Accounting Research

Management for Professionals
Erik Jannesson
Fredrik Nilsson
Birger Rapp Editors
Strategy,
Control and
Competitive
Advantage
Case Study Evidence
Management for Professionals
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Erik Jannesson • Fredrik Nilsson • Birger Rapp
Editors
Strategy, Control and

Competitive Advantage
Case Study Evidence
Editors
Erik Jannesson Fredrik Nilsson
Department of Management and Engineering Department of Business Studies
Linköping University Uppsala University
Linköping Uppsala
Sweden Sweden
Birger Rapp
Institute for Management of Innovation
and Technology, Gothenburg
Ljusterö
Sweden
ISSN 2192-8096 ISSN 2192-810X (electronic)

ISBN 978-3-642-39133-0 ISBN 978-3-642-39134-7 (eBook)
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Preface
For quite some time, the area known as strategy and management control has been
of considerable interest to researchers and practitioners. Somewhat simplified, this
subject concerns how the control systems of firms should be designed and used in
order to formulate and implement strategies that contribute to competitive advan-
tage and sustained high performance. Since each firm is unique, strategies and
control systems must also be unique. Firms that succeed in establishing control and
formulating strategies that are internally consistent, while also appropriate to the
environment in which the firm operates, are more competitive than those where this
is not the case.
Substantial research resources have long been devoted to identifying interrela-
tionships in this area. Many articles, book chapters and entire books replete with
valuable knowledge on the subject have been published. However, there is also an
abundance of ambiguous and contradictory findings, not least because many studies
explore these relationships at a single point in time. It is also common for the
research design to cover only one strategic level (corporate, business or functional
level). In addition, almost all studies focus on a limited part of a control system,
despite the existence of several control systems which should be interrelated and
thus affect each other. There is thus a great need for research with a holistic point of
departure, that is, research on the relationship between strategy, control and com-
petitive advantage over extended periods and at several strategic levels, while also
taking into account the existence of several control systems in a single firm.
This book reports on research with precisely this orientation. With one excep-
tion, the studies presented in the book are based on research conducted in doctoral
thesis projects. Without a doubt, these studies are unique in both extent and focus,
and they provide highly valuable contributions to the research area of strategy and
management control. They represent a considerable effort in regard to resources
and involvement over an extended period. Moreover, all the firms and organizations
presented are interesting and exciting, each with a fascinating history. The reader is
given an in-depth look into how changes in the environment lead to adjustments in
strategies and control systems. It is also clear how difficult and challenging it is to
implement these changes and why such efforts are not always successful. But
perhaps most importantly, the book conveys in-depth knowledge and understanding
of how strategies and control systems affect competitive advantage and
performance.
v
vi Preface
This book is a consolidation of the research mentioned above, but it is not an

ending. We will continue with research on strategies, control systems and competi-
tive advantage. We are therefore interested in your feedback on the content of the
book and naturally on any points that are unclear and on any omissions. Information
on how to reach us can be found in the Introduction to the book.
Finally, we wish to thank the authors of the respective chapters for fruitful
collaboration. In addition, we are deeply grateful to Associate Professor Adri de
Ridder, who prepared the financial data presented in the Appendix. We wish to
thank the Jan Wallander and Tom Hedelius Foundation, as well as the Tore
Browaldh foundation, for providing part of the financing for this book project.
Financial support was also received from the Institute for Management of
Innovation and Technology (IMIT) and the Swedish Research School of Manage-
ment and Information Technology (MIT). Our thanks go to Dick Wathen and
Donald MacQueen (Chap. 9) for their assistance in editing the language of the
manuscript.
Linköping Erik Jannesson

Uppsala Fredrik Nilsson
Ljusterö Birger Rapp
May 2013
Contents
1 Introduction to the Cases: Theories, Concepts and Models . . . . . . . 1

Erik Jannesson, Fredrik Nilsson, and Birger Rapp
2 Driving Strategic Change at Saab AB: The Use of New Control
Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Erik Jannesson
3 How Management Control Affects the Implementation
of Strategies in a Decentralized Organization: Focus on
Formal and Informal Control in the Case of Atlas Copco . . . . . . . . 59
Klas Sundberg
4 Success Through Consistent Strategy: How Does Scania’s
Management Control Matter? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Nils-Göran Olve
5 Changing Strategies and Control Systems at a German Insurance
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Susanna Poth
6 Strategy, Management Control and Organizational Design:
Empirical Illustrations from SCA Packaging . . . . . . . . . . . . . . . . . . 139
Katarzyna Cieslak
7 Linking Strategy and Inter-organizational Relationships:
The Case of Volvo and Scania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Zita Ambrutytė
8 The Role of IT Systems in the Strategy Process:
The Case of Electrolux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Fredrik Nilsson and Jan Lindvall
9 Funding, Strategies and Management Control Systems:
Empirical Evidence from Two Chamber Orchestras . . . . . . . . . . . . 213
Fredrik Nilsson and Anna-Karin Stockenstrand
vii
viii Contents
10 Conclusions and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

Appendix: Choices of Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
About the Authors
Zita Ambrutytė is currently a management consultant in the Mergers and

Acquisitions sector as well as on investment-related Lithuanian governmental
projects. She is also a Visiting Lecturer in Management Control and other subjects
at the International Business School of Vilnius University and with the Executive
Programme of the International School of Management in Vilnius, Lithuania.
Katarzyna Cieslak is Acting Assistant Professor in the Department of Business
Studies at Uppsala University. Her PhD thesis was on the role of controllers in
organizations and the impact of organizational context on this role. Her research
concerns the interplay between management control and IT in organizations, as
well as issues of corporate governance, with a focus on executive compensation.
Erik Jannesson is Assistant Professor in Economic Information Systems at
Linköping University. His research is focused on strategic management control,
in particular the relationship between strategy and management control on and
between different levels in large organizations. As a researcher and consultant, he is
also interested in questions regarding management control and value creation from
a sustainability perspective.
Jan Lindvall is Associate Professor in the Department of Business Studies at
Uppsala University, where he conducts research and teaches management control
related to IT. He is especially interested in how new technology, such as Enterprise
Resource Planning (ERP) systems and Business Intelligence, can influence trans-
parency, accountability and motivation in global companies.
Fredrik Nilsson was appointed Professor of Business Studies, especially accounting,
at Uppsala University in 2010. Previously, he was Professor of Economic Informa-
tion Systems at Linköping University and Institute of Technology. His research
focuses on how information systems (e.g. management control systems, financial
accounting systems and production control systems) are designed and used to
formulate and implement strategies.
Nils-Göran Olve is Adjunct Professor at Linköping University and Guest Professor
at Uppsala University. He is also a consultant and author of numerous books on
management control and controllers – in particular how they and new forms of IT
ix
x About the Authors
affect strategies in organizations and how control should be used to realize strategy.
His books on the Balanced Scorecard have been translated into a number of
languages, including English, Spanish, Japanese and Russian.
Susanna Poth has worked in the insurance industry in Europe, mainly Germany,
since 1997. In 2005, she deepened her practical experience in strategy as well as
management and production control by taking part in the research programme on
Strategy, Control and Competitive Advantage.
Birger Rapp is Research Professor at the Institute for Management of Innovation and
Technology (IMIT). In 2007, while Professor Emeritus of Economic Information
Systems at Linköping University, he was appointed Visiting Professor at Uppsala
University and at Blekinge University College. He has previously served as Dean
of the Swedish Research School of Management and Information Technology,
Vice President at Large of IFORS (International Federation of Operational
Research Societies) and President of EURO (the Association of European
Operational Research Societies).
Anna-Karin Stockenstrand is Assistant Professor in the Department of
Business Studies at Uppsala University. Her research concerns accountability in
organizations and the long- and short-term effects on internal processes from
adaptation to external demands, particularly in connection with funding. She is
currently conducting research on the effects of financial reporting standards on
different parts of the management control function.
Klas Sundberg is Lecturer at Dalarna University. He belongs to the research profile
area of ‘Complex Systems – Microdata Analysis’. At Uppsala University, he earned
a licentiate degree in business administration. His research focuses on strategic
management, management control and accounting, but he has also published in the
field of information systems.
Introduction to the Cases: Theories,
Concepts and Models 1
1.1 Introduction
In 2005 the book titled Understanding competitive advantage: The importance of

strategic congruence and integrated control, by Fredrik Nilsson and Birger Rapp,
was published.1 In the introduction to the book, the authors (p. 3) present the
principal elements of their starting point and their overall contribution as follows:
This book provides an analysis of ways for the individual firm to create competitive advantage
on its own market. Our theoretical starting-point is that the alignment of strategies and control
systems affects the firm’s chances of successfully positioning itself in its chosen arena of
competition. The firm is in a better position to concentrate on activities that create value for the
customer if its strategies and control systems are mutually consistent and adapted to expected
external demands. This book is thus a contribution to the literature that treats competitive
advantage on the basis of the match between the environment and internal resources.2
One central starting point for the book was the strong demand for studies in the
field of strategy and management control. The demand was especially great for so-
called multi-level studies, i.e., studies that explore the relationship between strategy
1
This chapter is to a large extent based upon the reasoning found in Nilsson and Rapp (2005) as
well as Nilsson (2010).
2
As earlier mentioned all empirical chapters, except one, are based on dissertation projects (including
one licentiate theses). Quotes from interviews in Swedish have been translated to English.
E. Jannesson (*)
Link€oping University, Link€
oping, Sweden
e-mail: erik.jannesson@liu.se
F. Nilsson
Uppsala University, Uppsala, Sweden
e-mail: fredrik.nilsson@fek.uu.se
B. Rapp
Institute for Management of Innovation and Technology, Gothenburg, Sweden
e-mail: birger@rapp.se
E. Jannesson et al. (eds.), Strategy, Control and Competitive Advantage, 1

Management for Professionals, DOI 10.1007/978-3-642-39134-7_1,
2 E. Jannesson et al.
and control not only at one organizational level, but at several levels simultaneously,
such as the corporate, business and functional levels (see for example Ittner and
Larcker 2001; Langfield-Smith 1997; Luft and Shields 2003). With the ambition of
providing a contribution in the field of strategy and management control – and
particularly the need for starting with the complex interplay between different
organizational levels – Nilsson and Rapp (2005) conducted a comprehensive review
of the literature. This study subsequently provided the basis for developing a holistic
and tentative model showing the relationships between the firm’s business environ-
ment, the presence of strategic congruence3 and integrated control,4 respectively,
and how these relationships affect competitive advantage and performance.
Eight years have now passed since the model was first presented. For this reason it
is appropriate to outline the subsequent development of research in the field of
strategy and management control. Have there been any empirical studies confirming
or refuting the model; that is, do we know more today about the importance of the
relationship between strategy, control and competitive advantage5 in large, complex
firms? Our study of the literature,6 which is presented later in the chapter, shows that
much of the research on strategy and management control has continued to focus on
only one or two organizational levels, although there are exceptions.
An example of a two-level study is Brown and Anthony’s (2011) study of Procter &
Gamble’s (P&G) development of corporate and business strategies between the years
2000 and 2010. The authors describe the creation of a firm-wide ‘innovation factory’
intended to exploit synergies in research and development. Building the innovation
model into the corporate strategy resulted in its adoption throughout the firm.
A manifestation of this is that the businesses were involved in the process through
training and creation of business-unit-related innovation and project teams, as well as
other ways. The purpose of the latter was to develop business strategies with the help
of innovative new products and business models – this was successfully done.
Through clear control linked to portfolio management, as well as risk and profitability
in the new businesses, the firm also achieved a substantial increase in profitability
during the period in question.
Another example is Oliva and Watson (2011) study of the sales and production
planning process at a US consumer-oriented electronics firm. The study shows how
the firm integrated all functions concerned in the planning process, thus creating a
homogeneous information flow from forecast to delivery (see also Smith et al.
2010, for a corresponding discussion from an interorganizational perspective).
3
A firm with strategic congruence has coherent and mutually reinforcing corporate, business and
functional strategies adapted to the environment.
4
A firm with an integrated control system has created a consistent flow of information within and
between the central instruments of control.
5
From this point on, when we speak of strong competitive advantage, we tacitly assume that this
leads to high performance. As is shown in Sect. 1.6, we have also chosen to discuss competitive
advantage and performance as two strongly linked phenomena.
6
The way in which the literature review was conducted is described in Appendix.
1 Introduction to the Cases: Theories, Concepts and Models 3
Among other things, this change contributed to more accurate forecasts, a sharp
reduction in inventory levels and a doubling of on-time deliveries. Moreover,
seeking consensus when the change was made generated a strong sense of involve-
ment within the respective functions. According to the authors, this was very
important in the effort to reach a high degree of goal-achievement.
The examples above show that a multi-level study gives us deeper insight into
and understanding of how the relationship between strategy and control affects a
firm’s competitive advantage. In the next section, where the theoretical foundations
of the book are presented in detail, we provide further examples of studies on these
relationships. But even if all these provide valuable theoretical and empirical
contributions, we have only limited knowledge and understanding of the phenome-
non of strategic congruence and integrated control, and of how they combine to
affect the competitiveness of firms. For this reason, there is a need for more in-depth
case studies that explore several levels within the firm (cf. Berry et al. 2009;
Bhimani and Langfield-Smith 2007; Kathuria et al. 2007).
To our knowledge, there are only a few studies of the kind described above, that
is, studies focusing on strategy and control at the corporate, business and functional
levels. More specifically, we are referring to the studies by Anjou (2008), Nilsson
(2010) and Sundberg (2009). These studies were all conducted through the research
program “Strategy, Control and Competitive Advantage (SiSK),7” based on
Nilsson and Rapp’s tentative model just mentioned (2005). This anthology is
therefore, to a large extent, based on the results of the SiSK program. The overall
purpose of the anthology, and of the research program, is to gain further knowledge
and understanding of how strategic congruence and integrated control affect the
competitive advantage of firms.8 The anthology also includes studies conducted
outside the research program, when such studies are clearly oriented toward the
relationship between strategy, control and competitive advantage.
From Table 1.1 it is apparent that the anthology is based on completely unique
empirical material, with the inclusion of several of Sweden’s leading firms as well
as a large German insurance company and two chamber orchestras. All these
studies provide important contributions in increasing knowledge and understanding
of the relationships between strategy, control and competitive advantage in general,
and strategic congruence and integrated control in particular. In addition, all
chapters are based on a contingency-theoretical starting point, and the authors
adhere explicitly or implicitly to the model developed by Nilsson and Rapp
(2005). To avoid repetition, we have chosen to present the model in detail in this
introductory chapter. In subsequent sections we consequently discuss the different
ingredients individually, that is, the environment, strategic congruence, integrated
7
The acronym is based on the Swedish name of the program.
8
From here on, the designation of “firm” refers to corporate groups, that is, large, complex
organizations with several business units.
Table 1.1 Case companies included in the anthology

Period under Type of Number
Chapter Firm study study Type of firm of levels
2 Saab 1995–2008 Longitudinal Engineering firm 3 levels
3 Atlas Copco 1980–2011 Longitudinal Engineering firm 3 levels
4 Scania 1992–2010 Longitudinal Engineering firm 3 levels
5 Insurance 1995–2010 Longitudinal Services firm 3 levels
company
6 SCA 2008–2009 Cross-section Engineering firm 2 levels
7 Scania and 2002–2003 Cross-section Engineering firm 2 levels
Volvo and 2006–2007
8 Electrolux Approx. Longitudinal Engineering firm 2 levels
2000–2008
9 Two chamber Approx. Longitudinal Cultural 2 levels
orchestras 2000–2008 organization
control and competitive advantage as well as performance; in the final section of the
chapter, we present Nilsson and Rapp’s (2005) complete model. For the purpose of
explaining the model, we used two typical cases of firms with a high degree of
strategic congruence and integrated control. The chapter concludes with a
summary.
1.2 The General Model
In this chapter we initially emphasized that there is a demand for research on the
relationships between strategies and control at and between all levels in large,
complex firms (see for example Luft and Shields 2003). It is an interesting and
highly relevant research area since there is reason to assume that firms which have
succeeded in establishing consistency between strategies at different levels (strate-
gic congruence), and corporate-wide planning and follow-up (integrated control),
are more highly competitive and create more value (better performance) than firms
which have not succeeded in this regard. The extensive research conducted with a
so-called contingency-theory approach has shown that organizations which have
succeeded in adapting strategies and control systems to each other – and to the
requirements of the environment – are more successful than when this is not the
case. At large, complex firms this adaptation is even harder to achieve; it is
therefore of greater importance for the possibilities of controlling and organizing
the business (Goold et al. 1994; Nilsson 2002). In light of these circumstances,
Nilsson and Rapp (2005) conducted a comprehensive review of the literature in the
areas of strategy and control (management control and production control). On the
basis of this review, the authors developed a tentative model, of which the basic
variables and relationships are presented in Fig. 1.1.
Environment Strategic congruence Integrated control
External fit Internal fit
Competitive advantage
Performance
Fig. 1.1 The general model for analysis (Nilsson and Rapp 2005, p. 36)
Similar models have been previously presented, for example by Galbraith and
Nathanson (1978, p. 2), Hill and Brown (2007, p. 1352) and Hrebiniak et al. (1989,
p. 5). One important difference, however, is that in the model of Nilsson and Rapp
(2005), consideration is given to how strategic congruence and integrated control
together affect competitiveness and the possibilities of creating value (i.e. high
performance). As far as we know, few researchers have previously taken this
relationship into account. On the other hand, it may be noted that there is a growing
interest in studying strategic congruence and integrated control as separate areas of
research. We will present this research when the constituent elements of the model
are treated within the respective sections below. These subsections are based to a
substantial extent on the presentation by Nilsson and Rapp (2005).
The theoretical point of departure for the model is the view of firms as open
systems; that is, a firm is considered to affect and be affected by its environment
(the two-way arrow between environment and strategic congruence in Fig. 1.1)
(cf. Hrebiniak et al. 1989). Strategic congruence is assumed to be an essential
condition for facilitating co-ordination of the firm’s various activities, ensuring that
opportunities in the environment are exploited and threats eliminated (cf. Fry and
Smith 1987; Hofer and Schendel 1978; Nath and Sudharshan 1994). This is
customarily referred to as external matching in order to indicate the importance
of mutual adaptation between the firm’s resources and the demands of the environ-
ment (Lawrence and Lorsch 1967).
In order to implement chosen strategies, it is necessary to influence the
behaviour of management and other employees. This requires that the control
systems of the firm is designed and used in accordance with these strategies
(Anthony 1965). Integrated control is assumed to facilitate the exchange of infor-
mation between different organizational levels, creating a common frame of refer-
ence and ensuring more transparent decision-making. This may be assumed in turn
to facilitate discussions on how chosen strategies are to be implemented and
whether these strategies need to be changed (Nilsson and Rapp 2005, p. 93). The
arrow between strategic congruence and integrated control in Fig. 1.1 is two-way in
order to show the following relationship: that the control systems also affect the
choice of strategies (cf. Hall and Saias 1980) – so-called internal matching.
A firm with both external and internal matching is thus well positioned in its
business environment in that congruent strategies are implemented at the corporate,
business and functional levels with the aid of an integrated and well-designed
control system. This positioning is in turn critical if the firm is to become highly
competitive (Porter 1985) and thus create value (i.e. high performance) (Rumelt
2003). In other words, a firm needs to achieve both strategic congruence and
integrated control in order to be successful. However, such alignment might not
be seen as something entirely positive within the firm:
Getting functions or business units aligned with the overall strategy is also often problem-
atic. Many organizations are made up of fiefdoms, unwilling to share power, resources,
information, or ideas in the interests of the greater good. Trapped in their own “stovepipes,”
business units or functions may find it difficult to see how actions at their level can lead to
greater achievement for the total organization.
(Fonvielle and Carr 2001, p. 8)
This quotation highlights the importance of the individual in this connection, that
is, of all people on whom the firm’s success depends. In Collins’ (2001) comprehen-
sive empirical study, the author points out precisely the importance of the individual
in making the firm highly competitive. For example, he notes that the inner motiva-
tion of people to achieve success is an important aspect: ‘the right people do the right
things and producing the best results that they can, regardless of what the incentives
look like’ (Ibid, p. 67). Only putting the right people in the right place can thus be
considered a factor for success. Thus, by this reasoning a dynamic controller may be
considered pivotal in creating more strategic management control (see Caglio 2003;
Nilsson et al. 2011; Zoni and Merchant 2007). As shown in these and other studies,
the controller has also been given a more strategically oriented role. At the same time,
however, there are indications that the opposite may hold true:
The role of management control continues to be an important support function, but there are
signs that it is mainly concerned with pushing through managerial objectives rather than
contributing to developing organisational strategy. Could it be that that the demands of
today’s complex and highly competitive environment have led to controllers attempting to
limit their role to what they are good at: traditional management control?
(Nilsson et al. 2011, p. 31)
No matter what role individual controllers choose to assume, they are of

importance for creating strategic congruence and integrated control. In this book,
however, the role of the actors in the work of creating strategic management control
will only be touched on implicitly since the focus – in accordance with the starting
point in Nilsson and Rapp’s (2005) model – is on structural factors. The reader who
is especially interested in the role of the actor in designing and using management
control is referred instead, for example, to Hendry et al. (2010), Johnston and
Staughton (2009) and Lambert and Pezet (2010).
1.3 The Environment
In this book, the environment is envisaged as the competitive domain in which the
firm operates (Nilsson and Rapp 2005). In order to make the environment more
manageable from a theoretical standpoint, Nilsson and Rapp (2005, p. 37) discuss it
on the basis of how uncertain it is, in other words, ‘[. . .] the extent to which it is
possible to foresee both major and minor changes in the firm’s environment’. More
specifically, their reasoning is based principally on stability in the business unit’s
inflow of new orders and particularly the possibilities of providing a detailed and
accurate long-term sales forecast (cf. Shank and Govindarajan 1993). An environ-
ment characterized by a high degree of uncertainty, where long-term planning is
very difficult, is termed “turbulent”, whereas an environment characterized by low
uncertainty (favourable conditions for long-term planning) is termed “stable”.
The question is then what affects the degree of uncertainty. In the literature
where environmental analysis is treated, a number of models are presented which
provide guidance on this question (see for example Fleisher and Bensoussan 2007;
Johnson et al. 2005). One example is the five-force model by Porter (1980). That
model emphasizes that customers and suppliers (by virtue of their bargaining
power) affect competitive advantage in the industry and thus the individual firm
as well. The same is true of the existence and development of substitutes and
barriers to entry. Both together and separately, these aspects affect the firm’s ability
to prepare an accurate long-term forecast of new orders. It is conceivable, for
example, that strong bargaining power of customers tends to increase uncertainty
in planning, as decisions on the business and its conditions are made by the
customer; thus, the timing and consequences of decisions are largely outside the
firm’s control and may be difficult to foresee.
Another relevant model to use as a starting point is the STEEP model (see for
example Fleisher and Bensoussan 2007), where STEEP is an acronym for Socio-
logical, Technological, Economic, Environmental and Political. In other words,
conditions in each of these areas need to be considered and related to the firm if it is
to understand its environment and thus what affects the degree of uncertainty in
planning. In the model, the social dimension stands for aspects like culture,
population structure, gender roles, etc., whereas the technological dimension
concerns the use, development and significance of technology in the environment.
The economic dimension relates to the overall national economy, which includes
for example the state of the economy, energy prices and interest and exchange rates,
and the environmental dimension covers, among other things, legislation on the
physical environment and the demands of various actors in regard to the environ-
mental responsibility of firms. Finally, the political dimension is about such aspects
as legislation and other forms of regulation, taxes, public service and national and
international collaboration among public organizations.
Taken together, these models help us to understand what the business environ-
ment is like and what factors affect the individual firm. Thus, a turbulent and a
stable environment, respectively, represent entirely different opportunities and
limitations for firms, and to understand them is important in designing appropriate

strategies and control systems (Bhimani and Langfield-Smith 2007; Langfield-
Smith 2007; Luft and Shields 2003).
1.4 Strategic Congruence
According to Nilsson and Rapp (2005, p. 47), there is strategic congruence when
‘[. . .] the corporate, business and functional strategies of the firm are mutually
consistent, with strategy at each organizational level appropriate to the firm’s
competitive arena and overall strategic aims.’ One reason for why such coordina-
tion might be considered important can be described as follows:
[. . .] competitive advantage may reside in the orchestrating theme and integrative
mechanisms that ensure complementarity among a firm’s various aspects: its market
domain, its skills, resources and routines, its technologies, its departments, and its decision
making processes (Black and Boal 1994; Inkpen and Choudhury 1995). Indeed,
organizations may be viewed as systems of interdependency among these components,
all of which must be coordinated to compete in the marketplace. It is the complexity and
ambiguity of these relationships that give some organizations unique capacities that are all
but impossible to copy (Lippman and Rumelt 1982). Configuration, in short, is likely to be a
far greater source of competitive advantage than any single aspect of strategy.
(Miller 1996, p. 509f)
From this quotation, it is evident that strategic congruence is difficult to create

and copy, and thus an important source of competitive advantage. What is
surprising is that more research has not been done on how congruent strategies
affect competitive advantage. As shown by Nilsson (2010), and further developed
here, a considerable portion of the research that has nevertheless been conducted
can be divided into two groups: (1) studies directed at the corporate and business-
unit levels (see for example Brown and Anthony 2011; Burgelman 2002; Hansen
2009; Joseph and Ocasio 2012; Lind 2004), and (2) studies directed at the business
and functional levels (see for example Brown and Blackmon 2005; Brown et al.
2007; Raymond and Croteau 2009; Samuelsson et al. 2006; Swink et al. 2005; Ward
et al. 2007). In addition, there are studies that mainly discuss strategies on two
organizational levels but have also touched in a more general manner on strategies
at the third level (see for example Ahlstr€ om 2008; Moore and Birtwistle 2005;
Nilsson 2002).
In cases where the functional level is considered in the discussions on strategic
congruence, it is common to include production strategies (Langfield-Smith 1997,
2007). Partly for this reason, Nilsson and Rapp (2005) discuss production strategy at
precisely the functional level. They also state (Ibid, p. 75f; cf. Skinner 1969, 1974):
In the effort to become highly competitive, the manufacturing function and its activities are
considered especially important (Voss 1995). Concepts like “world-class manufacturers”
and “lean and mean enterprises” have been coined to designate firms where a well-
developed manufacturing function is one of the principal reasons for their financial success
(Cooper 1996).
Hence, the production process is often complex and requires extensive

co-ordination (cf. Hansen and Mouritsen 2007a, b); this in turn poses strict
requirements of co-ordination with business strategies.
The reasoning above is based, however, on a traditional industrial view of
production strategies, where physical products have been in focus. In recent
years, however, the production of services has become important (cf. Vargo and
Lusch 2004). This has meant that attention has turned to research on the importance
of service production to a firm’s competitiveness. An example is Ahlstr€om (2008),
who studies strategies and control on the market for senior housing. He uses Nilsson
and Rapp’s (2005) framework as the starting point for his study but limits it to the
business and functional levels. Moreover, he uses, for example, the model devel-
oped by Silvestro et al. (1992) for service production instead of the traditional
production-strategy typology of Hayes and Wheelwright (1979). The conclusion of
Ahlstr€om’s study is that successful so-called concept builders on the senior housing
market have established strategic congruence and integrated control. His study thus
confirms Nilsson and Rapp’s (2005) hypothesis. Chapters 2 (Driving strategic
change at Saab AB: The use of new control practices), 5 (Changing strategies and
control systems at a German insurance company) and 9 (Funding strategies and
management control systems: Empirical evidence from two chamber orchestras) in
this book present three studies which have also examined strategic congruence and
integrated control in businesses and organizations that partly or wholly produce
services.
One important question in this kind of study is how well strategies at different
levels need to be coherent if they are to be considered congruent. In this case, we
have chosen to adopt the perspective stated by Nilsson (2010, p. 69, translated).
Hence, to analyse the existence of strategic congruence
[. . .] it is important to clarify in as great detail as possible the degree to which strategies can
be regarded as implemented, and also in what ways they can be considered mutually
reinforcing. In the cases where implementation of strategies has progressed far enough to
have a substantial mutually reinforcing effect, one may assume that they can be considered
to have achieved a minimal state of congruence. Thus, strategic congruence can be
achieved to varying degrees (cf. Miller 1996).
The difficulties of measuring the degree of congruence, however, are consider-

able, and in the literature there is a growing emphasis on the importance of
operationalizing strategies and control systems (Hill and Cuthbertson 2011) and
in capturing the degree to which the actors in an organization consider the strategies
to be congruent (Prieto and de Carvalho 2012). Regardless of method, however, it is
still up to the researcher to determine the degree to which the strategies are actually
congruent and to describe the cases so as to give readers a reasonable chance to
form their own opinion on this issue.
A closely related question is whether an extremely high degree of strategic
congruence is to be considered entirely positive. Even though this is far and away
the most frequently encountered starting point in the literature, some scholars
maintain that it also entails substantial risks. Miller (1996) is one of them; among
other things, he notes that for a focused operation – that is, where there is a very
high degree of strategic congruence – ‘[. . .] there is a danger that such very highly
configured firms will become too simple – too dominated by a single world view,
too monolithic, too driven by one theme or function’ (Ibid, p. 510; cf. Burgelman
2002; Kathuria et al. 2007). One example is Anjou’s (2008) study of Scania, a firm
well known for its high degree of strategic congruence. In her study, she shows how
this relationship is reflected in a clear control model that replicates and reinforces
Scania’s strategic focus, with the consequent risk of making it more difficult to
innovate and to reconsider the firm’s concept of business. In her final chapter, she
expresses this point as follows (ibid, p. 148, translated):
There is a risk, however, that the control model is so well established that innovation
through new thinking is made more difficult. The reason is that control is so well integrated
that there is a danger that employees act with too much conformity and that they do not dare
to present suggestions for improvement and change. In addition, it may be problematic to
hold an unconventional view at a firm with such strongly established procedures for
planning and follow-up. Major changes in the business environment, or mergers and
acquisitions, may also be more difficult to manage if the control model becomes too strong.
Thus, a sufficiently high degree of matching of strategies at different levels may

be preferable (Miller 1996). The question, however, is what factors may be consid-
ered to facilitate – or even precondition – the achievement of such matching.
Nilsson and Rapp (2005) highlight, for example, decision situations, core compe-
tence and business logic as three important factors. Decision situations refer to the
type of decisions made at different levels within the firm and the information on
which these decisions are made. Core competence is to be understood as an internal
competence, i.e., one within the firm, when a major portion of the firm’s products
contribute substantially to their value as perceived by customers, and moreover are
difficult to copy. A common business logic, to put it simply, reflects the fact that the
different businesses of the firm create value in a similar fashion; in other words,
they have the same business logic and thus the same critical factors for success.
However, the authors are not very detailed in their discussions of these factors.
Nilsson (2010, p. 47, translated) carries the reasoning further and notes, among
other things, the following:
The basic content of the discussions on decision situations, core competence and business
logic, respectively, has been the same: uniformity in the respective dimensions helps to
create a focus within the corporate group. Corporate groups with uniformity both within
and between dimensions have created a so-called heartland. A heartland includes
businesses with a common logic and thus common criteria for success. In such a situation
corporate management is in a good position to be highly familiar with the business and thus
to contribute actively in the creation of value by the group. Furthermore, the common
success criteria facilitate co-ordination of strategies, as well as integration of the control
system, since there is a common starting point for what is important within the group. That
is why harmonized decision situations, core competence and business logic are assumed to
facilitate the creation of strategic congruence and integrated control (cf. Goold et al. 1994)
[. . .].
1.5 Integrated Control
According to Nilsson and Rapp (2005, p. 94), there is integrated control when ‘[. . .]
strategic planning and follow-up at each organizational level are coherent through-
out the firm. The purpose of integrated control is to facilitate the exchange of
information between different organizational levels and decision-makers
concerning strategic, tactical, and operating decisions.’ Integrated control is
intended to establish a focus by specifying the firm’s typical decision situations
and the core competence and business logic on which these decisions are based
(Chenhall 2005; Nilsson and Rapp 2005). Chien and Cunningham (2000, p. 299)
describe the content and relevance of integrated control as follows:
[. . .] business managers are constantly seeking ways to improve the management of
resources to survive and make a profit. To develop a good business plan, managers cannot
formulate their individual operating plans in a vacuum. Integrating planning information
derived from various functions in the firm is key to the development of an effective business
plan. In business planning it is essential to recognize and understand the interrelationships
among various planning functions in marketing/sales, production and finance. Such inte-
gration provides accurate information for coordinated development of the plans. Informa-
tion on expected sales revenues, production levels, production workforce size, inventory
levels, and cash requirements for workforce and materials is indispensable for the effective
coordination of these three major planning functions. Without coordination, it is difficult to
assure that the plans work in concert to achieve the objectives of the overall business plan of
the firm.
Integrated control is thus about co-ordinating information within and between

different control systems, such as management control, production control, environ-
ment control, project control and HR control (Nilsson et al. 2011). The purpose is to
focus the attention of managers and employees on what is important and how they
can contribute to the performance of the organization (Berggren and Bernshteyn
2007; Boswell 2006). Nilsson and Rapp (2005), however, have chosen for pedagog-
ical reasons to discuss only management control and production control. Focusing
on just two control systems makes it simpler to clarify the conditions for integration.
By management control the authors mean ‘[. . .] the formalized, information-based
routines, structures and processes used by management to formulate strategies and to
implement them by influencing employee behaviour’ (Ibid., p. 99), and by produc-
tion control they mean ‘[. . .] the formalized, information-based routines, structures
and processes used by management to formulate strategies and to implement them
by controlling manufacturing processes, including materials, machinery,
employees, and suppliers’ (Nilsson and Rapp 2005, p. 109). As can be seen, the
similarities are considerable, and both cases highlight the formulation and imple-
mentation of strategies, primarily through affecting the behavior of management and
other employees.
We have previously noted that attention is given to integrated control in the
literature, and in addition that studies are conducted from different perspectives.
Some examples are the use of key numbers in a vertically integrated agribusiness
(Bryceson and Slaughter 2010), the relationship between performance measurement
systems and strategic planning (Gimbert et al. 2010), the balance between
empowerment and integration in a strategic performance measurement system

