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This research investigates the relationship between business strategy and accounting-based-control-systems. This
research was designed to determine the nature and extent of differences in the control systems of firms which
follow different busness strategies. The focus of this research is the relationship between two classes of variable :
control systems attrbutes& business strategies.
Khandwalla (1!"# $Effect of Different Types of Competition on the Use of Management Controls, Journal of
Accounting Research% : study about the relationship between firm strategies and control system
&iller &'riensen (1("# $Innovation in Conservative and Entrepreneurial irms, !trategic Management Journal%
: the firms engaged in continual product development and the search for new mar)et segments became
differentiated and re*uired elaborate control for purposes of integration
Tushman& +adler (1!(# $Information "rocessing as an Integrating Concept in #rgani$ational Design,
Academy of Management Revie%%
Kamm (1(,# $The &alance of Innovative &ehavior and Control in 'e% "roduct Development% : control was
tightest in companies which were perceived to have the highest level of product-mar)et inovation
Control Systems Attributes
.ontrol /ystems is formali0ed procedures and systems that use information to maintain in organi0ational activity.
1xamples of control systems attributes include : tightness of budget goals2 use of cost control2 fre*uency of
reporting2 and intensity of monitoring performance results.
&iles&/now identified 3 generic strategies which labeled 4rospector2 5efender2 and 6naly0er.
5efenders: operate in stable products areas2 offer more limited products than competitors2 compete
through cost leadership2 *uality2 & service.
4rospectors: compete through new products & mar)et development. 4roduct lines change over time and
this type of firms is constantly see)ing new mar)et opportunities
6naly0ers: combine parts of both 5efender and 4rospectors strategies.
&iles&/now topology was chosen in this research because of " reasons:
1. it7s well documented2 it represents the current strategy
". the topology has been independently tested in subse*uent studies and found to be a useful means of
classifying generic strategies across diverse industries
This study investigates from an accounting perspective: which specific attributes of control system design differ
with a firm7s strategy.
8o: .ontrol system attributes do not differ between 4rospector firms and 5efender firms
Sam"le sele#tion
/now&8ambric) identify 9 methods of classifying firms into groups by strategy:
:nvestigator inference
/elf-typing by sub;ect firm
1xternal assessments by experts
The use of ob;ective indicators
1xternal assessments by experts was chosen for this study due to certain advantages:
The method allows for large sample si0e
:t is well suted to identifying reali0ed
5isadvantages of this method is raters may possess limited )nowledge concerning a large array of organi0ations.
/now&8abric) point out2 this disadvantage could be overcome by constraining the geographic proximity of firms to
4opulation: "<1 canadian manufacturing firms in 3( industries in southern =ntario and >uebect
/ample: !< manufacturing firms which completed an returned the *uestionnaire and agreed to provided
data for this study.
:nterview were conducted with senior general managers. The interview length was two to three hours and
discussions were tape recorded. The interview focused in the strategies followed by firm on the use of control
system within the firm.
:n measuring scale *uestion2 this study used 1, factors as contained in the *uestionnaire:
1. Tight budget goals
". 1xternal scanning
3. ?esult monitoring
9. .ost control
@. 'orecast
<. Aoals related to output effectiveness
!. ?eporting fre*uency
(. 'ormula-based bonus remuneraton
. Tailored control systems
1,. .ontrol system changeability
The *uestionare contained 33 Bi)ert-type scales concerning accounting and control attributes of the selected firms.
Cesides 1, factors2 this study also used :ndustry dynamism2 as the environmental variable2 and 4rofitability.
:ndustry dynamism is the extent of change and unpredictability in the technical and economic cimensions of the
industry environment. 4rofitability was measured as the mean of 3 year ?=: for the reporting business unit.
The sample for
this study was
split based on
si0e to create
two subsamples
of firs. 5ata
analysis was
conducted for
:the sample as a
whole &
separately for
each subsample.
8o was tested
using logit
model for nD!<
(3" 4rospectors2
99 5efenders#.
There are " procedures. 'irst2 for whole samples of firms2 the model is signi&i#ant with an ?
D,.3@ and the
model correctly classified !,E (F
D 1@.(<G p H ,.,,@# of firms in the sample. /econd2 for two subsamples of firms
split by si0e: (1# 3 firs with "@,-<,, employees and ("# 3! firms withI<,, employees. /plitting the sample si0e
improved both the classification accurance and the variance explained by the model.
/o2 8o can be re;ected. .ontrol system attributes do indeed differ between 4rospector firms and 5efender
Correlation an' inter$ie% 'ata
The correlation between ?=: and 1, factors representing accounting control system attributes for the full sample
and for subsamples of 5efender and 4rospectors firms.
() !oals an' Monitoring
'1does appear to be associated with ?=:. 5efender reported that budget pressure2 as a positive force2 would
challenge his managers.
'<& '3 shows that :nterviews suggest that 4rospectors firs are extremely active in monitoring deviations for
budget through exception reports and monthly review.
*) E+ternal s#anning an' &ore#ast 'ata
'" doesnot appear to be associated with ?=:. The scanning tends to be informal. The 4rospectors firms did appear
more aggressive in their scanning of competitor activities.
'@ appears to be related to ?=: both large&small 4rospectors but not for 5efenders. 'irst2 4rospectors put
their attention to the developing strategic plas from the bottom-up. Jhereas2 5efenders often plans cycle depeded
on the downward communication of goals set by top management. /econd2 4rospectors scenarios were often less
structured and more based on starga0ing for purpose speculation concering future products and mar)ets2 in
contrast 5efenders scenarios tended to be more focused.
,) Remuneration
'( suggest that 5efender firms provide bonus on achiving predetermined budget ore than 4rospectors. 5efenders
*uantify performance criteria better than 4rospectors.
-) Tailoring o& Control System
' indicates 4rospectors custom tailor control system to users7 need to a reater extent than 5efenders.
'! shows that large 4rospectors has a negative relationship. :t is because 4rospectors have a special need to
transmit environmental information to senior managers.
.) Control System C/angeability
Two variables exhibited on control system changeability: 1. 're*uency of control system change2 ". :mportance of
informal communicaton in supplying control information. '1, was positively associated with ?=: for large
4rospectors and negatively associated for large 5efenders
0) Cost Control
'9 indicates a negative relationship between cost control and firm performance for 4rospectors suggests that these
firms focus their control efforts on areas other than cost control. 8owever2 5efeders show lac) of significance.
1) In'ustry 'ynamism
Table 9 show that industry dynamism is positively related to ?=: for 4erspectors and negatively associated with ?=:
for 5efenders. This indicates that firms do well to match their business strategy to their industry environment.
The evidence from this study suggests that: firms following different strategies do indeed employ accounting
control system in different ways and offers some preliminary conclusions concerning the attributes which may
differ according to strategy.
Two strategic firm types identified for this study2 4rospector and 5efender2 appear to be valid an common
This study considers control attri(utes which differ between 4rospectors and 5efenders2 and provide
evidence concerning control systems in the two types of firms.
8igh performing 4rospectors seems to put more attention to forecast data in control systems2 setting tight
budget goals2 and monitoring outputs carefull.
'or 4rospectors2 cost control is reduced. Barge firms tend to report fre*uently and use uniform control
systems which are modified when necessary.
5efenders2 especially large firms2 use their control system less intensively. They give bonus remuneration
based on the achievement of budget targets and tended to have little change in their control systems.