The Pros And Cons Of Financial Targets

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To succeed in today’s highly uncertain environment, business organisations should never rely completely on a control system that emphasises financial (or quantitative) targets.
Management control systems have been the subject of much research and debate ever since their inception under traditional tools such as budgeting and planning. Their definition has never been fully clarified, though an approximate definition can be given; management control systems (MCS) are vehicles for both creating and conveying strategy throughout a business and can do so through a wide range methods such as; creating a sense of culture and behavioural expectations, managing the performance of employees and managers (Drury, 2016). Financial targets are a more traditional
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These criticisms are backed by further findings from Chenhall and Langfield-Smith (2007), from which we can infer that target based strategy isn’t complex enough to deal with larger firms facing more uncertainty, as a worse performance only leads to more uncertainty and exposes the company to further risks it will struggle to quantify, such as competitor performance. Grafton and Widener (2010) explains that a financial target or budget based approach is suitable in smaller firms, where managers are often the shareholders, the firm faces less internal and external uncertainty, presumably as there are less agency issues and fewer competitors. This implies that on a small scale, the impact of uncertainty is reduced through maximising the performance of a firm, as more resources are then available to aid survival and capitalise on the failings of local …show more content…
Financial targets are typically charged with stifling innovation, a response to uncertainty which Teece et al. (2016) clarifies is essential in helping a business adapt and thrive in uncertain conditions. However, Bisbe and Otley (2004)’s research finds that financial targets actually moderate innovation, only lowering it when it is high, implying that if applied correctly, financial targets may be used to induce innovative management, again, implying targets aren’t suitable in complex, dynamic companies like Google but may be useful in smaller businesses, as reiterated in Teece and Leih (2016).
Marginson and Ogden (2005) explains target’s relationship with innovation as a trade-off at lower levels, leaving senior managers to innovate. There is evidence of how this is perhaps a poor choice in many businesses as much innovation comes from the boundaries of a company, as those most in touch with the markets. An example of this is game developer, Valve and their PC game distribution platform Steam, suggested and developed by non-managerial employees (Felin and Powel, 2016). lt has evolved into a monopoly and ensured the company a great deal of reliable revenue and advertising platform, which shields it from the uncertainty and competition often faced by competitors in this volatile

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