(Kolehmainen 2010), integration of different quality systems (López-Fresno
2010), the consequences of a non-integrated performance measurement system for
strategy implementation (Micheli et al. 2011), integration between sales and
operations planning and collaborative planning, forecasting and replenishment
(Smith et al. 2010) and integrated planning in the value chain (Oliva and Watson
2011). In addition, there are two other areas, closely related, to which attention is
given when integrated control is discussed.
One area is how Enterprise Resource Planning systems (ERP systems) affect
management control (see for example Chapman and Kihn 2009; Granlund and
Mouritsen 2003; Quattrone and Hopper 2006). These computer-based information
systems are founded specifically on the idea of an integrated information flow
throughout the firm. To simplify somewhat, it means that the accounting should
be done in the same way throughout the firm and that there is therefore a need for a
common control model. All accounting concepts must also be defined in the same
way. The basic principle is that a transaction need only be recorded once in the
common data base that constitutes the core of the business system (Hedman et al.
2009). The advantages of this type of integrated data-based information system are
many. One of them is that the handling of transactions in the accounting can be
automated, leading to substantial gains in efficiency. Another advantage is that
information can be made available quickly and analyzed in a completely different
way than before (Rom and Rhode 2007). One disadvantage, however, is that a
business system forces all businesses in the firm into a common control model, and
that the scope for situational adaptation at lower organizational levels is limited.
According to Nilsson and Rapp (2005, p. 209), this becomes a problem when the
degree of strategic congruence is limited:
In corporations where strategies and control systems are not mutually consistent, in
principle only the transactional data can be assumed to be the same. This means that the
benefits of an integrated business-support system cannot fully be exploited and that there
will be additional costs. For example, certain special adaptations of the business system will
probably be necessary since the requirement of total uniformity in tactical and strategic data
will mean that the system will only meet the information needs of certain decision-makers.
In other words, ERP systems are based on the idea of a common control model
for the entire firm, and as noted in previous sections, this is not a new idea in the
literature on management control. Another area that has been given more attention,
like the increased interest in ERP systems, is to regard the control system as a
package of different instruments of control. Malmi and Brown (2008) call it a
“management control package” and describe it as follows:
There are a number of reasons why studying the MCS [Management Control System] package
phenomenon is important. Firstly, MCS do not operate in isolation. While much of the MCS
research considers single themes or practices that are seemingly unconnected from each other
and the context in which they operate, these invariably sit within a broader control system
(Chenhall 2003). This has several implications. For one, Fisher (1998) argued that if the links
between various MCS are not recognized, then the way in which the considered MCS
components relate to studied contingent variables will lead to erroneous conclusions.
(Malmi and Brown 2008, p. 287)
Cultural Controls
Clans Values Symbols
Planning Cybernetic Controls

Reward and
Long Financial Non Financial Hybrid
Action Compensation
range Budgets Measurement Measurement Measurement
planning
planning Systems Systems Systems
Administrative Controls
Governance Structure Organisation Structure Policies and Procedures
Fig. 1.2 Management control package (Malmi and Brown 2008, p. 291)
There are a number of different frameworks that can be regarded as a manage-

ment control package, and Malmi and Brown (2008) have used them in putting
together their structure (Fig. 1.2). As can be seen, it comprises three levels. The
lowest level concerns administrative control – governance structure, organiza-
tional structure and policies and approaches – and according to the authors, this is
the foundation for other controls and is therefore located in the base of the model.
The middle level concerns formal planning and follow-up, and is what Nilsson
and Rapp (2005) refer to as management control. The third and highest level is for
cultural control, that is, affecting human behaviour through clans, values and
symbols. ‘Cultural controls are pictured at the top to indicate that they are broad,
yet subtle controls. They are assumed to be slow to change, thus, providing a
contextual frame for other controls’ (Malmi and Brown 2008, p. 295).
Nilsson et al. (2011) use Brown’s framework in introducing the concept of
control mix. By this term they mean the combination ‘[. . .] of the various forms
of control that an organization applies’ (ibid, p. 70). They continue:
The parts should fit together and reinforce each other appropriately. In the case of
management control, it is particularly important that it fits with other forms of control
which use similar processes [. . .] so that the control becomes integrated. But informal
control should speak the same language as management control, or deliberately comple-
ment it, so that management control represents one part of the message and other control
forms other parts of the message.
According to Nilsson et al. (ibid) the control mix is about using different control
mechanisms to communicate a message to employees for the purpose of affecting
their behaviour, in both the formulation and the implementation of strategies. From
the quotation it can also be seen that the control mix is a broader concept than
integrated control, and that the latter can be regarded as a part of the former. When
we examine current research on the relationship between different instruments of
control, we find that they clearly show the complementary picture discussed by
Nilsson et al. (ibid) in regard to the use of instruments of control. What is
remarkable is that the studies concern only one or two organizational levels
(see for example Marginson 2002; Mundy 2010; Sandelin 2008; Tuomela 2005;
Widener 2007), just like the research focused on integrated control. One exception
is Sundin et al. (2010), which studies management control in a company where the
control requirements vary depending on differences in the information needs of

central stakeholders. The study thus shows that the control package can balance
different information needs and therefore need not necessarily have uniform design
and use at the corporate, business and functional levels. Another study which
examines management control at three levels is Kolehmainen (2010). However,
this study is not based on a control-mix perspective, but shows how a telecom firm
can go about establishing integrated control, particularly in regard to strategic
performance measurement systems.
Finally, it is relevant to ask how strong the necessary links within and between
different control systems must be for control to be regarded as integrated. Is it
enough, for example, if most of the areas of focus in the strategic plan are reflected
in the budget and key numbers, or must all areas of focus be considered in detail in
the more specific control over an annual cycle? Is it enough if the new orders forecast
provides the basis for management and production control at a more overall level, or
must there be a strong relationship between new orders and, for example, what key
numbers are used in the two control systems? Just as with the corresponding
questions in regard to strategic congruence, there are no clear answers to this type
of question (cf. Hanson et al. 2011). The congruence of the information flow within
and between control systems must therefore be described in detail in order to permit
assessment of the degree of integration. Ultimately, this assessment is done by
the researcher, and it is therefore important to show clearly which data have been
used, how they have been analyzed and what conclusions have been drawn.
1.6 Competitive Advantage and Performance
Competitive advantage and performance are two phenomena that are very closely
interrelated and thus difficult to separate analytically. As previously noted, we have
therefore chosen to treat them together. Porter (1985) is one of the researchers who
have also chosen to discuss these concepts in this way. In his view, being competi-
tive means that the firm has established a strong market position, and such a
position is possible to achieve only if customers find that the firm creates value
for them over an extended period. Creation of value for customers leads in turn to
the firm’s gaining market share and a record of good profitability (high perfor-
mance) in the long run. In addition, the existence of established measures of market
share and profitability has helped to promote their use in comparing firms and thus
in showing the consequences of their competitiveness:
Tersine and Hummingbird (1995, p. 8) hold that it is the competitive position, which should be
interpreted as market share, that should be compared, whereas Day and Wensley (1988, p. 2)
maintain that it is a combination of the firm’s market share and profitability that should be
related to competitors. Porter (1985, p. 11) has instead applied a purely profitability perspec-
tive and contends that it is possible to express an opinion on the competitiveness of a firm
exposed to competition by comparing its profitability with the profitability of the industry. A
strong competitive advantage implies long-term profitability above the industry average.
(Nilsson 2010, p. 1, translated)
We have chosen to adopt this perspective and thus to regard competitive

advantage like Porter (1985), who holds that the firm must meet the requirement
of profitability above the industry average over an extended period if it is to be
considered strongly competitive. Whether profitability is based on return on total
capital, return on capital employed or some other measure of return depends on the
conditions prevailing and on the purpose of the specific comparison.
Using measures of return entails a number of challenges. One example is the low
degree of comparability of results for listed companies, due to differing policies
regarding revenue and cost items in the income statement (Scheja 2009).
Challenges of this kind, together with the consequences for the possibility of
measuring competitive advantage, are summarized by Nilsson (2010, p. 61, trans-
lated) as follows:
[. . .] competitive advantage is a multidimensional phenomenon, and monetary measures
should therefore be supplemented, for example by other market-related measures like
market share or customer satisfaction (cf. Bharadwaj et al. 1993, p. 87; Keats and Hitt
1988, pp. 576–577, 590; Morgan and Strong 2003, pp. 165–166; Venkatraman and
Ramanujam 1986, pp. 801–806). The reason for using several dimensions may be
explained as follows:
“The financial analyses of a firm may be compared to how a physician measures the
temperature, blood pressure, pulse etc. of a patient. Each of them taken along says very
little, but together they provide a picture of the patient’s health (Hallgren 1988, p. 53).”
Pettigrew and Whipp (1991, p. 37) also point out that the use of only one measure and a
single point of measurement can result in misleading outcome data. The profit for a
particular year can be maximized in the short run, and the negative effects will probably
not be captured in the measurements.
Even though interpreting and analyzing measures of return entails difficulties,

we have chosen to use these in this book as a way to express competitive advantage.
Our reason is that the objective is not to provide an exact picture of competitive
advantage, but more of an indication as to whether it is strong or weak and how it
has developed over time (cf. D’Aveni et al. 2010). To obtain a fuller picture of the
firm’s competitive advantage, however, its performance should be analyzed.
A firm’s aggregate performance is customarily considered to include the total
economic, social and environmental consequences of a business (Nilsson and Hahn
2012; SIS 2010). It is normal, in addition, to refer to performance as a “triple
bottom-line phenomenon”. This is also the perspective that guided the development
of Corporate Social Responsibility (CSR), that is, the idea that firms increasingly
consider non-monetary dimensions important when they follow up and evaluate
their performance. For instance, a number of guidelines, policies and behavioural
codes have been created for the purpose of supporting firms’ CRS activities
(Grafstr€
om et al. 2008). Among other things, the following is stated in PwC’s
(2010, p. 4) CSR Trends 2010:
Corporate responsibility has changed from being a nice thing to do to a core business value
that defines the best business on the planet. In one year alone, the number of companies
with CSR information on their website jumped to 81 % at the end of July 2010 from 75 % at
the end of July 2009. In Europe that statistic is approaching 100 %, with 94 % of all
companies posting CSR information, 74 % posting a link to CSR on their corporate home
page and 81 % publishing a CSR report.
In line with this development, the traditional view in business literature has also
changed in regard to the point of departure in viewing a firm’s performance (see for
example Pfeffer 2009; Porter and Kramer 2011). As Nilsson and Rapp (2005, p. 39)
describe it:
By performance is meant the value that is created for the firm’s most important
stakeholders. Both practitioners and scholars commonly define performance in terms of
total shareholder return (dividends plus shareholder price appreciation). Donovan et al.
(1998, p. 18ff.) argue, however, that it is not sufficient to focus solely on shareholders; due
consideration must also be given to other major stakeholders, most notably customers and
employees. In the view of these others, there is competition for all three categories of
stakeholders, and every firm must create value for each in order to prosper. Finding this
view persuasive, we have chosen to define performance according to the degree to which
value is created for employees, customers, and shareholders. In our opinion, lasting high
performance is the result of a strong competitive position in respect to all three groups.
The latter means in turn that performance, like competitive advantage, is relative
and that comparisons between firms are important. One precondition for this is
relevant information. To analyse shareholder value, the measure of Total Share-
holder Return (TSR) is applicable in almost every situation, including non-listed
firms, even though the calculations then entail special challenges. However,
analysing value creation for employees and customers becomes problematic. In
both cases there is a need for internal information that firms do not commonly share,
even though customer value can be captured to a large degree by an outside party.
In those cases where performance is explicitly discussed in the chapters of this
book, this is therefore based on a shareholder perspective; availability of informa-
tion had been decisive for what has been feasible, particularly if the purpose, as
noted, is to show trends rather than determine performance exactly.
Finally, one may ask whether it is even possible to identify what strategies and
control systems mean for competitive advantage and performance. The answer
depends on so many different aspects, and fully isolating the significance of
particular phenomena entails substantial difficulties. However, with the aid of
evidence chains (cf. Miles and Huberman 1994), it should be possible at least to
clarify the importance of strategic congruence and integrated control (cf. Ezzamel
et al. 2008; Goold and Campbell 1987; Nilsson 2010; Pettigrew and Whipp 1991).
As is shown by, for example, Nilsson (2010) evidence chains can be used for
describing the relationship between changes in the environment, strategies,
controls, behaviour and, finally, what this has meant for the company’s competitive
advantage and performance. The latter can be analysed by
[. . .] making comparisons over the entire period under study between the existence of
strategic congruence and integrated control, on the one hand, and the firm’s competitive
advantage and performance, on the other. Such an analysis makes it possible to form an
opinion on whether the presence of strategic congruence and integrated control is positively
correlated with any periods of strong competitive advantage and performance.
(Nilsson 2010, p. 70, translated)
1.7 The Tentative Model
As mentioned previously, the result of Nilsson and Rapp’s (2005) review of the
literature is a tentative model for the relationship between the different dimensions
described in their book (see Fig. 1.3). Moreover, each of these can be measured
when the authors define one or more specific variables for each dimension, that is,
for the environment, strategies, management control, production control, competi-
tive advantage and performance. Figure 1.3 presents the model with all its constit-
uent elements.
Nilsson and Rapp (2005) show that the variables can be combined in different
ways, but they argue that there are two combinations that promote the creation of
strategic congruence and integrated control. Hereafter, these are referred to as the
Portfolio Manager and the Activity Sharer, which are viewed as descriptions of a
firm that is competitive. Of course there might be other combinations that appear
among competitive firms. However, the authors’ theoretical discussion indicated
that companies that match either of the two are more likely to be successful than
others. Particularly since the two are in a better position to create a focused firm
adapted to the environment.
At the same time, it is important to point out that the reasoning based on the
variables is on a more general and conceptual level, where variables with appar-
ently good matching in practice may contain elements of conflict. One example is
that non-monetary control at the business and functional levels, respectively, does
not necessarily mean that control is integrated. It is conceivable, for example, that
the non-monetary information at the respective levels sends different signals on
what is important, even though the information in itself is of the same type. The
same reasoning can be applied to strategies, where the underlying strategic
orientations need to match if the strategies are to be congruent.
Table 1.2 presents in summary the characteristic features of each case type, and
below we describe two fictitious “cases” for each case type in order to show clearly
what they mean. These two case types are based on the discussion in Nilsson and
Rapp (2005, Chap. 5), which also provides references to previous research.
1.7.1 The Portfolio Manager
A Portfolio Manager – commonly known as a conglomerate – is characterized by a

high degree of diversification and limited synergies. With the absence of substantial
gains from co-ordination, the various businesses of the corporate group are man-
aged as autonomous firms, with each unit expected to maximize its profit. Corporate
management controls operations through decentralized decision-making. How
results are achieved matters less than achieving them or exceeding the corporate
targeted return. Units that fail over time to achieve these targets are divested or shut
down. A Portfolio Manager features, in other words, tight, monetary and short-term
management control.
Sub-environment corporate Corporate strategy Management control Manufacturing control

Type of information used:
Intensity of monitoring:
Corporate level
Monetary or Non-monetary
Tight or Loose Capacity & planning strategy:
Environmental stability: Synergy potential: Type of information used: Lag/Level or Lead/Chase
High or Low High or Low Monetary or Non-monetary Customer order decoupling point:
Time perspective: Make to stock or Make to order
Short-term or Long-term Control concept:
JIT or MRP
Strategic congruence Integrated control
Sub-environment unit Business strategy Management control Manufacturing control

Business unit level

Intensity of monitoring: Monetary or Non-monetary
Environmental stability: Product uniqueness: Type of information used: Lag/Level or Lead/Chase
JIT or MRP
Strategic congruence Integrated control
Sub-environment function Functional strategy Management control Manufacturing control

Functional level
Intensity of monitoring: Monetary or Non-monetary
Environmental stability: Technical flexibility: Type of information used: Lag/Level or Lead/Chase
JIT or MRP
Performance
Fig. 1.3 The tentative model of Nilsson and Rapp (2005, p. 193)
The strategy and control of the Portfolio Manager is appropriate for businesses
that operate in mature industries with a stable environment, that is, with
businesses that follow a strategy of cost leadership. This business strategy is based
on the fact that the unit competes through a standardized product offering and low
production costs. The demand for this type of products is normally considered to
be relatively stable with no major fluctuations in customer preferences. The stable
Table 1.2 Summary of dimensions and outcomes for Portfolio managers and Activity sharers
(Based upon the reasoning of Nilsson and Rapp 2005. The same table has also been used in Nilsson
2010, p. 14)
Dimensions Portfolio Manager Activity Sharer
Environment Stable Turbulent
Corporate strategy Portfolio management Activity sharing
Business strategy Cost leadership Differentiation
Functional strategy Assembly line/Continuous flow Job shop/Batch
Type of information used Monetary Non-monetary
Intensity of monitoring Tight Loose
Time perspective Short-term Long-term
Capacity and planning strategy Lag/Level Lead/Chase
Customer order decoupling point Make to stock Make to order
Control concept Just-In-Time (JIT) Materials-Requirements
Planning (MRP)
environment facilitates both short- and long-term planning of operations. This means
that the budget has an important role in planning and follow-up and that it is regarded
as a contract where no deviations are accepted. Given the constant effort to make
production more efficient and to eliminate all activities that do not create value,
monetary information is used. Follow-up has a short-term perspective. In other words,
the kind of management control that is appropriate with a cost leadership strategy has
the same design and use as that of a Portfolio Manager.
At the functional level, the production strategy used is consistent with the focus
of the business strategy on standardized and inexpensive products: assembly line or
continuous flow. These production strategies are characterized by large-scale pro-
duction where the purpose is to achieve economies of scale. Another feature is that
the production apparatus has a high degree of mechanization, which makes it
inflexible; in other words, it is difficult to change the volume and mix of production.
With the stable environment, however, the conditions for both short- and long-term
planning are favourable. For this reason, new production capacity is not acquired
until a strong need has arisen; in other words, undercapacity is sought in order to
maximize machine utilization (lag). Short-term production planning is intended to
keep the volume of production as steady as possible (level). Since the customer is
linked to the product at a late stage of the process, production is to inventory (make
to stock), which also contributes to a more even volume of production. The control
philosophy of Just-In-Time (JIT) is adopted, as it helps in maintaining an even,
cost-effective flow in the production process.
In summary, this case type is representative of a corporation where competitive
advantage and performance are based on cost-effectiveness. The choice of corpo-
rate, business and production strategies provides a stable environment that makes it
possible to design and use a kind of management and production control that helps
in keeping costs as low as possible.
1.7.2 The Activity Sharer
An Activity Sharer is characterized by a low degree of diversification and substan-

tial synergies. Co-ordinating important activities – such as purchasing, production
and marketing – can help the corporate group to increased cost-effectiveness and/or
to provide a more differentiated product offering. Since the businesses of the group
are related, corporate management must look to the performance of the entire
corporation; the results of particular units are then of secondary importance. It is
more important to evaluate how each business contributes to the larger whole in a
long-term perspective. To ensure that synergies are exploited, decision-making is
centralized. In view of the fact that corporate management participate in planning –
and therefore possess a good knowledge of the businesses – together with the long-
term focus of strategy, follow-up is loose and non-monetary in nature.
The Activity Sharer’s strategy and control is especially appropriate for
businesses that operate in industries with rapid development and innovation. In
such a turbulent environment a strategy of differentiation is commonly found. This
strategy means that the business unit competes through unique product features,
such as high quality and innovative design, so that it can charge a premium price. It
is characteristic for this type of product that customer preferences change rapidly,
thus making both short- and long-run business planning more difficult. Dependence
on research and development – which should preferably be co-ordinated within the
firm to achieve maximum effect – and a large and varied product offering – also
contribute to uncertainty. In view of all these factors taken together, the budget does
not play a particularly prominent role in control. Rather, planning is looser and
more long-term in nature. Moreover, non-monetary information is used to capture
critical success factors for the chosen strategy of differentiation, such as quality,
R&D etc. The design and use of management control are thus the same for a
strategy of activity-sharing as for a strategy of differentiation.
The production strategy appropriate for differentiated products is the so-called
job shop strategy or batch strategy. Both these strategies can handle the requirements
of customization to which the differentiation strategy contributes, that is, large
variations in production volume and product mix. One consequence of this flexibil-
ity is that the production apparatus has a relatively low degree of mechanization
compared to the production strategies of assembly line or continuous production;
another is that substantial overcapacity is necessary in order to cope with the
changeability of customer preferences (lead/chase). Since the differentiation strat-
egy is based on customization, the products are linked to the customer at an early
stage, thus making production to inventory impossible (make to order). The control
philosophy adopted is Materials-Requirements Planning (MRP) in order to manage
variations in production volume and mix.
When all features are considered, this case type is characteristic of a corporation
where competitive advantage and performance are based on product differentiation.
Given the choice of corporate, business and production strategy, the result is a
turbulent environment where design and use of management control and production
control are intended to create flexibility and the opportunity for customization.
1.8 Summary
The chapter begins with a presentation of the origin and purpose of the book, where
the latter is to gain further knowledge and understanding of how strategic congru-
ence and integrated control affect competitive advantage of firms. This introduction
is followed by a review of theories, concepts and models. The starting point for this
review is the model of Nilsson and Rapp (2005). It shows how the environment,
strategies and control systems of firms affect competitive advantage and perfor-
mance. The model is based on the so-called contingency theory; thus, firms which
have adapted their strategies and control systems to each other and to their environ-
ment are assumed to be more competitive than firms which have not achieved this
type of congruence.
What makes this model unique is that it not only provides tools for analysis of
how the environment, strategies and control systems are affected on an organiza-
tional level, but it also takes into account the firm as a whole. The authors have
therefore chosen to emphasize the importance of strategic congruence (that
strategies are consistent among different levels) and integrated control (that there
is interrelated planning and follow-up). It has long been observed that multilevel
studies can help us to enhance our understanding of what affects strategies and
control systems (see for example Luft and Shields 2003). As can be seen from the
literature review in this chapter, however, there are few studies which can be said to
consider two or more organizational levels.
The chapter concludes with an examination of the two case types that describe
two combinations of strategies and control systems that may be assumed to make a
firm strongly competitive. Of course these two examples are simplifications of
reality, but nevertheless they provide a clear picture of how strategic congruence
and integrated control may appear. Almost always – as will become apparent in the
book’s empirical chapters – the most successful and competitive firms deviate in
some ways from the ideal picture of what constitutes strategic congruence and
integrated control. One explanation is that almost all successful companies are
constantly changing and therefore have fixed strategies and control systems only for
brief periods. A further explanation is that Nilsson and Rapp’s (2005) model is a
simplification and does not fully reflect the complexity of strategies and control
systems encountered at large firms.
In the following empirical chapters, completely unique empirical material is
presented. It shows how a number of complex and successful organizations have
chosen to design and use their strategies and control systems. As will be apparent,
these studies show the importance of strategic congruence and integrated control
for the creation of competitive advantage. They also show strengths and
weaknesses of the model developed by Nilsson and Rapp (2005) and how it should
be modified for use in future research.
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Driving Strategic Change at Saab AB:
The Use of New Control Practices 2
Erik Jannesson
2.1 Introduction
There has long been a demand for research showing the significance of
relationships between strategies and control for the competitive advantage of
complex corporate groups (see for example Bhimani and Langfield-Smith 2007;
Langfield-Smith 1997; Otley 1980). Moreover, a number of such studies have been
conducted, but they have not adopted the holistic approach highlighted by Nilsson
and Rapp (2005), where strategies and control are treated at the corporate, business
and functional levels to obtain a true understanding of their importance. More
specifically, the authors maintain that it is essential to establish strategic congru-
ence (mutually coherent corporate, business and functional strategies) and
integrated control (control systems with a flow of consistent information within
and between the principal mechanisms of control) in order to be competitive.1
The study in focus in this chapter has therefore applied the holistic approach
propounded by Nilsson and Rapp (2005). More specifically, this chapter is devoted
to the strategic change undergone by Saab AB,2 the defence and security company,
since the mid-1990s, and to the design and use of control in maintaining the forward
momentum of change. The actions of the corporate group were taken in response to
changes in the business environment since the 1990s. At that time Sweden’s
defence forces accounted for roughly half of Saab’s sales. As there was little or
1
See Chap. 1 for a thorough discussion regarding this.
2
This chapter is not about Saab Automobile, the automobile manufacturer, which was formed in
1990 from collaboration between Saab-Scania AB, as it was called at that time, and General
Motors (GM). These two corporations each owned a 50 % share in the company, but in 2000 Saab
Automobile became wholly owned by GM. In 2010 Saab Automobile was purchased by Spyker
Cars before going bankrupt at the end of 2011.
E. Jannesson (*)
Linköping University, Linköping, Sweden

