Rendell Company, Case Analysis on Management Control System

CASE CONTEXT

Rendell Company is experiencing some difficulties in implementing its modern control techniques due to the irking relationship between the divisional controller and the corporate controller. This is mainly because the loyalty of the divisional controllers rest with the divisional managers. Because of this current set-up, Mr Bevins believes that information regarding the divisions’ performance are not reported accurately and biased.Mr. Bevins is interested if applying a control organization structure similar to Martex will resolve the conflict between the role of the corporate controllers and the divisional controllers.

STATEMENT OF THE PROBLEM

Given the status of goal incongruence between the Corporate Controller and the Division Manager; and the Division Controller caught between, should Rendell Company change its control organization structure similar to Martex?

FRAMEWORK OF ANALYSIS

• Analysis on Rendell and Goal Congruence
• Analysis of Rendell’s current control structure
• Analysis on Martex’s control structure
• Conclusion ; Recommendations
• Case Questions Rendell Company

Rendell Company has seven divisions, each responsible for the manufacturing and marketing their distinct product line with little interdivisional business. The control structure of the company was organized such that Division Controllers report directly to his Division Manager. On Goal Incongruence Because of the company’s control structure, there is conflict of interest between the roles of the Corporate Controller and the Division Managers and conflict on the working relationship between the Division Controllers and the Corporate Controller.

The goal of the corporate controller is to optimize the use of funds for profitability. The goal of the divisional managers is to receive a bigger budget for his division by reporting numbers that reflect effective management. The Division Controller reports to the DM and has a dotted line relationship to the Corporate Controller. The DC is torn between two conflicting goals of the Division Manager and the Corporate Controller.

Analysis on Rendell’s Control Structure According to Mr Harrigan’s points of view:

Pros:

• The Division Manager trusts the Division Controller, thus information is shared freely compared to Martex structure which opens possibility for DM’s to see the DC’s are a ‘spy’.
• The Division Controller shares a common goal with the division and assists the Division Managers the best that he could to achieve these goals.
• With the division controllers reporting directly to division managers, the current set-up allows tactical issues to be resolved faster because timely information is easier retrieved.

Cons: Since the DM is the one who reports the numbers to the Corporate Controller, this gives the DM the ability to conceal or overstate financial reports.

• Empowerment for Divisional Controllers are not achieved which is the goal of the Corporate Controllers. This is mainly because the DC works for the DM who owns the responsibility of reporting budgets and performance reports.
• There is goal incongruence between the Divisional Controller ; the Corporate Controller. The reliability of the information provided by the DC may be biased due to loyalty with the DM. Worst case, the DC and DM can connive to hide financial flaws.

Analysis on Martex’s Control Structure

Pros:

• Objective decision-making on budget standards & percentage of sales because the loyalty of the DC lies on the CC.
• Unbiased information provided to the corporate controller.
• Division controller is more empowered and plays a more active role in analyzing budgets and performance.
• Minimize added fats in division expense budget and overstatement of performance.

Cons:

• Goal incongruence between the Division Controller and the Division Manager may hamper division objectives. The DC may be regarded as an outsider or a ‘spy’ and not as a part of the team and may result to lost of the general manager’s confidence to the division controller
• Change may not be suitable for a like Rendell which has a Business Unit organizational structure with divisions acting like a separate company and is measured by the unit’s profitability.
• DC is more empowered and ‘work with’ and not ‘work under’ the Division Manager.
• Change in the organizational structure may be difficult to implement and may be out of jurisdiction of the Corporate Controller. Such change needs approval by the top management and may take a long time.

CONCLUSIONS ; RECOMMENDATIONS

Rendell should retain its current control structure. Making drastic changes on the how control system is setup might be more of a disadvantage. Also, the current setup in Rendell Company works best for their organizational structure. They need their business units to be intact and work as a team since the goal is to have high profitability for their respective units. Changing the setup would make the divisional controller somewhat an outsider from the team, and may create further conflicts or problems within the unit.Rendell Company is better off adapting dotted line controller relationships due to the following justifications:

• A structure similar to Martex might not fit with Rendell’s organizational structure.

  Such change may jeopardize the established line of authority.

• Changing the control structure may also cause loyalty issues because DMs might feel by-passed if Division Controllers will report to the Corporate Controller. This can also hamper attaining the business goals and objectives of each division.

We also recommend that the company implement additional control systems to answer issues on credible expense budget and performance reporting and conflict between division controllers and corporate controllers:

• Implement a centralized accounting system to avoid fat expense budgets. It might be difficult to convince divisions to use one accounting system and it is vital to communicate its benefits.

  Use change management tools before and during implementation. Centralized accounting system can also help divisions monitor their expenses on a regular basis and gives them more control on critical and trivial expense items. Establish clear and firm ethical standards or a common code of conduct for all employees and repercussions on departures from these guidelines and promote a culture of proper business ethics.

• Set targets and standards or KPI’s based on historical facts and industry standards. This will avoid setting unrealistic profitability targets that can lead to overstating performance reports.
• Establish an incentive system that will push the Division Controller and Division Manager to achieve the business unit goals and objectives.

  Review the role and job description of the division controllers to give him accountability on the budget and performance reports. The current set-up does not give accountability and may be the reason why division controllers allow division managers to tweak financial data. DC should also have a more active role in evaluating the performance of the business unit.

• To address the issue of divisional controller loyalty, the corporate controller may have an established influence on his or her performance appraisal. Though the divisional general manager is the immediate supervisor, corporate controller will also have a say on the promotion, salary increase etc.

  of the divisional controllers.

CASE QUESTIONS

What is the organizational philosophy of Martex with respect to the controller function? What do you think of it? Should Rendell adopt this philosophy?The corporate controller reports directly to the president and all division controllers, other accounting, data processing and analysis groups, reports to the corporate controller. The responsibility of the controller is to establish budgetary standards of operations and objective percentage of profit on sales for each of the divisions and domestic subsidiaries. We recommend that Rendell retain its current control structure but implement additional control systems mentioned above to address concerns on business ethics, credibility of data and conflict between the corporate controllers, division controllers and business unit managers.To whom should the divisional controllers report in the Rendell Company? Why?The DC should report functionally to the Division Managers and help the managers attain business unit goals and report administratively to corporate controller to make sure that company strategies are implemented. Management control system design should also take into account the organization’s culture and informal organizations that has been formed within the company.

What should be the relationship between the corporate controller and the divisional controllers? What steps would you take to establish this relationship on a sound footing?Open communication lines through an effective feedback system. Frequent meetings and updates. Establish clear objectives expectations which can be used as metric for performance appraisal.Would you recommend any major changes in the basic responsibility of either the corporate controller or the divisional controller? Division Controllers should still continue to report functionally to Division Managers and report administratively to the Corporate Controller. In this way, the divisional controllers would be directly reporting to their divisional general managers but at the same time they know that the corporate controller has a say in their performance appraisal. This promotes goal congruence of the three functions.