British Journal of Management, Vol.

11, 197–212 (2000)

On Strategy and Management Control:

The Importance of Classifying
the Strategy of the Business
Magnus Kald, Fredrik Nilsson* and Birger Rapp†
Deloitte & Touche, *Deloitte Consulting, P.O. Box 10152, Arenavägen 55, S-12126 Stockholm and †Economic
Information Systems, Department of Computer and Information Science, S-58183 Linköping, Sweden

The point of departure for this paper is a number of contingency-theory studies on the
relationship between business strategy and the design and use of management control.
In these studies strategy has been operationalized in different ways – a major reason
why the findings are ambiguous and difficult to integrate. Thus there is a strong need
for a common frame of reference for classifying business strategy. In view of the multi-
faceted nature of the concept of strategy, however, it is neither desirable nor possible
to arrive at a single method of classification that would be appropriate in all situations.
Rather, the task is to integrate different strategic variables such as strategic pattern,
strategic position and strategic mission. In this paper we show how these three variables
may be assumed to influence, and be influenced by, what characterizes changes in
strategy and how business units manage their product offerings. Unlike most previous
studies in the field, this paper discusses how the strategic variables taken together may
be assumed to influence the classification of strategy and thus the design and use of the
management-control system. Our deductive analysis, and the hypotheses used in connec-
tion with it, show that studies which consider only one strategic variable may lead to
erroneous conclusions about the relationship between strategy and management control.

Introduction there has been a renewed interest in many of

Interest in the research area of strategy and
management control has increased significantly
in recent years (Langfield-Smith, 1997). One
indication of this growing interest is the impact of
methods like the balanced scorecard (Kaplan and
Norton, 1996), strategic management accounting
(Bromwich, 1990) and value-based management
(Donovan, Tully and Wortman, 1998). Moreover,
with the growth of research in the zone where
strategy and management control intermesh,
1
An earlier version of this article was presented at
the European Accounting Associations Congress in
Bordeaux in 1999. We acknowledge valuable comments
from Professor Hodgkinson and three anonymous
reviewers. This work has been partly supported by
IMIE (The International Graduate School of Manage-
ment and Industrial Engineering).
the business-strategy typologies, which were pro-
posed in the 1970s and 1980s.
One major branch of the field comprises the
studies of how management-control systems are
designed and used when strategies are developed
and implemented. Here a case-study approach
is often used, with the focus on the role of
management-control systems in the development
and implementation of new strategies (Roberts,
1990; Simons, 1990; Archer and Otley, 1991).
Another important branch is represented by the
studies on the relationship between strategy and
selected parts of the management-control system.
Here contingency theory serves as the theoretical
foundation, and studies based on questionnaires
are the most common method of research
(Govindarajan and Gupta, 1985; Simons, 1987;
Govindarajan, 1988).

© 2000 British Academy of Management

198
In spite of considerable research, however, the
findings are ambiguous, particularly in the case of
the contingency-theory studies. The explanation,
according to Langfield-Smith (1997), lies in the
different ways in which strategy, management-
control systems and goal achievement have been
operationalized. Although the various ways of
characterizing management-control systems have
been simplistic, the most obvious problem is still
the absence of a common point of reference
for classifying business strategy. Since different
schemes of classification have been used, it is
difficult to form an opinion on how strategy has
influenced the design and use of management-
control systems. Simons (1987), for example, in a
study based on the classification scheme of Miles
and Snow (1978), showed how innovative com-
panies in fast-growing industries (so-called
prospectors) closely monitored financial results.
By contrast, Govindarajan (1988), who followed
Porter’s (1980) scheme of classification, demon-
strated that financial results were less closely
monitored at innovative companies (with a so-
called differentiation strategy).
In order to interpret these inconsistent findings,
we must find a way to relate the classification
schemes of Miles and Snow (1978) and Porter
(1980) to each other. Attempts to integrate dif-
ferent strategic variables have been made by
Govindarajan and Shank (1992) and Langfield-
Smith (1997), among others. The purpose of this
paper is to build further on their work and to
discuss how three well-known strategic variables
taken together may be assumed to influence the
classification of business strategy and thus also to
explain the design and use of the management-
control system.
Theoretical basis
Schemes of classifying business strategy
Given the multifaceted character of the concept
of strategy, a number of different definitions have
been developed. Many of the early definitions
focused on the planning process and particularly
on how the resources of the organization should
be used to achieve planned goals (Chandler, 1962;
Child, 1972; Lorange and Vancil, 1976). Interest
in this approach declined in the mid-1970s, when
strategies came to be regarded as more complex
and related to organizational, technological and
M. Kald, F. Nilsson and B. Rapp
psychological factors, among others (Chaffee,
1985). One new line of research which emerged
during this period – and which is represented by
researchers like Pettigrew (1977) and Dirsmith
and Covaleski (1983) – regards strategies as ‘ori-
enting metaphores constructed for the purpose of
conceptualizing and guiding individual attitudes
of organizational participants’ (Chaffee, 1985,
p. 94). This line of research, however, has had no
significant impact on studies specifically devoted
to the relationship between strategy and manage-
ment control.
In the mid-1970s interest also turned to the
organizational environment and its effect on
strategy. In this area of research, strategies are
discussed in terms of strategic adaptation, which
is about establishing consistency between the
organization and its environment. A number of
scholars have attempted to provide systems for
generic classification of strategies at both cor-
porate (Rumelt, 1974; Porter, 1987) and business-
unit levels (Mintzberg, 1973; Utterback and
Abernathy, 1975; Miller and Friesen, 1978). In studies
of the relationship between business strategy and
the design and use of management-control sys-
tems, the classification schemes of Miles and Snow
(1978), Porter (1980) and Gupta and Govindarajan
(1984) have had considerable impact. The prob-
able explanation is that these strategic typologies
are well accepted and internally consistent
(Hambrick, 1983; Dess and Davis, 1984; Mercer,
1993; Parnell, 1997). Furthermore, strategic
typologies make it easier to depict the strategy
currently followed – a particular advantage in
conducting surveys (Hambrick, 1980).
