Patterns of management control in a family managed business in an emerging economy: the case of Dilmah tea in Sri Lanka

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University of Wollongong Research Online University of Wollongong Thesis Collection 1954-2016 University of Wollongong Thesis

Sri Lanka Siriyama Kanthi Herath University of Wollongong Recommended Citation Herath, Siriyama Kanthi, Patterns of management

Department of Accounting and Finance, University of Wollongong, 2001. http://ro.uow.edu.

1 University of Wollongong Research Online University of Wollongong Thesis Collection University of Wollongong Thesis Collections 2001 Patterns of management control in a family managed business in an emerging economy: the case of Dilmah tea in Sri Lanka Siriyama Kanthi Herath University of Wollongong Recommended Citation Herath, Siriyama Kanthi, Patterns of management control in a family managed business in an emerging economy: the case of Dilmah tea in Sri Lanka, Doctor of Philosophy thesis, Department of Accounting and Finance, University of Wollongong, Research Online is the open access institutional repository for the University of Wollongong. For further information contact the UOW Library: research-pubs@uow.edu.au

3 PATTERNS OF MANAGEMENT CONTROL IN A FAMILY MANAGED BUSINESS IN AN EMERGING ECONOMY: THE CASE OF DILMAH TEA EST SRI LANKA A Thesis submitted in fulfilment of the requirements for the award of the degree: DOCTOR OF PHILOSOPHY from the UNIVERSITY OF WOLLONGONG Department of Accounting and Finance New South Wales Australia By Siriyama Kanthi Herath B.Com (Hons), M.B.A (University of Colombo, Sri Lanka) M.Com (Hons) ACCY (University of Woliongong, Australia) October, 2001

4 Certificate I, Siriyama Kanthi Herath, certify that this thesis has not been submitted previously as part of the requirements of another degree and that it is the product of my own independent research. 11

5 Dedication To my husband, Anushka and our children, Laksitha and Dinushka for the devotion and encouragement given during this research project and To my father William Kalupahana and my mother Wimala Kalupahana for their never-ending love and financial support. ni

6 Acknowledgments I would like to express my sincere gratitude to Associate Professor Robert Williams, my supervisor, whose invaluable suggestions and advice helped me direct and focus the research. I am indebted for his friendly guidance en the improvement of the content and presentation of the dissertation. Special appreciation is also extended to Dr. Sudhir Lodh, my former co-supervisor, whose kind guidance and suggestions gave me valuable insights into the research in its early stage. I am also appreciative of Professor Michael Gaffikin, Head of Department of Accounting and Finance, University of Woliongong, Professor Warwick Funnel, and Associate Professor Hema Wijewardena, who provided a considerable number of valuable comments and suggestions and gave me the opportunity to work as a part time teacher within the Department. Sincere appreciation is extended to Professor D. Atapattu (University of Ruhuna), Professor W. M. Jayaratne (University of Colombo), and Professor Jay Rajasekera (Internationa! University of Japan) for their encouragement in my academic work. 1 am very grateful to Mr. Dilhan C. Fernando, Director of Marketing, Ceylon Tea Services Ltd. who provided invaluable support in conducting the empirical research, for without his support this project would never have been undertaken. I am also appreciative of Merrill J. Fernando (Chairman and Managing Director of Ceylon Tea Services Ltd) for giving me the opportunity to undertake my empirical study of the company. I am also appreciative of a number of senior managers and ether employees at the research organisation. Especially, I am thankful to Malik J Fernando (Director of Operations), Jaynthi Wijesekera (Marketing Director's Secretary), Saradha Sesa (Financial Controller) Asoka Bandara (Assistant Production Manager), Mahen Rasaratnam (Tea Consultant), Ronald Rubera (Business Development Manager), S. Ramabadra (Accountant), Vajira Karunaratne (Quality Assurance Manager), Dilrukshi Seneviratna (Food Technologist), Bennet Jayasuriya (Human Resources and Administration Manager), BCF Mandis (Security Manager), Sanjaya Perera (Shipping Manager), Dilshan Boteju (Marketing Operations Manager), Regional Marketing Manager (Australia and NZ), and Rehini Disanayaka (Lady Security Officer) who gave assistance to me in the conduct of the empirical research. Many of them were kind enough to provide information through s for more than two years. A very special thank you to C. Smark who generously helped me in conducting my literature review. Many thanks to Justin Norris, Administrative Assistant to the Sub Deans and Dean Trifunovich, Computer Systems Officer for giving their best support for my study. The moral support I received from my husband, Anushka, and our daughter, Laksitha and our sen, Dinushka, is inexpressible. Their patience and cooperation helped me to complete the thesis. It is hard to express in words the encouragement and support I received from my parents, my brother, Sarath and my two sisters, Asoka and Nalika towards the completion of this thesis. Their support helped me overcome my financial problems enormously. IV