28 E. Jannesson
no competition in this business, Saab had basically a monopoly in the areas of the
Swedish market where they operated; they were the only company that developed
and manufactured the products and systems concerned. Around the turn of the
millennium, a realignment commenced, in which Saab intensified its focus on the
export market. A few years into the 2000s, the corporation was considerably more
exposed to competition than before. To adapt the business to the new competitive
situation, there were substantial changes in, and internal matching of, strategies and
control at the corporate, business and functional levels. During this period, Saab
remained competitive and the company has even been termed chronically success-
ful (see Herin 2006; cf. Elofsson 2011).
In light of this change process, we can engage in meaningful discussions on the
relationship between strategies and control at the corporate, business and functional
levels, and on what it means for a firm’s competitive advantage. The purpose of this
chapter is to provide further knowledge and understanding of the establishment of
strategic congruence and integrated control over time in a corporate group’s efforts
to be competitive.3
The remainder of this chapter is structured as follows. The next section discusses
what exposure to competition means for a company’s competitive advantage. The
section thereafter is devoted to the development of Saab’s business, its strategies
and control in the mid-1990s and to the changes occurring in the corporation’s
environment from 1995 on. The fourth section presents the principal internal
changes in the corporation for the purpose of adapting the business to changed
external conditions, and the development of the corporation’s competitive advan-
tage. The chapter concludes with a discussion about results.
2.2 Exposure to Competition and Its Importance

to a Company’s Competitive Advantage
Chandler’s Strategy and Structure, first published in 1962, provides background

on the development of US firms and industry from the mid-nineteenth to the
mid-twentieth centuries. The starting point for the discussion is the importance of
the business environment for strategic orientation and internal structure. Chandler
summarizes as follows:
The market, the nature of their resources, and their entrepreneurial talents have, with relatively
few exceptions, had far more effect on the history of large industrial firms in the United States
than have antitrust laws, taxation, labor and welfare legislation, and comparable evidences of
public policy. Possibly tax regulations have had more of an impact on the strategy of
expansion since World War II, but their influence has not appreciably altered broad trends
in the structure and strategy of great enterprise. On the other hand, government action such as
defense or countercyclical spending that directly affected the market by increasing the national
income or by making government itself a large customer has had a significant effect in the
3
The empirical data, analysis and conclusions in focus in the chapter were presented in their
entirety in the doctoral thesis by Nilsson (2010).
2 Driving Strategic Change at Saab AB: The Use of New Control Practices 29
growth of the large enterprise. The changing munitions market was of far more importance, for
example, to the history of the du Pont Company than any antitrust action. Antitrust has had
probably the greatest impact on corporate structure and strategy in those relatively rare cases
where it transformed a monopoly into an oligopoly.
(Chandler 1984, p. 384)
A number of different phenomena in the business environment have thus affected

internal strategies and structures and thus competitive advantage as well. Chandler’s
conclusion that internal structures follow changes in strategy, which in turn follow
from changes in the environment, is based on organizations exposed to competition.
Firms in a monopoly position did not act in the same way. For example, the work on
the internal structure of a large monopoly firm is described as follows:
The International Nickel Company, which became the International Nickel Company of
Canada, Ltd. in 1916, began as a combination in 1902. Although its senior executives had
worked out an embryonic functional structure by World War I, they did not give serious
attention to organization until the postwar depression brought a sharp decline in the demand
for nickel. [. . .] In 1928 International Nickel’s merger with the Mond Nickel Company,
Ltd., gave the new combination a virtual monopoly of the industry. Administrative consol-
idation of these two enterprises came slowly, with the first steps being taken in 1936 and
with further centralization in the 1950s.
(Chandler 1984, p. 330)
The limited interest in internal changes is based primarily on the company’s

monopoly position, which assured continuing sales with satisfactory profitability
despite considerable inefficiency. The internal structure of the firms exposed to
competition, by contrast, was necessary and thus more comprehensive as well.
Ten years after Chandler’s book, Khandwalla (1972) published a study showing
results corresponding to Chandler’s. Khandwalla underscores the importance of
competitive pressure for the use of management and production control. From
information from 92 US industrial firms, he concludes as follows:
We have seen that there is a positive association between competition and the use of
sophisticated management controls.
(Khandwalla 1972, p. 282)
Above all, he shows that product-related competition affects the importance of

management and production control at companies. The more competition there is,
the more control is used for implementing strategies. Porter (1985) argues along
similar lines, but in discussing business strategies. In his view companies that have
been “stuck in the middle” can still be successful, but on condition that they either
have a monopoly or that their principal competitors are also “stuck in the middle”.
Such a market-based approach to competitive strength, however, is not the only
explanation. Institutional forces of both internal (Scapens 2006) and external
(Meyer and Rowan 1977) origin are important. This means, for example, that internal
factors taken for granted, such as behaviours, customer expectations of organizational
actions, national and international politics and economics, as well as laws and
regulations, have an effect. Chandler highlights the importance of the antitrust laws
for changes in strategy and structure at monopoly firms, as well as the significance of
more general legislation and the actions of the government as a customer.
30 E. Jannesson
All factors considered, it can be noted that firms may be competitive even though
they are relatively inefficient; in a monopoly position they do not need to adjust
their strategy and structure to the same extent as a company exposed to competition.
However, exposure to competition is not the only factor of importance for being
competitive. Institutional forces also have an influence, and they can rapidly affect
a firm’s competitive advantage.
2.3 Saab’s Business and the Changed Environment
Svenska Aeroplan Aktiebolaget (Saab), a company in the defence and security

sector, was formed in 1937 to meet the need for a domestic Swedish military
aviation industry arising from the establishment of the Swedish Air Force in the
mid-1920s. As early as 1941, the first aircraft, a B17, was delivered to the Air Force.
Subsequently, an additional six combat aircraft models, the latest being the JAS 39
Gripen, were developed and manufactured. Although the original intention was to
produce military aircraft, a number of other commercial arrangements have arisen
from this business. Examples included civilian aircraft, missiles, training equip-
ment and microwave and antenna equipment for space vehicles.
In 2000 Saab made the strategically significant move of acquiring Celsius, a
competitor, and the new corporate group became the dominant defence firm in
Scandinavia. The merger resulted in a more extensive product portfolio.
The broad-based product range is clearly focused on future defense needs and a safer society.
(Saab 2004, part 1, p. 31)
So far in the twenty-first century, Saab’s business has been in the following 11
overall areas: aviation, weapons systems, unmanned systems, simulation and train-
ing, command and control, communication, signature management, aerospace,
sensor systems, electronic warfare systems, and support systems. At the end of
2010, the corporation had 12,536 (8,426)4 employees in five (four) continents. Total
sales were MSEK 24,434 (7,925), with an export share of 62 % (60).5 Total orders
on hand amounted to MSEK 41,459 (20,509) million, with an export share of 69 %6
(22) (Saab 1995, 2010).
Until the turn of the year 2009/2010, the business units of the corporation were
organized into three segments (see Fig. 2.1).7 In the Aeronautics segment, much of
4
In this paragraph figures in parentheses refer to corresponding data at the end of 1995.
5
The export share of 60 % in 1995 was the highest of any particular year in the 1990s. The average
export share for the years 1994–1999 was 49 %, with the yearly figures as follows: 1994, 49 %;
1995, 60 %; 1996, 55 %; 1997, 51 %; 1998, 41 % and 1999, 38 % (Saab 1995, 1996, 1997, 1998,
1999)
6
The export share of 69 % is for 2009. Since 2010 the corporation has reported only the export
share of total revenue.
7
At the turn of the year 2009/2010, the business units were assorted into five business areas. But
since no empirical evidence has been collected for the period thereafter, the corporation’s
development after that point is not considered.
CEO and corporate staff
Defence & Security Solutions Systems & Products Aeronautics
Saab Aerotech Saab Avitronics Saab Aerosystems
Combitech Saab Barracuda Saab Aerostructures
Saab Grintek Technologies Saab Bofors Dynamics Gripen International
Saab Security Saab Microwave Systems
Saab Surveillance Systems Saab Training Systems
Saab Systems Saab Underwater Systems
Fig. 2.1 Saab’s segments and business units at the end of 2009
the business was related to the JAS 39 Gripen. In 2007–2008 high priority in
resource allocation was given to the development of a flying Gripen demonstrator,
as it would be the foundation for the next Gripen generation. The segment also
included the development and production of parts for Airbus and Boeing, as well as
the development of Unmanned Aerial Vehicles (UAV). Both areas contribute to the
continued development of Gripen.
The Defence & Security Solutions segment accounted for most of the corporation’s
growth, primarily in domestic security, command and control systems and defence-
and security-related services. Many systems delivered in this segment are of such a
nature that customers wish to collaborate solely with suppliers in their own country.
Examples might include high-level command and control systems at the core of the
customer’s business. For security reasons, they do not want to admit foreign entities
into the business. It is therefore important to create several home markets8 – this was
an important reason for the acquisitions made by Saab during the period 2004–2006.
The principal companies concerned were Grintron (2003) and Grintek (2004) in South
Africa, Elesco in Finland (2004) and Maersk Data Defence in Denmark (2006).
Clearly the largest acquisition after Celsius, however, in terms of size as well as
importance, was Ericsson Microwave Systems (2006). Among other things, Micro-
wave Systems had already supplied radar previously to Gripen and fire-control radar to
Saab Bofors Dynamics. The importance of this arrangement was expressed as:
[. . .] an acquisition that strengthens our position in several strategically critical areas and
adds world-leading competence and products in the field of sensors.
(Saab 2006, part 1, p. 4)
8
‘By a home market is meant a country where Saab has operations that meet at least three of the
following four criteria: (1) sales consistently above a certain level in the country, (2) local value
added, (3) at least two of the segments have customers in the country and (4) Sweden has good
political relations with the country’ (Nilsson 2010, p. 82, translated).
32 E. Jannesson
The Systems & Products segment consisted largely of the corporation’s niche
products like camouflage net, supporting weaponry and remotely operated under-
water vehicles. Several of the niche products were and still are world-market
leaders. Furthermore, they fulfil an important function in relation to the other two
segments, either as an important complement in the total offering or as a door-
opener for bigger transactions at a higher level in the system.
When the business-unit and functional levels are discussed in this chapter, three
business units are in focus: Saab Aerosystems (Aerosystems), Saab Bofors Dynamics
(SBD) and Saab Systems (Systems). For a long time Aerosystems has concentrated
almost exclusively on the development, production and maintenance of combat
aircrafts. The most recent of these is the JAS 39 Gripen, which in 2006 accounted
for 85–90 % of the business unit’s sales. Since 2000 operations have been gradually
broadened and by the end of 2009 it also included UAV’s and the aftermarket for the
company’s own aeronautical systems. SBD was formed in 2000 from the merger of
business units from Saab and Celsius. Since then the business has concentrated on
development and production of weapons systems for sea, land and air. Saab Systems
was also created in 2000 by a merger of businesses from Saab and Celsius. This
operation has related primarily to military command and control systems as well as
sensors.9 In 2006–2008, moreover, a substantial business was built up in domestic
security, but it was later moved to a newly created business unit focused specifically
on domestic security.
The above description of the overall development of Saab will be followed by a
discussion aimed at laying the foundation for a subsequent report on the work of
strategic change at Saab. First, there will be a presentation of Saab’s environment,
strategies and control systems in the mid-1990s. Thereafter, the principal changes in
Saab’s environment from 1995 on will be discussed. Together these two sections will
form the basis for the presentation of a number of evidence chains. These will describe
what changes in the business environment have led to in the way of internal changes in
strategies and control systems at Saab, as well as how the company’s competitive
advantage has been affected (see Sect. 2.4 Changes in Saab’s strategies and control).
2.3.1 Saab’s Environment, Strategies and Control Systems

in the Mid-1990s
In the mid-1990s Saab could be regarded as a conglomerate. The corporation

consisted of five business units that were evaluated primarily on the basis of two
key numbers, one for profitability and one for growth. As two respondents put it:
Saab was a small conglomerate with very different businesses; actually, we could have
abolished corporate management.
(Respondent, corporate management at the time)
9
‘There are several different kinds of sensors, but all of them have the task to gather information,
on light, sound or motion, for example, to convert it to a suitable format and in certain cases also to
distribute the information to other subsystems’ (Nilsson 2010, p. 207, translated).
We have a history as an extremely decentralized company. Bengt Halse, our previous

CEO, actually had no interest in getting involved in the operations of the various business
units, as long as these would deliver ten percent on the bottom line.
(Respondent, corporate level)
The principal reason for the focus on the individual units was the view of senior
management on synergies. One senior executive noted the following:
I am definitely of the opinion that the gains from coordination are less than the costs.
(Respondent, corporate management at the time)
This meant that corporate management looked elsewhere and sought collaboration
with other corporate groups, one of which was BAE Systems, in order to sell JAS 39
Gripen on the export market. This was the case even where the different business
units of the corporation had the same customers and the same core competence. The
core competence had to do with systems integration, that is, the ability to get different
parts, physical and electronic, to interact in a whole system. The following is an
excerpt from Saab’s annual report for 1995 (p. 4, translated):
A common feature of the Group’s different operations is that they work together with
sophisticated customers, often in projects, and with technologically advanced products and
systems. There is thus a high degree of relatedness, technically and in many cases between
businesses, in the different parts of the group.
However, given the view of senior management in regard to synergies, the

synergy potential was not realized. With this kind of corporate strategy, discussions
on strategy at the corporate level did not include setting priorities for different
endeavours within the corporation. Instead, these matters were handled by the
respective business units, which had resources of their own and managed their own
investments. Work with strategy was thus largely decentralized to the business units.
The control mechanisms primarily used at the corporate level were a budget and
a financial business plan.10 There was virtually no strategic business plan,11 and the
result of the strategic planning was of such a nature that it was classified as secret
and thus not communicated within the corporation. Both the budget and the
financial business plan, moreover, were largely aggregates of business-unit
planning, and without any direct links to each other. Specifically, this meant that
there was a discrepancy between long-term and short-term monetary control. The
reason for this was the lack of a need for such coordination. As for Sweden’s
10
The term “control mechanism” refers to the principal general components of a control system.
Each one includes processes of planning and follow-up for affecting behaviour in the organization.
Aside from the budget and financial business plan, the Balanced Scorecard and the strategic
business plan are examples of control mechanisms.
11
The three mentioned control mechanisms can be described as follows: ‘The strategic business
plan includes a description of the firm’s strategic direction for coming years, whereas the financial
business plan consists of annual income statements and balance sheets for the next 5 years. The
budget includes an income statement, as well as selected key performance indicators, for the
coming year of operations’ (Nilsson 2010, p. 98, translated).
34 E. Jannesson
interests, a high degree of self-sufficiency in defence materiel has been of central

importance, and the Swedish government has paid Swedish suppliers for develop-
ment and production of advanced national defence systems. This has led to a close
partnership between Saab and the Swedish government, which in turn has affected
their financial relationship. For a long time a cost-plus model was used, where Saab
was paid for the work it did plus an agreed margin. This meant that Saab profited
from increased costs, and that there was no need for internal coordination to
improve efficiency in resource allocation; they earned money in any case. To
increase total earnings further, Saab tried to export products developed for the
Swedish market.
During the 1990s each business unit was evaluated on the basis of profitability
and growth. The targeted levels were individual and were set in a dialogue between
the corporate CEO and the business-unit CEO. The principal purpose of the
monetary control was to see that business units optimized their own operations;
for this reason, there was a focus on individual projects within the business units.
2.3.2 Radical Change in Saab’s Environment (from 1995 on)
In the global defence industry there is basically one customer in each country: the
national defence or military forces. Each customer, moreover, has a procurement
organization that is the direct counterpart of suppliers, in Sweden’s case the
Swedish Defence Materiel Administration (FMV). The global industry is heavily
regulated by a set of national laws governing the export of defence-related products.
Since many transactions are decided at the highest political level, they are political
by nature. Suppliers are expected to repay the customer through investments in the
purchasing country of at least the same magnitude as the customer’s investment.
Furthermore, the number of companies operating in the industry is limited, and the
competitors are quite familiar with each other. Life cycles in the industry are long,
often 30–50 years, and the industry is not very prone to cyclical fluctuations.
Until the mid-1990s, Saab’s monopoly position on the Swedish market meant that
the corporation could operate under secure conditions; they could count on orders
from the Swedish government that would also be fully financed. Subsequently three
changes drastically altered business conditions for the corporation’s operations.
These changes were the end of the Cold War, reduced defence budgets throughout
the world and the terrorist attack in the US in 2001.
With the end of the Cold War, the need for defence materiel throughout the
world gradually diminished. Together with technological development that created
opportunities for more complex solutions, this necessitated reduction in the number
of suppliers in the industry. After the ensuing consolidation, four leading corporate
groups emerged on the US market by the mid-1990s. In Europe the situation was
similar around the turn of the millennium.
In Sweden the end of the Cold War led to a reorientation of the country’s defence
strategy beginning at about the turn of the millennium. As the need for defence
against invasion was not considered as great as before, there was subsequently a
gradual shift toward a smaller, network-based defence.12 During 2000–2007 the

total defence budget, including defence materiel, was thus reduced by 20 %. The
new materiel procurement strategy in 2007 was a contributing cause of even greater
reductions in the defence budget than before. With the new strategy, the first step
was to purchase systems that were already fully developed, whether they came from
Swedish or international suppliers. In many other countries there is no similar
policy; there the domestic defence industry is still protected by excluding foreign
suppliers from the procurement process. For Saab this has meant increasing expo-
sure to competition on the Swedish market.
Although many countries have cut their defence budgets, defence-related costs
on a global level have been rising since the mid-1990s. This trend is explainable
largely by the enormous investment of the US in building up the Department of
Homeland Security in response to the terrorist attack in New York on September
11, 2001. This and subsequent terror strikes have contributed to asymmetric threat
assessments throughout the world, as it is no longer so clear who constitutes a threat
and in what way. As a result, it is important to protect not just borders, but also
infrastructural flows in society, such as flows of people, money and goods, and to
monitor security-sensitive operations such as prisons and nuclear power plants. For
this purpose, comprehensive investment in better and more efficient flows of
information is a necessity. As an example, the RAKEL information system
(Radiocommunications for effective command), which has recently been
implemented in Sweden and enables communication between different emergency,
or “blue-light,” services like the police, the fire and rescue service and emergency
medical care. Saab is one of the suppliers to the system. Domestic security has
become an area on which an increasing number of corporate groups, both within
and outside the defence industry, are focusing their business.
In order to respond to these changes in the environment, Saab has undertaken an
internal process of change, leading to revisions in strategies and control at the
corporate, business and functional levels. The purpose has been to adapt operations
to the changed conditions. What these adjustments mean will be discussed in the
next section.
2.4 Changes in Saab’s Strategies and Control
A central element in the process of change at Saab has been to shift the focus from
the Swedish market, where the resources available are decreasing, to the export
market. It has therefore become important to create “one Saab”. This means,
12
‘A network-based defence consists of different actors, digitally linked both horizontally and
vertically. A vertical link means that there is a digital connection the whole way from the
individual soldier to the highest operational command. A horizontal link means that there is a
digital connection between actors in different domains, such as air, land and sea. The vertical and
horizontal links make it possible to create a real-time image that is at once congruent, comprehen-
sive and detailed’ (Nilsson 2010, p. 80, translated).
36 E. Jannesson
for example, that synergy potential should be realized in order to supply customers
with the integrated systems solutions that they demand, such as creating a network-
based defence. For Saab to supply these systems, collaboration between two or
more business units is often required.
Furthermore, with trimmed-down defence budgets throughout the world,
countries have become unwilling to finance the development of new systems.
Consequently, it has been a crucial strategic choice for Saab to create resources
to finance development on its own. To implement these strategies, there has been
radical change in the company’s control systems. For instance, control mechanisms
have been integrated; the time horizon for control has been prolonged, horizontal
groups have been created, and strategic planning has become more involved.
In each of the next four sections, so-called evidence chains are used to provide a
more thorough description of these changes. In this connection, an evidence chain is
to be considered as a description of how changes in Saab’s environment have
affected the strategies of the corporation, how strategies have affected, and been
affected by, changes in management and production control, and how the changed
system of control has affected behaviour within the corporation. In conclusion, there
is a fifth section on what the above has meant for the corporation’s competitive
advantage and performance (cf. Ezzamel et al. 2008; Goold and Campbell 1987;
Miles and Huberman 1994; Pettigrew and Whipp 1991).
2.4.1 From Conglomerate to “One Saab” (from 2001 on)
A change in the orientation of Saab’s corporate strategy, from being a conglomerate to

starting to realize the corporation’s synergy potential, thereby creating “one Saab,” was
considered important to the corporation’s efforts to remain competitive. “One Saab”
means a cohesive corporate group with a strong brand name and the capability of acting
together and in unison when doing business on both a greater and a lesser scale. In order
to implement the new strategy, a substantial change in control was required, from
optimization of the individual business units to a focus on Saab as a whole.
Control began to change during 2001–2002. One example is the creation of the
Business management group that included the heads of defence-related units. This
group met on a continuing basis to discuss how the units could collaborate for such
purposes as creating common comprehensive solutions. Another example is the
creation of Saab International, a corporate-level unit with the task of coordinating
global marketing and sales within the group. The most important change during this
period, however, was the creation in 2002 of the corporate staff unit for Strategy and
business development. For a number of years before then, there was no strategy staff
at the corporate level; work related to strategy was decentralized to subordinate
units. The following is an excerpt from Saab’s annual report:
[. . .] each business area manager has clear financial goals and the mandate to reach them.
Their ability to deliver will play a decisive role in the success Saab has as a whole. [. . .] All
the business areas operate as industrial units, with clear operating objectives and essentially
all the resources they need to achieve them.
(Saab 2000, p. 11)
The mission of the new staff unit was to replace the clear decentralization of the
group with a focus on centralization. In 2003, when the new CEO assumed his
position, endeavours to create “one Saab” were stepped up. In that same year, the
business areas were terminated, and the business-unit heads thereafter reported
directly to the managing director. The purpose was to remove organizational obstacles
to free relations between business units. The Business development council, a group
comprising the business development or marketing managers of the respective busi-
ness units, was also established. The dialogue between the members of this group
primarily concerned potential business operations across organizational boundaries.
At the turn of the year 2004/2005, the business units were grouped into three
segments. The principal criteria for assignment to a segment were business logic and
synergy potential; business units with similar or complementary operations were
grouped into the same segment. By the end of the following year, there had been
substantial restructuring in order to gather similar competence even more clearly into
the same single business unit in order to promote realization of synergies. For example,
all aircraft maintenance within the corporation was placed in a single business unit.
Overall, these structural changes were made to facilitate collaboration between
business units, and the segments created were intended to communicate the importance
of working together. For the latter purpose, management control has also been changed.
The greatest change has been the implementation of an overall corporate strategy and a
joint strategy process. It includes a number of seminars with representatives of corporate
management and of the respective business units. A central part of the process is to
discuss in a more structured fashion than before the applications of business units for
approval of investments. Therefore, participants in the strategy seminars are organized
as fictitious corporate managements with the duty of setting priorities among investment
applications. The real corporate management then takes back the results from the
seminars for consideration in decisions on which applications to approve.
By choosing, discarding, influencing, changing and rejecting [investment approval
applications], we [corporate management] build up our strategy. These are the key
decisions we take on our strategic direction [. . .], these give us power, in that we have
the capital and thus the capacity to invest.
(Respondent, corporate management)
The strategy seminars also serve another important purpose, that of creating
conditions for adaptation of business strategies to corporate strategy. Through
participation of business-unit representatives in both the corporate and the
business-units strategy process, they give and receive information in each process,
and the strategic direction at the respective levels is thus formed through mutual
accommodation. In addition, the seminars establish points of contact between
business-unit representatives which are important for future collaboration, as in
business across business-unit boundaries. At the same time, the business units are
still evaluated primarily by monetary measures, particularly of the unit’s growth
and profitability. As one respondent noted,
the operating margin is a very powerful incentive for business units.
(Respondent, business-unit management)
38 E. Jannesson
It is emphasized, moreover, that the income statements and balance sheets of the
business units have a higher priority than those of the corporation. A number of
respondents noted that portions of management control thus run counter to the
direction of corporate strategy.
To create motivation and inspire a will, you have to take another look at this [management
control]. After all, we are measured solely on the results of the business units. If we have to
give too much of the profit to others, we will lose some of our willingness to act on the basis
of one Saab.
Corporate management, however, do not seem to consider this a totally undesir-

able consequence. One respondent from senior corporate management emphasized
that a reasonably large and well-composed business unit is the foremost factor for
commitment and success; in other words, it is most important to create conditions
for each business unit to become successful in its own business.
Corporate management control is thus used for different purposes. The strategic
planning is in place to create one Saab, and the monetary targets are there to keep
the focus on the individual business unit, particularly its businesses and individual
monetary targets. As a consequence of the latter, however, considerable synergy
potential has still not been realized:
Things are definitely moving in a direction where Saab is becoming more concentrated and
is trying to pull together, but we still have a good way to go before you can say that we are
really good at it. Tempers still flare up very easily, and there are hard-hitting discussions on
how things ought to be and who is going to earn money and everything having to do with
that.
(Respondent, divisional level)
However, there are many examples showing that the change in control for the
purpose of creating “one Saab” has had the desired effect. In 2006 the five
aeronautically related business units developed a common aeronautics strategy,
an unprecedented step. This means, among other things, that the business units
concerned are acting in concert within the framework of Clean Sky, the EU’s major
project on a more environment-friendly way to fly. Each business unit, moreover,
has adapted its own individual business plans to the common strategy. In that same
year the Defence & Security Solutions segment conducted a review of the strategic
business plans of each business unit in order to identify areas not covered, or
overlapping, and new business opportunities between units. One consequence
was that in the following year Systems and Saab Communications conducted
their strategic planning in a joint process.
In addition, work is in progress within the corporation on a number of
arrangements across business-unit boundaries, a development that several
respondents attributed in part to the changes in control. For example, SBD and
Saab Microwave System are collaborating in a common system in order to win the
contract for a major export deal; Systems, Saab Underwater Systems and Saab
Microwave Systems are working together on a Swedish submarine project; Systems
and SBD are collaborating on the creation of total solutions for weapons command
and control systems, and Saab Training Systems is contributing to SBD’s work on
NLAW (an anti-tank missile launcher) through involvement in development and
production of the simulator. Overall, Systems often works together with Saab
Communications, Combitech, Saab Training Systems and Saab Microwave System
in different types of business arrangements. In the domestic security business, too,
there have been a couple of breakthroughs that several respondents would have
considered impossible if the units had not been forced into conduct business
development jointly.
2.4.2 From a Single Principal Customer to Many Customers:

Focus on Exports (from 2003 on)
The focus of the Swedish Defence Forces on special defence operations means
fewer resources for Sweden’s defence industries; they spend less on defence
materiel, and they are willing to purchase from foreign suppliers. In order to
continue growing, Saab chose to try compensating for reductions in orders through
an increased focus on exports. Despite greater efforts to export in the initial years of
the 2000s, this endeavour did not really get underway until the 2003s. But then it
yielded quick results. By 2005, exports accounted for a majority of sales (56 %) and
the share of exports in orders on hand was 75 %. An increase of 10 percentage
points in both cases. At the end of 2009 the corresponding figures were 69 % and
62 %, respectively. In total, the export-related increase in sales for the period
2003–2009 was 115 %, from SEK 7.9 to SEK 17 billion. Moreover, Saab’s annual
report for 2010 points to a continued positive trend.
One consequence of the efforts to increase exports is the much higher degree of
uncertainty about which orders the corporation will receive. Relations with FMV
are very good, and the parties are engaged in a continuing dialogue on future
business. On the export market, by contrast, Saab does not have anything like the
same relationship with potential customers; there is thus considerable uncertainty
about the inflow of new orders. Consequently, greater flexibility within the corpo-
ration has become a critical factor for success; the company must be able to adjust
continually to the orders actually received. Precision in delivery, that is, delivery on
time, has become another success factor. In relations with FMV, it has been
possible to renegotiate delivery times if delays arise, but on the export market
delays result in heavy fines and damage to the company’s reputation. Consequently,
there have been substantial changes within the corporation in order to focus
operations on these two critical success factors.
An important element in the efforts to improve flexibility has been to enhance
the skills of personnel. At Aerosystems a number of shop employees have been
trained as ground staff, with competence as both mechanics and electricians. In this
way the number of alternative ways to allocate manpower has increased greatly.
40 E. Jannesson
At Systems there have been efforts since 2004 to see that employees in software
production13 have at least two primary skill sets. A broader range of competence
leads to a larger number of choices in the division of labour within projects and thus
greater flexibility in the use of manpower. The criteria for allocating competence-
development resources have thus changed, from previously being spread over a
number of specific areas of competence to free allocation on the basis of long-term
needs for competence; it has thereby become possible to conduct training with a
specific focus. In management control, moreover, job rotation has become an
important means of encouraging employees to apply for new positions and thus
broaden their skills. The above-mentioned efforts at Systems, however, have not
had the impact sought by business-unit management. According to several
respondents, many employees are satisfied with their work situation and have
therefore had no wish to change their duties.
At SBD increased flexibility was one of several reasons why the internal profit
centres were abolished and replaced by a functional organization in 2004. The creation
of a uniform business unit has featured, among other things, implementation of joint
processes for production, planning and follow-up. This has entailed, in turn, greater
opportunities for transferring employees among the different production facilities,
including both traditional and software production. There is some collaboration as
well, but to a large degree each facility remains focused on its own operations.
The principal approach of the corporation to managing fluctuations in manpower
needs is to collaborate with a number of consulting firms, both internal and external.
Many business units have a target of meeting 85–90 % of manpower needs with
their own personnel, and then filling the remaining requirements with consultants.
With this policy it is relatively simple for a unit to adjust manpower levels without
laying off its own employees. If there is not enough work, it is also possible to rent
employees out to the company’s own consulting firms.
The other critical success factor, precision in delivery, has also been the basis for
a number of changes. For example, measurements of, and discussions on, precision
in delivery have become important at all corporate levels. The purpose has been to
try to change deeply rooted behaviour – some respondents refer to it as a strong
engineers’ culture – based on the fact that it had not previously been necessary to
13
The concept of software production is used in accordance with Nilsson (2010, p. 29, translated),
that is, as ‘[. . .] a direct translation of Anderson’s (2003) use of software production instead of
software development or software engineering [. . .]. Software engineering and software produc-
tion should therefore be considered synonymous [. . .]. As I interpret the concept, Anderson uses it
to indicate that there are a number of concepts in traditional production that can be used in software
production to develop it further. My intent in using the concept is similar. Above all, it is about
pointing out that it makes no difference whether the production of software or of goods is involved;
a common set of concepts can be used in discussing all types of production. Such a set of concepts
also facilitates discussion on how to coordinate production strategies with corporate and business
strategies.’
deliver on time to the Swedish customer. On the export market, however, the rules
of the game are different.14
At SBD the “quality at the right time” initiative was launched in 2005 to solve
the problem of late deliveries. By restructuring production flows, moving key
people closer to the actual assembly and measuring the internal precision of
delivery in production processes, it has also been possible to improve precision in
delivery. Another part of “quality at the right time” is to involve the employees to a
larger extent. Around the turn of the year 2007/2008, each section – the lowest
organizational level – within the business unit gathered to discuss how they could
help to meet the targets for the business unit as a whole. This effort also yielded
results, but by the end of 2008, business-unit management had concluded that the
changes were not sufficient; in other words, precision in delivery was still not
satisfactory. Time and cost had long been given lower priority than the product
itself; this factor, together with the lack of direct consequences for those in charge
in the event of negative deviations, has shown that the engineering-oriented culture
built up over many years is still strong within the business unit.
On the other hand, the focus on precision in delivery has contributed to changes
in production processes at all three business units. At Systems and SBD, moreover,
control for making operations more efficient has been a major underlying factor in
the revision of production processes. The changes at the latter business units are
treated in the next Sect. (2.4.3 From customer financing to more self-financed
development). As for Aerosystems, the Lead-Time programme was conducted in
2001–2003 for the purpose of reducing lead times in the production process by half,
a goal which they also achieved.
Until the Gripen contract with Hungary was signed in 2001, the business unit had
only produced the JAS 39 Gripen for Sweden. The export business entailed quite
different conditions for delivery: the modified aircraft were to be delivered within a
year. The business unit therefore needed to change its production strategy in
preparation for future orders of the same nature. The external requirements were
of great significance in the endeavour to change, or as one respondent put it:
It was like putting all processes on turbo.
The lead-time project resulted in a new production strategy and changes in control in
order to support the new production strategy. The production process was changed
from being divided into stations and based largely on the shop employees’ own
decisions on assembly of individual parts without direct collaboration between stations,
to a process that was team-based and flow-oriented, with few internal delivery points.
In addition, the process became more standardized in implementing the respective
stages of assembly. The latter was a consequence of introducing production controllers.
Via these, assembly was divided up in detail into a number of commands and
production orders that provided a clearly structured, predictable process. The process
14
For a more detailed discussion on the importance of culture as a control mechanism, see Chap. 3
on Atlas Copco’s strategies and control.
42 E. Jannesson
was thus easier to follow up. The implementation of a new MPS system in 2006, as a
replacement for some 50 individual systems, is considered in turn to have aided in the
creation of an integrated information flow in the final assembly. As an effect of the
system, all planning and follow-up is done from the same starting point, and it has been
possible to make decisions on the base of information that is relevant and closely linked
to operations. The latter is due partly to the fact that much of the information is fed in by
assembly-line employees, who are right in the midst of the production flow.
Also, management control and production control have been integrated to
facilitate on-time delivery. This was the case not only at Aerosystems but also at
SBD and Systems. For example, the forecasts of new orders – including both
existing and forecast orders – in strategic planning (a part of management control)
have become the starting point for overall production planning (a part of production
control). Negative time deviations in relation to production planning are then
captured in measurements of internal delivery precision, this within management
control. The resulting integration enables the personnel in charge constantly to
observe current actual production in relation to plan. One consequence is that
important information is given on where corrections should be made, which in
turn can provide a basis for a decision to increase efficiency in the production
process and thus meet overall targets for production control. The importance of
integrated control is discussed in greater depth in Sect. 2.4.4 (From “government
agency” to new business thinking: Toward integrated control).
2.4.3 From Customer Financing to More Self-Financed

