Case study research

Case study research

Case study research offers the potential for a deeper examination of the processes involved in the relationship between MCS and strategy formulation and implementation. The aim of case research is not necessarily to identify the best fit between MCS, strategy and other variables, but to study the interactions between MCS and strategy. This may be contrasted with the empirical research reviewed in the preceding section that was cross-sectional in design and therefore presented a static view of MCS and strategy; the dynamic nature of the relationships cannot be inferred. Also, case studies can allow a wide range of controls to be studied, including those that are difficult to measure with surveys. In this section, the cases reviewed address a series of Interrelated issues: managers’ perceptions as mediating the link between MCS and strategy, the role of MCS in effecting or impeding strategic change, and choice of interactive and diagnostic controls to manage strategy. Managers’ perceptions as mediating MCS and strategy. Archer and Otley (1991) presented a rich description of the control system used in an agricultural manufacturing company. The managers of Rumenco saw their company as having limited opportunities to determine and pursue strategic goals, due to the declining industry and capital resource limitations. Managers characterized their competitive advantage as cost leadership (production) and product differentiation (based on technical expertise) within a specialized niche market. Rumenco was a small company that relied on a mix of formal and informal controls. The choice of formal controls reflected managers’ thinking about the existing strategy. Extensive budgetary controls and detailed cost reports supported the production cost focus, and extensive market information supported the maintenance of the technical advantage. Regular product development committee meetings played an integrative role, formally linking the three critical areas of the business - production, technical and marketing - which were the sources of competitive advantage. However, the close proximity of managers encouraged frequent informal discussions that were also important in achieving control and coordination. All of these control mechanisms acted to coordinate the major activities of the business and encourage efficient and effective implementation of the current strategy. However, while managers formally recognized there was a performance gap and a need to change strategy, the MCS only encouraged managers to “do what is currently being done more effectively.” The MCS was unable to assist in developing new strategies, and the company was eventually sold. There are three main issues that arise from this case. First, a complementary mix of formal and informal controls can be used to support a strategic direction. Second, committee meetings may play an integrative role in linking MCS and the execution of strategy. Finally, the potential for MCS to support existing strategy and lead to strategic change may be mediated by managers’ perceptions. Accounting controls and strategic change. In Archer and Otley (1991) the nature of the MCS was one factor constraining the develop ment of new strategies. This theme also appears in Roberts (1990) who studied strategic change in a large decentralized company. The high level of decentralization encouraged competition between profit center managers, and distanced corporate managers from changes in market conditions that affected profit centers. Accounting information was seen as a powerful influence in shaping managers’ activities and relationships. However, while it created an external image of success, it concealed potentially damaging strategic consequences. Roberts’ study emphasized how accounting controls can create a climate that can act against successful strategy formation and implementation processes. The accounting controls emphasized individuality, instrumentality, autonomy and dependence. They encouraged conformity and distorted communications, which conflicted with the requirements for successful formulation and implementation of strategy. However, as in Archer and Otley (1991) management conferences (meetings) intervened to play an important integrative function to help resolve conflict between accounting controls and strategy. These meetings provided managers with a means for developing strategy as they encouraged interdependence and reciprocity among the profit center managers and enabled a sharing of market knowledge. They also helped create a set of shared meanings around which actions could be mobilised. This study is valuable as an example of how accounting controls, which for some organizations may have dysfunctional implications for strategy development, can be balanced by non-accounting controls (in this case, management meetings). The integrative role that meetings played was to balance conflicting perspectives, whereas in Archer and Otley (1991) meetings served to integrate the three sources of competitive advantage. Again, perceptions were considered important in influencing strategic change. Knight and Willmott (1993) provides a contrasting case to that of Roberts (1990) describing how new accounting control systems were used to effect strategic change in an insurance company. Unlike Rumenco (Archer & Otley, 1991) strategy was a “conscious choice” of management from a range of viable alternatives. The authors studied the company over a three year period to present a unique story of the implementation of a strategy, and the to move the sleepy paternalistic company to an aggressive competitive company. The control system played a role in adapting managerial attitudes and behavior to be more consistent with the new strategy and the new competitive environment. A similar situation was presented in Dent (1991) who explained how accounting control systems can be instrumental in effecting organizational change, which in turn may lead to control systems change. Knight and Wilmott (1993) reveal the power of accounting controls in influencing attitudes and behavior, however, in contrast with Roberts (1990) the dysfunctional effects of a heavy reliance on cost control