7 Abstract This study is concerned with the patterns of management control existing in a family controlled tea exporting company in Sri Lanka, Ceylon Tea Services Ltd (Dilmah). The focus of the research is on the procedures and processes of control operated in the researched organisation. The study begins with a detailed discussion of the theory of management control. It examines both traditional and contemporary views of management control. A review of the basic concepts of control precedes the detailed review of literature on management control. A model of management control is developed as a guide to the study based on the literature reviewed. Several formal and informal control mechanisms, which affect organisational effectiveness, are identified. The case findings are then presented and an integrative model of management control for studying family controlled businesses is presented based on the evidence obtained in the study.

8 TABLE OF CONTENTS Certificate Dedication Acknowledgments Abstract Table of Contents. List of Exhibits... II iii iv V vi xi CHAPTER ONE: STATEMENT OF THE ISSUE 1.1 Introduction 1.2 Research Focus 1.3 The Purpose of the Study 1.4 Statement of Research Questions 1.5 Background of Research Questions The Concept of Management Control 1.6 The Conceptual Framework 1.7 Research Strategy 1.8 Organisation of the Research Report CHAPTER TWO: MANAGEMENT CONTROL AND MODELS OF ORGANISATION 2.1 Introduction 2.2 Management Centre! Definition of Control Process of Control The Need for Control Management Control Systems The Role of Management Centre! Systems Effective Management Control Systems 2.3 Typologies of Management Control Control Research Under Different Paradigms Other Typologies: The Rational-Natural and Closed-Open Perspectives of Organisations Organisational Effectiveness Theoretical Perspectives of Effectiveness Types of Control Mechanisms Found in the Literature 2.4 Introduction to the Research Framework: The Otley et a! (1996) and the Whitley (1999) Frameworks The Open-Closed and Rational-Natural Perspectives The Closed Rational Perspective The Closed Natural Perspective The Open Rational Perspective The Open Natural Perspective VI

9 2.4.2 The Whitley Framework of Centre! Dimensions of Management Control Systems The Degree of Fermalisation The Extent of Control The Extent of Subordinate Influence in Centre! System The Scope of Control System Control System Types Bureaucratic Control Systems Output Based Centre! Systems Delegated Control Systems Patriarchal Centre! Systems 2.5 Case Studies in Management Centre! 2.6 The Relationship of the Literature to the Study 2.7 Summary CHAPTER THREE: A MODEL OF MANAGEMENT CONTROL FOR A FAMILY CONTROLLED BUSINESS 3.1 Introduction 3.2 Guiding Perspective: Management Control Perspective 3.3 The Model of Management Control Components of the Proposed Model of Management Control Organisational Structure and Strategy as Components of Management Control Organisational Structure as a Component of Management Control Organisational Strategy as a Component of Management Control Corporate Culture as a Component of Management Control Management Information System as a Component of Management Centre! Cere Control Package as a Component of Management Centre! Organisational Effectiveness as a Component of the Proposed Model Summary of the Proposed Mode! 3.4 Summary of the Chapter CHAPTER FOUR: METHODOLOGICAL OUTLINE 4.1 Introduction 4.2 Research Methodologies in Management Accounting. 4.3 Case Study Research Overall Research Perspective 4.4 Research Design Study Questions Study Propositions Unit of Analysis VII

10 4.4.4 Linking the Data to the Propositions and Interpreting Study's Findings The Role of Theory in Research Design Criteria for Judging the Quality of Research Design Sources of Evidence Interviews with Internal Staff Employee Opinion Surveys Direct Observation Archival Records Press Releases and Online Information Contacts with 'Dilmah' Through Electronic Mail Customer Opinion Survey Analysing Case Study Evidence 4.5 Summary CHAPTER FIVE: THE SRI LANKAN CONTEXT 5.1 Introduction 5.2 Sri Lanka and the Tea Industry The Early Era of Ceylon Tea Industry Post Colonial Sri Lankan Economy and the Tea Industry 5.3 The Parent Company: MJF Group Tea Companies 5.4 The Subject Organisation (Ceylon Tea Services Ltd) 5.5 Summary CHAPTER SIX: CORPORATE STRATEGY AND ORGANISATIONAL STRUCTURE: CEYLON TEA SERVICES LTD 6.1 Introduction 6.2 Dilmah Tea: a Brief Sketch 6.3 Company History Merrill J. Fernando as an Entrepreneur: Vision of Dilmah Founder Definition of Business 6.4 Corporate Strategy Strategic Managers and Ownership (as at 31 March 2000) Strategic Planning Management Human Resources Growth Strategy MJF Group's Strategic Alliances with Hayleys and Aitken Spence; Tea Plantation Companies The MJF/Celestial Partnership MJF Group's Alliance with Forbes and Walker Ltd 6.5 Organisation Structure: Business Segments and Reorganisation Corporate organisation 6.6 Summary vm

