MANAGEMENT CONTROL SYSTEMS AND STRATEGY:
A RESOURCE-BASED PERSPECTIVE
JEAN-FRANÇOIS HENRI
Assistant professor
École de comptabilité, Université Laval
Québec, (Qc), Canada, G1K 7P4
Phone: 418-656-7737
Fax: 418-656-7746
I would like to thank Claude Laurin and Ann Langley for their insightful comments and suggestions. I would also like to acknowledge the useful contributions of Christopher Chapman, Robert Chenhall, Louise Côté, Maurice Gosselin, the two anonymous reviewers and the participants at the 2003 CAAA Conference and 2003 EIASM Workshop on Performance Measurement and Management Control.
MANAGEMENT CONTROL SYSTEMS AND STRATEGY:
A RESOURCE-BASED PERSPECTIVE
ABSTRACT
The aim of this study is to examine, from a resource-based perspective, the relationships between the use of management control systems (MCS) and organizational capabilities. More specifically, the study focuses on the diagnostic and interactive uses of one important aspect of MCS, namely performance measurement systems (PMS), and four capabilities leading to strategic choices (i.e., market orientation, entrepreneurship, innovativeness, and organizational learning). Three research questions are investigated in this study: (i) To what extent do the diagnostic and interactive uses of MCS contribute specifically to the creation and maintenance of capabilities leading to strategic choices? (ii) To what extent do the diagnostic and interactive uses of MCS act in combination to produce dynamic tension which contributes to the creation and maintenance of these capabilities? (iii) To what extent does the use of MCS contribute to organizational performance? The results suggest that an interactive use of PMS fosters the four capabilities by focusing organizational attention on strategic priorities and stimulating dialogue. Also, by creating constraints to ensure compliance with orders, the diagnostic use of PMS exerts negative pressure on these capabilities. Furthermore, some evidence suggests the influence of dynamic tension resulting from the balanced use of PMS in a diagnostic and interactive fashion on capabilities and performance.
Key words: performance measurement, resource-based view, capabilities, strategy, interactive, diagnostic, dynamic tension
1. INTRODUCTION
In the current business environment characterized by fast changes in customers, technologies and competition, organizations need to continuously renew themselves to survive and prosper (Danneels, 2002). Innovativeness, organizational learning, market orientation and entrepreneurship are recognized as primary capabilities to reach competitive advantage (Hurley & Hult, 1998; Hult & Ketchen, 2001; Ireland, Hitt, Camp, & Sexton, 2001). Over the past 15 years, the resource-based view (RBV) of the firm on the origins of competitive advantage has become a very influential framework and one of the standard theories in the field of strategy (Barney, Wright, & Ketchen, 2001; Hoopes, Madsen, & Walker, 2003). The RBV is based on the principle that competitiveness is a function of distinctive and valuable resources and capabilities controlled by a firm. Despite considerable interest in the relationship between management control systems (MCS) and strategy, the MCS literature has devoted scant attention to the RBV. This study seeks to extend the research at the interface between MCS and strategy with the application of a RBV framework.
So far, a significant body of literature has explored the effects of strategy on MCS and, to a lesser extent, the effects of MCS on strategy (Dent, 1990; Langfield-Smith, 1997; Shields, 1997). A first line of research has emphasized the effects of strategy on MCS. The concept of strategy has been generally examined at a strategic-choice level: (i) market positioning: cost leadership versus differentiation (e.g. Govindarajan, 1988; Govindarajan & Fisher, 1990; Bruggeman & Stede, 1993), (ii) strategic pattern: prospector versus defender (e.g. Simons, 1987; Abernethy & Guthrie, 1994; Hoque, 2004), (iii) strategic mission: build, hold, harvest (e.g. Govindarajan & Gupta, 1985; Merchant, 1985), or (iv) strategic priorities: customization, quality, flexibility, etc. (e.g. Abernethy & Lillis, 1995; Chenhall & Langfield-Smith, 1998; Baines & Langfield-Smith, 2003; Ittner, Larcker, & Randall, 2003).
These conceptualizations generally take strategy as a given, consider it from a content perspective (Fahey & Christensen, 1986), and restrict its scope to the notion of intended strategy (Mintzberg & Waters, 1985).[1] In these studies, MCS are considered for the most part to be strategy-implementation systems and the last step in the strategic-management process. This conceptualization of MCS follows a structural approach whereby the perspective is static and the focus is placed on such issues as the presence or absence of specific systems, their technical properties and their design (Dent, 1987; Chapman, 1997; Chapman, 1998).