Miles and Snow (1978) may be considered to
have developed the strategic-choice approach
further (cf. Child, 1972). Their strategic typology
represents a complex theory, which has served as
a stimulus for a large body of empirical research
(Doty and Glick, 1994). From their research,
Miles and Snow identify a number of issues con-
stantly confronting management. These may be
summarized as three fundamental problems: the
entrepreneurial problem, the technological prob-
lem and the administrative problem. The entre-
preneurial problem concerns, for example, which
products and markets should be developed,
whereas the technological problem is about the
production resources required in the form of
technology and staff. The administrative problem
is one of how to organize and control the business.
On Strategy and Management Control
As the company encounters uncertainty and
change, solutions to the entrepreneurial, techno-
logical and administrative problems must be ad-
apted to each other in a continuous and dynamic
process. If these problems are resolved in a con-
sistent manner, there emerges a strategic pattern
that is stable over time. Strategic patterns are
expressed in the functioning of the entire organ-
ization; they therefore reflect the strategy that has
been realized, rather than the one that was
intended (cf. Mintzberg, 1987).
According to Miles and Snow (1978), it is
possible to distinguish groups of companies
within each group that deal with the three prob-
lems in a relatively similar fashion. The respective
groups may be designated as the strategic typ-
ologies of defenders, prospectors, analysers and
reactors. In the studies on strategy and manage-
ment control, the typologies of defender and
prospector have been the principal ones used.
The explanation is that the analyser has features
of both defenders and prospectors and is there-
fore not a pure concept in itself. The typologies of
Miles and Snow have also been used for norm-
ative purposes, since they predict that consistently
coherent solutions to the three fundamental
problems will create a successful strategic pattern.
This notion is found particularly in the studies
on strategy and control, which focus primarily
on successful organizations. Here we also find a
reason why reactors are excluded; since these
have no real strategy, they will not be successful in
the longer run.
Strategic choice as discussed by Miles and
Snow (1978) means that management chooses a
domain in which the organization will operate.
This choice is the point of departure for the
analysis by Miles and Snow, an analysis with an
inward focus on conditions within the company,
particularly the interrelationship of domain, tech-
nology and organization. While also starting with
the company’s domain, Porter’s (1980) analysis is
more outwardly focused on how the organization
can achieve competitive advantages over its com-
petitors. Thus, the point of departure for Porter’s
analysis is similar to that of Miles and Snow,
although Porter’s work emphasizes other dimen-
sions of business strategy and thus to some extent
other organizational variables as well.
Porter’s (1980) original normative framework
has been tested empirically in a large number
of studies. It has thus proved to be a relevant
199
description of how successful organizations oper-
ate (see for example, Calori and Ardisson, 1988).
Porter bases his analysis on the five competitive
forces facing all organizations. In his view,
the relationship with customers and suppliers,
and the threat of new competitors or substitute
products/services, determine the average level of
profitability in the industry. To gain competitive
advantage and achieve an above-average return,
the organization must adopt a business strategy of
being better than the other organizations in the
industry at managing the five competitive forces.
In Porter’s view, the strategy must be based on
either differentiation, cost leadership, or focusing.
Focusing means that the organization, on the basis
of either differentiation or cost-effectiveness, can
choose to serve a narrower segment of the market.
However, focusing is not an explicit strategy in
itself but a choice within a strategy – one reason
why focusing is not used in the studies on strategy
and management control.
In the choice between cost leadership and
differentiation, industry conditions affect whether
one strategy or the other will yield a greater com-
petitive advantage. Gilbert and Strebel (1988)
have shown that when industry conditions change,
strategy must be adjusted accordingly. In an initial
phase, when an innovation has just been launched,
it is possible to charge a premium price, but
as competitors introduce similar solutions, price
becomes increasingly important. Therefore, in
time there must be a transition from a strategy of
differentiation to one of cost leadership. When a
new innovation is launched, it will once again be
possible to charge a premium price. Thus, cost
leadership and differentiation have the character
of strategic positions, which must be reconsidered
over time (cf. Mintzberg, 1987).
Opinions differ as to whether cost leadership
and differentiation may be combined. For example,
Hall (1980), in a comprehensive study of 64 US
companies, showed that only three of the 16 most
successful companies in the sample combined cost
leadership and differentiation. Cooper (1996), on
the other hand, maintains that Japanese com-
petition is forcing many companies to compete
with both the low price and the high quality of
their products. Porter (1985), however, holds that
even if two strategic positions can be combined, it
is not possible to achieve both cost efficiency
and differentiation over a longer period while
also earning an above-average return. Instead,
200 M. Kald, F. Nilsson and B. Rapp

Table 1. Schemes of classification by business strategy

Study Strategic variable Archetypes Features

Miles and Snow Strategic pattern Defender Stable domain, limited product range, competes through
(1978) low cost or high quality, efficiency paramount, centralized
structure.
Strategic pattern Prospector Turbulent domain, always seeking new product and market
opportunities, uncertain environment, flexible structure.
Strategic pattern Analyser Hybrid, core of traditional products, enters new markets
after viability established, matrix structure.
Strategy lacking Reactor Lacks coherent strategy, structure inappropriate to purpose,
misses opportunities, unsuccessful.
Porter (1980) Strategic position Differentiation Product uniqueness leads to higher prices, emphasis on
marketing and research.
Strategic position Cost leadership Low price, focus on high market share, standardized
products, economies of scale.
Choice within a strategy Focus Focus on defined buyer group, product line or geographic
market.
Gupta and Strategic mission Build Mission is to increase market share, capacity
Govindarajan investments, low relative market share, high growth
(1984) industries.
Strategic mission Hold Mission is to keep existing market share, quality
improvements and marketing campaigns crucial for success,
high relative market share, mature industries.
Strategic mission Harvest Mission is to maximize short-term earnings, investments will
decrease rapidly, high relative market share, declining
industries.

Source: Simons (1990, p. 130), modified.

according to Porter, management should try to
adapt the company’s strategic position to the
development of the industry.
