How Top Managers Use the Entrepreneurial Gap to Drive Strategic Change

Abstract

Prior research provides strong evidence for the association between business strategy and the design and use of management control systems. We complement this research by examining the role of management control systems in situations of strategic change. We report the results of an in-depth longitudinal field study of Henkel, a German multinational company, from 2008 through 2013. During this period, the company declared a new strategy. To implement this strategy, senior management purposefully misaligned span of control and span of accountability – labeled the entrepreneurial gap – to stimulate individual initiative and higher levels of performance. Our description of how top managers enacted change suggests a strong relationship between management control systems, organizational structure, and cultural norms that together support desired outcomes. In addition, we provide evidence on the timing and sequencing of actions by top management. By the end of our study period, Henkel was a top performer in its various markets and was leading the German blue-chip index in stock returns.

Keywords:

• Management control systems
• Organizational structure
• Accountability
• Strategic change
• Organization change
• Organizational performance

Acknowledgements

We want to thank the associate editor and two reviewers for their invaluable comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplemental Data and Research Materials

Supplemental data for this article can be accessed on the Taylor & Francis website, doi:10.1080/09638180.2020.1792959.

Appendix. Henkel’s Field Study Data Collection

Notes

1 An additional outcome of this research project was a teaching case for classroom use (Simons & Kindred, 2011). The teaching case and this paper draw on the same data. However, the teaching case was written to illustrate the challenges that Henkel managers faced in order to motivate class discussion. This paper presents an in-depth analysis of management actions and the grounded theory that emerges from this analysis.

2 Accountability refers to expectations about what a manager ‘should be able and obliged to explain, justify and take responsibility' (Messner, 2009, p. 918).

3 Agency theory reinforces this view by suggesting that performance measures used for incentive purposes should be aligned with decision rights (Antle & Demski, 1988): measures that are broader than the related decision rights push too much risk onto the agent; conversely, measures that are too narrow fail to capture the complex, multi-tasking nature of managerial work.

4 The definition of span of control used in this study is broader than the traditional definition of span of control which includes only the number of people reporting directly to an individual. Here, it refers to all the resources that a manager controls (not just to the number of people reporting to the manager).

5 Interestingly, stretch goals is also one of the mechanisms that we document at Henkel.

6 The Appendix available online describes the data gathered (personal interviews, management meetings observed, documents reviewed) during the study period.

7 The practitioner version became the teaching case cited in footnote 1.

8 Our analysis included all the variables listed in Figure 1. In some cases, such as divestitures and centralizing services, they are mentioned here without much elaboration because, while they affect span of control and/or span of accountability, the specifics of their implementation are not much different from the interpretation that the reader will give to these events. Other observations and events are described in more detail because of their unique design and use. However, all these variables had some impact on the entrepreneurial gap over time or contributed to its implementation (e.g., cultural changes).

9 Rorsted came from Hewlett Packard. He joined this company when it acquired Compaq. At Hewlett Packard, he was head of the EMEA region with 40,000 people and $50 billion in revenue. At Henkel, he was vice-president of human resources, purchasing, information technology, and infrastructure services before becoming CEO as part of the succession plan.

10 Pfister and Lukka (2019) describe how stretch goals lead to creativity and risk-taking through the interaction of results control with personnel and cultural control as employees assimilate stretch targets into their own values. Our findings are consistent with this evidence: the benefits that have been argued to be associated with stretch goals require interaction with other control mechanisms. In contrast to Pfister and Lukka, at Henkel, stretch goals were just one mechanism out of many – such as performance measures, evaluation, decision rights, and incentives – that the company used to achieve strategic change.

11 Other aspects of creating a winning culture included four principles: (1) everyone wants the Henkel team to win, (2) everyone is eager to beat the competition, (3) everyone is proud of and motivated by the common success, and (4) everyone delivers at his/her best. Its implementation happened around three themes: (1) management competencies, (2) leadership principles, and (3) organizational climate. New competencies included: can-do-mentality and optimism; customer focus; willingness to drive change; competitive mindset; strategic and visionary thinking; passion to win; conflict handling; cultural awareness; developing; building organizational capability; and act as a role model. Leadership principles highlighted accountability; optimism and passion for business and performance; drive change and question status quo; empower teams and strengthen their capabilities; dynamic team diversity; open, direct, and consistent communication; generate trust and focus on empathy; develop and coach top talents; give and ask for feedback; and entrepreneurial role models. Organizational climate was articulated across the following dimensions: clarity and commitment; accountability and discipline; encouragement and delegation; team spirit; rewards and appreciation; passion for excellence and desire to win.

12 Point 2 was further elaborated: ‘to ensure that direct reports understand the mission, strategic priorities, targets and reporting lines, everyone has their targets linked to their incentives, and mandatory face-to-face meetings for performance evaluation.' Point 3 also explained: ‘to ensure that top performers get stronger and more visible rewards and recognition, active demotion of underperformers, and Henkel reward ceremonies for best performance,' and Point 4: ‘with every business head driving the aspiration level for the unit, establishing goals for organizational development, and reinforcing new hire assessment after six and twelve months.'

13 Wider performance measures mean that a manager has more tradeoffs to consider when attempting to maximize a measure. For instance, stock price is a wider measure than profit because a manager has to balance short and long term considerations to maximize stock price, while maximizing the current year’s profit does not require consideration of long-term factors. Similarly, profit is a wider measure than revenues because profits depends on tradeoffs among revenues and costs.

14 Consider, as an example, the difference between holding a manager accountable for a single measure – profit – versus accountability for achieving every single line item on an income statement. The former allows the managers to make many tradeoffs (say between R&D spending and advertising); the latter approach limits those tradeoffs.

15 Certain staff positions were not ranked using this performance evaluation system because of the unique set of skills and few peers to rank against.

16 This result is consistent with prior findings that document how top managers use human development systems in an interactive way to align and leverage skills with the organization’s strategy (Simons, 1991).

17 Since we finished the case study research, the stock has had mixed performance. When Rorsted took over as CEO in April 2008, the stock was trading in the €25–€29 range. By April 2013, the stock was trading at €73 per share. In November 2015, two months before Rorsted announced his departure, it hit a maximum of €107. By May 2017, the stock traded at €125 and as of May 2019, the stock is at around €90. The open question is whether the actions described in the case study research resulted in sustainable long-term performance improvements driven by innovation and entrepreneurial activity, or were due to short-term effects.

18 The system changes reported in Figure 5 reflect our findings at Henkel. Future research might identify alternative designs of management control systems that lead to an entrepreneurial gap. In other words, the concept of the entrepreneurial gap refers to the purposeful misalignment of both spans to create entrepreneurial behavior and it is not linked to specific management control systems; the Henkel case illustrates a particular implementation of the concept.

19 The sequencing of changes in our study – starting with structural changes, moving to cultural aspects, and finishing with redesigning of performance measurement and incentive systems – suggests the existence of underlying variables that might be generalized across settings. For example, tackling structural changes first is consistent with these decisions encountering the least organizational resistance and facilitating the acceptance of new values. Performance measurement and evaluation as the last step is consistent with these changes reinforcing the new set of organizational values.