A second line of research has emphasized the effects of MCS on strategy. The concept of strategy has also been examined at a strategic-choice level and, to a lesser extent, at a capabilities level. First, a number of studies have examined strategy at a strategic-choice level: (i) strategic priorities (e.g. Chenhall, 2005; Marginson, 2002), and (ii) strategic change (e.g. Abernethy & Brownell, 1999; Chenhall & Langfield-Smith, 2003). Other studies refer indirectly to strategy at a capabilities level in terms of innovation or organizational learning (e.g. Kloot, 1997; Davila, 2000; Bisbe & Otley, 2004).
These conceptualizations consider strategy as being influenced by MCS, consider it from a process perspective (Huff & Reger, 1987), and expand its scope to the notion of emergent strategy (Mintzberg & Waters, 1985). In these studies, the role of MCS in the formulation of strategy is recognized as well as their continuous implication during the strategic-management process. This conceptualization of MCS follows a processual approach whereby the perspective is dynamic and the focus is on such issues as the dialogue and interaction surrounding the use of MCS (Dent, 1987; Chapman, 1997; Chapman, 1998).
Numerous authors have pointed out that the findings provided by the MCS-strategy stream of research remain ambiguous and sometimes contradictory (e.g. Langfield-Smith, 1997; Chapman, 1997; Abernethy & Brownell, 1999; Chenhall, 2003; Ittner et al., 2003). These ambiguous results can be attributed in part to the various definitions, conceptualizations and operationalizations of strategy and MCS (Langfield-Smith, 1997; Simons, 1990; Kald, Nilsson, & Rapp, 2000). They can also be explained by two elements: (i) the absence of a theoretical framework founded on the resource-based view, and (ii) the limited attention devoted to the dynamic tension resulting from different uses or roles of MCS.
First, the relationship between MCS and strategy may not have been studied at the right level of analysis. As suggested by Ittner & Larcker (2001), one key element in studying strategy and MCS is to identify the specific factors that do in fact lead to strategic success. Following the RBV, the link between strategy and MCS may occur at the capabilities level rather than the strategic-choice level. The RBV rests on the principle that competitiveness is a function of the strength, expert exploitation, and leveraging of specific internal resources and capabilities controlled by a firm (Lengnick-Hall & Wolff, 1999). These resources and capabilities are distinctive, valuable, and must be protected from imitation, adoption, or substitution by competitors to create a sustainable competitive advantage (Wernerfelt, 1984; Barney, 1991). They support strategic choices by providing the competitive advantage necessary to materialize these choices. MCS must be aligned with capabilities to be effective and consistent with strategic choices. Hence, the notion of strategic choice itself may not be directly traceable to MCS. Instead, the relationship should be examined between capabilities and MCS, rather than between strategic choice and MCS.
Secondly, the traditional role of MCS in the implementation of strategy is commonly recognized (e.g. Anthony, 1965; Ansoff, 1965; Andrews, 1971). Following the work of Simons (Simons, 1990; Simons, 1991; Simons, 1994; Simons, 1995), several studies have examined a more active role of MCS in the formulation of strategy and the implementation of strategic change (e.g. Abernethy & Brownell, 1999; Chenhall & Langfield-Smith, 2003; Bisbe & Otley, 2004). Another line of research describes how the organizations balance the traditional and more active roles of MCS (e.g. Dent, 1987; Haas & Kleingeld, 1999; Chapman, 1998; Ahrens & Chapman, 2004). However, less attention has been devoted to the effects of dynamic tension resulting from the balance use of MCS in various ways. Notable exceptions are the work of Chenhall & Morris (1995) and Marginson (2002). While the former has examined the joint effect of organic processes and formal MCS on performance, the latter has used the model of Simons to report some trade-offs resulting from the various uses of MCS. A more complete understanding of the relationships between MCS and strategy requires the integration in the theoretical and empirical analyses of both traditional and more active roles of MCS, as well as the tension resulting from those uses.
Building on the work of Simons, this study aims to examine, from a resource-based perspective, how the use of MCS by top management team can act as an antecedent to organizational capabilities leading to strategic choices. Specifically, this study focuses on the traditional feedback role of MCS to support the implementation of strategy (‘diagnostic use’) and the more active role of MCS associated with the signals sent throughout the firm to focus organizational attention, stimulate dialogue and support the emergence of new strategies (‘interactive use’). These two types of use work simultaneously but for different purposes. Collectively, their power lies in the tension generated by their balanced use which simultaneously reflects a notion of competition and complementarity.