A suitable starting point for this analysis is
the so-called product life cycle, in which the
development of an industry is reflected in four
phases: introduction, growth, maturity and decline
(Porter, 1980, p. 158). A third type of strategic
variable may be linked to a life-cycle perspective:
strategic mission. Gupta and Govindarajan (1984)
emphasize the conflict between the objectives
of market-share growth and short-run profit
maximization. They distinguish three business
strategies – build, hold, and harvest2 – depending
on the development of the market and the life-
cycle phase of the organization’s products. Since
the product life cycle is based on the assumption
that products go through different phases, in which
demand and market share vary, a company’s
strategic mission will also change over time. Like
2
The business strategies of build, hold and harvest
have also been discussed by the Boston Consulting
Group (Henderson, 1972), Arthur D. Little (Wright,
1975).
Porter’s strategies, the product life cycle was con-
ceived with a normative purpose and has subse-
quently been verified by empirical research (see,
for example, Mercer, 1993). Table 1 summarizes
the strategic typologies of Miles and Snow (1978),
Porter (1980) and Gupta and Govindarajan (1984).
Management control
Control in the broad sense of the term relates
both to organizational structure (Burns and
Stalker, 1961; Chandler, 1962) and to informal
processes (Cyert and March, 1963; Pettigrew,
1977). Another area of control concerns formal
processes. This area is treated under the subject
of management control, which Anthony (1965)
defines as ‘the process by which managers assure
that resources are used effectively and efficiently
in the accomplishment of the organisation’s
objectives’ – in other words, control using both
financial and non-financial objectives. Mintzberg
(1983) discusses how different control mechanisms
are emphasized, depending on the company’s
situation. In his opinion, greater use of manage-
ment by objectives is required when the business
is so complex that exercising control through
On Strategy and Management Control
rules and instructions is no longer possible. This
view is supported by Williamson (1985), who
shows empirically that when companies move
from a functional organization, in which the busi-
ness is planned and evaluated as a whole, to a
divisionalized structure, management by object-
ives must be used more extensively. Existing studies
on strategy and control have focused largely on
business units of divisionalized corporate groups,
in which management control plays a major
role. These studies examine the design and use
of various procedures in management control
(Dent, 1990). Some of the dimensions treated are
the use of financial versus non-financial measures
(Govindarajan and Gupta, 1985) and centraliza-
tion versus decentralization (Govindarajan, 1988).
However, in regard to the conflicting results of
existing studies, the dimension of tight versus
loose control (Dent, 1990) is the one which has
been discussed to the greatest extent.
According to Anthony, Dearden and
Govindarajan (1992), if management monitors
the activities of the business unit frequently, it
may be said to exercise tight control. More
limited monitoring of the business unit’s activities
may then be termed loose control. According to
Anthony, Dearden and Govindarajan, the differ-
ence between tight and loose control thus relates
to the degree to which management monitors
what a unit is doing. Among the characteristics of
tight control are short-term goals and extensive
involvement by management in day-to-day
operations. Other features are that the budget is
considered to be binding, that there are frequent
determinations of whether budget targets are
being met and deviations from the budget are
generally not considered acceptable. Loose con-
trol is characterized by more limited management
involvement in day-to-day operations. When con-
trol is loose, the budget is regarded more as a tool
of planning and communication than as a binding
commitment. Furthermore, deviations from the
budget are not treated so seriously.
One frequently stressed disadvantage of tight
control is that the use of budget targets, to the
exclusion of other methods of control, may ad-
versely affect communication between different
organizational levels and lead to the manipulation
of data (Hopwood, 1972). Moreover, short-term
benefits may be given priority over what is best in
the long run. On the other hand, tight control
helps to motivate management and employees
201
to meet budgeted targets (Anthony, Dearden and
Govindarajan, 1992). This view is supported by
Otley (1978), who conducted a study specifically
designed to test whether Hopwood’s result was
universal or contingent; the conclusion was that in
certain circumstances tight control leads to better
performance. In summary, these findings indicate
that the kind of control exercised is dependent on
the situation (Anthony, Dearden and Govindarajan,
1992) – a view propounded by researchers who
favour a broader definition of management con-
trol (Rotch, 1993; Otley, Broadbent and Berry,
1995).
The relationship between business strategy and
management control
Studies based on contingency theory constitute one
major branch of the research area of strategy and
management control. As early as 1972, Khandwalla
published a study, on the relationship between the
design and use of formal management-control
systems and the intensity of competition; the study
showed that with increased competition there was
more extensive reliance on formal systems of con-
trol. These findings were corroborated by Kamm
(1980), who concluded that formal control was
greatest at product- and market-innovative com-
panies. On the other hand, Miller and Friesen
(1982), who studied both entrepreneurial and con-
servative companies, found a negative correlation
between formal control and the rate of innovation
at entrepreneurial companies with a strategy of
continual product and market development.
Subsequently a large number of studies were
published on the relationship between strategy
and management control – unfortunately the find-
ings were far from clear (Langfield-Smith, 1997).
In Table 2 we will acquaint the reader more closely
with a number of studies based on the strategy-
classification schemes of Miles and Snow (1978),
Porter (1980) and Gupta and Govindarajan (1984).
These schemes relate to the strategic variables con-
sidered in this study: strategic pattern, strategic
position and strategic mission.
Even though our review covers a limited
selection of studies on the relationship between
business strategy and management control, it
suggests a number of contradictory conclusions.
For the studies by Govindarajan (1988) and by
Bruggeman and Van der Stede (1993), the find-
ings indicated in Table 2 are largely consistent.
202
Table 2. Empirical studies of Management Control System and strategy
Study Strategy Management control system
Govindarajan Build, hold, and Reliance on formula versus
and Gupta (1985) harvest strategies. subjective incentive systems.
Relative importance of
performance criteria for bonus
determination.
