Knowledge Specificity in Management Control System Design: A Case Study Evidence

This paper builds a theoretic model to explain why and how knowledge specificity impacts firms’ Management Control Systems (MCS), based on Transaction Cost Economics (TCE). The model concludes that managers organize MCS on an individualized basis when knowledge specificity in a transaction is low, and involve worker teams when the specificity is high. Using the Product Variety Strategy (PVS) as a proxy for knowledge specificity, the model is examined in four New Zealand case units. The evidence is largely consistent with the theory, where for low specificity, decision management rights are centralized but the execution right is delegated to individual workers. The performance of individual workers is evaluated through task standards, and the incentive compensation is partly traced to individual performance. For high specificity, decision management rights are shared by manager with workers as one team, and the performance of the team is evaluated with reference to the job plan measures. Incentive compensation is traced to the whole firm, wherever inter-team involvement exists.