Development (from 2007 on)
With the decline in orders from FMV to the Swedish defence industry, together
with Sweden’s new materiel supply strategy, FMV no longer finances innovative
development. Nor is Saab in a position to obtain financing on the international
market; they need to invest the resources themselves. It has thus become important
to improve efficiency in operations in order to create resources to cover the
increased costs of marketing and selling on export markets. At the corporate level
this has entailed changes in management control that put a focus on cutting costs.
At the end of 2007, the COGS (Cost of Goods Sold) project was launched for the
purpose of saving one and a half billion SEK annually after 2010. The project
required that the business units economize each year, as they have clearly succeeded
in doing. In addition, since 2007 the business units are to prepare complete monthly
financial statements so that the board and corporate management can follow
developments more closely in monetary terms. Previously, complete financial
statements were prepared only in connection with quarterly reports. A couple of
respondents summarized the change in management control as follows:
Reporting has exploded in the past year [2007].
In the past year there has been a very strong focus on financial aspects.
At Aerosystems the focus on costs has led to discussions about improving efficiency
in software production. For example, implementation of a new simulation environment
has begun; younger and less expensive consultants have been retained, work packages
have been outsourced and implementation of model-based production15 has
commenced. The focus on precision in delivery has also had an effect on the latter
change mentioned above. Model-based production is considered a more time-efficient
process that is helpful in meeting delivery commitments.
As far as SBD is concerned, the work of improving efficiency meant that
everything not absolutely necessary for conducting projects during 2008 was deleted
from the budget. For example, the long-term endeavour in methods development
initiated in software production has been postponed. Thus, the newly commenced
adaptation of software-production strategy to business strategy could not continue as
planned. The following are some examples of more positively oriented changes
resulting from the focus on costs: a revised proposal for the next generation of Robot
70, a choice of general direction in the use of model-based production in software
production, as well as a decision that new development is to be conducted with the
use of the joint business-unit instrument, CAD (Computer-Aided Design).
At Systems the efforts to improve efficiency have been in progress since the
business unit became a part of Saab in 2000. At first the intent was to correct
unsatisfactory financial performance; subsequently the focus shifted to achieving
profitable growth. In both cases management control has played a central part.
Revision of planning and follow-up processes began in 2004 and has generated
links between the different control mechanisms. A clear focus, with solidly based
endeavours, has thus been achieved. These include increasing capacity utilization in
order not to lose work hours. Levels of revenue and costs are now brought up for
discussion in follow-up, helping to ensure that the company
has managers who understand that it is important to meet the budget.
As business-unit management has continually raised the targets for the invoiced
sales, net income and new orders of the divisions, the outcomes in these areas have
also improved. For example, the operating margin of the business units soared by
some 250 % in 2005, and has thereafter remained at the corresponding level. This
has occurred despite a decrease in the external development resources allocated and
the cost increases entailed by the efforts on export markets.
15
Model-based production is used in the same way as in Nilsson (2010, p. 133, translated): ‘The
usual term for model-based production is model-based development. In accordance with the use of
the concept of software production instead of software development, model-based production is
used as a synonym for model-based development. The concept means that graphic models of the
system serve as the basis for its design. From the models, moreover, documentation and codes can
be generated automatically. As it is then a simple matter to reuse previously designed models, it is
possible to achieve a higher degree of reutilization of previously delivered systems.’
44 E. Jannesson
We have developed from a rather rudimentary approach to long-range planning to being

extremely ambitious now.
The strategic thinking has gotten much better; nobody could fail to notice that.
(Respondent, functional level)
The effort to achieve profitable growth has driven the development of changed
production strategies at Systems, as in the other business units. For example, iterative
production has become a growing part of software-related operations. This approach
is considered to save many work hours, primarily because of the continual feedback
loop created. In addition, business-unit management is attempting to promote the
realization of synergy potential between divisions in order to reduce consumption of
resources, through the use of joint hard- and software platforms, for example. Also, a
common product portfolio for the business unit as a whole has been established to
replace the product portfolios of the respective divisions. The purpose is to avoid
doing similar work on similar products in the different divisions; development
resources are to be coordinated as much as possible so as to improve efficiency in
the use of resources.
The respondents underscore, however, that the focus on profitable growth has
had some negative consequences as well. For example, follow-up of measures in
the Balanced Scorecard (BSC) has been overshadowed by monetary follow-up,
with the result that some planned activities for achieving strategic targets are not
implemented. Furthermore, short-term cost-cutting is directed at optimizing results
on a quarterly and an annual basis. Another problem highlighted was the lack of a
sufficiently strong culture of maintaining budgeted levels within the business units.
Control is regarded as loose, a factor probably tending, at present as in the past, to
soften the consequences of negative deviations.
2.4.4 From “Government Agency” to New Business Thinking:

Toward Integrated Control (from 2003 on)
The change from a monopoly position, with an operation similar to that of a govern-
ment agency, to subsequent exposure to competition, has been a central factor behind
what a respondent called a business awakening within the corporation. Since efficient
use of resources has become central for being able to deliver what customers want, it
has been considered essential to integrate control mechanisms and information flows.
While the importance of integrated control has been mentioned in previous sections,
in this section these changes are discussed in greater detail.
At the corporate level, integration of the strategic business plan, the financial business
plan and the budget have been considered important for achieving a more efficient and
focused use of resources. The purpose has been to facilitate implementation of the new
corporate strategic orientation. Links between the three control mechanisms have also
been established in several ways. Since the introduction of a more structured method of
dealing with investment applications, the strategic and financial business plans have
been prepared in parallel, and the two business plans have been discussed together at
corporate-level seminars on strategy. The financial business plan translates the strategic
business plan into an income statement and a balance sheet for the coming 5 years.
After the two business plans have been approved, the work on the budget begins.
Since the outset of the 2000s, this includes preparation of a regular budget for the
next year as well as a preliminary budget for the year thereafter. The preliminary
budget serves both as the first year of the financial plan for the following year of
operations, and as the starting point for the regular budget for the following year of
operations. The use of the preliminary budget thus creates a connection between the
two control mechanisms, and indirectly between the budget and the strategic
business plan. Such a connection ensures that there will be continuous review of
the matching between short-term and long-term control.
The integration at the corporate level is regarded partly as a central element in
decision-making about and within the COGS project, a project that must be consid-
ered important for implementation of corporate strategy, as it helps to free up
resources for essential activities on the export market. Through integration between
the strategic business plan and the continual follow-up of the budget, information is
created to facilitate identification of possible changes in the environment, of the time
horizon for internal action to adjust the business according to these changes, of the
time horizon at which internal changes are possible and of how much must be saved
in order for the targets to be achieved.
Budget follow-up has also contributed information for decisions on the areas
where the corporation should focus additional investment; it has thus affected which
investment applications are approved by corporate management. One example is the
stepped-up investment in UAV’s, where budget follow-up has been one indication
that there is considerable potential in this area.
The kind of integration between the three control mechanisms at the corporate
level has also taken place within the business units. The latter, moreover, use non-
monetary key ratios linked to the business plans and the budget. At Aerosystems a
significant part of integration has been driven by the so-called SBG (a Swedish
acronym for Strategic preparedness group). This group was formed in 2005 and
charged with preparing the content and coordination of the four overall control
mechanisms within the business unit.
The integration of the overall control mechanisms within Aerosystems has had a
number of consequences. For example, the allocation of resources for development
has been more focused, with a link to the general business strategy. The clearest
example is the investment of the business unit in civilian subsystems. At the outset
of the 2000s, they perceived the opportunities for utilizing their competence in
military subsystems, such as fuel and guidance systems, on the civilian subsystems
market, i.e. as subsuppliers to Airbus and Boeing. Substantial resources were set
aside for development, and the business unit began subsequently to actively market
a few selected subsystems. However, the unit has found it difficult to be competitive
on price, and the budget follow-up shows that this endeavour has not led to the
desired outcome. It has therefore been downplayed in favour of investments in other
strategically prioritized areas with a better cash flow, i.e. Gripen and the UVA.
46 E. Jannesson
At SBD integration of the control mechanisms began in 2004, when management

saw that the creation of a uniform business area with a clear focus was essential for
addressing changes in the environment. During the period 2000–2003 the business
area consisted of a handful of profit centres where each was trying to optimize its own
business. Integration of these profit centres was considered necessary for achieving
more efficient use of resources in relation to changes in the environment.
Integration within SBD has primarily entailed the establishment of uniform
control directed at the critical success factors. Internal and external precision in
delivery has become important throughout the business unit, and different control
mechanisms have been used to accomplish the necessary change. These endeavours
have also led to significant results. For example, an overall production plan was
created as an aid to decisions on what missile orders are to be carried out and by
whom. The point of departure has been the overall planning for new orders. The
new production plan has restored some order and structure in internal production
priorities and thus led to fewer problems with deliveries.
SBD’s implementation of the IT tool KUPP (a Swedish acronym for Calculation,
Follow-up, Planning and Forecasting) in 2005 is regarded as an important change in
project control. Business-unit management has had several intentions with this
implementation, but the overall purpose is for the system to function as support
in the planning and follow-up of all projects. Since both potential orders and orders
received have been put into the system, it is possible to obtain detailed information
on the expected need for resources. This information is the central starting point for
preparing the budget at the functional level.
Since the system also facilitates uniform planning and follow-up processes
within and between projects, the quality of the information used in control is
enhanced; within the same system, there are similar definitions, starting points
and reporting of information into the system, thus contributing to more correct
information. This is intended to help improve precision in delivery, an objective
that has not yet been achieved to the desired extent.
The common system for planning and follow-up is also designed to facilitate
collaboration between the geographically dispersed operations of the business unit,
and this purpose has been achieved. For example, there has been temporary
relocation of personnel, and discussions have been initiated on moving the produc-
tion of certain parts from one place to another. In both cases the information in
KUPP on resource needs has been used in the decisions for the purpose of achieving
efficient utilization of resources.
Respondents take a positive view on using KUPP, primarily in planning and
forecasting. Several note that the system has helped improve the quality of information
in that everything is contained within the same system. As for follow-up, however,
opinions differ. Some maintain that the degree of detail in follow-up is excessive,
whereas others find it insufficient.16
16
For a thorough treatment of the importance of uniform IT systems for creation of integrated
control, see Chap. 8 on Electrolux’ strategies and control.
At Systems as well, integration of control was commenced in 2003–2004. The

intention was to create conditions for efficient use of resources and a greater
orientation toward results. This was considered a critical success factor for meeting
the overall targets. Integration has meant that the budgets, and thus the planned
investments, of the internal divisions are thoroughly discussed in relation to the
strategic business plan. Also, the focus on costs throughout the business unit has led
to implementation of new software-production strategies and thus to more efficient
work processes.
Integration of control mechanisms within the business units has not been limited
to management control and production control taken separately; rather, the two
control systems have been integrated with each other. In all three business units,
targets and measures for production are now handled within management control.
Instead, overall production control concerns who will do what and when, and the
time limit for the latter work is specified with the aid of the delivery-precision
measure in management control.
In the case of Aerosystems, the connection between management control and
production control means, for example, that negative time deviations in relation to
production planning (a part of production control) are captured in measurements of
internal delivery precision in management control. The same is true for SBD and
Systems. Another example from all three business units is that the proportion of
billable hours worked by employees in final assembly and software production is
put in focus in management control with the aid of measures for capacity utilization.
The examples cited are used here to show that measures and targets regarding
production are a part of management control. However, it could equally well be
argued that information in relation to production planning is a part of production
control, for the focus is precisely on the work of the production function in both
planning and follow-up. With this point of departure, the principal criterion for
classification of the measure is not the control mechanisms, but the function in the
organization which the information concerns.
The discussion shows that it is not certain whether targets and measures related
to production are part of management control or production control. This in itself is
a clear indication of integrated control: there are no clearly separable parts of
control; rather, the central flow of information converges into a whole. Since
connections of the same type have gradually become a reality in all three business
units, the management control and production control systems of the three units
have been integrated.17
Despite substantial integration both within and between management and pro-
duction control, parts of the total information flow have not yet been integrated with
the central flow at either the corporate level or within the business units. For
example, the division of responsibility for the strategic and financial business
plans, respectively, at the corporate level means that a number of divergent
17
For further discussion on the integration of management control and production control, see
Chap. 4 on Scania’s strategies and control.
48 E. Jannesson
elements are evident when the two business plans are viewed together. At
Aerosystems lowered cost levels in the budget do not always mean that the target
levels for related non-monetary targets will be corrected. Nor do all sections have
their own targets, and some respondents felt that employees at the lowest organiza-
tional level were not sufficiently involved in the processes of change. Furthermore,
project planning did not always reach down all the way to the individual level, so
that not everyone knew how targets at her/his own level were related to more
comprehensive targets higher up. Management by objectives is still regarded
as something aside that you need to remember to work with.
(Respondent, business-unit level)
SBD has been working on trimming its organization, and this together with a high
work load has been emphasized as the principal reason why working with operating
plans at lower organizational levels has not gained a foothold. An operating plan is a
breakdown of the strategic business plans for subunits within the business unit. The
internal focus on time and cost has meant, in addition, that individual projects have
been optimized, rather than that giving priority to actions focused on the long term.
For example, there is no incentive in the project to implement minor additions that
would be useful in future projects as well. On-time delivery to the customer has the
highest priority, which means that internal development relative to non-monetary
targets is often neglected in favour of operations-related work.
At Systems most of their non-monetary targets are of limited significance for
purposes of control. One clear indication of this is that some section heads are not
even sure about the number of perspectives used in the business unit’s scorecard.
Moreover, there appears to be a general lack of explicit involvement of the lowest
managerial level in implementation of strategy. One respondent summarized it as
follows:
As a manager at my level, you are very detached from everything. Not until this year [2008]
did we have a managers’ forum, which happened because all section heads’ had the same
boss and thus held meetings together. Otherwise it was a very isolated position.
(Respondent, functional level)
From the standpoint of business-unit management, the focus in a way has been to
optimize monetary results on a quarterly and annual basis, or at least to try to make
sure that they reach budgeted results, even if this is at the expense of a long-term
view. This has meant in turn that business development has been put on the back
burner. As one respondent put it:
If you end up with the right figure on the bottom line, you will probably receive a rather
large degree of tolerance for the way you ran the business in getting there.
(Respondent, divisional level)
Despite this kind of deviations, it is apparent that control has come to consist of a
clear central flow of information within the corporation, with a focus on the most
critical success factors within the corporation: precision in delivery and improving
business efficiency. This integration has led to the implementation and revision of
new strategies.
2.4.5 Saab’s Competitive Advantage and Performance

(from 1995 on)
The purpose of this chapter is to gain added knowledge and understanding of

strategic congruence and integrated control over time in a corporate group’s
striving to be competitive. Competitive advantage is to be understood in Porter’s
(1985) terms; that is, profitability over time must exceed the industry average if a
firm exposed to competition is to be considered a strong competitor.
To determine Saab’s competitive advantage, return on assets – ROA – has been
chosen as the operational measure of the phenomenon; this is in line with many
other studies (cf. Davis et al. 2003; Jacobson 1987; Morgan and Strong 2003).
Among other things, the measure takes into account the income statement and the
entire balance sheet, which is important in evaluating the total achievement of a
firm (cf. Hallgren 1988).
Saab’s clear monopoly position on the Swedish market from 1995 until a few
years past the turn of the millennium indicated that the firm had virtually no exposure
to competition. But Saab’s products and services were sold on the competitive
international market as well, and this business accounted for a substantial share of
sales. Thus, even though Saab’s exposure to competition was far from 100 %, it is
sufficient to permit the use of Porter’s definition given above as the starting point for
a discussion on Saab’s competitive advantage.
In order to form an opinion on the latter, a comparison between Saab’s ROA and
the industry average is required. As no overall average of the latter kind could be
identified, averages for the US and European markets, respectively, were chosen. In
the first case, use was made of the companies included in SPADE defence index
(DXS) as a starting point. In the latter case, the Thomson Reuters Datastream’s
European index for the aerospace and defence industries (AERSPER) was used.
The respective indices, together with Saab’s rate of return, are presented in Fig. 2.2.
The figure shows that Saab throughout the 2000s has earned a return in line with
the rate of return in Europe (except for 2008)18; in some years it has been somewhat
higher and in other years somewhat lower. In comparison with the average US
competitor, by contrast, Saab’s rate of return was lower throughout the period under
study. In the 1990s the difference was substantial, whereas in the latter years of the
period under study, it was 1–2 %, except for 2003 and 2008, when it was greater.
It is important to realize, however, that Saab and the US parties have operated
from two widely different points of departure. So far in the 2000s, Saab has had to
face a reduced domestic defence budget, foreign competition for business with
FMV as the customer and overall a sharp increase in exposure to competition. The
US parties, on the other hand, have benefited from a strong increase in the defence
budget. The US involvement in major armed conflicts during the 2000s has meant
that firms in the US defence industry have received more orders from the US
18
The marked decrease in Saab’s rate of return in 2008 was due largely to fund allocations and
write-downs on civilian aircraft projects.
50 E. Jannesson
15%
10%
5%
Europe
(AERSPER)
0% Saab
US (DXS)
-5%
-10%
-15%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Fig. 2.2 Saab’s ROA and average ROA in Europe and the United States, respectively, in
1995–2008 (Nilsson 2010, p. 112, translated)
government, orders for which international suppliers have not been allowed to
compete. Similar conditions apply for the major European defence firms as well.
As measured by return on total capital, Saab’s competitive advantage by definition
cannot be considered strong; a clearer difference in relation to the European average
would have been necessary, as would a higher-than-average return in the US. But with
conditions differing so sharply between Saab and many of its European and US rivals,
Saab’s rate of return must nevertheless be considered good at least by comparison
with competitors. If we also take into account the difference in business conditions,
Saab’s competitive advantage can even be considered strong. With limited means
(relatively speaking) and without the backing of a politically influential customer on a
global scale, Saab has performed impressively in achieving a return over the years on
a level with that of its international competitors.
A firm’s competitive advantage, in turn, may be assumed to create value (i.e.
high performance) for a number of stakeholders. In the literature, interest is focused
on three groups of stakeholders: shareholders, customers and employees. High
performance for each group is considered a precondition for high total performance
by the firm (cf. Goold et al. 1994). Therefore, measurement of Saab’s performance
is important as a complement to the preceding discussion on the company’s
competitive advantage. To use only measures of competitive advantage as a starting
point may be misleading, as a presentation of the corporation’s performance will
make clear.
However, the operationalization of performance with all of the above-mentioned
stakeholders as a starting point is not possible here; there is simply no externally
available information on value creation for the customers and employees of the
competition. The discussion on performance has thus focused on shareholders, and
250%
225%
200%
175%
AERSPER
150% (Europe)
125% DXS (US)
100%
OMXSPI
75% (Sweden)
Saab's TSR
50%
25% SX20PI
(Sweden)
0%
-25%
-50%
-75%
1998 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
(Jun 18) (Dec 31) (Dec 31) (Dec 31) (Dec 31) (Dec 31) (Dec 31) (Dec 31) (Dec 31) (Dec 31) (Dec 31) (Aug 31)
Fig. 2.3 Saab’s TSR and four stock-market indices for 1995–2008 (modified from Nilsson 2010,
p. 115, translated)
more specifically on a particular measure: total shareholder return (TSR) (cf. de

Mortanges and van Riel 2003; Nilsson and Rapp 2005). The accumulated value of
TSR has been calculated for each year with the aid of the following formula:
ðSale price Acquisition price þ Reinvested dividendÞ

TSR ¼
Acquisition price
Saab’s TSR has been calculated and compared with the general index of the
Stockholm Stock Exchange (OMXSPI) and the engineering-company index
(SX20PI), the DXS index in the United States and Datastream’s European index,
AERSPER. The result is presented in Fig. 2.3. As can be seen, Saab’s performance
in the latter years of the period under study has been much higher than the European
index and the two Swedish indices, whereas it has been on the same level as the US
index. It can thus be concluded that the development of value for Saab’s
shareholders has been favourable (relatively speaking) during the period under
study. Overall, Figs. 2.2 and 2.3 show that Saab, despite radical changes in the
business environment, has done well in competition with the European and US
players and thus maintained its competitive advantage.
Conclusions and Implications

The radical differences between Saab’s environment before the millennium and
its environment thereafter have led to sweeping changes of the corporation’s
52 E. Jannesson
strategy and control.19 Strategically Saab decided to focus on the export market
in compensation for the decline in orders from the Swedish market. Moreover,
they chose to build a cohesive and synergy-realizing corporate group,
“one Saab,” to meet customer needs for more integrated systems solutions and
to utilize internal resources more efficiently.
To implement strategies, different types of control mechanisms have been used.
The so called control mix has consisted primarily of what Malmi and Brown (2008)
refer to as administrative control, planning and cybernetic control. In the first case, a
number of major structural changes in organization have been implemented, and the
management structure has been changed with the introduction of horizontal groups.
Planning has been changed through the introduction of a common corporate strategy
process, and in cybernetic control the use of the budget and key performance
indicators has been changed. In large part these mechanisms are complementary
and create a common focus on the critical success factors. The continued evaluation
of business units on the basis of monetary targets, however, encourages conflict in
the behaviour of the units; this can be seen, for instance, in their continued emphasis
on their own businesses instead of considering the corporation as a whole. This
preference is evidenced, for example, in comprehensive discussions on how certain
business across business-unit lines is to be conducted and who is to make money.
Furthermore, there is continuing internal development of products and platforms
within business units rather than with other business units. The latter would probably
lead to more efficient utilization of each SEK invested in development. The same is
true of the priority given by business units to their own small-scale operations
instead of the larger business conducted jointly.20
Nevertheless, there has been clear mutual adaptation between strategies and
control at the corporate, business and functional levels. This has meant, in turn,
that congruent strategies have been formulated and implemented, and that
control has been integrated. Two cases are provided below to serve as examples.
The accommodation presented, however, is not unique to Saab; previous studies
show the same pattern (cf. Bhimani and Langfield-Smith 2007; Langfield-Smith
1997; Otley 1980). However, since most of them are not focused on all three
levels, it is not possible to form a complete opinion on their interplay (see for
example Roberts 1990). The discussion below provides a valuable contribution
to research in the area through its holistic review of the accommodation that has
taken place (see also Anjou 2008). How this is done is discussed after the two
examples.
19
The content in this section is to a large extent an exact reproduction of parts of the concluding
discussion in Nilsson (2010).
20
For a more detailed discussion on the relationship between different control mechanisms in the
total control mix, see Chaps. 3 and 4 on Atlas Copco’s and Scania’s respective strategies and
control.
Fig. 2.4 Interplay between Strategy Control

strategy and control for (1) Corporate-wide strategy
Corporate level Focus on exports
success on the export market process
(1)
(2) Precision in delivery and

Business level Focus on exports
improving efficiency
(3)
Iterative and model-baserad (4) Activity-related targets for

Functional level
production implementation
The first example deals with the focus on the export market and is illustrated
in Fig. 2.4. The numbers provided in the following text indicate which part of the
figure is being treated. (1) The corporate endeavours to exploit the export market
increased considerably in 2003 in order to compensate for the decrease in
resources from FMV. With the implementation of a corporate-wide strategy
process, the strategic business plans at the corporate and business-unit levels,
respectively, have been prepared in parallel through accommodation. As this
process has helped to link together corporate and business strategies, it has also
tended to reinforce the focus on exports within the corporation.
(2) The two main critical factors for success in exports have been to deliver to
the customer on time and to improve the efficiency of operations. To achieve the
first goal, targets for precision in delivery have been established, and the
outcomes in relation to the targets have been given considerable attention in
follow-up. In order to improve efficiency in operations, the budget has been
used. In particular, the management groups at each level have set requirements
for reducing budgeted cost levels. Moreover, follow-up has become more
frequent, especially at the corporate level, in order to improve control over the
development of costs.
(3) Control for greater precision in delivery and significant improvements in
efficiency have led to discussions on the functional level concerning, for example,
how production processes can be changed so that the targets in question can be
reached. In software production, one result has been that implementation of
iterative and model-based production has begun, as these are considered to help
shorten lead times as well as reduce costs. In addition, the change has contributed
to greater flexibility in production, a step deliberately taken for the purpose of
managing the consequences of the uncertainty on the export market. (4) At the
functional level management control has been used to ensure implementation of
the changed production processes. This has been done through formulation and
continual follow-up of activity-related targets for introduction; in other words,
activities for implementing changes have been identified, and deadlines for their
implementation have been set.
The other example of accommodation, or mutual adaptation, concerns the focus
on realizing synergy potential at all levels within the corporation (see Fig. 2.5).
(1) Since 2003 it has been the ambition of corporate management to create “one
Saab”. To achieve this aim, structural changes have been made, horizontal
54 E. Jannesson
Fig. 2.5 Interaction between Strategy Control

strategy and control for (1) Structural changes, horizontal
Corporate level “One Saab” mechanisms & common
realization of synergy strategy process
potential (2)
Realization of business-unit (3)

Business level synergy potential (internal and Centralized initiatives
external)
(4)
Uniform software production (5)

Functional level Uniform planning processes
processes
mechanisms have been implemented and the corporate-wide strategy process has
been used to communicate the importance of realizing synergy potential. (2) At the
business-unit level, this has meant, for example, that in the planning of future
endeavours and business activities, greater consideration has been given to other
business units. A number of business transactions extending across unit boundaries
have been implemented. In addition, within the business units the realization of
synergies has been regarded as important, primarily for making it possible to utilize
monetary resources more efficiently and thus cover the increased costs entailed by
the focus on exports. (3) For this purpose, a number of centralizing changes have
been made. An example is the implementation of KUPP at SBD, one aim of which
is to facilitate coordination of different production facilities.
(4) The centralizing changes have eliminated a number of information- and
organization-related aspects that have made it more difficult to coordinate within
business units. In the first case, IT systems like KUPP has helped to create a
common information flow for production processes, concerning for example
which work package is to be processed when and by whom. On the other hand,
the organizational changes at SBD, for example, have led to production being
gathered into common units. These changes, together with the earlier mentioned
change process of adapting production in accordance with the two critical
success factors have helped to provide a common starting point for software
production within the respective business units. Uniform production processes
have thus been implemented. (5) These have contributed to the establishment of
uniform planning processes. As an example, the senior management for final
assembly at SBD meets continually for such purposes as discussing problems
faced by the different units. The topic may concern efforts to find a solution to
problems of personnel deployment through such means as temporary geographic
relocation. This type of integrated planning for final assembly can make it easier
to realize synergy potential.
In sum, strategies at the corporate, business and functional levels have been
adapted to the environment and to each other in a way that has led to the
emergence of two primary critical success factors within the corporation. With
the control system integrated and adjusted to meeting these factors, a focused
information flow has been obtained. As a consequence, decisions have been
made and changes implemented that in many cases have a common purpose: to
succeed on export markets. The considerable degree of strategic congruence and
a set of controls that in many ways are integrated have thus been important in
enabling the company to pursue new strategies to meet the overall goals of
growth and profitability.
Implementation of the changed strategies has taken place while at the same
time the corporation has maintained its competitive advantage in a radically
changed industry. This is an indication that the strategic congruence and integrated
control achieved by the corporation have been essential to its competitiveness.
Exactly how essential, though, is impossible to specify. It is clear, however, that
the interlinking of strategies and control has been important in motivating
employees to identify and implement solutions, partly to compensate for reduced
revenue on the Swedish market, and partly to adapt the business to conditions on
the export market. Since implemented strategies adapted to the environment may
be considered central to a company’s success, it is reasonable to assume that
Saab’s strategic congruence and integrated control have been important to the
corporation’s competitive advantage. With this conclusion, the chapter provides a
significant contribution in view of the long-present demand for multilevel studies
on the relationship between strategy, control and competitive advantage (cf.
Bhimani and Langfield-Smith 2007; Langfield-Smith 1997; Otley 1980). This
provides a clear and detailed picture of how strategies and control at and between
all organizational levels have interacted in a way that has created a clear focus and
thereby put in place the conditions for competitive advantage.
The chapter thus provides empirical evidence related to Nilsson and Rapp’s
(2005) more theoretical reasoning on the importance of strategic congruence and
integrated control; Saab’s actions in accordance with the changed environment
are consistent with the authors’ hypothesis on behaviour to create competitive
advantage. The chapter also shows that it is not necessary to drive integration of
strategies and control to an extreme. What matters is to create a flow of
information that is integrated and that reaches virtually all parties concerned;
this creates internal transparency with in turn permits decisions and actions in
accordance with goals and strategies.
At the same time, the chapter also contributes to research related to the
importance of exposure to competition in adaptation of strategies and control
(see Chandler 1984; Khandwalla 1972). The study is an example showing that
previous research findings are still relevant. At the same time as Saab’s competitive
situation was changing from a monopoly position to one of considerable exposure
to competition, control has become increasingly important in the organization. The
growing use of control has also contributed to a change in behaviour and to
implementation of new strategies adapted to the environment. All this has been
brought about so that the corporation will be successful on the export market
exposed to competition.
56 E. Jannesson
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How Management Control Affects
the Implementation of Strategies 3
in a Decentralized Organization: Focus
on Formal and Informal Control
in the Case of Atlas Copco
Klas Sundberg
3.1 Introduction
This chapter studies how the control systems of Atlas Copco, a Swedish industrial
company, have changed and how different systems interact to implement strategies
and achieve financial targets. More specifically, the chapter treats how formal
management control is supplemented by informal control in order to implement
strategies and achieve success.
Although it has long been known that control of companies is exercised in
different ways (see e.g. Hopwood 1974; Otley 1980; Ouchi 1979), the literature
on management control has focused on studying calculations and models based on
quantitative, often monetary, information. There is an awareness, however, that
other means of control, such as personal control and cultural control, can be used in
organizations (e.g. Merchant and Van der Stede 2012). But little has been written on
how this is done in practice and how such control can complement formal manage-
ment control.1 This study is devoted to how the management of Atlas Copco uses
informal control in running this decentralized corporate group.
The global industrial company, Atlas Copco has several different businesses,
including the manufacture and sale of compressors, industrial tools, construction
equipment and rock-drilling equipment, while also having a high degree of
decentralized decision-making. For example, Atlas Copco is more diversified
than Scania, another company in this book. The success of a company like Atlas
Copco is of particular interest considering that management thinking often
1
Since the outset of the 2000s, there have been a growing number of studies on informal control,
primarily on why and how management control changes in organizations (e.g. Burns and Scapens
2000; Lukka 2007; Pitkänen and Lukka 2011).
K. Sundberg (*)
Dalarna University, Falun, Sweden
e-mail: ksu@du.se