Simons (1987) Prospectors and Control-system attributes:
defenders. (1) Tight budget controls
(2) External scanning
(3) Result monitoring
(4) Cost control
(5) Forecast data
(6) Goals relating to output
effectiveness
(7) Reporting frequency
(8) Formula-based bonus
remuneration
(9) Tailored control systems
(10) Changeability of control
system
Govindarajan Differentiation and Administrative mechanisms:
(1988) cost-leadership (1) Budget-evaluative style
strategies. (2) Decentralization
(3) Locus of control
Bruggeman and Differentiation and Characteristics of budget
Van der Stede cost-leadership control systems:
(1993) strategies. (1) Commitment to budget
(2) Budget revision
(3) Type of control
(tight or loose)
(4) Participative budgeting
(5) Top-down versus bottom-up
(6) Monthly variance analysis
(7) Degree of centralization
Rajagopalan Prospectors and Incentive system:
(1996) defenders. (1) Form of incentive
(cash versus stock)
(2) Evaluation period
(short term versus long term)
(3) Performance criteria
(accounting versus market-
based, quantitative versus
qualitative)
Collins, Prospectors and Budgetary usage:
Holtzmann defenders. (1) Financial objective
and Mendoza (2) Establishes authority
(1997) (3) Coordinate operations
(4) Make plans
(5) Budgetary participation
M. Kald, F. Nilsson and B. Rapp
Results
Bonus based on long-term evaluation criteria
tends to increase efficiency with a build strategy
but to decrease efficiency with a harvest strategy.
There is no correlation between choice of
strategy, use of short-term criteria and efficiency.
Successful prospectors are characterized by
tight control, with an emphasis on forecasts,
strict budget targets, frequent reporting and
careful monitoring of revenues, while paying
less attention to cost control.
Defenders feature looser control, with less
reliance on the formal management-control
system.
With large defenders there is a negative
correlation between the financial performance of
business units and the use of strict budget targets
and close monitoring of results.
A successful differentiation strategy de-
emphasized budget targets.
For units with a cost-leadership strategy, the
process of budgeting and performance
monitoring fulfilled an important function.
Budgets were revised more often with a strategy
of differentiation than with one of cost-
leadership.
Business units which sold differentiated standard
products, and units which were cost leaders,
exercised tight control, with no budget revisions.
At business units with a differentiation strategy
based on product flexibility and production to
order, there was a looser form of management
control, with flexible budgets.
Defenders primarily used short-term, low-risk
forms of incentives (that is cash bonuses) based
on quantitative criteria for evaluating
performance.
With prospectors incentives were more long term
in nature and involved a higher risk.
Prospectors used budgeting to a much greater
extent than defenders, analysers and reactors.
On Strategy and Management Control
Both studies showed, among other things, that
business units with a cost-leadership strategy resort
more to tighter control with strict budget targets
than do units with a differentiation strategy. The
studies by Govindarajan and Gupta (1985) and
Rajagopalan (1996) have been based on other
strategic typologies and have also explored other
elements of management control to some extent.
In comparison with the studies of Govindarajan
(1988) and of Bruggeman and Van der Stede
(1993), however, the findings are similar; they
show that looser, more subjective performance
monitoring followed from strategies associated
with high uncertainty about the future. Simons
(1987) and Collins, Holtzmann and Mendoza
(1997), however, unlike the other studies, showed
that strategies linked with a stable environment
led to loose control, while tight control was found
with strategies in a turbulent environment. Accord-
ing to Dent (1990), the looser control found
at defenders was probably explained by the fact
that cost control was provided by the production
technology itself. The tight control at prospectors
was likely due to a desire to harmonize the pro-
innovative culture of the typical prospector with a
more conservative view of the unit’s opportunities
for expansion.
In summary, it may be noted that since the
studies used different schemes of classification, it
is difficult to analyse and reconcile the findings.
One interesting question, for example, is whether
a prospector always follows a differentiation or
build strategy. The answers to questions of this
nature are very important if we are to understand
the relationship between strategy and manage-
ment control. Consequently, we have good reason
to analyse more closely the schemes of classifying
business strategy which have been used in the
studies cited above, and also the strategic variables
which determine classification.
Comparison in two dimensions
The classification schemes of Miles and Snow
(1978), Porter (1980) and Gupta and Govindarajan
(1984) proceed from the same point of departure:
the opportunity for strategic choice open to the
organization. The strategies, structures and pro-
cesses of the organization are not predetermined
by the business environment (Child, 1972). Rather,
organizations create their own environment by
choosing the domain or competitive arena on
203
which their markets, products, technology and
ultimately their strategy are based (Weick, 1977,
1979). Although the strategic typologies of Miles
and Snow (1978), Porter (1980) and Gupta and
Govindarajan (1984) are based on many common
assumptions, they focus on different character-
istics of a business-unit strategy: strategic pattern,
strategic position and strategic mission. The choice
by the organization affects these characteristics in
different ways and to differing degrees. For ex-
ample, a choice which entails a change of strategic
position does not necessarily involve a change of
strategic pattern (cf. Mintzberg, 1987). Conse-
quently, strategic change is an important aspect to
consider when strategic pattern, strategic position
and strategic mission are compared.
In the relationship between strategic change and
strategic pattern, strategic position and strategic
mission, the organization’s product offering, in-
cluding how it is managed, plays a major role. For
example, in a strategic pattern the critical ques-
tion is whether organizations should try to find
new markets or concentrate on developing their
current market position. This choice will affect
the length of the product life cycles concerned
and consequently which strategic mission will be
given priority. On the other hand, if the discussion
concerns strategic position, the question is more
whether the price or the distinguishing features of
the product should be emphasized.
Strategic change. Strategies change over time;
the change is sometimes incremental (Quinn, 1980),
sometimes rapid and revolutionary (Mintzberg,
1978). Miles and Snow (1978) hold that strategies
are the product of a large number of greater and
lesser decisions which together form a clear pattern.