Hence, three specific research questions are investigated in this study: (i) To what extent do the diagnostic and interactive uses of MCS contribute specifically to the creation and maintenance of capabilities leading to strategic choices? (ii) To what extent do the diagnostic and interactive uses of MCS act in combination to produce dynamic tension which contributes to the creation and maintenance of these capabilities? (iii) To what extent does the use of MCS contribute to organizational performance? A theoretical model is developed and tested with empirical data gathered from a survey.
The remainder of this paper is organized as follows. The next section briefly examines the resource-based view and the use of MCS following the model of Simons. Thereafter, a theoretical model is developed and a set of hypotheses is presented. The next two sections include a description of the survey design, the analysis of the data using structural equation modelling and a discussion of the results. The final section presents the theoretical contributions, practical implications, limitations and insights for future research.
2. THEORETICAL FRAMEWORK
2.1 Definition of Constructs
Resource-based View and Capabilities
The RBV conceptualizes firms as bundles of resources heterogeneously distributed across firms, and that resource differences persist over time (Wernerfelt, 1984; Amit & Schoemaker, 1993). Resources that are valuable, rare, inimitable and non substitutable lead to the achievement of sustainable competitive advantage that cannot be easily duplicated by competitors (Barney, 1991). Resources include various elements that can be used to implement value-creating strategies: specific physical assets (e.g., specialized production facilities, geographic location), human resources (e.g., engineering experience, expertise in chemistry), organizational assets (e.g., management skills, superior sales force), and competencies (e.g., miniaturization, imaging) (Barney, 1991; Teece, Pisano, & Shuen, 1997; Eisenhardt & Martin, 2000).[2]
Capabilities forge a link between resources and permit their deployment (Day, 1994). They are the organizational processes by which firms synthesize and acquire knowledge resources, and generate new application from those resources (Kogut & Zander, 1992). Formally stated: “The firm’s processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as market emerge, collide, split, evolve, and die.” (Eisenhardt & Martin, 2000:1107).
Innovation, organizational learning, market orientation and entrepreneurship are recognized as primary capabilities to reach competitive advantage, to match and create market change. Past research suggests that each of these four capabilities is adequate to offer strengths, but is not sufficient to develop sustained advantages. Only collectively can they help a firm to be uniquely competitive (Bhuian, Menguc, & Bell, 2005; Hult & Ketchen, 2001; Ireland et al., 2001; Hurley & Hult, 1998). Hence, this paper investigates the influence of MCS on each of these four capabilities.
First, innovativeness refers to the notion of the organization’s openness to new ideas, products and processes, and its orientation toward innovation (Hurley & Hult, 1998). Innovation is considered by many scholars and managers to be critical for firms to compete effectively in domestic and global markets, and one of the most important components of a firm’s strategy (Hitt, Ireland, Camp, & Sexton, 2001). Firms that have a greater capacity to innovate are able to develop a competitive advantage, achieve corporate renewal and achieve higher levels of performance (Hurley & Hult, 1998; Danneels, 2002).
Second, organizational learning refers to the development of insights, knowledge and associations among past actions, the effectiveness of these actions, and future actions (Fiol & Lyles, 1985). An organization’s ability to survive and grow is based on advantages that stem from capabilities that represent collective learning (Nevis, Dibella, & Gould, 1995). Learning is considered to be an important facilitator of competitive advantage by improving a firm’s information processing activities at a faster rate than rivals do (Baker & Sinkula, 1999).
Third, market orientation refers to the organizational emphasis on customers’ expressed needs and on the development of long-term thinking based on customers’ latent needs (Slater & Narver, 1998; Slater & Narver, 1999). It specifically relates to three components, namely customer orientation, competitor orientation and inter-functional coordination. Market orientation effectively and efficiently creates the necessary behaviors for the creation of superior value for customers, and thus, continuous performance for the business (Kohli & Jaworski, 1990; Narver & Slater, 1990).
Fourth, entrepreneurship refers to the ability of the firm to continually renew, innovate, and constructively take risks in its markets and areas of operation (Miller, 1983; Naman & Slevin, 1993). Entrepreneurial actions entail creating new resources or combining existing resources in new ways to develop and commercialize new products, move into new markets, and/or service new customers (Hitt et al., 2001). Entrepreneurship is identified as a critical organizational process that contributes to firm survival and performance (e.g., Miller, 1983; Barringer & Bluedorn, 1999; Hitt et al., 2001).