 160 branches across Iran along with operations in Iraq, UAE, and Turkey.

The chain of stores is mainly owned by major government banks where Bank Melli owes 19.8% of shares, Bank Saderat owes 14.2% of shares, Bank Mellat owes 10.1% of shares, and Bank Tejarat owes 9.5% of shares and Bank Sepah with9.4% of shares. Remaining shares are owned by individual peoples.

Refah Stores is operating three different types of stores amongst its outlets; about 160 are branches that are located in key provinces. Amongst these, about 45 stores are situated in Karaj and Tehran which is a clear indication of the company’s concentration within these cities. The second type of outlet is those which are not completely owned by Refah Chain and are operating in affiliation with other firms and such types of stores are three in total. The third type of outlet is basically retailers of whose products are delivered by Refah and the debit card of whom is accepted. There are 723 outlets of this form spread throughout the country.

 

 

Empirical Material

The empirical material for this work was obtained through interviews. Managers at different levels of the organizational structure were interviewed and all interviews were conducted on the phone

The Vision and Mission of Refah Stores

Vision and mission are the core of any model. Vision can be referred to as an aspirational explanation as to what the company is willing to attain in the longer term. It serves as a guide for selecting current as well as the future course of action. Alongside this, a mission is a declaration of the core purpose and focus of the organization which tends to remain the same over time.

According to Ferreira and Otley (2009), vision and mission are considered as a management control process of an organization since it delivers information as to how organizational values and purposes are established as well as communicated as a way to influence the behavior of all participants in the organization.

The vision of Refah Stores is to emerge as a multi-format retailer that has the capacity to deliver the best in class margins, sales and profitably operates within strategic locations inside Iran and in other countries of operation.

The mission statement of Refah Stores is to remain committed with the promise of delivering great experience through high quality and distinct products at reasonable prices, served by dynamic and dedicated employees who are guided by the core values laid down by the founders of the Stores.

Organizational Structure

Organizational structure is a way to integrate management control which operates by functional specialization and organizational design has an impact over various controls that can be applied (Malmi & Brown, 2008). According to Albahari et al. (2011), inappropriate organizational infrastructure can result in a configuration gap which can eventually negatively impact the control system within organizations. Refah Stores is undergoing a reorganizing procedure that aims towards creating an organizational structure that provides support to coordination and faster decision. The purpose of such a structure is to help in coordinating as well as visualizing opportunities along with determining weaker areas. This structure will benefit Refah in the transferring of information and communication between the warehouse and the retail stores.

 

 

Management Control Systems (MCSs) at Refah Stores Chain Co

Cultural Controls

Employees in Refah Store Chain are selected very carefully and in accordance with the requirement of the position. Like any other supermarket, there are a whole lot of people who are working together and are from diverse backgrounds as well as specializations. As a result, there is a fusion of various cultures which can result in the arising of complications amongst the employees. Culture plays a very important role in the supermarket industry as they need to continually evolve in order to become innovative as well as deal with new processes and ideas (Albahari et al. 2011). To foster this process, relationships should be carried out smoothly and easily between people and all informal relations are strengthened at every level. Routines, bureaucracy and restricted formal relationships are discarded and managers are required to invest all their efforts to strengthen trust between people working inside the supermarkets.

The store has provided uniforms to its employees. All employees have been provided with the same uniform without any command except that of in the butchery section.

When a new employee is hired, he/she is trained for on-floor dealings for almost a week. This training involves understanding the working procedure of the store as well as educating about selling and customer relations. Additional training will be provided over the basis of function and position.

Planning Controls

Usually, two planning control systems are being used in Refah Stores which include business and budget plans. Business plans are made for 5 years whereas; budgets are developed for one year. The process of developing a business plan is simultaneous with budgeting. The business plan is developed for all superstores of the chain and is then divided into regional business plans for every store by the managers. The process is that the top management guides lower-level management and determines what areas need to be focused more. However, the store management and team have the right to apply whichever guideline is applicable and can implement actions that they consider to be more important for the development of the store. For example, if the need is to reduce the waiting time at counters, adequate measures need to be undertaken to reduce waiting time and increase customer satisfaction.

Personnel planning are another important aspect within management control (Chan & Pretorius, 2007). Planning about the budget involves planning about store staff as the cost of hiring and recruiting staff is considerable and needs to be considered in the process of budgeting. Every store has a staff planner which aims in planning staff which matches the requirements of the customers to working hours. To conduct this effectively, a cross-functional staff system is applied in which the staff members can work in different areas of the store which will be in accordance with the laid staff plan.

