Management Control Systems in Startups

Question 1

Davila and Foster, 2007 discusses what?

Answer 1

Examines adoption of Management Control Systems, in start-ups in a sample consisting of biotech firms, IT firms and others. “The voluntary early adoption of these, indicate that these pass a market test”

Question 2

Does the rate of adoption of management control systems affect CEO rotation?

Answer 2

Yes. CEO´s choosing to have low MCS intensity have significantly higher hazard ratios.

They often get replaced by CEOs with professional managers with experience, education, and motivation. (Founders are ill suited managers)

Question 3

Why do you need MCS for growth? With an emphasis on employees

Answer 3

1) When you grow to a certain size, you can no longer supervise and control directly through observation. “We figured our personalities can go through one floor and two walls”
2) External pressure from VCs and investors to centralize decision-making.

Question 4

What kind of pricing does pharma utilize?

Answer 4

Pharma is value-based pricing (that is, the product is based on the value added to the society – like saving on further hospitalization, increased life expectancy etc.)

Question 5

Do management control systems impede start-up development?

Answer 5

Maybe, if implemented wrong. But not necessarily. The need for these systems grows when the company grows as owners cannot know everything going on in the company anymore (think 10 employees to 50)

Question 6

Management Control Systems (MCS) are?

Answer 6

Formal information-based routines to keep or alter behavior in an organization.

Question 7

Mention the 8 types of management control systems (MCS)?

Answer 7

1. Financial planning
   Operating budget, cash flow, projections, sales projections
2. Financial evaluation (evaluation of performance)
   Capital investment approval procedures, operating expenses etc.
3. Human resource planning
   Codes of conduct, training program etc.
4. Human resource evaluation
   Performance evaluation and rewards
5. Strategic planning
   Strategic milestone plans, product portfolio plan
6. Product development management
   Project milestones
7. Sales/marketing management
   CRM
8. Partnership management
   Partner monitoring systems

Question 8

What is the most commonly adopted MCS across the eight categories?

Answer 8

Financial planning

Question 9

What are the 3 most commonly adopted MCS across the eight categories and what do they have in common?

Answer 9

Planning! Financial planning, strategic planning, and human resource planning

Question 10

When does the importance of financial evaluation and human resource evaluation increase?

Answer 10

In year 4/5, before that, it’s not very important.

Question 11

What is the correlation between MCS and growth?

Answer 11

From investment rounds series A to D (VC rounds) – MCS increase across all categories. However, in life science, sales/marketing MCS often don’t increase as much, as you often out license the sales, as building a sales force is a lot of work.

Question 12

What is the difference between VC backed and non-VC backed biotech startups?

Answer 12

The VC backed once utilize more MCS!

Multiple possible explanations:
- VC backed companies grow faster => demand for MCS.
- VC capital is necessary for firms that are cash flow negative in start-up=> need for financial planning.
- Because it’s a prerequisite by the VCS?
- Is this because it attracts VCs?
- Because they are better businesses because of the MCS?

Question 13

The razor-blade model is?

Answer 13

Selling the machine cheap and then sell the “razor-blade”/reagents afterwards at a higher price.

Question 14

What does Christner and Strømsten look into?

Answer 14

How accounting mediates innovation over time

Question 15

What is the theory of mediation?

Answer 15

A mediating instrument is an instrument that links different actors and domains and both represents and intervene in the economic representation. – Think: Moore’s law made more investments go into chips –> reinforced/mediated the development.

Question 16

What is IRR? And what does it equal?

Answer 16

Internal Rate of Return = Net Present Value (NPV) = -C0 + Ct/(1+r)^t

Question 17

What are overhead cost?

Answer 17

The indirect costs of an organization, usually classified as manufacturing, administration, rent etc.

Question 18

Why are overhead costs difficult?

Answer 18

Because they are more intangible and unclear and indirect. It’s difficult to trace compared to direct costs. Especially as the organization grows.

Question 19

What is fixed cost?

Answer 19

Costs that are not immediately affected by changes in volume (usually the output).

Question 20

What is the problem with fixed cost?

Answer 20

If sales go down, you cannot necessarily cover your fixed cost. You need income to cover these as they are not easy to get rid of.

Question 21

What is direct cost?

Answer 21

Financial items that can be easily traced to a product or service.

Question 22

What is variable cost?

Answer 22

Costs that may vary in output: e.g. labor (in production) and materials.

Question 23

What is marginal cost?

Answer 23

The cost of producing one extra unit.

Marginal costs affect your choices. If the marginal cost is very high, it might not be worth it to produce it. If the marginal cost is higher than the expected income from sales, it’s not worth it. It’s forward looking, meaning it’s doing something extra (from producing 1 to producing 10 units for example)

Question 24

What is Opportunity cost?

Answer 24

The cost of deselecting an opportunity. The cost of the second best option.

Question 25

What is Sunk cost?

Answer 25

Expenditures incurred in the past that cannot be recovered. Often affects your decision-making in a problematic way – don’t throw good money after bad money.

Question 26

What is average cost?

Answer 26

Total cost divided by number of units

Question 27

What is contribution margin?

Answer 27

Difference between price and variable cost

Question 28

What is operating leverage?

Answer 28

Operating Leverage = CM/profit

High OL = High costs each months, but increasingly high profit with increased volume. Meaning fixed costs are high but variable costs are low.
Low OL = Low costs each month

Question 29

What is turnover?

Answer 29

Turnover is the total nr. of sales made by a business in a certain period

Question 30

What three elements make up organizational architecture?

Answer 30

• Assignment of decision-making authority: who gets to make what decisions.
• Performance evaluation: how is the performance of business units and employees measured?
• Compensation structure: how are employees rewarded

Question 31

What are the three assumptions in organizational architecture?

Answer 31

• Individuals maximize their own self-interest
• Owners of firm want to maximize firm value
• Maximizing firm profits maximizes firm value

Question 32

Incentives are designed to do what?

Answer 32

Design performance incentives based on internal accounting measures to motivate employees to take actions that will maximize firm value

Question 33

What are the 5 agency problems (with solutions) in organizational architecture?

Answer 33

1) Free-rider problem: Agents have incentives to shirk because their individual efforts are not directly observable.
Solutions: Incentive contracts, monitoring, etc.

2) Horizon problem: Agents expecting to leave firm in near future place less weight on long-term consequences.
Solutions: Incentive contracts, monitoring, etc.

3) Employee theft: Employees take firm resources for unauthorized purposes.
Solutions: monitoring, inventory control, etc.

4) Empire-building: Managers seek to manage larger number of agents to increase their own job security or compensation.
Solutions: Modify incentive contracts, benchmarking, etc.

5) Influence Costs
Solution: rules and bureaucracy

Question 34

What is the breakeven point/”to breakeven”?

Answer 34

Breakeven point: QBE is the number of units that must be sold at price P such that total revenues (TR) equal total costs (TC).

Breakeven is when revenue = total cost for units sold at a certain price.

Question 35

MCS affect startups how?

Answer 35

Starts ups that grow faster, rotate CEO less often and receive more funding use management controls too a larger extent than other firms.

Question 36

Do MCS affect development of a company?

Answer 36

Finance and control systems affect innovation and thereby the development of firms.