60 K. Sundberg
emphasizes the importance of concentrating business around a core competence

(e.g. Prahalad and Hamel 1990). In view of Atlas Copco’s success, it is obvious that
a relatively diversified product portfolio is compatible with a highly profitable
business. The purpose of this chapter is to show how a mix of different instruments
of control can lead to strategic development and contribute to value creation
(i.e. high performance) by a company. The chapter’s purpose is accomplished by
presenting and drawing conclusions from a longitudinal case study of Atlas Copco.2
Next section discusses previous research in management control that provides
the basis for this study, and explains why a broad view of management control is
necessary. Thereafter, I describe the case, which has a longitudinal approach over a
period divided into several epochs. The following section presents the conclusions
and implications of the study. Finally, questions of method are addressed in the
Appendix.
3.2 Formal and Informal Mechanisms of Control
The starting point for this study is found in the contingency-theory approach shared
by Nilsson and Rapp (2005), among others, and based on the proposition that a
company’s strategy and management control in the optimal case affects, and is
affected by, its environment. The concepts of strategy and environment are defined
and employed as in Nilsson and Rapp (2005). This entails an implicit assumption
that strategic congruence and integrated control in the long run facilitate the
development of competitive advantage and performance.
This study presents a broad view of management control. This means that both
formal and informal control is considered. Such a perspective on management
control can also be found in previous research (for an overview see, e.g.
Langfield-Smith 2007; Merchant and Otley 2006). A common feature of the
typologies in this research is a traditional hard quantitative core of formal manage-
ment control supplemented by informal control that may be considered “softer” and
more difficult to gather under the same heading. In recent years there has been a
growing interest in the combination of such formal and informal control
(e.g. Carenys 2010) according to several conceptual models (e.g. Malmi and
Brown 2008; O’Grady et al. 2010; Simons 2000), but there are still few empirical
studies (Berry et al. 2009; Tucker 2010).
The expanded perspective on management control arose from the growing
criticism during the 1970s and 1980s that management control systems then were
too monetary and overly influenced by financial accounting, and that this hampered
strategic development (see e.g. Hayes and Abernathy 1980; Johnson and Kaplan
1987). Hofstede (1978) underscores that the literature on control has ignored the
influence on intraorganizational behaviour of social factors like the status and
2
A substantial part of the empirical data in the chapter is from a study presented in a licentiate
thesis by Sundberg (2009).
3 How Management Control Affects the Implementation of Strategies. . . 61
relationships of individuals. This means that the cybernetic models in management

control are incomplete as control models, for only to a limited extent can they
handle targets or reliably measure or follow up the information essential in
motivating people to act.
Ouchi (1979) expands Hofstede’s approach and discusses different types of
control, where the control mechanisms of market, bureaucracy and clans are in
focus. The conclusion is that management can influence an organization’s members
not only through formal control but also through social procedures. Jaworski (1988)
builds further on this and creates a frame of reference around informal control. It
has been used in subsequent studies (e.g. Cardinal et al. 2004; Jaworski et al. 1993;
Kirsch 2004; Loughry 2010).
Jaworski (1988) holds that formal control differs from informal control in that
the former consists of some kind of documentation, whereas informal control is not
documented but still influences individual behaviour in the organization in various
situations. The documentation that characterizes formal control can have both a
market mechanism and a bureaucratic mechanism, according to Ouchi’s (1979)
classification. Some specific examples of formal control with a market mechanism
are profit planning, product calculation, budgeting, performance measurement, trans-
fer pricing and investment calculations, whereas the bureaucratic mechanism can be
exemplified by control instruments such as division of responsibility, reward systems,
form of organization, personnel structure and decision-making processes. Informal
control can consist of group norms, company culture and symbols, for example.
Jaworski (1988) maintains that formal control is about communicating the goals
of management – a necessity especially when the goals of subordinates do not
coincide with those of management. Such incongruence means that management
needs to formalize what is expected of individuals to keep these employees from
heading off in an entirely different direction than the correct one in management’s
view. Management then needs some way to inform subordinates of the
organization’s goals, such as through budgets, personnel planning, job descriptions
and the like. Management must also create incentives for everyone to pull in the
same direction.
On the other hand, if the individuals in the organization are already seeking to
achieve the same goals as the organization, or if the goals are congruent in some
other way, it is not as necessary in the same way to formalize the duties of
individuals. People will know the goals anyhow or find ways that coincide with
the organization’s goals even though these are not written down on paper. An
example of such informal control is the case where personnel have worked in the
organization for an extended period and with the passing of time have associated
themselves with the organization’s goals. Such control can also be present in
organizations with particularly strong values, such as religious groupings where
symbols and rituals are methods for socializing individuals to organizational goals
(Ouchi 1979).
Jaworski et al. (1993) hold that formal and informal control can be combined and
that maximum organizational efficiency is achieved when both the formal and the
informal control are strong. The underlying logic is that in situations where formal
62 K. Sundberg
controls do not suffice for motivating and co-ordinating the multitude of individual
behaviours, informal control can still guide the actions of individuals if they
intuitively know “what we do and what we don’t,” even if there are no documents
or explicit rules for their actions.
The mix of different controls has also drawn attention in more recent years,
where Malmi and Brown (2008) and Nilsson et al. (2011), for example, discuss how
different systems can be combined into a management control package. Although
the idea of a control package can be found in earlier literature, studies in recent
years have concentrated not only on conceptual models but also on describing and
explaining practice (Frigotto et al. 2011) and correlation with success (e.g. Kallunki
et al. 2011). However, there is a need for further studies on non-formalized control
(Berry et al. 2009). There is a special demand for case studies in this area since it is
difficult to use quantitative methods to operationalize and measure such control in a
reliable manner (Kallunki et al. 2011).
In contingency theory there is an implicit assumption that adaptation to the
surrounding situation will lead to higher efficiency (e.g. Donaldson 2001). In this
chapter that is taken to mean that management control adapted to strategy and the
environment will enhance performance. In the empirical material for this study,
performance has been measured as the real growth in profit of the Atlas Copco
corporate group and its units. The chapter also refers to other financial key measures
for the purpose of discussing the relationship between strategy, control and perfor-
mance in different periods.
3.3 The Case of Atlas Copco
Atlas Copco is a Swedish corporate group comprising 280 legal entities with
consolidated sales (in 2011) of MSEK 81,203 and an income of MSEK 12,988.
The group has some 35,000 employees and sells to about 170 countries. In its
annual report (Atlas Copco 2011, p. 2), the corporation states its vision as being
an industrial group with world-leading positions in compressors, expanders and air treat-
ment systems, construction and mining equipment, power tools and assembly systems.
The four business areas of Compressor Technique, Mining and Rock Excavation
Technique, Construction Technique and Industrial Technique are further divided
into 22 operating divisions that run manufacturing companies, sales companies and
supporting activities. As suggested in Fig. 3.1, the divisions can jointly use internal
and external service providers.
Of group sales excluding intragroup transactions, Compressor Technique
accounts for 39 %, Mining and Rock Excavation Technique for 36 %, Construction
Technique for 16 % and Industrial Technique for 10 %. The management of global
operations is located as follows: the management of Compressor Technique is in
Belgium, while Construction Technique is managed from China. Senior manage-
ment of the other two business areas are located in Sweden, although subordinate
divisions may have their management in other countries.
CEO and corporate staff
Mining and Rock Excavation

Compressor Technique Construction Technique Industrial Technique
Technique
MVI Tools and Assembly

Oil-free Air Underground Rock Excavation Portable Energy
Systems
General Industry Tools and
Industrial Air Surface Drilling Equipment Construction Tools
Assembly Systems
Gas and Process Drilling Solutions Road Construction Equipment Chicago Pneumatic Tools
Specialty Rental Rock Drilling Tools Construction Technique Service Industrial Technique Service
Exploration and
Airtec
Geotechnical Drilling
Quality Air Rocktec
Mining and Rock

Compressor Technique Service
Excavation Service
Internal and external service providers
Fig. 3.1 Atlas Copco’s operating organization, April 2012 (www.atlascopco.com/us)
As for ownership, ever since the company was formed in 1873, the picture has
been dominated by the Wallenberg family, which is also engaged in several other
Swedish industrial companies. When Atlas Copco was started, manufacturing
consisted in providing railroads with steam locomotives and railroad cars. To a
large extent, the company manufactured its own machinery and production tools.
Gradually it became so skilled in pneumatics that it also began to sell machines and
tools externally to other manufacturing industries. Through the company’s compe-
tence in pneumatics, it began to manufacture drilling and hammering equipment as
well in order to provide the mining and construction industries with tools, primarily
for drilling and hammering holes in hard rock.
During the first half of the twentieth century, diesel technology entered the scene,
and the company, at that time named Atlas Diesel, was involved in developing and
manufacturing diesel engines for industrial use. It turned out, however, that the
company’s strength lay in pneumatics, and the emphasis shifted to this technology
after 1950. To show this strategy the company changed its name to Atlas Copco.3 As
a consequence of the new focus, companies for manufacturing compressors were
acquired in Belgium and elsewhere. The company expanded vigorously during the
post-war period, and toward the end of the 1960s its principal areas of involvement
emerged: compressors, mining machines, construction machines and industrial tools.
Like many other large Swedish industrial companies, Atlas Copco’s current
business is based largely on innovations made long ago and subsequently refined
and adapted to specific applications and customer groups. An example is oil-free
screwcompressors, which are a major product area for the company:
3
The name “Copco” is a shortening of “Compagnie Pneumatique Commerciale”.
64 K. Sundberg
These compressors are based on an element developed about 40 years ago or more. And
actually there are still very few suppliers of this type of compressors.
(Division controller)
The fact that the oil-free compressor element still embodies the world-leading
technology in the industry illustrates that technical progress is relatively slow and
that there are seldom radical innovations that revolutionize the business. This may
be contrasted, for example, with developments in mobile telephony or the pharma-
ceutical industry, which are required to invest a much larger share of their resources
in R&D than this traditional industrial company.4
Aside from the technological development, which can be considered stable,
Atlas Copco must address other environmental factors of a more macroeconomic
nature. In this respect the business areas differ from one another to some extent. For
example, the business area of Mining and Rock Excavation Technique is affected
by world-wide mining output, which in turn is impacted by world-market prices of
metals, the development of which is heavily influenced by investment in infrastruc-
ture and building. The business area of Construction Technique is also affected by
cyclical conditions for investment in infrastructure and building, whereas the
development of Industrial Techniques is influenced primarily by conditions in the
automobile industry and, like Compressor Technique, by general conditions in
industry. Since the entire business of the company serves customers that manufac-
ture, the general state of the economy generally has a substantial impact on sales.5
The general state of the economy can be measured by GDP growth, as is evident
from Fig. 3.2. The figure shows that the development of the economy has varied
sharply since 1975 and that it can be difficult to predict exactly when downturns
will occur.
Although the development of the economy affects Atlas Copco’s sales, the
market is nevertheless relatively stable in that the company focuses to a large
extent on specific industrial markets where customers make long-term investments,
e.g. in industrial compressors and assembly systems. As these facilities are very
important to the productivity of industrial customers, it is essential that customers
continually invest in this type of machinery and equipment.
How the company strategically addresses this environment and how control has
changed are described and discussed in Sects 3.3.1, 3.3.2 and 3.3.3. To highlight the
longitudinal approach, the sections provide a chronology of events for the years
1980–1989, 1990–1999 and 2000–2011. Section 3.3.1 concerns the period
1980–1989, which is characterized by the company’s on-going divisionalization
following the structural problems in the 1970s. Above all, the section treats how the
4
For example, in 2010 Ericsson, the supplier of telecommunications equipment, invested over
15 % of its sales in R&D, and Johnson & Johnson, the pharmaceuticals group, invested over 11 %.
The corresponding share for Atlas Copco was just over 2 %.
5
In recent decades, however, the company has become less dependent on cyclical fluctuations, as
will be shown later in this chapter.
8%
6%
4%
2%
EU
0% Sweden
-2% World
-4%
-6%
-8%
1975 1980 1985 1990 1995 2000 2005 2010
Fig. 3.2 GDP growth in Sweden, the EU and the World 1975–2010 (www.databank.worldbank.org)
profit centres were consolidated and how the group could stay together despite the
clear boundaries established between different divisions. Section 3.3.2 is devoted to
1990–1999, the period right after completion of the company’s divisionalization.
One aspect underscored in this section is the more diversified strategy created
through several major acquisitions. Section 3.3.3 is about the company from the
year 2000 until its current business was in place. The principal feature of this period
is growing globalization, with vigorous expansion in Asia; Atlas Copco has been
able to benefit considerably from this development. The section also deals with the
company’s increasing focus on its traditional business while also becoming less
dependent on the state of the economy. This section shows that here, too, the
different elements of management control have been of significance.
3.3.1 Decentralization/Divisionalization (1980–1989)
Like other industrial companies, Atlas Copco suffered from profitability problems
at the end of the 1970s in the structural crisis faced by most companies in the
Western World.6 The structural transformation of industry was evidenced by large
variations in GDP growth, shown in Fig. 3.2. During the mid-1980s the economy
became more stable, and world-market demand for industrial products picked up
again. However, oversupply in the international mining industry kept prices of
metals at a record low all the way until 1987, when industry began again to need
more metals for production. In general, the environment became less turbulent in
6
The divisionalization was a process that last for decades but was finally completed 1992.
66 K. Sundberg
the early 1980s, but for Atlas Copco the upturn did not come until the end of the
decade, particularly for business related to mining machinery.
The Company’s Strategic Development 1980–1989

At the outset of 1980s, Atlas Copco consisted of a number of geographically
organized sales companies, a few product companies and corporate management.
The structure was so complicated that it was difficult to maintain overall control of
all group units. To establish order and transparency, management undertook
sweeping decentralization of business into different divisions, which were given
clear profit responsibility. This step made it easier to see the consolidated results of
different businesses and especially for the group’s various products. The
surrounding structural crisis framed the question with extreme clarity: what
would the group invest in, and how should the profitability of these investments
be determined? Profit responsibility was given a product or customer orientation
through dismantling the formerly autonomous sales organization, which had been
geographically oriented, and putting its constituent elements under the control of
the newly created divisions. The resulting organization had a clear impact, and gave
financial success. To a large extent it survived the ensuing decades. The
decentralized view meant that joint corporate operations were cut back both in
number of functions and in staffing, as virtually all operational decision-making
was transferred to the divisions.
With the business units organized as product- or customer-oriented in different
specific business segments, while at the same time given greater autonomy, they
also grew more isolated from each other. For example, the sales companies became
more specialized, so that there could be several different Atlas Copco sales
companies in the same geographical area but selling different products. Not only
did this mean fewer synergies in sales; it also made it harder to identify the core
competence shared by the different business units.
Decentralization meant that the different business units could have their own
product strategies for the products and customer segments to be served. But there
was also an overall business strategy of a differentiated character: the group would
provide customers with the kind of products that would enhance customer profit-
ability. This strategy required technology, quality and durability as well as knowl-
edge of customers and presence with them. The business strategy proved fortunate
for Atlas Copco’s divisions:
We invested in these segments with discernment and developed new products. They were to
embody top-of-the-line technology as far as absolutely possible [. . .] We worked much
more together with our customers, with the result that we developed a customized assort-
ment [. . .] After that we soon started to generate consolidated profits.
(Former division head)
As with the differentiated business strategies, the company focused on produc-

tion to customer order. This was also an attempt to reduce the lead time, and thereby
make the use of capital more efficient. Production processes varied considerably
from one division to another, since some products were developed and produced
specifically for each customer, e.g. production in the Gas and Process division.
The manufacture of other products, such as industrial tools and industrial

compressors, was more standardized. In principle, production became governed
by demand, also based on forecasts for the manufacture of components.
Although Atlas Copco’s business units generated higher profits during the latter
1980s, the increased differentiation meant that the units drifted apart, so that the
core competence for products was distributed among different business units. This
explains why the group’s units ended up with such disparate products.
This meant that there was no strategy for Atlas Copco as a whole, since it would not serve
any purpose. But the business units had their strategies [. . .] Each business should have the
best chance on the market.
(Former corporate CEO)
Formal Management Control 1980–1989

When Atlas Copco was divisionalized, that step reinforced the principles for formal
management control. In the previous organization, calculating the consolidated
profit or loss for different units was so complicated that it was hard to obtain
information for decisions on priorities. The far-reaching decentralization that was
established, with responsibility for profit and profitability, meant that the product-
oriented divisions were given clear targets and incentives for improving the cost
effectiveness of their businesses. When results could subsequently be calculated, it
became clearer what needed to be strengthened or reduced, or which businesses
should be sold off or terminated. This was fully consistent with the corporate
strategy based on the operating autonomy of the divisions, where the role of
corporate management was to monitor the businesses and see that they generated
the results desired:
The role of corporate management was to set goals, but above all to evaluate the perfor-
mance of the business units.
(Former corporate CEO)
The company focused on the consolidated results of products from an opera-

tional point of view. That was emphasized when the company established “the
operational organization,” for which measurement and accounting were
concentrated as from 1989 on operating income. This meant that financial revenue
and costs were thereafter treated as ‘the legal (from an accounting standpoint)
organization’ and that these items were consolidated only at the corporate level
and were not charged to the operating divisions. This was regarded as an advantage
over smaller-sized competitors, for example, since operational management could
ignore financing issues and focus their organizations on producing and selling
products that would yield the desired operating income:
Liquidity problems and questions of finance were generally not something you had to
consider [. . .] There was an internal corporate bank.
(Former head of product company)
68 K. Sundberg
The increased focus on consolidated financial results also meant that production
and logistical functions were streamlined. When the division heads were given
responsibility for the entire operational chain for products, from development/
design to sales and service, there was a greater incentive to review total costs in
all stages of operations. Moreover, with production governed by demand while
distribution was concentrated to fewer units, inventories were reduced, enhancing
capital efficiency.
Informal Control 1980–1989

Although accounting in monetary terms was an important aspect of control during
the 1980s, there was also an informal kind of control in the company during this
period. Ownership at Atlas Copco, as at many other large Swedish industrial firms,
was dominated by a few families or spheres of influence. The influence of owners
could be considerable. At Atlas Copco the leading representative of the owners was
Peter Wallenberg, who was deeply involved in strategy and operations during this
period. He often had a decisive influence on the recruitment of senior executives
and in the investments and streamlining undertaken by the business. His involve-
ment was based on many years of experience with company operations, when he
built up an extensive network of contacts:
He was very closely involved, and before board meetings we would always go into his
office, where he would listen to our presentations. And if spending money was involved, we
were always supposed to get in touch with him. He was incredibly active. And he was then
chairman of the board. And extremely well informed of what was going on, for he had
worked physically at the company so long that he knew people, and he knew the company.
(Head of corporate staff)
During this time, and especially before divisionalization had been fully
implemented, much of what Atlas Copco did was associated with Peter Wallenberg.
He was surrounded by a network of contacts consisting of executives and board
members of various local subsidiaries throughout the world; these people had
strong positions in the group and could act upward informally within the organiza-
tion. Obviously, having that kind of pipeline directly into the owner’s ear conferred
considerable power. This was naturally a source of strength when it came to
financing investments, provided the owner believed in their business potential.
While the powerful ownership was an advantage in regard to long-term
investments, the formal organization of decision-making was also affected by the
informal structure. This was acutely apparent in the event of downsizing, when
local board members and other senior executives could use their informal positions
to obstruct decisions that would affect them negatively.
If this guy down in France did not like the sound of something [from the corporate
management formally responsible], he would call the owner. He could do this because he
and the owner had been buddies down in Africa or the US or England. Then this sales
manager, who had so much power, would say something like, “Listen, that young upstart [at
corporate headquarters] is coming in and telling us what to do in one way or another; you
don’t agree with him, do you?”
This meant that there was tension, where there were persons with formal
consolidated profit responsibility for operations, while at the same time the owner
was acting in accordance with his own vision of the business:
When I was a boss, they told me that I had consolidated profit responsibility for all products
across the board, including capital investment. The only problem was that I didn’t have any
power.
(Former head of product company)
Although Atlas Copco also benefited later on from strong, long-term ownership,
the informal control centred around the owner weakened as divisionalization was
implemented. Corporate management was downsized, and many functions were
decentralized to the business units. However, corporate management kept trying to
influence behaviour in the organization, though with increasing emphasis on values
and on the approach to be taken. Management had been careful previously to instil a
common code for the local units when it came to physical things like signs outside
sales offices, the way motor vehicles should look, the logotype, etc. The object was
to make sure that outsiders could easily see that they were dealing with Atlas
Copco, while also building team spirit among company employees. In addition,
through divisionalization corporate management provided various good examples
of the way Atlas Copco’s units should act. To a substantial extent this concerned
how profitability could be increased and how successful units could be created. The
spirit that management wanted to engender within the group through purposeful
executive recruitment and in other ways is described by the CEO in the annual
report for 1985 (p. 33), with the Swedish factory in Örebro as an example:
It is one of the most modern production installations in Sweden for flexible production in
short series. The heavy emphasis in recent years on production technology to achieve the
lowest possible cost per unit produced will be continued in the years to come. We are
striving to become a low-cost producer, while still maintaining our high quality.
The same annual report (Atlas Copco 1985, p. 2) re-emphasized the common
strategy of increasing customer productivity: ‘Atlas Copco’s aim is to supply
equipment and specialized competence which increase the productivity of its
customers.’ This purpose and attitude recur continually in corporate presentations
and training materials, particularly as support for managers in spreading key
company values.
Company Performance 1980–1989

The clear profit responsibility that followed from the far-reaching decentralization
has been essential to Atlas Copco’s success. With management control focused on
profit, priorities could be set according to strategic and financial considerations. The
company has streamlined production, distribution and administration, thereby
shortening production and delivery times. Much of this work was done in the
1980s. An example of streamlining, according to the company’s own reports, was
that between 1976 and 1986 the number of employees was reduced by 1,846, while
sales rose from SEK four billion to SEK ten billion. After adjustment for inflation,
70 K. Sundberg
this translates into a productivity improvement of 35 %. At the same time, capital

efficiency increased through lower volumes of inventory, as shown by the decrease
of 37 % in the proportion of inventory to sales.
The concrete financial results of these changes are not directly apparent in
reports, but the overall picture that emerges from interviews and the financial
reports shows that the company would have had considerable problems if the
measures noted above had not been taken. One important precondition for the
changes was the clearer system of control, which could show where action was
required. Control was both formal, with vertical reporting, and informal in that
executives moved between different company units and spread best practice, e.g. in
regard to thinking in terms of profitability and focusing on customer productivity.
In this period there are several examples where managers who have led divisions to
positive financial development were given responsibility for other divisions and
made them profitable as well.
Toward the end of the 1980s, financial results began to improve, creating a
margin for expansion. In Industrial Technique, for example, acquisitions were made
in France, the United States and later in the United Kingdom; in combination these
transactions exceeded the existing business of Industrial Technique. In addition,
operations were acquired that were complementary to the existing production of
mining equipment. These acquisitions were initially treated as autonomous
decentralized divisions. Corporate management noted in the annual reports at that
time that this policy had benefits, particularly for customers, but realized afterwards
that it also entailed problems for the company, which could not fully draw on the
synergy potential that in fact existed. This aspect is discussed further in the
following sections on the 1990s.
3.3.2 Controlled Diversification (1990–1999)
The divisionalization of Atlas Copco was completed by the outset of the 1990s.
According to interviews with corporate management at that time, the group there-
after became a collection of operationally autonomous divisions, combined in
business areas which in turn made up a corporate group. During this time, however,
the business environment deteriorated. The increased demand for industrial
products in the second half of the 1980s was followed by a sharp downturn in the
economy at the outset of the 1990s, especially in Sweden. As shown in Fig. 3.2,
Swedish GDP growth was negative for a 3 year period, but other EU countries and
the rest of the world also reported lower growth rates than before. The fluctuations
in Atlas Copco’s environment had several basic causes, including unrest in the
Middle East, the changed political and economic situation in Eastern Europe and
the former Soviet Union and a turbulent situation on foreign exchange and money
markets.
The recession in the early 1990s meant less willingness to invest in infrastruc-
ture, construction and the like, thus reducing demand for many of Atlas Copco’s
products. In the mid-1990s a more favourable tendency commenced, with
increasing growth in China and India. Toward the end of the decade, however, the
economy slumped again, partly because of the so-called Asian crisis, which once
again entailed reduced investment, particularly in Asia, but generally throughout
the Western World as well.
Strategic Development of the Company 1990–1999

Since comprehensive improvements in capital efficiency had previously been
achieved, Atlas Copco could expand strongly just before and during 1990, and it
was also during these good times that substantial acquisitions were carried out in
the mining-related business as in Industrial Technique. The economic downturn
that followed brought a sharp drop in profits, particularly for the mining-related
business, which at the time was facing stiff price competition for its products. Atlas
Copco responded to this situation by concentrating its operations to fewer produc-
tion units and by further improving the efficiency of its commercial and distribution
organization. For example, much of the manufacture of mining machines was
moved from Germany and the United Kingdom and later even from the United
States to Sweden, and further emphasis was placed on the core business within the
mining machine segment: making tools for drilling in hard rock.
When the company’s profitability began to pick up again, several major
acquisitions were made a little farther away from the original core business of
providing industrial customers with machines, tools and other equipment. One
example of the company’s entering new markets was the acquisition of Prime
Service, a North American company specialized in leasing machines to smaller
industrial firms and craftsmen. Another example was the acquisition of a US
company specializing in tunnel drilling. These acquisitions gave the company a
better platform for growth, above all in the United States. At the same time, the
corporate group had to manage operations where there were differences in business
logic. This was especially noticeable in the business area of Industrial Technique,
which through acquisitions entered segments closer to consumers.
With the acquisition strategy, the company grew, but it was a challenge to
integrate operations and capitalize on the potential synergies from acquisitions.
Especially in the middle and toward the end of the 1990s, efforts were made to solve
this problem through organization, as with several divisions using joint distribution
units and distribution systems. It became apparent, however, that there was a
drawback to divisionalization and the acquisitions just before and around 1990;
for example, several divisions within Industrial Technique had similar business
strategies and operated partly on the same markets:
All divisions [could] sit there at board meetings and say, “We are going to penetrate Ford in
France,” “We are going to penetrate Ford in England, France and Spain” [. . .] If we had put
the [divisions’ strategies] together and seen how it really looked, made a matrix [. . .] partly
of what you wanted and how it actually was, I think we would find that we were all
stumbling around in the same squares. And then there were big empty patches which were
not detected since there was no common strategy at the business area level.
72 K. Sundberg
The incomplete integration of acquisitions, combined with decentralization, led

to internal competition, at the same time as business opportunities were not
discovered or exploited. In 1997, however, the organization was changed, and
three divisions within Industrial Technique were combined in an “alliance” for
gaining synergies. Another indication that corporate strategy was being drawn
toward a higher degree of activity-sharing was that the dominant business area in
the 1990s, Compressor Technique, was organized with the core technology gath-
ered in a separate division. That permitted the business area to benefit from the
resulting synergies, while the assembly and sales divisions could focus on their
respective areas of operation without much internal competition. This organization
also proved successful:
At that time it was even clearer that Compressor Technique represented earning power in a
completely different way than the others [. . .] the whole time Compressor Technique was
extremely successful.
The striving for synergies was necessary at a time when manufacturing was
focused on reducing costs and remaining highly competitive. There was no finan-
cial margin for internal competition when there were external competitors. The
winning concept around which Compressor Technique was organized was later
implemented in the other business areas.

Formal management control was just as important in the 1990s as before. On the
other hand, the forms of management control were changed as the company
switched its planning model from a formalized yearly budget process to 3-year
plans evaluated by so-called scorecards.7 As the transition involved more flexible
planning principles, operating management could focus on overall objectives rather
than reviewing implementation.
Before the change of planning principles the company mainly used balance
sheets and income statements. The divisions reported the outcomes but also
forecasts for operations in the coming 3 and 12 months. A mass of previously
used basic data furnished the foundation for the scorecards that later were in use:
7
The budget was eliminated at the corporate level. Since the company is decentralized, operating
managers can still use more detailed planning models, but in these cases local models are used
since there is no longer any requirement from above to present “budgets”. Instead there are several
“scorecards”. These scorecards, though, are not designed like the ones presented, for example, by
Kaplan and Norton (1996) as Balanced Scorecards, but are concentrated on key numbers for
investment, growth in company sales for different products and regions, development of income
and cash flow, working capital etc. Although the financially oriented key numbers predominated,
there are also HR-related key numbers such as the frequency of development dialogues, internal
mobility, sickness absence etc. The numbers used in measuring are increasingly specific to the
particular business the farther down you go in the operating organization.
The change in itself was not gigantic in a broader perspective, but was more of a changed
way of thinking, where information was formalized in the scorecards.
(Business area controller)
Since the company had long been controlled with monetary measures, the
scorecards were financially oriented for the most part, with measures of profit and
profitability used in consolidation at the business-area and corporate levels. As a
controller at the central divisional level put it:
I’m not sure how really balanced it is, to be honest. But it’s a scorecard, all right, with an
enormous slant to the financial side. You just have to admit it. You make a choice. At the
corporate and business-area levels, it’s very financial, but when you get down to the unit
level, other parameters become more important.
The switch to scorecards meant less work on detailed budget processes and
permitted the employees to focus on business operations. This transition required
greater stability and predictability; in other words, operations should achieve an
expected outcome each month. Consolidated key numbers were planned, measured
and presented in scorecards. They were then carefully followed up at various
meetings on different levels. Units at the functional level reported monthly to
divisional management with several different scorecards. In addition meetings
were held for evaluation at the functional, divisional and business-unit levels
several times a year. There the focus was on the development in each division of
the various product families and in the areas geographically covered by the sales
companies. The higher up in the organization the evaluation was conducted, the
greater the focus on financial developments. The evaluation of operations was the
basis for the managers’ bonuses. In this procedure, it was more performance-
oriented compared to previous principles for compensation.

Atlas Copco’s compressor divisions had a more logical and coherent strategy and
organization than the other businesses in the group, and later the other business
areas embraced the same organization principle. During 1990s there were some
divisions in Industrial Technique that competed with each other, and similar
products were sold under different brand names: ‘Everyone wants to sell to Ford.’
This behaviour was a consequence of the division heads’ financial focus. They were
also responsible for all operational aspects like production, sales, distribution
and brand management. Here corporate management took action to establish
co-operation between divisions. Informally but firmly, corporate management
insisted that division heads co-ordinate their strategies; otherwise there was the
threat of consolidating divisions (which was also carried out later on):
When [the group CEO] tells you, “Look, boys, now you’ve got to work together or else
we’ll consolidate your organizations [. . .],” that’s a threat, and in that situation I believe we
would have benefited even more if we had done it, but in an orderly way; we would have
avoided a lot of squabbling. For we couldn’t co-operate; there was no basis for it.
74 K. Sundberg
The informal control was a way for corporate management to hold the organiza-
tion together. A small central staff was kept for HR matters. That made HR-related
control possible at the corporate level. An example of this kind of control was the
principles for executive recruitment, which were strengthened and professionalized
during this time. With Atlas Copco’s numerous acquisitions, with widespread
geographic coverage, before and around 1990, there were many new employees
who were not known at headquarters and who did not know much about Atlas
Copco, either. By changing the principles for recruitment, the group set up an
internal labour market for employees, where diversity, mobility and international
experience were regarded as central factors in hiring decisions. Executive rotation
was also considered important, and in 1991–1996, 80 % of the 300 most senior
managers changed jobs, and most of them moved to a different country as well. This
rotation was considered essential for spreading experience and maintaining a
uniform approach:
The transfer of know-how takes place primarily through mobility on the internal labour
market. Creating favourable conditions for internal mobility lets employees bring their
experience and knowledge with them to their new jobs. This gives new perspectives and
enhances the transfer of knowledge between units.
Aside from the principles for executive recruitment, the central HR staff took the
initiative in the continuing development of staff skills. The principles were later
included in the scorecards used for planning and follow-up. To improve employee
knowledge of the company’s history, strategy and approach, a program called Atlas
Copco Circles was conducted in 1996–97 for all employees. The aim was to
encourage a sentiment of participation among employees, but also to develop
staff skills in the divisions, once questions of responsibility had been brought
further down in the organization. For this training, use was made, for example, of
The Atlas Copco Book that aims to define the company values and culture:
This pedagogical and very readable book sets forth the principles on which Atlas Copco’s
business is based. The book served as a basis for discussion in executive training and gave
individual employees an opportunity to form their own opinion on what Atlas Copco is.
The book is an internal material for the staff describing corporate logic and
policies. New editions have later been released and an important symbolic message
is when a superior gives the book to a manager on a lower level, thereby showing
the importance of the corporate values. The book serves as a form of values-
oriented control that includes guidelines both for the proper approach to customers
and for creating and maintaining internal efficiency. For the external public another
book The Atlas Copco Way was released 1998. It discusses different people who are
considered to have had great significance for the basis values that are “the very
soul” of the company. It also provides examples from the current business, which is
permeated by these values. In this respect as well, the best practice of successful
units is presented. This is shown to external parties even in annual reports but is not
followed up through any formal procedures.