Often, therefore, it may be more accurate to refer
to an organization’s adaptation to change in its
environment as an adjustment rather than a
change in strategy (Snow and Hambrick, 1980). If
we study adjustments in strategy, we can identify
a consistent pattern in the organization’s manner
of relating to its environment. Mintzberg calls this
pattern a metastrategy, that is, the underlying
orientation of the organization toward its en-
vironment. Metastrategies may be modified over
time but are seldom changed. Miles and Snow
agree with this view; thus, whether an organ-
ization is classified as a defender, prospector,
analyser, or reactor depends on the pattern of
interaction between the organization and its
204
environment. Moreover, in view of the slow rate
of change in this pattern, the classification of busi-
ness strategy will be stable over longer periods of
time.
Porter (1980) stresses the importance of
positioning the organization within the selected
industry. The choice of strategic position should
be based on a thorough analysis of the organ-
ization’s capacity to manage the five competitive
forces, and when these change, the organization’s
strategic position should be reviewed. Thus, a
change of strategy from differentiation to cost
leadership, or vice versa, is not ruled out by
Porter; on the contrary, it is sometimes essential
if a company is to remain competitive. However,
as mentioned earlier, a strategy that combines
differentiation and cost leadership is not con-
sidered feasible for any length of time (Hall, 1980;
Porter, 1985; Gilbert and Strebel, 1988).
Gupta and Govindarajan (1984) also empha-
size the role of analysis in the strategic choices of
the organization. The authors hold that business
strategy should be based on the development of
the market and the life-cycle phase of the organ-
ization’s products. From this starting point, the
organization may formulate its strategic mission
as one of build, hold or harvest. Since the product
life cycle is based on the assumption that all
products go through different phases, in which
demand and market share vary, business strategy
will necessarily change (Ansoff, 1984). The pace
of change will depend on the development of the
market and the nature of the product life cycle for
the individual organization.
Product offering. The development of the
market and the product life cycle do not only
affect an organization’s strategic mission – build,
hold or harvest. Miles and Snow (1978) also
discuss the product offering and what it means for
classifying business strategy. In this discussion the
perspective is that of the organization as a whole
and how it relates to its environment. Whether
to concentrate on finding new markets or on
developing an existing market position depends
on the nature of the organization’s strategic
pattern. Differences in strategy are not determined
by where the product happens to be in its life
cycle, but only by the duration of the life cycle.
With a prospector, for example, constantly on the
lookout for new products and markets, product
life cycles will necessarily be brief. Defenders,
M. Kald, F. Nilsson and B. Rapp
on the other hand, have a very limited product
offering and seek to maintain the viability of their
products as long as possible; as a result, their
products will tend to have long life cycles. From
this point of view, the characteristics of the
product life cycle in the short run are primarily a
consequence of the organization’s domain and
existing strategic pattern rather than a driving
force that affects business strategy. In the very
long run, changes in the product offering may be
one of the factors which contribute to the gradual
emergence of a new pattern for the organization
in relating to its environment. The new pattern,
in turn, can lead to a reorientation of business
strategy.
Porter (1980) prefers to de-emphasize the
organizational restrictions which according to
Miles and Snow (1978) limit the possibilities of
dramatically changing the product offering in the
short run. As has been noted previously, Porter
stresses that the product offering and its manage-
ment constitute the core of all successful business
strategies, so that strategic change is necessary
in both the short and long run. According to the
general reasoning of Hayes and Wheelwright
(1979), it should be possible to relate these changes
to the product life cycle. Hayes and Wheelwright
hold that in an initial phase, the growth phase,
the product is highly differentiated and is com-
petitive primarily because of attributes other
than price. As the product and the market
mature, price becomes more relevant, as does a
strategy of cost leadership. Gilbert and Strebel
(1988), who studied strategic change in the car
industry, found that the switch from a strategy of
differentiation to one of cost leadership occurs
when a product formerly considered unique has
become generally accepted. The other kind of
strategic change is a transition from a strategy of
cost leadership to one of differentiation, as when
an existing product is reworked and tailored for
introduction in an entirely new market segment.
Analysis
From the foregoing comparison, we find that
different aspects of strategic change and product
offering are emphasized, depending on the choice
of strategic variable. However, the presence of
numerous points in common has encouraged
researchers to try to integrate different strategic
On Strategy and Management Control
variables. Govindarajan and Shank (1992), for
example, discuss how strategic position might
be related to strategic mission. In a subsequent
article Langfield-Smith (1997) adds the variable
of strategic pattern to the analysis of Govindarajan
and Shank. While commendable, these efforts
do not provide a more detailed discussion on how
the strategic variables are interrelated and how
they may jointly affect the classification of busi-
ness strategy. Such a discussion could help to
improve our understanding of the relationship
between business strategy and the design and use
of management control. It should thus be possible
to shed further light on the ambiguous findings
presented in many of the contingency-theory
studies.
Classification based on three strategic variables
Miles and Snow (1978) chose to base their scheme
of classification on the interaction of the organ-
ization with its environment and on the strategic
pattern which is thereby formed. Special atten-
tion is paid to the organizational features typical
of the four strategic patterns identified. In their
classification, Miles and Snow thus consider more
organizational features than either Porter (1980)
or Gupta and Govindarajan (1984), who focus
primarily on products. It is therefore reasonable
to assume that in the broad classification scheme
of Miles and Snow we would find organizations
with the same strategic pattern despite different
strategic positions and objectives.
According to Miles and Snow (1978), defenders
focus mainly on reducing production and dis-
tribution costs while maintaining or improving
quality. This strategic pattern is due to the
dependence of the organization’s competitiveness
on the price and quality of its products and on its
customer service. In Porter’s (1980) conceptual
framework, this strategic position has features
of both differentiation and cost leadership, with
the attendant danger that the organization will
be ‘stuck in the middle’. Therefore, a successful
defender may be expected to have an unam-
biguous strategic position with distinct features of
either product differentiation or cost leadership.
When cost leadership is emphasized, the organ-
ization’s strategy will probably be to improve
production efficiency while maintaining quality,
whereas a product-differentiation strategy will
be likely to encourage continuous refinements
205
on existing products (cf. Miles and Snow, 1978;
Porter, 1980). Growth may be expected to occur
through further penetration of existing markets
for a limited number of products. This situation
is compatible with product differentiation, since
the organization’s success is dependent on ‘. . . its
ability to maintain aggressively its prominence
within the chosen market segment’ (Miles and
Snow, 1978, p. 37). The fact that few wholly new
products are introduced means that the organ-
ization seeks to prolong the life of its products to
the extent possible. With long product life cycles
and a stable domain, the emphasis is on a strategic
mission of hold and harvest (cf. Gupta and
Govindarajan, 1984).