were not apparent. This may have been because the new cost control orientation encouraged was consistent with the thrust of the new strategy. The choice of interactive and diagnostic controls to manage strategy. Simons (1987b, 1990, 1991, 1994) presented a series of cases that contribute to a theory of how senior managers can use controls to implement and develop business strategy, which culminated in his book Levers of Control (Simons, 1995). Simons argued that it is not the identification of controls associated with particular strategies that are important, but the distribution of management attention among controls. Like the cases already reviewed, MCS are not viewed merely as devices that constrain and monitor activities to ensure that organizational goals are achieved, but play a role in maintaining or altering patterns of organizational activity. Simons describes “interactive controls” as those that senior management choose to monitor personally. This directs attention towards strategic uncertainties and allows managers to monitor emerging threats and opportunities. The choice of interactive controls provides the signal to subordinates about which aspects need to be attended to, and when new ideas should be proposed and tested. This activates organizational learning, and new strategies emerge over time through the debate and dialogue that surrounds the interactive management controls. “Diagnostic controls” are then used to implement intended strategies (Simons, 1995, p. 63). These controls measure critical performance variables, and their management is delegated to staff specialists. While firms competing within the same industry may face the same set of strategic uncertainties, managers’ identification of relevant environmental uncertainties, and hence, choice of interactive and diagnostic controls may differ. Notably, Simons does not consider how managers’ perceptions and other information processing characteristics affect these choices (Gray, 1990). Simons (1990) compared the competitive characteristics and MCS of two companies operating in the one industry. Company A was a defender, a cost leader and adaptive, while Company B was a prospector, followed a differentiation strategy (based on product innovation and quality) and was entrepreneurial. Company A operated in a relatively stable environment and many aspects that were important for sustanable competitive advantage were highly controllable, and therefore, were treated as diagnostic. Interactive control focused on the strategic uncertainties of product or technological change that could undermine the company’s low cost position. Company B used budgeting systems and planning systems Interactively to set agendas to debate strategy and action plans in the face of rapidly changing environmental conditions. Simons found that subjective reward systems motivate organizational learning in rapidly changing environments where rewarding team effort is important. This is consistent with research described in an earlier section (such as Govindarajan & Gupta, 1985) which supported the use of subjective bonus systems in firms following a differentiation strategy. In a subsequent study, Simons (1991) refined his theory and identified five different types of control systems which managers may choose to use interactively: programmed management systems, profit planning systems, brand revenue budgets, intelligence systems and human development systems.

Three propositions were presented. First, senior managers with a clear sense of strategic vision may choose one type of control system to use interactively, and this choice is influenced by technological dependence detailed development of the new control system. Cost control was the major control mechanism used within product markets, complexity of the product chain and the ability of competitors to respond to product market Initiatives. Second, senior managers use multiple control systems interactively only during short periods of crisis, and when the organization is in transition. Third, senior managers without a strategic vision, or without the urgency to create a strategic vision, do not use control systems interactively. Interactive controls force personal involvement, intimacy with issues and commitment which guides the formal strategy-making process. Simons (1994) extended his earlier work to examine how ten newly-appointed senior managers used formal control systems as levers of strategic change and renewal. While there were differences between managers implementing revolutionary and evolutionary change, the following features were common. The managers used control systems to overcome organizational inertia, communicate the substance of their strategic agenda, organize implementation timetables and targets, ensure continued attention through incentives, and to focus organizational learning on the strategic uncertainties associated with their new strategy. These studies represent a move towards providing a model of the ways that senior managers may select and use MCS in strategy formation and implementation, and to stimulate strategic change. Unlike the empirical studies reported in an earlier section, the content of the strategy is not critical to understanding the nature of the relationship between controls and strategy. Simons (1995) hypothesized that senior managers may use different aspects of the control system to focus on four key constructs that are critical to the successful Implementation of strategy. Core values (which influence belief systems) and interactive control systems (which control strategic uncertainties) are described as creating positive and inspirational forces. Boundary systems (which control risks) and diagnostic control systems (which control critical performance variables) create constraints and ensure compliance with rules. Simons argued that the dynamic tension between these opposing forces allows the effective control of strategy. Simons considered the broad range of formal, informal and cultural controls in his model. However, unlike the previous cases reviewed which took a more interpretive approach, his model adopts a more functionalist approach to explaining the relationships between MCS and strategy.