In the 1990s Atlas Copco underwent major changes, particularly those related to the
comprehensive acquisitions carried out in different sectors. As these acquisitions
were integrated into the existing organization, changes occurred. The ensuing costs
of restructuring affected profit and profitability in the short run. At the same time,
the company earned substantial profits in its compressor-related businesses. These
divisions were the most stable in their profitability and organizational structure. The
company also made acquisitions in Compressor Technique, and these businesses
were organized directly under the existing divisions. Atlas Copco’s executives at
the time were given direct responsibility for integration. This resulted in faster
integration of the acquired businesses compared with when the acquired businesses
comprised a consolidated profit centre of their own.
During the 1990s, the group grew through acquisitions in sales and number
employed, and it achieved a higher level of profits. It is also interesting to note that
return on investment stabilized compared to previous decades. The stability was
evident in the steadier ROA8 (Return on Assets) of the group. This key number
could be 4–10 % instead of sometimes dropping close to zero as it had in the past.
This was due partly to the extremely high profitability of Compressor Techniques
and partly to the profitability of the company’s traditional business of Industrial
Technique. An additional cause is that other businesses could concentrate their
operations in fewer production units, thus improving cost effectiveness.
The clearer consolidated profit responsibility for the operating units contributed
to financial stability. When the responsibility of executives was clarified further at
the same time as they continually had to report stable key numbers, they naturally
reviewed the totality of the costs of their businesses and took their own initiatives
toward improving efficiency. At the corporate level, instruments of control were
required in order to benefit from the synergies between divisions. Through
increased staff training and even more executive rotation, a desirable approach
could be spread throughout the group, particularly in taking responsibility for
financial progress. In several cases total costs could also be reduced by transferring
executives who had streamlined production at one unit to do the same at other units
as well.
3.3.3 Less Cyclical Dependence and More Globalization

(2000–2011)
Atlas Copco showed an outstanding profit trend during the 2000s despite several
deep recessions. In 2000–2011 operating income nearly tripled, and return on
shareholder equity soared from 13.2 % to 47.6 %. Also, the company has become
less sensitive to cyclical fluctuations than before. Two of the reasons are alert
8
The definition of ROA (Return of Asset) used here is: annual income/total assets.
76 K. Sundberg
monitoring of the business environment and greater flexibility in realigning pro-

duction. Another reason is that the company has further diversified risk through
focusing more on delivering products to the aftermarket:
We have a concept that we call “one to one,” which means that when we sell a machine, we
also try to sell a service contract for the same machine as well.
In a recession, demand for new manufactured products normally tends to fall off.
But the company’s customers continue to use their existing equipment, so that the
need for service and spare parts continues or even increases. There is much to
indicate that the company’s success so far in the 2000s is due to decreased cyclical
sensitivity, and that this has contributed to steady profitability despite sharp cyclical
fluctuations. In 2009, for example, the company achieved an ROA of almost 9 %
and profit margin of 13 %, while many other industrial companies reported negative
results related to the downturn in the economy.
The Company’s Strategic Development 2000–2011

Atlas Copco has benefited from the rapid growth in China, India and other Asiatic
countries. The expansion in these countries has led to high demand for compressors,
earth-moving machines and other heavy equipment for demolition and construc-
tion. In connection with this expansion, prices of metals have risen. For example,
the prices of copper and zinc have skyrocketed to several times their previous
levels. Atlas Copco has been able to take advantage of the increased demand for
raw materials from mines by strengthening its position as a supplier of mining
equipment. Moreover, Atlas Copco has had a strategy of “getting in on the ground
floor,” i.e. being present early on, in countries with development potential. This was
true of the Canadian mining districts in the early 1900s as well as Africa and the
Balkans. In addition, for many years Atlas Copco has had its own organization in
place and has been involved in the industrialization of China and India.9
In addition to aftermarket products, Atlas Copco has focused on the specific
product areas where the company has traditionally been very successful. An
example of this was when the company in 2005–06 divested its North American
equipment leasing business and its more consumer-related production of electrical
hand tools. These businesses had been acquired only about 10 years earlier and had
undergone major restructuring. In the strategy that emerged for the businesses that
were retained, there was a focus on producing and delivering machines and other
equipment primarily to industrial customers. In the annual report for 2010 (p. 2),
management puts it this way:
9
In the twenty-first century, moreover, the management of the business area of Construction
Technique have been stationed in China in order to come closer to the most expansive market for
that business area.
Atlas Copco is an industrial group [. . .] The group delivers sustainable solutions for
increased customer productivity through innovative products and services.
The company has maintained its strategy of acquiring closely related businesses.
One example is the acquisition in 2004 of the rock-drilling business of Ingersoll-
Rand in the United States. Another example is the acquisition in 2007 of Dynapac
and its production of compaction, milling and paving equipment for road and
ground work.
Atlas Copco’s strategy after the turn of the millennium has focused on specific
areas of application and the company’s basic and traditional business logic. The
emphasis on aftermarket products reinforces this strategy in that the company
assumes responsibility for what happens with the customer after a machine has
been sold:
In a mining machine, there are a lot of components, tubings, seals and other spare parts that
need to be changed regularly. Here the customer should first turn to us, as we supplied them
with the machine.
(Head of marketing)

The transition to continuous planning and evaluation by scorecards had its impact
by the 2000s. It gives the company a more flexible and uniform kind of control,
particularly when viewed from above. Management uses a number of indicators
that show where the business is headed. The intensity of follow-up depends on the
stability of the specific businesses. When there is concern about a business,
e.g. because of an economic downturn, the business is followed more closely.
This puts pressure on managers further down in the hierarchy to take action to
meet established goals:
Subsidiaries have almost unlimited freedom as long as they deliver on the key numbers
according to plan. Or a high degree of freedom at any rate. But if they are not keeping up
with their plan, there will be very close follow-up of what they are doing.
Thus, the units face pressure from above to perform and reach the targets that
have been set in the scorecards. At the same time, managers of product companies
are highly autonomous and use forecasts that are continually followed up. When
there are deviations from the forecast, managers can adjust production in the short
run, e.g. through cutting back on temporary staff and quickly lowering the volume
of production, or by short term switching the manufacture of components from
external subcontractors to in house.
The decentralized principles of control are still observed in the 2000s. Corporate
management says that they need to give division heads responsibility and power
over their businesses while at the same time controlling them so that they collabo-
rate in exploiting synergies. The successful concept around which Compressor
Technique was organized in the early 1990s – gathering joint core competence in
78 K. Sundberg
a single dedicated division – has also spread to the other business areas in the 2000s.
For example, the Rocktec division was created in the business area of Mining and
Rock Excavation Technique. This division develops and manufactures core
components that are used by other divisions in the same business area.
Organizationally, the strategy of focusing on the aftermarket has entailed
changes at Atlas Copco. These businesses are based on different market logic,
with an entirely different competitive situation, for example. This may mean that
each business area now has its own divisions or functions specialized in service. It is
thus possible to obtain financial and consolidated reports on how the results of this
business are progressing. The potential of these divisions is considerable.
According to one business area manager, the value of a service and spare-parts
contract may be four times the price of the machine itself.

Atlas Copco’s focus on profitability intensified during the period studied. The
formal operating control and organization is concentrated by the fact that each
product will have its chance on the market, and that the performance is continu-
ously evaluated. During the 2000s the importance of the business areas on the level
above the divisions have enhanced when the divisions went specialized on
functions like manufacturing, marketing and service. In that type of organization
an overall strategy is needed for product development and other mutual functions.
In the business areas these kinds of tasks follows a relative loose structure where
employees from different divisions work in projects that do not always follow the
formal organization. The results of those more informal organizations are reported
to councils of the business area that make formal decisions about the ideas that the
project groups propose. This is one example on how the formal control can be
completed with informal control to keep together a decentralized corporation and
make strategic development:
The external marketing divisions have marketers who sit here at home, where they work
very closely with both product developers and sales companies. Here the idea is to get
things stirred up, and we have deliberately kept this R&D under very loose control, by
trying to get them close to each other physically. We have brought together product
developers and marketers and told them to work together. This is called Drive Team.
(Division head)
The importance of informal contacts between formally autonomous units has

been strongly underscored by several Atlas Copco interviewees. For example, it is
considered a central success factor for product development. It has been part of
company spirit for decades, and it still is:
We are still living in this culture, and it is very important that we aim to preserve it, as we do
in various ways. But you don’t see it, of course, in the organization chart; [. . .] it’s based on
dialogue and consensus [. . .]. And it’s crucial to maintain this customer focus, this way of
thinking.
(General manager, product company)
This company spirit is supported by corporate management even though

operations are managed within the divisions. At Atlas Copco the role of corporate
management has become one of overall understanding, that is, identifying changes
in the business environment at the macro level. This is transformed by management
into specific declarations indicating the course to be followed. An example is when
the strategic plan was presented around 2003:
The CEO was crystal clear. He said, “I believe the Atlas Copco group can grow a lot more
than the general rate of recovery in a business cycle and that we can have organic growth.”
He said “I think acquisitions are fine, but our growth should be two-thirds organic and one-
third through acquiring other companies” [. . .] and he also said “You’ve got to employ
more ‘feet in the street’ [sales and service personnel].” Those declarations, I believe, are
much more decisive for what happens in this kind of corporate group than the scorecards in
themselves.
Another direction communicated by corporate management through the strate-

gic plan was the vision of being “First in mind – First in choice®”, an ambition to be
the kind of company that stakeholders first think of and then choose. The object is to
be the world leader in the business areas where the company operates, in regard
both to technically advanced projects and to an approach to stakeholders such as
customers, employees, shareholders, society at large etc.
The vision “First in mind – First in choice®” is not new at Atlas Copco. The
ambition of being the biggest and the best has always been present. By virtue of its
acceptance as an overall corporate vision, the business has been co-ordinated in a
clear manner. One consequence of this declaration of will is that businesses are
divested if they cannot reach this goal. If the business is not considered number one
or two on its markets, or in a position to be, it will be divested. This approach is also
important in internal discussions on acquisitions or other investments.

Atlas Copco’s profits have shown considerable improvement during the 2000s, with
annual income more than quadrupling. Despite two deep recessions, the company
has done well. During the financial crisis of 2008–2009 the profit margin did not
drop under 13 % when a lot of other manufacturing companies had big losses. The
reasons cited had to do with strategy and control. The company is now so highly
diversified that both product and geographic dispersion provide a spread of risk that
makes the company less vulnerable if a product area runs into financial difficulty, or
if a particular region is struck by a slump. Moreover, the company has many
customers and does not stand or fall with a drop in a single customer’s sales
volume. The emphasis on the aftermarket has made the company less cyclically
dependent; these relatively profitable aftermarket products can sell despite a low
level of investment in new machines. Today there is flexibility in production thanks
to a high proportion of variable costs, enabling the company to adjust its costs
during upturns and downturns in demand.
80 K. Sundberg
There are several factors of importance for the increase in value creation at Atlas
Copco. The vision of being “First in mind – First in choice®” is a clear guide. It has
focused operations on a single point of departure, on being biggest and best. As a
result, less successful operations have been divested, and overall profitability has
increased.
The informal organization is another factor of importance. In order to develop
customized products, contact with customers is essential. This contact takes place
through different divisions, though there are no formal channels for it since the
divisions are autonomous profit centres. The personnel policy, with rotation of
managers and a common forum for division heads, leads to informal contacts that
facilitate communication between divisions. It is not unusual for the head of a
producing division to be appointed later to head a marketing division or even a
business area.

The purpose of this chapter is to describe how different types of control systems
interact to implement strategy. The case of Atlas Copco has interesting
implications and shows how formal management control can be supplemented
with informal control in a company with far-reaching decentralization. When a
company consists of a number of autonomous profit centres, something more
than financial planning and follow-up of results is needed to hold together the
different units of a relatively diversified corporate group. That something more
might be a set of bureaucratic regulations with formal provisions for how things
are to be done. At Atlas Copco these formal rules are kept to a minimum;
instead, they speak of spreading “best practice” informally throughout the group.
This case study shows that changes in strategy and control take more time to
implement than is stressed in the traditional literature on management control.
Textbooks and articles sometimes describe management control as a cookbook
where formal instruments of control receive particular emphasis. Kaplan and
Norton (1996), for example, begin by comparing the controls of a business
manager to the instrument panel of an airplane. This simile gives the impression
that a simple push of a button or turn of a handle is all that is needed to
accomplish a preprogramed change. This case study on Atlas Copco shows
that the company’s success is the result of decisions and processes initiated
some 30 years ago or even earlier. The strategies have developed over time, and
the company has gradually arrived at a highly successful concept for its business.
During the process of development, there are examples both of successful and of
less successful endeavours. This experience is borne by people in the organiza-
tion, who form current strategy. This conclusion is important to consider in
discussing conceptual models like those of Nilsson and Rapp (2005), Simons
(1995) or Malmi and Brown (2008), for example. These models are based on
logical concepts and draw a map, but it is important for users to be aware that
they are not moving instantly from one box to another, but that their actions have
consequences elsewhere on the map. This case study illustrates the dynamics and
complexity of strategy and control in reality, and it reinforces theories on

strategic development (see e.g. Hedberg and Jönsson 1978; Häckner 1988;
McCarthy 2003).
Another finding in this case study is that Nilsson and Rapp’s model (2005)
should be supplemented by informal control in order to explain how strategies
are formulated and implemented. The study shows how informal control can
serve as an important complement to formal control, and it provides an addi-
tional contribution to new theory in this area (see e.g. Cravens et al. 2004;
Jaworski et al. 1993; Silaen and Williams 2009). Formal control is important
for clarification and follow-up in areas of responsibility. In particular, the lines
of responsibility are shown through the formal organizational structure. In the
case of Atlas Copco, an organization of autonomous divisions was created,
where managers were given full responsibility for their businesses. The formal
organization, with distinct vertical channels of communication, subsequently
provided the framework for other controls. People at Atlas Copco, or with ties to
the company, were interviewed; they stated that the decentralized responsibility
indicated the respective domains of managers. Freedom within this given frame-
work is an important motivating factor for taking action.
The study shows that formal management control is of major importance in
creating transparency. That makes clarity and incentives for promising and
achieving results, particularly from a tactical and operational perspective. The
freedom to act strategically is present only if financial results are stable. If the
desired results are not attained, control is tightened and remedial action is
required. At Atlas Copco, organizational units are expected to achieve stipulated
amounts of revenue and costs. Each unit is autonomous and is to report satisfac-
tory results, on which the managers’ bonuses are based. Atlas Copco gives its
division heads considerable freedom in business and functional strategies, but
they are required to report and evaluate how well their businesses are meeting
their targets.
A combination of a decentralized organization and formal management
control can lead to a situation where the overall efficiency of the group is
lower because synergies have not been exploited. As indicated in the literature
(e.g. Nilsson and Rapp 2005), there is a danger that decentralized organizations
will drift apart when each business unit goes its own way, and it may be difficult
to find a common concept of business for all corporate units. Here is where
informal control becomes important in a decentralized organization. This control
can provide the cement that holds together the formally autonomous profit
centres. How this informal control is manifested may vary, as previous studies
also show (e.g. Silaen and Williams 2009).
The conclusions of the study develop theory in the area of relevance for
management control; they underscore the importance of a well-functioning
control system at a company, particularly in an environment of increasingly
global competition and sharp cyclical fluctuations. In addition to efficient
systems of planning and follow-up, lasting success and survival also require
systems for communicating strategic direction. In this regard, Atlas Copco may
provide a good example.
82 K. Sundberg
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Success Through Consistent Strategy:
How Does Scania’s Management Control 4
Matter?
Nils-Göran Olve
4.1 Introduction
For a long time, Scania has remained remarkably consistent in its competitive
positioning. Its origins date back to the early 1900s, and since 1924 it has produced
trucks and busses in Södertälje, a town close to Stockholm. From 1969 until 1995 it
formed part of Saab-Scania, which at that time was a major industrial group also
producing passenger cars and aircraft, but Scania retained its strong identity.
Business units within the group deployed very different management control
practices. Hence, Saab-Scania was acting as a conglomerate, in spite of operating
in industries where synergies would seem possible. Throughout this period, Scania
was the most profitable part of the group. After more than a quarter-century it again
became a separate company in 1995.
According to its website (www.scania.com), Scania is ‘the leading company in
its industry in terms of both profitability and brand’. For many decades it has
focused almost exclusively on heavy trucks and busses. In addition, it produces
industrial and marine engines, but revenues from these have been only 1 or 2 % of
those from trucks and busses. Services account for a growing share of its revenues,
but also relate to Scania’s trucks and busses.
Scania emphasises three core values: Customer first, Respect for the individual
and Quality. Presentation materials from Scania stress its modular product system
that enables it to tailor each vehicle to specific transport needs, providing customers
with better overall operating economy. Production takes place largely in Sweden
Much of this chapter is based on a licentiate thesis by Annette Anjou (2008), whose contribution is
gratefully acknowledged.
N.-G. Olve (*)
e-mail: nils-goran@olve.se

86 N.-G. Olve
and Brazil, with assembly closer to customers also in other European countries,
Africa and Asia. Scania now operates in about 100 countries and has 35,000
employees.
The impression given in presentations by the group’s controllers over the years is
that financial controls, although important, do not play a major role in the company’s
success. Scania was very early (1997) to abolish traditional budgeting, and in the late
1990s Johnson and Bröms (2000) used the company as evidence that control through
non-monetary metrics and a strong culture were better avenues to success. Under the
heading of ‘Financial outlook’ on its website (www.scania.com), we even learn that
Scania’s leadership philosophy is based on achieving continuous improvements without
quantifiable targets to be reached by specific dates.
This makes it a lasting and useful example of a current theme in the literature
about control: how different types of controls interact in a ‘control package’ (Malmi
and Brown 2008) or ‘control mix’ (Nilsson et al. 2011). Earlier studies have used
other frameworks for studies like this one, mainly Simons’ (1995) levers of control
(e.g. Tuomela 2005; Widener 2007), but studies based on Malmi and Brown (2008)
are still few. Hence the chapter gives a valuable response to Malmi and Brown’s
(2008, p. 288) request for
understanding of the impact of other types of control [than accounting-based] (such as
administrative or cultural) and whether/how they complement or substitute for each other in
different contexts.
The chapter also provides interesting insights about the relationship between
strategy and control, and the extent to which control should emphasise financial
targets. There are several studies dealing with this aspect, but mostly from a perspec-
tive of strategy and management control (Langfield-Smith 1997, 2007; Nilsson and
Rapp 2005). In this case, however, a specific management perspective is of great
importance, putting earlier research in a new perspective. When questioned about
Scania’s approach to control, the company’s executives regularly referred to the
emphasis on customers’ operating economy and continuous improvements. And it
certainly has helped that the leadership in Scania has been highly stable; the present
(2011) chief executive, Leif Östling, has served since 1989.
The purpose of this chapter thus is to provide an increased understanding of the
control mix in a company where strategy has been consistent and focused for a long
time period, and where corporate leaders claim that values and methods rather than
quantified targets have been the road to success.
The next section summarises ideas about the use of a “triple approach”
consisting of metrics, decisions and responsibility as important elements of the
control mix, to which I will return at the end of the chapter. The bulk of the chapter
is devoted to a presentation of Scania and its control practices from 1992 until now.
This can be largely summarised in some “themes” which seem to characterise
control at Scania, and founded on the identity and practices that Scania has nurtured
and groomed over several decades. Finally, we will reflect on how these may
presage views on strategic control that have become current in recent literature,
4 Success Through Consistent Strategy: How Does Scania’s Management. . . 87
and provide a model for other firms. Or should we conclude that consistent and
organic development of such controls over a very long period, as at Scania, is a
precondition for succeeding with them?
4.2 Influencing Employee Behaviour:

Metrics–Decisions–Responsibility
Definitions of management control increasingly stress ‘influencing employee

behaviour’ (see Chap. 1). This aim can obviously be achieved in many ways, but
the definitions usually limit management control to formalised or structured means
of control. Some authors, like Malmi and Brown (2008), extend management
control far beyond the realm of financial data. Scania provides a case where this
is relevant, as the corporation uses methods and values in a structured way to
influence employees, with decentralised responsibilities and continuous learning as
key principles. Scania’s controllers play a key role in this system.
Nilsson et al. (2011) describe management control as a two-way bridge between
strategy and behaviour. It provides information and incentives for employees in an
organised way, emphasising those aspects of their activities and the environment
that the designers of controls consider critical for success – i.e., those essential for
realising strategies. The expected result is that employees, managers as well as
workers will pay attention to these selected aspects and have a shared sense of
direction. It is not just a matter of providing targets that lead to desired behaviour;
rather, information and incentives should communicate management’s view of
strategy in a way that engages employees’ imagination and stimulates a quest for
improvements. This is why the bridge should be two-way. Control practices enable
management to indicate a strategic direction, but also mobilise knowledge that is
dispersed throughout the organization.
Nilsson et al. suggest that there are three elements in an organization’s manage-
ment control that should be designed and used to achieve this: metrics, decisions
and responsibilities. They link these to Simon et al. (1954, p. 22) statement that
“figures” are used in three ways: to direct attention, solve problems, and ‘as a sort of
score card’ (see Nilsson et al. 2011, p. 177).
Metrics are concise descriptions of selected characteristics of something, for
instance a physical object or an activity (Nilsson et al. 2011). In the context of
management control, metrics have traditionally been financial, linked either to
financial reporting or to financial-analytical metrics such as forecasts of future
cash flows or assessments of customers’ profitability.1 Especially from the 1990s
and onwards, non-financial metrics and the use of multiple metrics have also
1
Anjou (2008), following the SiSK framework (i.e. Nilsson and Rapp 2005), used the terms
“monetary” and “non-monetary” information. This has been retained below where explicit refer-
ence is made to her study. Otherwise, the broader terms “financial” and “non-financial” informa-
tion were preferred.
88 N.-G. Olve
received increased attention as suitable for use in management control. The princi-
pal explanation is that metrics are central to communication about present and
desired characteristics of activities and the business environment, and that innova-
tive metrics and the use of multiple metrics may convey such characteristics better
than metrics derived from financial accounting. According to Nilsson et al., man-
agement should use metrics that enable communication which is relevant to the
strategy employed and highlights those characteristics that seem of greatest impor-
tance to monitor and discuss.
Decisions are the choices through which managers and other employees influ-
ence the future of the organization (Nilsson et al. 2011). Management control is
particularly concerned with those recurring situations where decentralised actions
impact the organization’s costs or revenues and ultimate success. In such situations,
management will often want to apply specific decision models, or at least to require
that specific characteristics of the situation be considered in a systematic way
before action is taken. Management control should make sure that this happens.
Examples are profitability assessments of alternative actions.
The third element, responsibilities, concerns the continuous endeavour to
achieve objectives which does not, at least consciously, involve specific decisions.
Strategic objectives must be expressed in a way that can guide everyday efforts and
encourage learning from experience, i.e. communicate responsibility. Otherwise
people will not focus on them. In the theory and practice of management control,
there has long been an emphasis on target-setting and performance evaluation. At
least until recent decades, metrics in financial reports were used for this purpose;
now they are often complemented by analytical and non-financial metrics in
scorecards. Nilsson et al. (2011) claim that making responsibility visible through
these metrics is a key element in control.
There is interaction between metrics, decision models and responsibilities.
Metrics will obviously be used in making decisions and articulating responsibilities
(and reviewing performance). All three are combined in communicating strategic
priorities. For instance, when decision-making procedures are prescribed in great
detail and employees have little discretion, responsibilities must be expressed
differently than in a situation where professional employees are expected to handle
decisions as they find suitable. In the latter case, responsibilities need to be
expressed in a way that provides guidance and ensures a common direction, through
strategic goals to be achieved, etc.
Even by themselves, however, the metrics will be important as an interpretation
and operationalisation of objectives and strategies. This use of metrics is what
Simon et al. (1954) called ‘directing attention’. Balanced scorecards and similar
“performance management” proposals extend the focus of management controllers,
effectively requiring integration of their work with that of production control, HR
plans etc. These also may be said to function through metrics, decision models and
responsibilities. A traditional view of management control might limit it to control
exercised through accounting-derived financial metrics, and make a clear distinc-
tion between management control and other controls. Scania’s emphasis on contin-
uous improvement without quantifiable targets, quoted in the introduction above,
already implies a view of control which could mean either that management control
is unimportant, or that it operates less through targets and is integrated with other
forms of control. For this reason it is interesting to describe Scania’s management
control, not least the actual work of controllers in Scania.
4.3 The Scania Case 1992–2011
4.3.1 Company Description
Even before again becoming a separate company with public ownership in 1995,
Scania had long maintained a highly separate identity which had evolved over time
without major disruptions:
Scania’s strategic direction was decided already in 1940. High profitability should be
reached through: focusing on the heavy segment of trucks; building trucks using the module
system; developing and producing strategically important components in-house; working
in close collaboration with suppliers and focusing on exports to achieve volume (Nilsson
1997). According to Scania respondents, Scania’s corporate strategy was unchanged
between 1992 and 2006, as is confirmed through a study of its annual reports for this period.
(Anjou 2008, p. 86, translated2)
This is in itself remarkable, as Scania was part of Saab-Scania for 26 years.

During this long period, many expected that synergies and possibilities of joint
operations between Scania’s trucks and Saab’s passenger cars would be explored.
The fact that this never really happened facilitated the dissolution of the merger in
1995.
Scania also had other corporate relationships. For several years until 2002,
Scania owned 50 % of Volkswagen’s Swedish subsidiary. In 1999 Volvo tried to
acquire Scania, but the merger was prohibited by European competition authorities.
Still Scania’s focus remained the same. Value-based and cultural controls have had
time to penetrate the minds of everyone at Scania. This is also linked to the
unchanged leadership, which goes back to the role played by the traditionally
foremost family in Swedish business, the Wallenbergs, whose group Investor was
the largest owner – though not majority owner – of Scania until 2008, when
Volkswagen became majority owner.
In recent years, trucks and busses have accounted for 70 % of Scania’s revenues,
with services at around 20 % and growing. Engines constitute only about 1 %, with
most of the rest made up of second-hand vehicles. Trucks and busses – all heavy (in
excess of 16 t) – can be tailor-made in accordance with customer needs. This is
achieved through module-based production, a concept that is central to Scania’s
way of operating. Modularised production allows the company to customise
2
Quotes from Anjou were translated by me and then reviewed by her. My interviews with
controllers were also conducted in Swedish, and one controller then approved my translations.
90 N.-G. Olve
products according to customer requests, so that each vehicle delivered is unique,

even though they can all be seen as variants of one basic product. It is therefore
debatable whether Scania should be seen as highly diversified (within its chosen
range of products) or close to a one-product company. This also shows up in how
Scania uses “number of vehicles” in its reports as a self-evident statistic for
production volume. The total dominance of trucks and busses, closely integrated
in production, also means that there is effectively only one business unit, and that
Scania’s business strategy is also its corporate strategy.
Based on this stable strategy, Scania has expanded organically through its early
focus on growth markets. For example, it has been producing trucks in Brazil since
1957. In 2010 Latin America and Asia accounted for just over half of all Scania
vehicles delivered, although this was partly due to the crisis in European
economies. Scania is absent from the US market – according to the company,
customer demands there are notably different. Total sales in 2010 were MSEK
78,168 and continued growth during the first half of 2011 indicated a strong
comeback from a drastic downturn in 2007 and 2008. In the autumn of 2011,
however, renewed doubts arose about economic developments in Europe.
Milestones in this development have been modularisation and methods control.
As early as 1940, Scania began its quest for a limited set of components that could
be combined in as many ways as possible, in order to satisfy customer requirements
yet retain economies of scale in development, production and service. It is a global
system, enabling product differentiation in each market. It is closely linked to
Scania’s Production System (SPS), which controls activities through methods
rather than financial targets. SPS evolved through contacts with Toyota and applies
globally to all production and improvement efforts. Standardised procedures and
the concept of “takt” – the normalised pace of activities – are central to SPS, as are
zero-errors, just-in-time based on Kanban cards, and constant improvements.
Anjou (2008), whose extensive study of Scania’s development covers the years
1992–2006, concluded that this period was characterised by:
• Increasing environmental uncertainty
• Recognition of an increasing potential for synergies, and their realisation
• Increasing differentiation
• Increasing technological flexibility and complexity.
In spite of business cycles, these were years when Scania managed to predict
demand fairly accurately. This changed in 2008, when orders were cancelled and
Scania had to reduce production drastically. However, in Södertälje the cutback
mainly took the form of everyone’s – including top managers – taking 1 day per
week off, and workers’ spending a few days per week developing their skills. In our
interviews, one controller called it a totally new experience for Scania to have to
adapt to market conditions in this way.
Anjou found increasing uncertainty in Scania’s business environment towards
the end of the period covered in her study (2006), but viewed in light of 2008, this
uncertainty must now seem highly relative. Compared to most other businesses,
Scania was characterised by stable growth over more than half a century, with only
some increase in uncertainty in the early 2000s. It was then taken by surprise – like
many other firms – by the downturn in 2008, but managed to handle it quite well.
Following the downturn, it is generally perceived that Scania is back on track. Its
major uncertainties now have to do with the intentions of Volkswagen, which
became majority owner in 2008. But that is outside the scope of this chapter.
4.3.2 Strategy and Control at Scania: Organically Evolved

Coherence?
This section traces the development of management control at Scania during the
last two decades, and in particular how control has reflected and contributed to its
strategic focus. First, the conclusions of Anjou (2008) concerning the period
1992–2006 are summarised. Then, evidence from interviews in 2009 and 2011
with controllers at Scania is reported. The following sections focus on the far-
reaching integration of strategy and methods that is deeply rooted in Scania’s
management control. Some “themes” in Scania’s control, based on both Anjou
and the interviews, are suggested in an attempt to capture what may set Scania’s
experience apart from that of most other firms. Finally, I discuss how different
controls in Scania have related to each other during the period under study.
Throughout, the focus of interest will be on how Scania’s very consistent
strategy and leadership philosophy, with its scepticism towards quantitative targets,
has impacted its control practices. My first contacts with controllers at fairly high
levels in Scania date back several decades, and they have constantly described their
tasks as extensive and important. This may seem surprising to those who equate the
work of control with checking the achievement of quantitative targets, which
Scania claims not to use, or controlling through financial metrics, as Scania’s
methods-based control relies heavily on other types of metrics. So what control
practices have evolved at Scania? What can its stable development over a long
period teach us about strategic control, now that “control mix” and “control
package” are seen as likely developments in the literature on control?
Control at Scania 1992–2006: General Characteristics

In comparing 1992 and 2006, the starting and end point of her longitudinal study,
Anjou (2008) found very little change and characterised Scania’s control in both
years as in Table 4.1.
As can be seen from Table 4.1, Anjou found a distinction between Scania in
1992 and 2006 only in regard to production control concept. This does not mean
that there was no change, but only that the control characteristics as described by
the model remained the same. For instance, Anjou underlines that the focus on
productivity increased throughout this period. The number of vehicles produced per
employee rose from 2.7 in 1990 to 6.4 in 2006. Batch sizes decreased, sometimes to
just one. Deviations from standards were used for learning about how to avoid
errors and increase flexibility, partly through increased global interchange of parts.
But these changes were gradual and continuous, and in line with Scania’s philoso-
phy of constant improvements. Thus, there was no radical change, except for
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Table 4.1 Control at Scania in 1992 and 2006 (Anjou 2008, p. 139, translated)
Components Variables investigated Characterised as
Management control Intensity of monitoring Tight and loose
Type of information used Monetary and non-monetary
Time perspective Long-term and short-term
Production control Type of information used Monetary and non-monetary
Capacity and planning strategy Track/Level
Customer order decoupling point Assembly to order
Control concept MRP (1992); JIT (2006)
production control concept, in the characterisation reported in the right-hand

column of Table 4.1. This is different in comparison to some of the firms described
in this book, which have changed to a much greater extent over the years.
Let us now look more closely at some of the variables in the table. Anjou
identified Scania’s strategy as a combination of differentiation and cost leadership.
This necessitates a focus on improving efficiency and elimination of activities
which do not add value (waste). She links this to the use of both non-monetary
metrics (for quality) and monetary ones (for cost).
According to Anjou, the timeframe of Scania’s management control was both
long- and short-term. This is explained by its efforts to exploit activity sharing and
at the same time attain flexibility. Anjou refers to production planning as “track/
level”, meaning that capacity is planned for expected demand, while still seeking to
maintain level capacity utilisation. Modularisation allows customised products
which are tailor-made, yet with relatively short lead times and reasonable
economies of scale.
The one radical difference between 1992 and 2006 in Anjou’s table is that during
the period under study Scania introduced Kanbans – a “pull” system (JIT: Just in
Time) rather than the “push” system (MRP: Material Requirements Planning) used
by Scania until about 1996. This was possible because of a flexible workforce,
which in turn was a consequence of good labour relations leading to union accep-
tance of some temporary employments and flexible working hours.
Table 4.1 indicates a subtle combination of controls – tight and loose, monetary
and non-monetary etc. Anjou found that this was achieved through integration of
most types of planning, made possible largely by what she terms ‘crossfunctional
knowledge’ and a ‘meeting culture’:
The reason is that one and the same employee can take part in a number of different
interfunctional meetings concerning Scania’s planning and follow-up. For instance, an
employee can take part both in planning meetings concerning production and in follow-
up meetings on finance. This explicit meeting culture contributes to an informal transfer of
knowledge between the different subsystems. The crossfunctional knowledge has thus
facilitated the creation of integrated control at Scania during the period under study
[1992–2006].
(Anjou 2008, p. 143, translated)
Scania’s control culture appears to have evolved steadily over an unusually long
period. Financial controls were not perceived as a world apart, as both controllers
and many other employees often met in situations where costs were discussed
together with production issues. With many working for a long time at Scania,
“crossfunctional knowledge” encouraged an integration of controls that in other
corporations are perceived as separate. It also meant that controllers at Scania do
not focus exclusively on financials.
Control at Scania in 2011