11 CHAPTER SEVEN: FUNCTIONAL STRATEGIES: PRODUCTION, MARKETING, AND FINANCIAL STRATEGIES 7.1 Introduction, 7.2 Strategic Business Units Production Strategy Manufacturing Raw Materials Dilmah Operations Management Flavouring Tea Blending Strategy Operations in Dilmali Production Plant Packaging Production Facilities Production Planning Product Quality Marketing Strategy Organisation of Marketing Operations Areas of Operations Advertising and Promotion Dilmah Logo Financial Strategy Financial Situation Important Accounting Policies 7.4 Chapter Summary CHAPTER EIGHT: CORPORATE CULTURE 8.1 Introduction 8.2 Corporate Culture as Found in the Literature 8.3 Corporate Culture at Ceylon Tea Services Limited Commitment to Quality Passion and Dedication to Work Concern for Consumers Concern for Employees Concern for Innovation Concern for the Community Concern for the Environment 8.4 Summary CHAPTER NINE: MANAGEMENT INFORMATION SYSTEMS 9.1 Introduction 9.2 The Nature of Management Information Systems Management Information Systems at Dilmah 9.3 Accounting Information Systems The Financial Accounting Information System at Dilmah IX

12 9.3.2 The Management Accounting Information System Summary of Formal Accounting Systems 9.4 Chapter Summary CHAPTER TEN: CORE CONTROL PACKAGE OF MANAGEMENT CONTROL 10.1 Introduction 10.2 Core Centre! Mechanisms Departmental Budgets Total Quality Management Participative Approach to Management Teamwork and Employee Involvement Communication Efforts Recognition of Achievement Formal Rules and Regulations 10.3 Chapter Summary CHAPTER ELEVEN: TOWARD AN INTEGRATIVE MODEL OF MANAGEMENT CONTROL 11.1 Introduction 11.2 Answering the Patterns of Management Control 11.3 Assessment of the patterns of Management Control Strategic Planning, Management Control, Operational Control, and Accountability Accounting Control System 11.4 Control System Type: Major Characteristics of the Control System The Degree of Fermalisation: Reliance on Formal Rules and Procedures Control Over Behaviour Influence of Subordinates in Control Scope of Control System 11.5 An Integrative Model of Management Control 11.6 Chapter Summary CHAPTER TWELVE: CONCLUSIONS OF THE STUDY 12.1 Introduction 12.2 Major findings 12.3 Strengths and Weaknesses of the Study Future Research Directions 12.5 Conclusions of the Study Bibliography Appendices (Volume Two)

13 LIST OF EXHIBITS Exhibit Page 2.1 Organisational Models and their Dimensions of Reality Examples of Formalised Control Mechanisms Control Research Under Different Perspectives Control System Types The Model of Management Control Core Control Package Comparative Social Economic Indicators Export Structure of Sri Lanka, Comparative Expert Data (Rs'000) A Dilmah Tea Garden Dilmah Tea Factory Total Sales (Ceylon Tea Service Ltd.): Ceylon Tea Service (CTS) Employee Population: Turnover and Net Profit Shareholders Funds Fixed Assets and Investments Value Added Earning Per Share Return on Shareholders Funds Current Ratio Founder of Dilmah Tea Directors' Interest in Shares as at March The Management Team (as at November 1999) Ceylon Tea Services Ltd Staff Organisation Chart (as at January 2000) Organisation Chart (Prior to Restructuring in 1997) A Sample of Dilmah Products Tea Tasting by the Founder of Dilmah A Dilmah Tea Advertisement Dilmah Logo Financial Performance, : Ceylon Tea Services Ltd (In Thousand Rupees) Quality Policy Chairman with Plantation Workers' Children Distinctive Features of an Accounting System Distinctive Features of the Accounting System at Dilmah Perfonnance Appraisal - Management and Clerical Grades Employee Training Request Results of Survey of Organisational Climate and Values Recent Sales Data Results of Employee Job Satisfaction Survey An Integrative Model of Management Control for a Family Controlled Business 333 XI

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University of Wollongong. Research Online University of Wollongong Research Online University of Wollongong Thesis Collection 1954-2016 University of Wollongong Thesis Collections 2003 Teacher education and teacher competencies: a study of how