A prospector’s domain is continually under
development, with an incessant search for new
market opportunities, so that product life cycles
are short. Thus, there is no way to build up the
same stable structure and technology that we find
with a defender. Consequently, the organization
is dependent on human initiative rather than on
routine mechanized technology. The marketing
and development departments fulfill essential
functions, since it is vital to be first in introducing
new products (Miles and Snow, 1978). As with a
defender, a prospector’s strategic pattern of this
nature should be broad enough to include several
strategic positions. To use Porter’s (1980) termin-
ology, we may assume that the growth phase of
the product life cycle features a high degree of
product differentiation and the aim of quickly
gaining a high market share. It is reasonable to
assume that price competition will increase when
the products subsequently encounter stiff com-
petition in their maturity phase. It will then be
important to improve cost-effectiveness – at least
until the company needs large-scale technology
to be competitive. When this point is reached, the
prospector’s strategy will be to introduce a com-
pletely new product and discontinue the old one
(cf. Miles and Snow, 1978; Porter, 1980). The fact
that prospectors invest substantial sums in R&D
would indicate that this type of product intro-
duction is rather common. The resulting short
product life cycles, together with a turbulent
domain, mean that the strategic mission of build
and hold will be emphasized (cf. Gupta and
Govindarajan, 1984).
Since the strategic pattern may be regarded as
the underlying orientation of the way in which the
organization relates to its environment, changes
206
Differentiation Differentiation
Examples of the
product life cycle
Cost leadership Cost leadership
Defender Prospector
Figure 1. The relationship between strategic pattern, strategic
position and strategic mission
in this metastrategy occur rather slowly (cf.
Mintzberg, 1978). Therefore, changes in strategic
pattern from defender to prospector, and vice
versa, are rare in the short run. On the other
hand, it may be assumed that changes in strategic
position occur in both the short and long run.
With a defender, changes from cost leadership
to differentiation, and vice versa, should be
relatively unusual because of the long product life
cycles. In view of the emphasis on the strategic
mission of hold and harvest, priority is given to
large-scale operation and cost-effectiveness. For
as long as possible, the organization seeks to
avoid reworking and differentiating products for
introduction in a new market segment (cf. Gilbert
and Strebel, 1988).3 With a prospector it may be
assumed that the short product life cycles lead to
rapid changes in strategic position. The strategic
mission of build and hold requires that the organ-
ization constantly introduce new products to
replace those which have reached the maturity
phase and offer limited potential for further
improvement in cost-effectiveness.
Figure 1 shows the changes in strategic position
(differentiation and cost leadership) for different
strategic patterns (defender and prospector).
3
In this connection it should be mentioned that an
organization making this kind of change in strategic
position must be capable of maintaining a high degree
of cost-effectiveness while at the same time increasing
the degree of differentiation. The difficulties of chang-
ing strategic position under these or corresponding
circumstances (change from differentiation to cost
leadership) are discussed thoroughly by Gilbert and
Strebel (1988).
M. Kald, F. Nilsson and B. Rapp
Because of longer product life cycles, the changes
for defenders are less frequent than for pros-
pectors. The figure also shows the length of the
product life cycle and the phase of the life cycle in
which a change to a new strategic position may be
expected.
A conceptual model
From the preceding discussion it is obvious that a
classification of business strategy based on several
strategic variables provides a richer picture of the
organization’s strategy than if only one variable is
used. At the same time, however, it complicates
the analysis of the relationships between the
strategy followed and the way in which the
management-control system is designed and used.
In particular, it becomes necessary to discuss the
effect of the different strategic variables, singly
and in combination.
Miles and Snow (1978) maintain that man-
agement control must fit the strategic pattern –
that is, the organization’s business strategy as a
defender or a prospector. Like the technology
(production and distribution solutions) chosen by
the organization, management control is the result
of a long process of development, according to
this view. At the same time, the authors empha-
size the risk that control will become institution-
alized to the point where it impedes strategic
change. Thus, the challenge is to create a
management-control system focused on present
strategy but also flexible enough to contribute
actively to changing strategy to fit new conditions
in the business environment (cf. Cyert and March,
1963; den Hertog, 1978). Such a system of man-
agement control must highlight information on
how the organization manages its customers and
processes that add value (Otley, 1994).
Since strategic position focuses on the product
offering and its production, we may expect the
management-control system to be highly depend-
ent on whether a strategy of cost leadership or
one of differentiation has been chosen (cf. Porter,
1980). However, these two strategic positions
are not unaffected by their underlying strategic
pattern. As has been mentioned previously, the
differences between a defender and a prospector
in regard to product offering and technology lead
to an emphasis on different strategic missions
(cf. Gupta and Govindarajan, 1984). The limited
product offering and the large-scale technology of
On Strategy and Management Control
Strategic
Defender
pattern
Strategic
mission Harvest
Strategic Cost leadership
position
Effect on MCS Tight control
Figure 2. Hypothetical relationships between strategic pattern, strategic mission, strategic position and the design and use of
management control
a defender will be accompanied by long product
life cycles and an emphasis on the strategic mission
of hold and harvest. A prospector is constantly on
the lookout for new products and has a flexible
technology; consequently, product life cycles will
be short, and the emphasis will be on build and
hold as the strategic mission (Miles and Snow,
1978). On these assumptions we may expect that
management control will be designed and used in
accordance with the strategic pattern and the
consequent strategic mission. Furthermore, it will
be important to adapt the systems of management
control as much as possible to the strategic position
of the organization. These hypothetical relation-
ships are shown in Figure 2, which illustrates that
defenders and prospectors emphasize different
strategic missions. The figure also shows that a
strategic pattern is broad enough to encompass
different strategic positions. Finally, the figure
shows how control is affected by the above, a
subject which will be treated in more detail in the
following sections.