In September 2009, with business improving after the downturn, I conducted
interviews with two leading members of Group Reporting and Control at Scania,
and in May 2011 I again met with one of them. The intention was to get an update
concerning control at Scania, rather than investigate it in depth.
Many leading executives at Scania believe that developments in recent years
have shaken up attitudes and mindsets in a way that was positive for the future.
Balance sheets, cashflow and the importance of the credit market are now apparent
to everyone. Formerly they were to some extent taken for granted in an engineering-
dominated culture. And forecasting continued to work fairly well throughout this
period, even though my informants admitted surprise that the loss of sales was so
great.
Accountants (controllers)3 have strengthened their positions over the past 15 or
20 years. Engineers predominate at Scania but are willing to listen to finance
experts as long as these have their numbers in good order.
You earn the right to speak through knowledge and showing interest – then you can be a
driving force. A super accountant is not necessarily a good controller. You need to be able
to probe where it hurts.
(Controller)
The controller interviewed found it important that accounting and management

control are linked, and that controllers have a solid foundation in accounting. But
according to him, control includes much more than finance. Now controllers are
much involved in strategy. How much controllers are engaged in issues outside
finance and accounting depends on a controller’s individual qualities, he stated. The
question is, ‘Are you prepared to talk about days and lead-times rather than cost?’
About 10 years ago, with the aid of consultants, Scania introduced scorecards –
although the term is not widely used at Scania – with three financial targets as well as
targets for capacity utilisation, absenteeism etc. Now headquarters no longer require
that these should be reported, though they exist and are used throughout Scania. Thus,
controllers no longer work on these aspects, either, and they do not seek to coordinate
the provision of information. Today no one owns the scorecard process, and the
person interviewed felt that this might be a disadvantage as it could need updating.
In fact, corporate follow-up in Scania is fairly simple – there is no business
intelligence application and no monitoring of customer satisfaction, and reporting
mainly concerns basic financial metrics. Monitoring numbers locally in production
3
The persons interviewed used the Swedish term “ekonom”.
94 N.-G. Olve
plants and market companies is regarded as much more important and there is talk
of ‘coordinated independence.’ In addition to a small corporate control staff, there
are controllers in plants who ‘take part in the match.’ In the interviews, this was
described as a ‘strongly decentralised network of fairly numerous controllers.’
In local units, the primary controls are methods and values: that is, an emphasis
on drivers. ‘Instead of targets we are interested in deviations and this shapes our
way of controlling. We always want to improve!’ Apart from unit costs, structural
faults are targeted.
Budgets do not fit into this way of thinking. They are seen as a poor tool for
control which encourages wrong behaviours, gaming etc. Instead, the focus is on
deviations – ‘loving deviations’ which you can learn from. This process has been
fairly constant since 1996. Top management at Scania visited Toyota in the US in
1995 and realized that it was feasible to become twice as good through adopting
their ideas of continuous change. It fitted well with Scania’s strategy and has been
practised ever since. But my informants did not rule out the possibility that a
revision might be needed now – ‘maybe some control through quantitative targets
would be beneficial?’ Still, such targets should then be based on methods, rather
than just imposed as standardised numbers.
Values are seen as an important part of control. Decentralised responsibility at
Scania is largely about values. They are stressed in internal communication and
presented in phrases that are well-known to everyone at the company: products
have to provide customers with long-term profitability; employees must be
respected; loyalty and an expectation that everyone will contribute; elimination of
waste; flexible production; R&D must be conducted close to customers.
Being successful and stressing control by values may have made Scania less
agile in adapting to the crisis, but the controllers came back repeatedly to the
benefits they brought. Desirable behaviours are built into the control that is
exercised through methods and values. ‘We rarely talk about the financial aspect.
But you must be able to explain down into the organization, break down share-
holder value and explain why investments need to be profitable.’ Non-financial
aspects also need to be taken into account. Controllers may for instance contribute
in discussions about structure: which activities exist, and where.
Control differs between production (“the industrial side”) and marketing (“the
commercial side”). Technology dominates thinking in development and produc-
tion, while in market companies everyone lives near customers.4 Apart from
strategy, coordination between the two is rather limited. The “commercial side” –
Scania’s sales companies around the globe – buys the products they need without
much coordination from corporate headquarters, which is a strategic choice.
Because products are customised based on the module system, production is
initiated only when there is a customer order. Compared to firms with more
coordination between production and sales, this results in more fluctuations in
production, but it is a way of encouraging adaptation to customer wants.
4
Both Anjou’s study and my interviews focus “the industrial side,” so the present chapter can only
provide limited information on “the commercial side.”
The controllers say that production has to live with this uncertainty, which explains
the stress on flexibility.
Control in “commercial” includes quantitative targets for sales. But here also,
there is an equivalent to the stress on methods on the “industrial side”: in the service
organization, which is an important part of “commercial”, control is based on the
“Scania Retail System”. This resembles SPS in the way behaviour is guided by
principles and methods, which in turn are determined by a set of overarching value
statements.
The values guiding Scania, on both its “industrial” and “commercial side”,
reflect a strategy that from the controllers’ viewpoint can be described as follows:
If Scania always delivers optimal economy for its customers it can charge
premium prices. ‘We tell them not to run after volume. We don’t mind telling
people our prices are high. It signals pride in our product. We stress quality and
service instead.’
A truck’s optimal economy has four core components: (1) low fuel consumption;
(2) high durability; (3) high up-time5 through (4) easy access to rapid service.
Among these, fuel consumption and durability become goals for production
(“industrial”), and up-time and price level for marketing (“commercial”). From
these, objectives for operations and functions such as purchasing are derived. This
is not a mathematical exercise of setting quantitative targets, but a call for continu-
ous improvement, directed towards the values which are communicated down into
the organization.
We have a high level of trust that employees will do as managers say, that our strategies are
actually carried out. This is why the annual strategy conference is important. Strategies
change gradually rather than through revolutions. Being a one-product firm also means that
top management know the business intimately and are trusted. And there is a lot of
transparency.
(Controller)
It can be seen that Scania over the years has arrived at a fairly simple message
that is communicated to many employees, not just managers. Several years ago, a
leading controller who had been asked to explain Scania’s control practices at a
conference started his speech by displaying a drawing of a middle-aged, heavy-set
man looking very sceptical and critical:
We show this picture to employees telling them that this is our customer: someone buying
and driving a Scania truck. We then ask them to consider if he would like what they are
doing now, and to pay for it. Does it provide value for his money?
Many Scania customers operate their trucks themselves, and the emphasis on
unbeatable operating economy is something Scania employees can envisage and
identify with. Values thus combine, with continuous improvements as an important
message.
5
The time a truck can be used and is not “down” for repairs and service. See Anjou (2008, p. 91).
96 N.-G. Olve
4.3.3 A Closer Look: Strategy, Operating Practices and Control at

Scania
Scania’s strategy and brand identity have remained remarkably stable. The
company’s offerings have remained targeted at a premium segment throughout its
modern history, unlike several other large truck makers, such as its Swedish
compatriot Volvo which also makes smaller trucks, and carries the Mack and
Renault brands in addition to Volvo. As mentioned in the previous paragraphs,
Scania’s strategic logic is geared to satisfying the needs of truck owners who often
drive their own vehicles or otherwise have a strong personal interest in their
performance and economy. Although Scania is an engineer-driven firm, ‘customers
first’ is a strong element in its culture.
As also mentioned, the view that this should be achieved through modularisation
can be traced back to 1940. Scania’s success has rested on the fit between several
mutually reinforcing themes. They have had time to mature, aided by low turnover
of management and employees. This long-term focus extends to customer relations.
Anjou describes how many customers are loyal to Scania:
Trucks have a life-span of about ten years. A truck on average has two owners and is then
scrapped. Timing of the next purchase may vary by one or two years. This makes it possible
for Scania to make long-term forecasts, and the company predicts future sales on a ten-year
basis. One more reason why it is possible to make ten-year forecasts is that Scania,
according to respondents, is a company with a strong focus on its core activity, i.e. truck
making. Respondents often refer to Scania as a “one-product firm”, as all components for
busses and marine engines are based on components from truck production.6 Respondents
stated that it would have been even more difficult to forecast demand if Scania had
diversified business units in different industries.
Anjou tells us that Scania’s long-term forecasts have proved more accurate than
short-term ones: repeat purchases are fairly certain, but their timing is not. This
seems to fit with the company’s experience of the business downturn in 2008 and
2009. Truck owners postponed renewing their fleet, but have since started coming
back.
The reasons for customer loyalty have to do mainly with quality and durability –
the truck’s longevity and up-time. The service network is an important factor in
this, as customers are assured rapid service. Truck-owners weigh operating costs
against the cost for operating problems, i.e. the cost of repairs and the opportunity
cost of foregone business during down-time. Scania’s products can be customised
and have good fuel economy, in both ways leading to low total cost of ownership.
6
According to my interviews, ‘all components’ may be a slight exaggeration. There is however a
very high degree of component commonality, as components are optimised for the long-haulage
segment.
The ability to predict sales has been somewhat less in newer markets such as
Latin America, where Scania has a strong presence and political decisions and
currency changes play a large role. Still, up till the recent crisis forecasts were
accurate enough to form the basis for adjusting “takt” (cf. above). As we saw in
Table 4.1, Anjou classified Scania’s production philosophy in recent years as just-
in-time, because production is initiated by customer orders. She also mentions that
this is ‘not entirely accurate,’ as Scania’s suppliers seem to produce components
based on forecasts rather than customer orders7:
[Scania’s] suppliers have “forecast orders” and know more or less what will be ordered.
Only when an order has been actually received, however, will supplies be sent. For Scania
to deliver on time, its suppliers must be reliable. They are obligated to supply on time and
therefore often have buffers. Some components formerly made by Scania are now made by
suppliers. A large share of Scania’s buffers has thus been shifted from Scania to its
suppliers. As Scania trucks start being produced only when the customer has placed an
order, and Scania has minimal buffers of finished components, the initial impression might
be that its customer-order point should be classified as “manufacturing to order.” But
Scania’s modular system enables it to produce a truck from a number of principal
components. We therefore classify the customer-order point as “assembly to order.”
(Anjou 2008, pp. 129–130, translated)
Truck customers “design” their orders by answering a set of about 150

questions, many with numerous possible responses. These requirements and
technical possibilities determine the customer-specific vehicle which is to be
manufactured.
Modularisation is at the heart of this entire process of creating a large number of
possible combinations with as few components as possible. It is applied globally
and makes it possible to satisfy the various needs and tastes of different markets. It
would simply not be feasible if the range of trucks also included smaller vehicles,
and the busses and engines offered by Scania must be possible to manufacture using
modified truck components. In 2000, 85 % of components for trucks and busses
were shared (Anjou 2008, p. 87), but according to my informants this proportion
may have decreased since then.
Component manufacture has been concentrated geographically to benefit from
local expert knowledge and reduce transport costs. Development of components
also takes place in the same location in order to encourage cooperation with
production (Anjou 2008, p. 90).
The Toyota-inspired SPS fits well with this arrangement. The ideal is that
production flows are “smoothed out,” as disruptions often cause problems. There
should be no buffers and no stops, with the whole production chain “takted”
(adjusted to a normalized pace) and possible to inspect visually, making it easier
to discover deviations. Production has been split into 10-minutes segments, making
it possible to trace deviations to employees (Anjou 2008, p. 128). Cost efficiency is
7
This should be compared with Chap. 7 in this book.
98 N.-G. Olve
promoted largely through values such as elimination of waste. There is a constant

effort to find and eliminate unnecessary work, moves, transports and inventories.
Simple metrics such as number of trucks per employee, together with educational
visits to other units encourage improvements.
4.3.4 Themes in Scania’s Control
For control purposes, Scania’s strategy and production are an uncommonly

integrated and stable basis. By now deeply engrained in the minds of everyone,
they constitute in themselves a kind of control which does not require intervention
by senior management or controllers. This sets Scania apart from most other
corporations. From Anjou’s study and my interviews three themes in particular
emerge as explanations for this difference.
Cross-Functional and Cross-Echelon Meetings and Long-Term In-House

Careers
Anjou (2008, p. 87) describes how many leading executives spent their entire
careers at Scania, starting out in a production plant or marketing unit and still
visiting operating units frequently to keep in touch. Scania’s culture is dominated
by engineers and hands-on thinking. Cross-functional meetings spread knowledge
about economic and production-oriented matters. Anjou (2008, pp. 87–88) quotes
one such executive who says:
Leading executives know by heart the cost of a truck, its profit margin and revenue. This
simplifies communication between finance and production. In discussing results everyone
knows what a deviation from forecast will lead to.
As quoted earlier, she talks about Scania’s ‘meeting culture,’ where people from
finance and production, both corporate and functional units, come together to
discuss current developments without separating financial and production controls.
Job rotation and alternative career paths for instance enable logistics experts to
work for a time in finance. Geographically decentralising control staff has also
contributed to a shared language for all executives (pp. 105–106).
Integration Between Production and Financial Controls, with Emphasis

on Non-financial Metrics
Starting with the corporate strategy, there is less emphasis on financial metrics than
in other similar firms. While these metrics are reported as part of management
control, we have seen that financial targets and budgets play little or no role in
influencing activities. Rather, management trusts methods and learning from
deviations to produce results, and when this works financial numbers should only
confirm what is already known from non-financial data.
Both Anjou and the controllers whom I interviewed reported frequent meetings
involving many employees where production and finance metrics were discussed
jointly, adding that controllers should ‘earn the right’ to express views in
non-financial discussions. Profitability is regarded as the outcome of doing things

right – i.e. in accordance with strategy and SPS. The emphasis on continuous
improvements encourages on-going comparisons between units and with past
achievements in production metrics and costs, although quantitative (e.g. financial)
targets – as discussed by the controllers above – are not really part of Scania
leadership philosophy.
Yet, financial numbers are used extensively for forward-looking purposes.
Financial scenarios are used, as are quarterly rolling forecasts. Requests for capital
investments can be made each quarter, and these obviously require financial
estimates. Cost calculations and “delivery value” (target cost of a product at
delivery) play an important role. Most key numbers used for control, however,
are non-financial.
Anjou investigated key numbers and found that most were unchanged between
1992 and 2006. Ten to fifteen had been decided by the management team in
Production & Procurement (“the industrial side”) of Scania, three quarters of
them non-monetary. The latter were considered more accurate and pedagogical
(Anjou 2008, p. 120). Precision in delivery is a prime metric and is displayed on
computer screens and information boards.
As mentioned earlier, the numbers are not called a scorecard at the corporate
level, though production units sometimes refer to them by that name. They are
divided into four focus areas: Personnel, Quality, Delivery and Cost. Under Quality,
deviations are the primary focus of attention.
Employees receive a bonus if they meet targets for three metrics: number of
trucks produced per employee, direct run (products which do not require
adjustments), and resolved deviations. The targets here are seen as proof that
methods are followed, rather than objectives as such.
Leading executives receive a bonus through another system, which is linked to
results:
[. . .] in the end it is always the financial result that counts. Leading executives are presumed
to be in the best position to influence this and are therefore evaluated on their ability to
improve it. To achieve a good financial result, however, employees need to follow the work
methods devised by Scania and understand how their work can result in higher profitability
for the Scania group. This is why they are evaluated based on non-monetary targets aligned
with key metrics that they can follow on a daily basis.
Top management (the executive board) thus focus also on improvements from
the previous year, rather than on budgeted targets as in most other corporations.
Although they receive rewards linked to finances, the connection with methods and
achievements measured in non-monetary terms should be obvious from the exten-
sive use of such metrics, and the frequent discussions about both types of metrics
together.
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Decisions on Volumes etc. Cascaded from Strategic Updates

Each year, Scania’s top executives gather for a 2-day meeting. The format and
timing has differed. Anjou describes how 350 people used to convene each Novem-
ber. They were then expected to convey strategic knowledge from these meetings to
their subordinates. Following the meeting, an annual strategic plan called Strategic
update was published. It included overarching strategies, principles and key
metrics, and it served as the point of departure for management control. Although
it should not contain any surprises, the emphasis could be different in different
years. For instance, in one year it targeted reduction of capital needs through shorter
lead times. This led to the introduction by the controller staff of a new key metric,
capital employed in inventories, which was then monitored in all production units.
Such change induced by a Strategic update could occur as soon as the next quarter
(Anjou 2008, p. 109).
A recent meeting was postponed until May, rather than being held in November,
because the latest Strategic update was still considered valid. To follow a prescribed
annual pattern, with a new meeting and a new update, would be considered unwise:
‘if it can be valid for more than 1 year, we should communicate and confirm that
rather than confuse through changes.’
The cascading of Strategic updates is somewhat different in different production
units, but essentially it means that strategies and financial scenarios for the next few
years are reflected in capacity and investment plans, and then in production plans.
Budgets were abolished in 1997 and replaced by rolling forecasts for the next four
quarters. They are followed up through crossfunctional meetings where deviations
are explained.
As forecasts contain the same parameters as Scania’s profit-and-loss and balance reports
these meetings also prepare for accounting reports. [. . .] Employees who report deviations
have often known of them in advance, and tell about their actions to correct them right
when they are reported. Rarely are deviations reported to group finance, as most are dealt
with at the functional level. Only major deviations are reported to the corporate level. The
occurrence of deviations is not serious, but deviations without remedial action are. When
deviations occur they are discussed afterwards in a smaller group. Forecasts are used
primarily to estimate volumes.
Replacing budgets with forecasts was also linked to the new stress on methods
(SPS). ‘Loving deviations’ and reacting to them would be hard if life were still
dominated by meeting annual budgets. Knowledge about how actions impact
financial outcomes is claimed to have increased, and quarterly reviews mean that
managers are no longer tempted to cover up or undertake actions just to stay within
the budget (Anjou 2008, p. 117).
For the product level, intended production cost is called “delivery value” and is a
target cost derived through benchmarking against competitors and estimating
customers’ willingness to pay. It should generally be unchanged during the year
and is a point of departure for costing. In all of this, method-based controls are
obviously essential.
4.3.5 How Different Controls Interrelate
Control through values and culture is often seen as an alternative to (or substitute
for) more traditional controls based on financial targets. Although budgets have
long been replaced by quarterly forecasts, financial metrics obviously still play a
part in Scania’s control. What evidence do we find in Scania about the relationship
between different modes of control: do they reinforce each other; are they used for
different purposes, etc?
In discussing the integration of production control and financial control above,
we found that the interplay between them is firmly based on the strategic logic
described earlier. Methods and values, especially continuous improvement, are
monitored through metrics which are largely non-financial. The reasoning behind
this, however – indeed, the strategic logic itself – is that financial success will come
from adherence to these principles. This closely resembles the logic advocated by
proponents of strategy maps and scorecards, where improvements in the internal
process perspective, for example, are expected to “drive” better performance in the
customer perspective and ultimately enhance financial performance (cf. Nilsson
et al. 2011). Scania has integrated similar thinking into its focus on methods and
communicates it through a combination of non-financial and financial data. In other
corporations this endeavour has often turned into a massive system of formalised
scorecards and extensive reporting of performance data, but at Scania it is partly
decentralised and seems largely to be carried out by the controllers who are
dispersed throughout the organization. Methods and values are essential for a
type of control that stresses decentralisation.
Malmi and Brown (2008) call traditional controls (like using budgets and
rewarding those who achieve pre-set targets) ‘cybernetic,’ implying that they
involve reaching and maintaining standards set by top management. Simons’
(1995) term ‘interactive controls’ connotes a situation where top management
does not necessarily have a priori knowledge to set targets or determine standards
for behaviour, but need interaction with lower echelons in the organization to arrive
at them. An interesting aspect of Scania’s use of controls is encouraging improve-
ment and ‘loving deviations’. Local management and employees should continu-
ously seek improvement opportunities on their own, rather than wait for top
management or corporate control staff to set targets. Still, “delivery value”
represents a kind of target. Scania’s control is cybernetic in the sense that people
at all levels are expected to react to information from markets and production, but
the aim is not to maintain a preset level. Rather it could be described as constant
improvement and focus on customer- and competition-derived needs and
opportunities.
As we saw in the table above, Anjou found only small changes in Scania’s
control during the 15-year period of her study. In that period, the fact that so many
executives and employees possessed and shared in-depth crossfunctional knowl-
edge contributed to creating integrated control, in the sense that this term is used by
Nilsson and Rapp (2005). There were, however, some moderate changes in control
between 1992 and 2006 (Anjou 2008, p. 143) These were:
102 N.-G. Olve
• Looser control
• More non-monetary metrics
• Shorter time perspective
• A move from material-requirements planning to just-in-time.
During the period, controller positions were created in production units, further
integrating financial and production control. Abolishing budgets and instead
stressing forecasts had a similar impact. It meant looser control, coupled with
even greater emphasis on differentiated product offerings.
More frequent follow-up of both monetary and non-monetary key metrics provides
employees in finance and production with more opportunities to talk about how numbers
develop. Following up quality more frequently, and introducing a larger number of non-
monetary metrics, support increasing differentiation in the business strategy. Intensified
follow-up of key metrics also helps Scania to eliminate activities that do not add value, an
important capability when combining differentiation with cost effectiveness.
Metrics thus play an important part, but many of them remain at the organi-
zational level where decentralised action should be taken. There is a strong
cultural component in how they are expected to lead to understanding and
action, rather than just motivate or trigger corrective behaviour. Hence, the use
of metrics at Scania cannot really be regarded as “cybernetic” (Malmi and
Brown 2008). Rather, it is meant to create an engrained culture extending across
units. And controllers deal with all kinds of data, not just financial. As metrics
are rooted in a strategy which is deeply engrained in Scania, they communicate
and reinforce values.
Much of this seems to be made possible by low turnover of key managers at all
levels, and by avoidance of major structural change. Scania management has
resisted suggestions for mergers or large-scale acquisitions. Volkswagen, the
majority owner since 2008 and with a controlling interest in MAN as well, may
eventually bring about greater changes in Scania. But for now, different kinds of
metrics seem to be regarded more as tools for communicating values and a shared
culture, based on customer orientation and continuous improvement, than top-down
controls. This is the case in spite of the existence, as reported above, of bonuses.
Only leading executives are rewarded for financial results, whereas in production,
rewards are based on a few selected metrics derived from Scania’s long-engrained
strategy.

Scania seems to be an unusually well-developed and successful example of
integrated control. Financial numbers are obviously important as the final
objective, but the majority of management decisions are guided by a mixture
of culture, methods, information sharing through meetings, non-financial
metrics and rewards based on them. These are used in a coherent way, and the
mechanisms are complementary rather than used in isolation (cf. Malmi and
Brown 2008). They are based on strategy, and through continual learning they
are also used to update strategy.
Early in this chapter, Nilsson et al. (2011) triple of metrics–decisions–respon-
sibilities was introduced. Scania’s control, as described in this chapter, can quite
easily be interpreted in these terms. On the “industrial side,” different types of
control are interrelated, and executives do not seem to experience any clear-cut
boundaries between different types of control: financial (accounting-based)
control or management control that uses other types of metrics, production
control, or more “cultural” forms of control. Controllers seem to have been
successful in gaining the credibility to “take part in the game.” The “commercial
side,” although not investigated in the present study, also seems to combine
financial controls with other measures of success.
Metrics are very consciously selected to communicate strategic priorities.
New metrics can be introduced and old ones retired if Strategic updates make it
desirable to do so. The metrics used are clearly derived from a communicable
“story” about what will make Scania successful. This story starts with the idea
that life-cycle profitability for customers should be higher if they own a Scania
truck rather than a competing brand. It can be contrasted with strategic stories in
some other firms, which start from ideas of producing financial benefits for
corporate owners, and comparisons with competing firms. Obviously these
matter at Scania as well, but the company seems to have been successful in
communicating benefits to customers as the driving force for all activities.
This points to the importance given to visualising strategy in a way that captures
the imagination of ordinary employees. Even the image of the sceptical face of an
imaginary Scania truck owner can be seen as a way of communicating in a
memorable way what is important. It is obviously not a metric in any normal
sense of the term. Yet when employees imagine his reactions, it may serve a similar
function: to guide their decisions in conformance with strategy. If this is successful,
decentralised decision-making can be practiced with confidence that it will lead to
the right actions. Metrics act as a language to convey values that are basic to Scania.
Decisions at Scania involve methods, capacity, investments and delivery
value, for example. For all of these there seems to be a coherent approach to
decision-making, where shared key metrics play an important role in structuring
motives and priorities – always based on strategy. Reacting to deviations also
belongs here. Procedures and instructions are simple and highly decentralised,
but intended to ensure that metrics receive sufficient attention when it matters –
e.g. that deviations are resolved.
Of particular importance here is the way in which decision-making is embed-
ded in methods. Having learnt from the Toyota way in the 1990s, Scania
controllers claim that if the prescribed methods and SPS are practiced correctly,
success should follow. Methods thus become a way of formulating tasks, a
concept that is central for our third concept: responsibilities.
Responsibilities are based on forecasts that are updated each quarter, and
on the structured approach to continuous improvements at all levels of
organization. Methods (in particular SPS) and living according to Scania
104 N.-G. Olve
values are rewarded with bonuses, which are linked to non-financial metrics
for most employees but to financial outcomes for senior executives. Targets
are downplayed, or at least reinterpreted as a continuous quest for
improvements. Where the tasks of an organizational unit or a specific
employee in other organizations might be expressed in terms of financial
targets (a budget), Scania controllers refer instead to following methods in
an appropriate way and thereby achieving improved performance. Non-
financial metrics may be used as evidence of such achievements before they
show up in financial terms, and both types are relevant for controllers. Among
controllers taking part in this quest for improvements, many are based locally,
out in factories and other Scania units.
Is Scania a unique case, with its patient nurturing of a coherent set of values
and practices over half a century or more? This question is obviously important
if we try to understand its implications for other firms. As noted above, manage-
ment researchers increasingly discuss how different controls are combined in a
control package. Nilsson et al. (2011) prefer the term control mix, as the
different “ingredients” of control should reinforce and react on each other.
Scania seems to provide several lessons about this:
• The benefits of consistency between different controls, and how integrated
controls may need to include cultural controls – everything that shapes
perceived responsibilities. Examples in Scania are the use of metrics that
convey values, and even a drawing showing a typical customer.
• The benefits of consistency over time. Success breeds success, and it may
seem easier not to change a winning game. But compared to many other firms,
where (new) managements are quick to change strategy and controls, it is
impressive and informative to view the deliberate pace of change at Scania.
• The benefits of a stakeholder-friendly corporate logic, when it comes to
winning employee commitment. Rather than focusing directly on shareholder
wealth or metrics derived from it, Scania employees are encouraged to benefit
truck owners – an example of behaviour that will lead in turn to rewards for
everyone at Scania.
The Scania case shows clearly that control is about communication (cf.
Nilsson et al. 2011; Simons 1995). To engage the skills and ambitions of
people, two-way communication about improvements and a “common cause”
are probably better than a cybernetic check-and-correct attitude. But in order
to reach the hearts and minds of people, each day’s communication can be
seen as a small addition to mindsets and enthusiasms which have been built
up for a long time. The three lessons about “benefits” identified above are all
linked to this cumulative aspect of Scania’s control. Is this a road to success
which is available to others, or do you need to have started on it long ago and
watched it grow slowly for decades? This is of course impossible to tell. But
it certainly requires strong leadership skills to introduce it in situations where
earlier practices were different, and to convince everyone suddenly to believe
in it and accept it.
References
(Eng: Scania’s success – The importance of strategic congruence and integrated control),
Licentiate thesis no. 1364, Linköping Studies in Science and Technology, Linköping
University.
Johnson, T., & Bröms, A. (2000). Profit beyond measure: Extraordinary results through attention
to work and people. New York: The Free Press.
Nilsson, C.-H. (1997). Strategic alliances, treat or trick? The case of Scania. International Journal
of Production Economics, 52, 147–160.
gic congruence and integrated control. Berlin: Springer.
Simon, H. A., Guetzkow, H., Kozmetsky, G., & Tyndall, G. (1954). Centralization vs. decentrali-
zation in organizing the controller’s department. New York: Controllership Foundation.
Simons, R. (1995). Levers of control: How managers use innovative control systems to drive
strategic renewal. Boston: Harvard Business School Press.
Tuomela, T.-S. (2005). The interplay of different levers of control: A case study of introducing a
new performance measurement system. Management Accounting Research, 16, 293–320.
Widener, S. K. (2007). An empirical analysis of the levers of control framework. Accounting,
www.scania.com, information retrieved during April 2011.
Changing Strategies and Control Systems
at a German Insurance Company 5
Susanna Poth
5.1 Introduction
In this chapter an excerpt from a case study of a German insurance company is

presented.1 The study covered the development of the insurance company between
1995 and 2010. As the insurance industry in Germany was de-regulated in 1994, the
chosen time frame made it possible to study how the insurance company reacted on
the market, which was changing from a protected to an open and more competitive
one. Although the market was de-regulated in 1994, it has only very slowly become
more competitive. The case study shows that even if a semi-protected, slowly
changing environment gives management some more time for reflection, a com-
pany still needs to react to changing conditions. If management hesitates too long,
there is a high risk that a company will lose its competitive advantage.
In the study the company’s reactions to changing market conditions as well as
the resulting competitive position are analysed. The analysis is supported by a
service industry framework based on the ideas of Nilsson and Rapp (2005). The
activities of the company in regard to strategy, control and organizational structure
are analysed in a holistic manner. The holistic approach permits analysis of the
interaction among different activities. Sometimes the activities strengthen each
other and thereby the company’s market position, and sometimes they counteract
each other in a way that reduces the expected benefits. The activities are analysed
on the company, business-unit (in the case company this refers to insurance-line
and individual insurance companies) and functional level (service production). The
multi-level analysis, and especially the interaction between chosen market position
and service production, provides a unique and holistic insight into the management
of a service company. With the support of the analysis model, the aim is to gain a
1
The entire case study is presented in a dissertation, with planned publication in 2013.
S. Poth (*)
e-mail: sanna.poth@gmx.de