 

Cybernetic Controls

Cybernetic controls at Refah Stores are action-planning and long-range planning. Budgets are used at the time of investments and most of the time KPI’s are used to measure daily, weekly, the monthly and yearly performance of stores. KPI’s comprises of both financial and non-financial factors such as cost and budget are financial factors whereas, safety and quality are rendered to be non-financial factors of KPIs.

Budget is initiated from the top management within stores where forecasts of cost and sales are set at a percentage of sales. Additionally, in the process of budgeting, different scenarios are also considered which can be used later on in case the actual sales and cost incurred are higher or lower than what was forecasted.

Apart from productivity and sales measures, Refah Stores also integrates other non-financial measurements such as market, the customer as well as an employee survey. The surveys are being standardized on a yearly basis through external companies and the data obtained is compared with other stores and with the results of the previous year’s survey. In this way, the store recognizes improvements or any deterioration within these aspects.

Rewards and Compensations

Refah stores use one reward system in their stores across the country as it makes it easier and fairer to administer and evaluate. At the store level, a premium salary system is applied where equal amounts are paid to workers – on-floor and off-floor – based upon their performance. Additionally, individual monetary awards are also provided to staff members who have given an extraordinary performance and have effectively contributed towards the attainment of store goals and objectives.

Alongside the usual payroll system, Refah Stores also works through feedback and activities as a means to show appreciation. The basic idea behind this process is to motivate employees in making self-made plans as to what they are willing to achieve at Refah Sores. The store also makes efforts to use internal recruitment so as to encourage and satisfy employees and ensure that the organizational culture is intact with the store.

 

Analysis

The culture at Refah Stores is strongly influenced by the labor culture in Iran which comprises of entrepreneurship, cost-effectiveness, and equality. Additionally, the culture is also influenced by increased focus over sales and target attainment.

The management control system focuses over directing the behavior of employees in the desired manner through different controls within a management control package (Merchant & Van der Stede, 2007). In the case of Refah Stores, efforts are being invested in developing a strong corporate culture where employees are hired according to the requirements of the position and are further trained and polished so that they serve as productive assets of the company.

Administrative controls are those controls that involve organizational structure, policies and procedures and governance structure (Malmi and Brown, 2008). Every store of Refah is operating with a single organizational and governance structure and is designed to foster communication, support, and control through various means. Guidelines related to company target and communication are spread over different levels of the organizational structure like that of regular staff meetings.

As Malmi and Brown (2008) indicate, planning is divided into action planning and long term planning at Refah Stores. Long-term planning involves developing a business plan and segregating it into the requirements of individual stores whereas, budgeting is prepared from the top level and guidelines are provided to middle-level and low-level managers. The forecast is based upon a particular percentage of sales and every store needs to adapt this even though they can impact numbers by providing their own forecast.

Cybernetic controls include financial and non-financial measurements in which budgeting refers to the financial measurement and quality and security refer to nonfinancial measurements. The cost of personnel is the largest cost category of Refah Stores and is measured through the ratio of sales. Being a larger retailer in the Iranian market implies a different form of inventory management for controlling their stock level and if it is required products are offered at reduced rates so as to get them sold out. This implies that the store can maintain a low level of inventory.

Both financial and non-financial measurement systems are incorporated which forms for a hybrid management system. According to Nørreklit (2003), the method of balanced scorecards allows managers to consider the organization from four distinct perspectives including internal perspective, customer perspective, financial perspective and learning and innovation perspectives. At Refah stores internal, financial and customer perspectives are highlighted. Innovation perspective is not measured even though; a lot of work is initiated in this aspect.

 

Conclusion

Refah Stores has a strong corporate culture which is apparent in its working conditions. The corporate culture is based upon equality and cost-consciousness and the management control process is set as a framework for directing employee behavior as well as demonstrating the direction of the store operations.

The measurement system at Refah Stores is detailed which allows the store to understand how the store performs and as such take actions accordingly. The measurement systems are used to effectively control resources.

The planning process at Refah is appropriate and involves sales staff within the planning process. Staff members are motivated to present their feedback and ideas so that the store can benefit from them.

The management control process involves various management controlling which some aspects may be complementary and some may overlap. The results may overlap with the cultural control process. It appears to be very reasonable to use both the forms of controls which will increase the level of motivation within the stores.

 

 

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