Strategic Choice and the Configuration of Management Control Systems

Abstract

This paper examines firms' design of performance measurement systems to support the effective implementation of business strategy, and tests whether different strategic choices are associated with the use of different performance measures. Performance measurement choices analyzed are the extensiveness, purposes and types of performance measures used. In addition, the use of alternative controls, action controls and problem solving teams, is examined. To explain these management control choices, the structural model developed also includes other important contingency variables that are associated with business strategy, including firm competencies, technology and environmental uncertainty. An analysis of 387 survey responses from a cross-section of industries suggests the existence of three broad types of business strategy, relating to innovation, customer-quality and low-cost. The findings suggest that emphasis on different strategies is associated differently with firms' competencies, environmental uncertainty, choice of technology, and use of performance measures. Although more emphasis on low-cost or customer-quality is associated with more extensive use of performance measurement information, each of the three strategies is also associated with use of different types of performance measures. Specifically, firms emphasizing innovation emphasize measures related to innovation, cost & efficiency and market performance (including profit). High emphasis on a customer-quality strategy is associated with emphasis on measures relating to quality and managers. Firms emphasizing low-cost emphasize measures related to cost & efficiency, production (systems) and employees. These firms also use performance information for more purposes than others. The results further show that most firms pursue combined strategies, which, compared to emphasis on a single strategy, is associated with more extensive and intensive use of performance information. This study thus finds support for contingency propositions that different strategic choices are differently associated with environmental and firm-level contingencies and require different configurations of management control systems.