Conclusion. These case approaches provide evidence about how MCS can inthtence strategic formulation, implementation and change. The notion of control systems playing a proactive role in shaping change is not the conventional approach taken by some prior researchers who saw control systems as passively following change (Den Hertog, 1978; Markus & Pfeffer, 1983) or by the contingency research reviewed in a previous section. Unlike the empirical studies the case approaches provide little evidence about the specific types of controls that suit particular strategies. However, the case authors would possibly contend that their research objectives were of greater significance. They provide valuable insights into how MCS may assist in the formulation and implementation of strategies. Casestudies have been criticized for their lack of generalizability and their inability to provide a body of accumulated knowledge. However, common themes emerge from the cases reviewed. All cases emphasized the importance of managers’ perceptions effecting the nature of strategic change, or the orientation of the MCS. Managers’ perceptions can be considered a mediating variable in the relationship between MCS and strategy (Archer & Otley, 1991). The interdependence of formal and informal controls and strategic processes,and the role of MCS in either supporting, or impeding strategic change was common to all cases. Management meetings were viewed as an important integrating mechanism, facilitating the relationship between MCS and strategy, by Archer and Otley (199 1) and Roberts (1990). In particular, the Simons studies provide a stream of case investigations that contribute towards a model of the dynamic relationship between MCS and strategic change, which is moderated by the ways that managers direct attention to controls. Contemporary approaches to performance measurement systems In recent years many normative studies and practitioner-oriented case studies have emerged which assert that performance measurement systems should be designed to directly support the strategic priorities of the business (see, for example, Kaplan, 1990; Nanni et al., 1992; Meyer, 1994). Lynch & Cross (1992) promoted a performance measurement hierarchy that articulates anintegrated performance measurement system, from senior management level to the operational level, which addresses both market and cost considerations to support aspects of strategic importance. Kaplan and Norton (1992, 1993) presented a balanced scorecard model that emphasizes the need for balance between short-term and long-term measures, and across the strategic dimensions of the business. In professional journals, such as Harvard Business Review, Management Accounting (both the USA and UK journals) and Journal of Cost Management for the Manufacturing Industry, the number of papers that reinforce the notions of consistency and integration between performance measures and strategy are numerous. It is interesting to consider how these contemporary papers relate to the issues reviewed in the preceding sections of this paper. For example, there was conflicting evidence in the empirical research on the different degrees of reliance on cost control of prospectors versus defenders. Supporters of the contemporary approaches to performance measurement systems claim that performance measures should support the focus of the strategy - be it cost, quality or delivery - to promote the “correct” orientation and behavior among all employees, and that a range of performance measures is important to provide “balance”. The contentious issues in papers that take contemporary approachesto performance measurement arise from intuitive arguments, rather than empirical evidence and include the issue of balance (short-term versus long-term measures), the degree of emphasis among various measures, the level of detail of performance measures at different managerial levels, and the degree of consistency between measures at all levels of the organizational hierarchy. The assumption is that performance measures direct attention and motivate employees to act in strategically desirable ways, and help management to assess progress towards strategic goals. Performance measures are assumed to be necessary in all situations, no matter what strategy is pursued. This supports earlier findings of Miller and Friesen (1982) who argued that MCS are useful for entrepreneurs (prospectors) to curb, or balance, innovative excesses, and may also cast light on the seemingly surprising findings of Simons (1987a) regarding the use of cost control in prospectors.