Hypothetical relationships
Where a defender has chosen the strategic position
of cost leadership, we typically find that most
products are in the decline phase of their life
cycles (cf. Porter, 1980; Gupta and Govindarajan,
1984). Since the domain is highly stable, with
no rapid changes in demand, the decline in total
207
Prospector
Hold Build
Differentiation Cost leadership Differentiation
Loose control
Loose control
Tight control
market volume is relatively slow (Miles and Snow,
1978; Biggadike, 1979). In a stable domain it is
appropriate to use formal models for planning
and performance monitoring. For example, it is
relatively easy to estimate revenues and costs in
a stable environment; thus both budgets and
traditional investment-calculation procedures will
likely be used (Shank and Govindarajan, 1993,
p. 97 ff.). By improving production efficiency
while maintaining quality, the organization seeks
to maintain market share and to avoid intro-
ducing new products for as long as possible (Miles
and Snow, 1978; Porter, 1980). The strategic
mission is harvest, which means that investments
are held to a minimum so as to maximize cash
flow (Henderson, 1972). The harvest mission is
reflected in management control by performance
monitoring focused totally on financial informa-
tion and by strict targets in the budget and other
financial plans (Shank and Govindarajan, 1993,
p. 100). In the organization’s bonus system,
financial criteria are paramount in determining
the bonus, since short-run profitability is given
priority (Govindarajan and Gupta, 1985). Taken
together, these factors lead us to the following
hypothesis on the relationship between business
strategy and the system of management control:
H1: At defenders that emphasize harvest and
follow a strategy of cost leadership, control
will be tight.
208
Where a defender has chosen the strategic position
of differentiation, we typically find that most
products are in the maturity phase of their life
cycles (cf. Porter, 1980; Gupta and Govindarajan,
1984). As with the strategic position of cost lead-
ership, the stable domain and the long product
life cycles mean that formalized planning and
performance monitoring are considered relevant
(Shank and Govindarajan, 1993, p. 97). At the
same time, the strategy of differentiation leads
to uncertainty – particularly as to whether the
upgraded products will be successful and thus
whether present markets can be penetrated fur-
ther (Hambrick, 1983). Therefore, the financial
aspects of planning and performance monitoring
are somewhat de-emphasized in favour of non-
financial information which better reflects the
critical success factors in a strategy of differ-
entiation (Shank and Govindarajan, 1993, p. 97
ff.). The presence of uncertainty regarding the
future development of the market also means that
performance monitoring will be more general in
nature (Govindarajan, 1988). In addition, with
hold as the strategic mission, the business will be
managed in a longer-term perspective than with
harvest. The bonus system will therefore be based
more on long-term, and normally non-financial,
criteria for evaluation (Govindarajan and Gupta,
1985). Taken together, these factors lead us to the
following hypothesis on the relationship between
business strategy and the system of management
control:
H2: At defenders that emphasize hold and
follow a strategy of differentiation, control
will be loose.
Where a prospector has chosen the strategic
position of cost leadership, we typically find
that most products are in the maturity phase of
their life cycles (cf. Porter, 1980; Gupta and
Govindarajan, 1984). The domain is characterized
by a high degree of turbulence, with rapid
changes in demand and total market volume
(Miles and Snow, 1978; Biggadike, 1979). Given
the turbulent environment and short life cycles,
planning and follow-up will be somewhat less
formalized than at a defender with a strategy
of cost leadership. Since demand is changing
rapidly, it is more difficult to forecast revenues
(Govindarajan, 1988). On the other hand, with
hold as a strategic mission, extensive cost control
M. Kald, F. Nilsson and B. Rapp
that heavily emphasizes financial information will
be required. Cost-effectiveness must improve as
quickly as the market is shrinking, if a substantial
decline in volume is to be averted (Henderson,
1972). Therefore, it is important to know exactly
which factors drive costs in the various operations
of the value-added chain (Bromwich and Bhimani,
1994, p. 126). As for the bonus system, it must
be consistent with the requirement of cost-
effectiveness, but without inducing counter-produc-
tive short-run behaviour that might undermine
the typically innovative culture at a prospector (cf.
Miles and Snow, 1978). Such a bonus system must
include both short-run and long-run criteria for
evaluating performance (Govindarajan and Gupta,
1985). Taken together, these factors lead us to the
following hypothesis on the relationship between
business strategy and the system of management
control:
H3: At prospectors that emphasize hold and
follow a strategy of cost leadership, control
will be tight.
Where a prospector has chosen the strategic
position of differentiation, we typically find that
most products are in the growth phase of their life
cycles (cf. Porter, 1980; Gupta and Govindarajan,
1984). The combination of many newly launched
products and a turbulent environment, in which
customer preferences are rapidly changing, leads
to a high degree of uncertainty (Miles and Snow,
1978; Biggadike, 1979). Business planning is then
difficult, and budgeting and comparing perform-
ance with the budget serve no meaningful purpose
(Govindarajan, 1988). Traditional investment
calculations also become irrelevant, since the tur-
bulent environment severely limits the possibility
of forecasting net cash inflow (Shank and
Govindarajan, 1993, p. 97 ff.). Instead, interest
is focused on information relating to the critical
success factors of the differentiation strategy.
Usually this information is non-financial in nature
and reflects dimensions like customer satisfaction
and product quality, image and so on (Bhimani and
Bromwich, 1989, p. 27). The bonus system, too,
is based on more long-term criteria, since build is
emphasized as a strategic mission (Govindarajan
and Gupta, 1985). Taken together, these factors
lead us to the following hypothesis on the
relationship between business strategy and the
system of management control.
On Strategy and Management Control
H4: At prospectors that emphasize build and
follow a strategy of differentiation, control
will be loose.
Discussion and conclusions
This article shows that the strategic variables of
strategic pattern, strategic position and strategic
mission affect the classification of business strategy
and can therefore serve as a starting point for
comparing studies on strategy and management
control. One principal finding is that organizations
which have chosen different strategic positions
and objectives may show the same strategic pat-
tern. Thus, both a defender and a prospector may
follow either a cost leadership or differentiation
strategy. Since changes in strategic position depend
on the length of the product life cycle, a defender
will change its strategic position less often than
a prospector. The length of the product life cycle
also affects the strategic mission of the organ-
ization. With a defender the product life cycle is
long and the domain stable, so that a strategic
mission of hold and harvest will be emphasized. A
prospector, on the other hand, will feature short
product life cycles and a more turbulent domain,
so that the focus will be on a strategic mission of
build and hold.
Previous studies in this area have only con-
sidered one of these strategic variables in exam-
ining the relationship between business strategy
and the design and use of the management-
control system. Analyses of the often ambiguous
findings of these studies have therefore sought to
compare different schemes of classifying business
strategy. With few exceptions, no attempts have
been made to integrate the different strategic
variables on which each scheme is based. Without
deeper analysis, many researchers have com-
pared, for example, the prospector of Miles and
Snow (1978) with a strategy of differentiation.
Studies by Simons (1987) and Collins, Holtzmann
and Mendoza (1997), which show that pros-
pectors use tight control, then become difficult to
interpret when Govindarajan (1988) shows that a
strategy of differentiation leads to loose control.
On the basis of the hypotheses presented in this
paper, one interpretation of this finding is that
Simons had studied prospectors which followed a
strategy of cost leadership with an emphasis on
hold as a strategic mission. However, a more
209
thorough analysis – which is outside the scope of
the present paper – would be necessary to deter-
mine whether this interpretation is accurate.
Concluding remarks and future research
Previous studies on the connection between
strategy and management control are based to a
large extent on contingency theory. Contingency-
theory studies have acquired a reputation as
large-scale questionnaire studies on the inter-
action of a limited number of variables (Otley,
1980). If strategic typologies are used as the
contingency variable, it will be possible to capture
more variables to explain how management
control is designed and used; examples of such
variables would be technology and organizational
structure (Chapman, 1997). However, given the
quantitative approach of the studies on strategy
and management control, various measuring
instruments – some of them rather primitive –
have been used in operationalizing the variables
in the studies. This fact is probably one of the
principal reasons for the conflicting findings in
this area of research (cf. Dent, 1990; Langfield-
Smith, 1997).
In light of these inconsistent findings, it is
apparent that future studies based on contingency
theory should examine business units in regard
to a number of strategic variables. It may then be
necessary to modify previous assumptions about
the relationship between business strategy and
the design and use of management control. The
hypotheses presented in this paper may be an
appropriate starting point for studies of this
nature, as well as for a more thorough analysis of
existing studies in the field.
The study of business units in regard to several
strategic variables may provide help in explaining
and predicting how management control is
designed and used; however, there is also a
danger that the theory will become elaborate to
the point where its inadequacies are apparent. In
order to improve the possibilities of explaining
and predicting the design and use of management
control, there is a need both for in-depth studies
focused on the specifics of particular cases, and
for quantitative studies that can identify a limited
number of general explanatory variables.
Our model provides a necessary summary of the
principal findings in the research field of strategy
210
and management control, as well as helping to
facilitate comparison among existing studies. What
future research needs, though, is not primarily
more quantitative studies, but consolidation with
the aid of case studies in which the models and
hypotheses in this paper can be developed further
and refined. Only afterwards should new quan-
titative studies be conducted to test the hypo-
theses. However, this kind of research strategy
poses numerous conceptual and methodological
challenges.
One such challenge is to provide a more
thorough explanation of how the strategy and the
control system of the business unit are designed,
thus making it possible to obtain more detail
on the relationship between strategy and control.
In order to compare these case studies with the
findings of existing quantitative studies, it will
be necessary to give the business strategy and
the management-control systems an operational
definition, for example, through the use of stand-
ardized measuring instruments. This approach,
however, is relatively unusual even though it
improves internal validity considerably. Thus, the
case-study approach is commonly criticized for
seldom using clearly defined measuring instru-
ments and for letting data collection be governed
by subjective judgements (Yin, 1989; Abernethy
et al., 1999). On the other hand, overly formalized
measuring instruments may fail to capture the
complexity of the phenomenon under study.
Another challenge is to consider strategy and
control in regard to context and process in order
to explain how strategy and control are affected
over time by political, cultural, and general
economic conditions (Hopwood, 1983, 1989;
Pettigrew and Whipp, 1993). In a study based on
such an approach, one requirement is that the
different contextual factors can be related to each
other and to the system of management control.
Furthermore, it must be possible to identify the
effect of the chosen strategy on the design and use
of management control. Given these consider-
ations, it is probably necessary to show how the
contextual factors change over a period of several
years. Consequently, the research design should
be based on a longitudinal study in which the
researcher is in a position to examine the organ-
ization very closely.
A third challenge is to study the use of
management control from an individual and
group perspective. The purpose is to explain what
M. Kald, F. Nilsson and B. Rapp
skills are required at the individual and group
level for establishing a strategic way of thinking
and for facilitating changes in strategy. Simons
(1990) is an example of a qualitative approach
which has made it possible to explain management’s
use of management control more thoroughly.
However, Simons (1990) has also been criticized
for a one-sided focus on management. According
to Gray (1990), Simons has not taken advantage
of the ample opportunities provided by the
case-study approach to capture the interplay and
possible conflicts between management and em-
ployees in implementing strategic changes. There-
fore, future case studies based on this approach
should devote more attention to the interaction
between management and employees in both
the formulation and the implementation of the
organization’s strategy. Another implication is
that more attention should be devoted to the role
of operative staff in the processes of planning and
follow-up (cf. Nilsson and Rapp, 1999).
In summary, future research in the field, with
the help of case studies and based on the findings
of existing quantitative studies, should seek pri-
marily to enhance our understanding of existing
theory and contribute to its further development.
Subsequently, quantitative studies may once again
be used to verify the relationships which will have
been identified. Thus, there is a need for interplay
and dialogue between a qualitative and a quant-
itative approach.
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