108 S. Poth
Environment Strategic congruence Integrated control Coherent organizational

structure
Performance
Fig. 5.1 Dimensions and relationships of interest in the model for competitive advantage in
service industry
better understanding of how a company’s activities in regard to strategy, control

and organizational structure affect its competitive position.
Before turning to the case company, its reactions to the changing environment
and the resulting competitive position, the theoretical framework used in the
analysis will be briefly presented.
5.2 Strategic Congruence, Integrated Control and

Organizational Structure in Service Industry
The tentative model of Nilsson and Rapp (2005) forms the baseline for the service
industry model used in the study. As the original model is designed primarily for the
manufacturing industry, some amendments are necessary within service strategy
and service control systems in order to take service-specific aspects2 into consider-
ation. In addition to the amendments related to service theory, a further dimension
is included. Nilsson and Rapp (2005) treat the design and use of control systems in
their model as an internal administrative mechanism. Other studies have designated
the design of organizational structure as an internal administrative mechanism,
in addition to design and use of control systems, to cope with uncertainty
(Govindarajan 1988; van Veen-Dirks 2005). Given the importance of human
resources in service management, organizational structure is included as an addi-
tional internal administrative mechanism. A simplified picture of the service indus-
try model for competitive advantage is provided in Fig. 5.1.
The amendments of the analysis model will be discussed in more detail in this
section. However, the rest of the chapter can be easily understood without reading
through this theoretical part.
2
These service-specific aspects are the simultaneous nature of service production and consump-
tion, the interaction with the customer that makes it relatively difficult to standardise the output of
service, as well as the fact that service consists of activities and not physical objects (Zeithaml
et al. 1985).
5 Changing Strategies and Control Systems at a German Insurance Company 109
5.2.1 Strategic Congruence and Service Strategy
In order to explain the strategic alternatives in service industry the model of Nilsson
and Rapp is refined in regard to business strategy as well as service production
strategy. Nilsson and Rapp use Porter’s (1980) competitive strategy model in their
tentative model. There are multiple examples showing that both cost leaders and
differentiators exist in service industry, although the model has not been widely
tested empirically in service industry.3 At the same time, studies have shown that
competitive advantage based on innovative differentiation is not easy to sustain in
service industry. The reason is that service offerings are more easily copied than
physical goods (Song et al. 1999), as they cannot be protected with patents
(Edvardsson et al. 1995). Therefore, service companies tend to use marketing or
image to differentiate themselves from their competitors (Easingwood and Mahajan
1989). Especially for service companies with rather complex but standardised
service offerings, differentiation in regard to image or reputation can be a basis
for a strong competitive advantage (Barney 1991; Ennew et al. 1993). In order to
map the activities of a service organization more adequately, innovative and
marketing differentiation are explicitly taken into consideration in the analysis of
business strategy. The different strategies require other principal activities, skills
and capabilities in different environments as illustrated in Table 5.1.
The different strategies are followed by emphasising different principal
activities. This also leads to different requirements concerning service production.
Since service production is at least partially dependent on interaction with the
customers a specific service production strategy developed by Silvestro et al.
(1992) was chosen for the analysis model. Silvestro et al. (1992) integrate multiple
dimensions of operations into their service production model. They position mass
service production and professional service production as two opposites of a
continuum. Generally mass service production is oriented towards efficiency
and high volumes of more standardised service offerings, whereas professional
service production is seen as a service production strategy for handling
customised service production with a high level of customer interaction and
thereby uncertainty in the production process. In Fig. 5.2 Silvestro et al.’s service
processes are mapped with the business strategy used in the analysis model, taking
uncertainty, flexibility of the production process, level of customisation and
production volume into consideration.
3
Only three empirical tests in service industry are known to the author: Chan and Wong’s (1999)
test in an international banking centre as well as the study of O’Farrell et al. (1993) in business
service firms provided support to Porter’s typology; Kim et al. (2004), on the other hand,
concluded that in order to be successful in e-Business, cost leadership and differentiation need
to be combined. The study conducted by Miller (1988) included some service organizations but did
not discuss service industry characteristics. Fitzsimmons and Fitzsimmons (2006) conceptually
applied Porter’s typology to service industries, and Meidan and Chin (1995) used Porter’s generic
strategies to map the strategies of building societies. However, empirical tests that especially take
service characteristics into account are still limited to the above mentioned examples.
110 S. Poth
Table 5.1 Summary of characteristics of Porter’s business strategies, including environment

uncertainty (based on Porter 1980, as well as Miller 1986, 1988)
Innovative Marketing
differentiation differentiation Cost leadership
Fulfilled through Design, technology, Brand image through Efficient-scale facilities,
customer service, or marketing and customer tight overhead and cost
other attractive features intimacy control
Principal Acquire ability to charge Create brand loyalty Gain market share
activities a premium price through through marketing through aggressive
to fulfil the goal research, development expenditures, image pricing by using
of unique service management and economies of scale,
offerings and service customer relationship designing products/
process design management as a service offerings easy to
foundation for charging deliver and/or by using
a premium price state-of-the-art
production equipment
Environment Turbulent and uncertain Semi-uncertain as Stable, limited
because of difficulty in loyalty is more stable uncertainty due to
predicting demand for than differentiation predictable demand
new offerings based on innovation
Decreased uncertainty
Business
Innovation differentiation Marketing differentiation Cost leadership
Strategy
Decreased flexibility/Decreased task uncertainty

Service
Production Professional service Mass service
Strategy
Decreased customer interaction (and customisation)/Increased volume
Fig. 5.2 The relationship between business strategy typology and the service production typology
How well a company performs its principal activities depends on its valuable
resources and dynamic capabilities.4 Valuable resources and dynamic capabilities
are therefore closely connected to the value chain of Porter (1985) as well as the
service production model of Silvestro et al. (1992). Over decades, numerous
strategy researchers (Barney 2001; Grunert and Hildenbrandt 2004; Lockett et al.
2009; Mahoney and Pandian 1992; Porter 1991; Priem and Butler 2001) have
emphasised the benefits of a complementary analysis of internal resources and
capabilities in order to gain a deeper understanding of a company’s competitive
situation. Based on the aim of acquiring a detailed understanding of the case study
company and the fact that the company’s resources and capabilities are considered
important for the case study company itself, the resources and capabilities and their
development over the years are included in the analysis.
4
Resources hold a potential for leading the company possessing them to a sustained competitive
advantage provided the resources are valuable, rare, not imitable and non-sustainable (Barney
1991). Whereas the resource-based perspective is rather static, based as it is on the resources
available, capabilities enable the company to create new resources and to refresh the existing stock
of valuable resources in changing environments (Ambrosini and Bowman 2009).
5.2.2 Integrated Control and Service Control System
The dimensions used by Nilsson and Rapp (2005) in management control are rather
independent of the type of industry.5 Therefore, no adjustments at this level have
been made. However, at the functional level – that is, production control – changes
are needed. Service production differs from goods manufacturing, as discussed
above; the production control dimensions therefore need to be adjusted in order to
take service production specifics into consideration (cf. Lowry 1990, 1993; Modell
1995).6 In the design of production control systems for service industries, there is a
need to look beyond traditional narrow conceptualisations of control. For example,
process control and social controls are useful, especially as uncertainty about
means-end relationships reduces the effectiveness of traditional formal mechanisms
of control (cf. Mills 1986). Therefore, production control priority ranging between
productivity and quality orientation, as well as the amount of social controls
embedded in service production, are used as service-oriented production control
dimensions. These two dimensions are briefly introduced below.
• Production Control Priority (Productivity vs. Quality): The balance between
productivity7 and quality8 is one of the principal issues in service production
management (van Looy et al. 1998; Siferd et al. 1992). Management must set
priorities, choosing between productivity and quality, as productivity can be
increased at the expense of quality, and vice versa (Lovelock 1992; Vuorinen
et al. 1998). The question whether quality or productivity should be prioritised is
related to the market position of the company as well as the chosen strategy for
service production (Vuorinen et al. 1998).
• Social Control as Control Concept/Philosophy in Service Production: Just as
several writers (e.g. Lind 2001) have called JIT (Just in Time production) a
philosophy of management in manufacturing, so can social control be termed a
control concept in the production of service (Lowry 1993). Generally there are
two basic monitoring mechanisms available to managers in service production:
control of output and control of behaviour. The degree of uncertainty inherent in
5
The tightness of control, non-monetary vs. monetary control and the control time horizon are
used as dimensions.
6
Modell as well as Lowry include control over the service production process when discussing
management accounting.
7
The measurement of white-collar productivity has become increasingly important as the share of
knowledge workers increases. However, the debate on service productivity is still only in its
infancy (Vuorinen et al. 1998). In service industries productivity is more difficult to define and
measure (McLaughlin and Coffey 1990), not least for lack of a description of what the output
actually is. This problem is compounded by uncertainty as to whether the service unit is working at
capacity and with the required quality at the time when measurements are made.
8
Quality of service is concerned with generating customer satisfaction. Johnston (1987),
Parasuraman et al. (1985) and Grönroos (1994), just to mention a few researchers, define quality
of service in terms of customer satisfaction, that is, by the degree of fit between customer
expectations and perceptions of service.
112 S. Poth
Fig. 5.3 The relationship Decreased flexibility/Decreased task uncertainty
between service production Service

control dimensions and the Strategy
service production typology Decreased customer interaction (and customisation)/Increased volume
Quality Priority Productivity Priority

Service
Production
Control
Control of behaviour Control of output
Increased predictability/Increased standardisation of work processes
the employee’s task and the level of discretion allowed to employees in handling
uncertainty will determine the monitoring mechanisms used (Cook et al. 2002;
Mills 1986; Simons 1995). Nesheim (1990) conclude that control of behaviour is
the right form of coordination when there is low predictability (e.g. intensive
customer interaction) and high performance ambiguity (e.g. high intangibility).
Standardisation of norms and values can thus be seen as an appropriate form of
control when standardisation of work processes or control of output is not
feasible.
In Fig. 5.3 the dimensions of service production control are mapped according to
service production strategy, taking into consideration the level of predictability and
the possibility of standardising work processes.
5.2.3 Coherent Organizational Structure
As already mentioned at the beginning of the theory section, organizational struc-

ture is included as an additional internal administrative mechanism. The inclusion
is due to the importance of human resources in service production (Chase and
Bowen 1991; Gustafsson and Johnson 2003; Skaggs and Youndt 2004). The
organization of human resources, that is, the organization of work, in connection
with strategic congruence and integrated control, has so far received little attention
in research, although its influence on production management has been recognised
(cf. van Veen-Dirks 2005).
In this study organizational structure is analysed on a corporate and service-
production level, with the primary focus on the organization of work in service
production. The corporate level is included mainly in order to analyse organiza-
tional changes, the reason being that the environment in the insurance business
changed from a protected to an open and more competitive market. On this level
centralisation and the coordination of common activities are included:
• Centralisation describes the distribution of power (Galbraith 2002) by specifying
authority and accountability (Malmi and Brown 2008), that is, whether the
authority to make decisions affecting the organization is confined to higher
levels of hierarchy or not (Miller 1988). Centralised companies can be very
effective in stable environments where the demand for updated environmental
information is limited (Child and McGrath 2001). In a more complex and
unstable environment, knowledge and expertise needs to be utilised without

regard to the organizational hierarchy (Andersen 2004). Accordingly, responsi-
bility and power will be decentralized to cope with environmental uncertainty
(Child and McGrath 2001).
• Coordination of activities refers to the systems that are in place to ensure that
representatives of the various functions and organizational units meet to co-
ordinate their activities (Malmi and Brown 2008). In situations with a high
demand for flexibility and speed, the organizational structure shifts towards
horizontal collaboration among diverse groups and functions rather than vertical
chains of command (Child and McGrath 2001; Kellogg et al. 2006), which tend
to be too slow in these situations (Hitt et al. 1998).
Given that human resources are highly involved in service production, it is of
central importance to match the organization of tasks with the requirements of
service production. As a general proposition, service organizations tend to use, and
to be more effective when using, a work organization designed to match the
uncertainty arising from the level of customisation and the interaction with
customers in service production (cf. Larsson and Bowen 1989). In the analysis of
the work organization, consideration is given to the functional power of service
employees connected to the formalisation of work processes, and the specialisation
of tasks:
• Functional power refers to the amount of work-related decision-making that
employees exercise. Functional power is connected with questions of how
problems are handled and who is responsible for making decisions about
exceptions. Decisions are made within different levels of uncertainty. When
uncertainty increases, tasks cannot be standardised and formalised (Mills and
Turk 1986). As exceptions are common, the hierarchy would become overloaded
if every matter were referred upward. Therefore, a high level of functional power
is an appropriate response to increased uncertainty on the task level
(Govindarajan 1986). Conversely, routine-based production, like mass service
production, calls for simplified and standardised production procedures
(Armistead and Clark 1994) that can be formalised. There are only a few
exceptions, which can be handled by centralised decision-making (Govindarajan
1986).
• Specialisation indicates the extent to which tasks are partitioned (Heckscher
1994). In general, the greater the extent of specialisation, the more efficiently a
subtask can be performed (Heckscher 1994). However, in order to process
customers with different needs, that is, when a broad range of services or non-
standardised services are offered, employees with customer contact need to deal
with variability and cannot specialise to the point where they can only perform a
limit set of tasks.
In Fig. 5.4 the dimensions of organizational structure are mapped with environ-
mental and task uncertainty arising from the chosen business and service produc-
tion strategy.
After discussion of the changes in the model for analysis and the relationships
between the dimensions, the case study will be described in the next section.
114 S. Poth
Decreased uncertainty
Business
Innovation differentiation Marketing differentiation Cost leadership
Strategy
Decentralised power Centralised power

Company
Organization
Structure
Horizontal coordination Vertical coordination
Decreased customer interaction/Decreased task uncertainty

Service
Strategy
High level of functional power Low level of functional power
Work
Organization Low level of formalisation High level of formalisation
Structure
Low specialisation High specialisation
Fig. 5.4 The relationship between organizational structure and strategy on business and service
production level
5.3 Case Description
After describing the service specifics, the case study material will be presented in
this section. The section is organised into six parts, each devoted to a separate
theme. First the principal changes in the German insurance market between 1995
and 2010 are highlighted; then the insurance group studied is presented. In the third
part the strategic development of the company, including its resources and
capabilities, is discussed. The fourth part is dedicated to the control system and
the company-level coordination structure while the fifth is devoted to the changes in
service production resulting from the introduction of the customer and sales
channel service centre. The competitive position of the case company during the
time frame under study is presented in the last part of this section. This section,
except for the part about the German insurance market is based on the material
collected in the field study of the insurance company. The interpretation of the case
material is presented in the next section (5.4).
5.3.1 The German Insurance Market
The environment of the German insurance industry has changed substantially since
the deregulation in 1994 (Zietsch and Fürtjes 2005, p. V). Over the 15 years
following the deregulation, the environment faced by German insurance industry
has been transformed from a protective and passive market to a more competitive
and differentiated one. This transformation is a result not only of deregulation, but
also of the expanding capabilities of information technology and the intensified
price competition due to declining market growth. Changes in political and regu-
latory conditions during the reconstruction of the German welfare state have also
required considerable adaptation by German insurers. In order to achieve positive
results, internal efficiency and effectiveness are required. However, the insurance
companies have been slow to recognise the impact of these factors. Webb and
Pettigrew (1999) draw a similar conclusion concerning the UK insurance market in
1990–1999. In order to succeed, insurers need appropriate control systems and an
efficient organizational structure aligned with the chosen strategy. Because of the
change many German insurance companies have therefore initiated a process of
internal restructuring and streamlining of internal business processes in order to
remain competitive in the changing market environment (Oletzky 1998).
Taking all parameters into consideration, it can be concluded that the insurance
market in Germany has been developing towards uncertainty. However, it is still a
rather protected growth market. The challenges do not originate from outside the
market, but from the rivalry among existing insurance companies. Legislation has
been changing the competitive framework, but so far it has only posed a serious
challenge in the area of health insurance. In all other areas, the legal changes have
been limited to product mix preferences or strengthening customer rights to
transparency.
Since the financial crisis of 2008, the development started in the late 1990s has
accelerated noticeably. The days when the market was growing and allowing an
excellent return on investment are gone. The old truth that ‘market share growth
equals increased profit’ is no longer applicable as the market is stagnating and
maturing (Oletzky 1998, p. 1, translated).9 Future success is likely to stem not from
market growth, but from the development of effective strategies based on an
understanding of a more complex and competitive market. After presenting the
insurance group studied, the strategic actions taken by the company to manage
these market changes will be described.
5.3.2 The Insurance Group
As of 2011, the insurance group studied could claim 200 years of experience in the
insurance industry. In 1811 its predecessor was founded as a state agency with the
task to take care of real estate fire losses within the region. In 1995 the Saving banks
of Bavaria and Rhineland-Palatinate took over the insurance company from the
9
Similar conclusions were made by Pettigrew and Whipp (1991, p. 55). In their study they also
concluded, some years after the deregulation of the insurance market in the UK, that another truth
from the 60s needed to be abandoned; it was no longer the case that ‘profits grow in line with
market growth.’
116 S. Poth
state of Bavaria and re-organised it as a public insurer.10 In other words, when the
newly formed insurance company commenced operations in July 1995, it was not
starting from scratch. In 1995 the insurer was a conglomerate of a life insurer, a
health insurer and two old and one new non-life insurers. During the 15 years since
its foundation, the insurance group has been acquiring other insurance companies
and building up its corporate structure. The insurance group nowadays unites 16
individual companies and is the largest public insurer in Germany. With revenue
exceeding seven billion euros and 6,500 employees, it is one of the ten largest
primary insurers in Germany. With the slogan “we insure you as we would insure
ourselves,” the group is involved in life and non-life insurance, with three regional
brands – in Bavaria and the Palatinate, in Berlin and Brandenburg and in Saarland.
Additionally, the insurance group provides the common health insurance scheme of
the public insurance companies operating throughout Germany. As a “regional
insurer,” the corporate group emphasises regional competence and proximity to
customers with the objective of being the regional market leader.
The insurance group has a rather complex structure. This is partly due to the fact
that insurance companies in Germany are required by law to set up separate firms
for life, health, and non-life insurance, respectively. Moreover, three additional
points concerning structure need to be highlighted. The first is that although one of
the group companies is officially the holding company where the results of the
individual insurance companies are consolidated, it does not act as a holding
company for the individual insurance companies. Instead, corporate interests are
observed through supervisory board assignments. Thus, the members of the Bavar-
ian Board of Directors have assignments in the Supervisory Boards of the insurance
companies in the other regions. The second point is the partly introduced sub-
holding structure for the different lines of insurance. The group founded a common
holding company to ensure common management of the health insurance
companies. However, for the life and non-life insurance companies no sub-holding
structure has been set up. Instead, governing boards for German-wide operational
coordination of the life and a non-life insurance business lines were established.11
Because of the partly introduced sub-holding level, both the insurance lines and the
regional insurance companies are regarded as business units in discussions on the
strategy, control and organizational structure of the case study company. The third
point is the common Boards of Directors, an arrangement which reduces the
complexity of the group structure. All the insurance companies in a region have
the same Board of Directors. This structure was introduced at the time of establish-
ment in order to ensure common responsibility for profits and costs. This structure
was intended not only to reduce complexity, but also to facilitate coordination
within a region.
10
The insurance companies are regionally organized under public law and do not compete in each
other’s regions.
11
The governing boards do not have any decision-making power over the insurance companies,
but can only recommend decisions to be taken by the regional companies. The governing boards
will be discussed in more detail in Sect. 5.3.4 (Coordination and control system).
After presentation of the insurance company under study, the activities of the
insurance group in strategy, control and organizational structure, as well as their
interaction, will be discussed.
5.3.3 Internal Resources and Capabilities and Strategic

Development of the Insurance Group
In this part the existing resources and capabilities and their development will be
discussed before the corporate and business strategy of the insurance company.
Service production strategy, however, will not be discussed in this part, but in the
part where the introduction of the new service organization is presented.
Internal Resources and Capabilities of the Insurance Group

The insurer inherited certain valuable resources at its foundation. The Saving Banks
were already established as a sales channel, especially for life insurance. Based on
this experience, the insurance company has been able to build up multiple strong
sales channels in addition to the Saving Banks. The multiple sales channels are true
assets, as insurance is a question of sales. Especially the Saving Banks, with high
market shares in their home regions (e.g. 60 % in Bavaria/Palatinate and in Saarland
and almost a monopoly position in Brandenburg), offer huge potential for growth.
Additionally, after a long history as regional caretaker in case of fire, the corpora-
tion started their business with an excellent image of trust. The image is especially
precious, as trust has immense value in insurance, more so than price, product
features and service orientation. This caretaker role is still visible through
engagements with regional fire fighters and in climate protection.
The group’s former caretaker role and current engagements, combined with the
fact that the insurer is not classified as profit-oriented as it is not registered on the
stock market, is a valuable advantage over multinational competitors. The finance
crises strengthened the importance of this image, as people value security even
higher since the financial crises. Moreover, the new insurance group was allowed to
take over the monopoly fire insurance portfolio from the Federal State. Since the
start, the insurance company has been able to keep the majority of these contracts.
The vast portfolio provides a good balance of risks that enables the insurer to offer
favourably priced coverage to clients. As this profitable portfolio is managed
directly, without any expensive sales intermediaries, it also strengthens the
company’s cost position. Thanks to its historical role in fire insurance, the company
has also gained an expertise in that area, which is broadly recognised, also by
competitors. Aside from the sales channel, the image of trust and the fire insurance
know-how mentioned above, the regional insurance companies in Saarland and
Berlin-Brandenburg mention regional presence as an important competitive advan-
tage. With a regional presence, the company is close to regional sales channels and
customers. Additionally, with their regional responsibility, it can respond quickly to
regional demands. During the period under study, however, responsiveness to local
demands was considered to be decreasing because of the centralisation of resources
at the group level.
118 S. Poth
The Saving Banks as a sales channel, the image, the enormous inherited fire
insurance portfolio and the know-how in fire insurance are valuable resources
arising from the history of the insurance company. These resources continue to aid
the insurer in gaining a strong market position. The common opinion among persons
interviewed, however, was that the insurer was not taking full advantage of this
potential source of support. The high potential of the sales channels, especially the
Saving Banks compared to other bank assurance operations, is not viewed as fully
utilised. The image of caretaker is considered in the marketing but not in the service
processes. Also, for a long time the former monopoly fire insurance portfolio was not
managed actively or seen as offering excellent potential for cross-selling. Although
the lack of use and further exploitation of existing resources was highlighted and
considered as potential for developing the business and strengthening the company’s
market position, little real development could be observed. Initiatives in new areas
have been taken, but because of the strong emphasis on existing business models and
goals, these endeavours were backed only by limited investments and commitment.
Although valuable resources can implicitly be found in the global goals of the
insurance company, which are presented next, the group’s strategy is not explicitly
taking them and their development into account.
Strategic Development of the Insurance Group

In 1998 the insurance company identified the global goals on which the annual
planning is based. These goals are applicable to all insurance lines and insurance
companies in the insurance group. After the acquisitions of the regional insurers,
the global goals were supplemented by more insurance-group-oriented goals, like
market position in the regions and the regional insurance model. Although the
global goals have not changed over the years, the description of them has been
altered. The global goals and their descriptions are presented in Table 5.2. In 2008
the global goals were renamed corporate strategy, which was presented to and
approved by the supervisory boards.
Although the company is positioned as a service insurer, considerable energy is
put into monitoring the development of costs. During the years of high growth, the
cost situation received little focus. However, since market growth stagnated almost
to zero, the cost situation has been getting more attention. The pressure for cost
saving has also been continuously increasing since 1999/2000, partly because of the
volatile capital market. As a consequence of this volatility, insurers in general can
no longer assume that return on capital can compensate for increasing costs. The
mounting cost pressure within the insurance company is also due to the general aim
of the German insurance market to lower the cost level. This pressure to lower costs
has caused reluctance to invest in quality-enhancing projects that bring long-term
benefits. ‘Costs are evaluated in figures whereas market-orientation projects are
about hope.’12 It has therefore become increasingly difficult to get top management
commitment for a project based on hope for a better future.
12
Comment by the manager responsible for evaluation of project ideas.
Table 5.2 Global goals as baseline for corporate strategy

Strategy/goal aspect Description
Profitability (since 1998) The goal is to ensure increasing profitability in all insurance
lines and all insurance companies belonging to the Insurance
Group. Profitability should be based on underwriting results as
well as on interest from investments. Until 2006 it was
explicitly stated that the corporate Board of Directors set the
profitability goals for all companies in the insurance group. In
2007 the importance of appropriate risk management was
added to this goal
Customer and sales The global goal is to achieve top values for customer and sales
orientation (since 1998) orientation. It is seen as a guideline for sales as well as
administrative and supporting functions. The customer- and
sales-partner satisfaction surveys are seen as a measure for
continuous improvement. In 2009 the goal was supplemented
by a group-wide customer view. Based on a comprehensive
group-wide customer view, the insurer together with its sales
partners should offer customers superior service, competence
and commitment
Cost position (since 1998) The goal is to maintain a cost-leadership position among
service insurers. In the annual planning, premium growth
must exceed cost growth at the corporate, insurance-line and
company levels. Until 2006, Corporate Control had the task of
monitoring cost development. In 2006 the centralisation of
tasks in regions with a low cost level was added to the
corporate goal. In 2009 the goal was supplemented by the
importance of standardisation and superior quality in order to
reach a good cost position
Market position (introduced The aim is to attain a leading market position in all regions by
after the acquisitions) exceeding the average market growth. This growth is to be
enabled by offering customers market-oriented and profitable
products and also through acquisitions, mainly in Germany.
Since 2009 the importance of keeping the existing profitable
insurance portfolio is a part of the market-position goal
Regional insurance (introduced The insurance company follows a regional business model in
after the acquisitions) which individual regional insurance companies operate with
their own brands in serving their local markets. By
highlighting the region, the insurer seeks to differentiate itself
from national competitors and to stress proximity to
customers and local sales partners. By being local the regional
companies can offer insurance products that meet local
demands. In 2009 this global goal was supplemented by a
sentence highlighting the corporate role and the benefit of
sharing central functions
Despite the strong influence of the corporate level on the insurance lines and the
regions, the corporation strongly believes in a regional insurance model as
described in Table 5.2. The regional business model, however, leaves some issues
open as it is broadly formulated and can be interpreted in many different ways
concerning regional responsibility versus central coordination in order to attain
synergies. The concept lacks clarity in regard to responsibilities, interfaces and
120 S. Poth
rules of cooperation among regional insurance companies. After the acquisitions

the corporate goals were introduced in the regional insurance companies. Expected
growth and cost position were formulated as short-term and long-term financial
goals. How to reach these goals was delegated to the regional companies. With the
high pressure to reach corporate goals, especially for growth, companies tended to
react opportunistically rather than strategically. Together with the fact that cooper-
ation among group companies is not clearly regulated, this has been contributing to
a high level of uncertainty about rules of business within and among the companies
belonging to the group.
The insurer has not changed the global goals since they were formulated, and it
plans to keep them as long as they “function”. It was highlighted that being a
regional market leader, offering multiple insurance lines, does not allow much
change. Throughout the interviews, there was a clear consensus that the main
corporate goal has long been, and still is, to achieve growth. Even after the financial
crises the commitment to grow more than the market average was kept. The stated
goal for an insurance company is to increase its revenue, as lost market share means
that a company is no longer competitive. Growth is also considered necessary in
order to control cost rates and to ensure more assets under management; also, as
sales channels are motivated by growth. The bottom line is that growth is needed to
finance the group’s large and complex structure. Long-term growth is said to be
valued more highly than short-term return on capital. At the same time, long-term
investments have been evaluated against short term cost targets after strict cost-
savings targets were introduced in response to the financial crises.
Until 2007 the insurer did not have a strategy process, but it had a very well-
functioning planning process with goals on the corporate level and action plans
prepared by the insurance companies describing how to reach these goals. In 2007
the insurance lines and supporting functions were given the tasks of developing
their business or functional strategies based on the corporate strategic goals. The
aim was to ensure that the insurance lines and supporting functions were aiming in
the same direction. The strategies were finalised in 2009. The resulting business and
functional strategies are still closely connected with the planning process as the
strategies developed are viewed primarily as an aid for identification of growth
areas and fields for cost saving. Although the company has intensified strategy-
related activities with the introduction of the annual strategy process, on-going
strategic development is still not considered a primary task of the Board of
Directors. Given this lack of top management engagement, differing interpretations
of the global goals and the priorities among them are common among the business
lines and the insurance companies. Despite the lack of a common interpretation, top
management is of the opinion that the company is not badly positioned compared to
other insurance companies in regard to its strategic activities.
During the interviews it was emphasised that thanks to the stable corporate
management with few changes among the board members, the company has been
acting consistently during its 15 years on the market. It was also pointed out,
however, that a stable management might not be optimal for dealing with the
changing environment. There was a perception, especially among mid-management,
Table 5.3 Aspects of corporate and business strategy

Aspects of strategy Around 1995 Towards 2010
Valuable resources Multiple and inherited at Resources not actively developed
and sustainable the formation of the group further nor explicitly connected to
capabilities strategic development
Corporate goals Growth Growth combined with cost
efficiency due to general market
development
Corporate strategy Management through global goals Management through global goals
(portfolio management strategy). (portfolio management strategy),
Limited synergies and limited need but at the same time as supporting
of coordination as insurance lines resources have been centralised,
were individual companies with more resource- and activity-sharing
own supporting functions activities have been started
Market position/ Not considered necessary for the Image differentiator (trust based on
Business strategy state-owned monopoly insurer of the former regional caretaker
the region position), but combined with cost-
centred orientation as a reaction to
limited market growth and the
financial crises
Strategic Annual planning process used for Global goals constantly amended
framework/ coordination of insurance lines and and definitions changed. High-level
coordination of companies. The global goals definitions and lack of priorities
strategic activities introduced in 1998 as guidelines among contradictory goals lead to
for the planning process different interpretations
that activities needed to be better coordinated in the company’s changing environ-

ment. The limited extent of coordination has already led to some difficulties. As
pointed out by a board member, ‘Before we were lucky, nowadays we are heading
from one error to the next,’ owing to the lack of strategic coordination and
clarification of the global goals among board members. As the corporate goals are
difficult to combine because of their contradictions, and as they allow a wide range
of interpretation, clearer guidance is sought, mainly by lower and mid-level man-
agement, for coordination among the insurance lines as well as supporting functions.
Summary of Strategic Development in the Insurance Group

The development of the internal resources and capabilities as well as the strategic
aspects on the corporate and business unit level is summarised in Table 5.3. It can be
concluded that valuable resources have not been further developed since the
company’s foundation, except for the extension of market channels. This might
change as the issue is increasingly being discussed. The overall corporate goal of
growth has remained, though the complementary goal of profitability has been
gaining in importance, especially since the financial crises. Right from the start,
the corporate strategy has been one of portfolio management, where the units have
been managed according to strict financial goals. During the last few years, however,
the level of coordination has been increasing with the concentration of resources to
central units acting for multiple insurance lines and regions. The principal aim of the
122 S. Poth
centralisation, though, is not to introduce activity- or knowledge-sharing, but to cut

costs in the regions by abandoning regional resources. All insurance lines position
themselves as service insurers. They use the image of trusted caretaker to differenti-
ate themselves from their competitors. The image, however, is not reinforced by any
activities. Instead, operations have been concentrated on cost saving, especially since
market growth has slowed after the financial crises. The cost-saving and other
control-related activities, as well as their fit with strategy, will be discussed next.
5.3.4 Coordination and Control Systems
After discussing the strategic choices taken concerning corporate and business
strategy, the control systems used and their alignment with strategy will be
described here. The treatment will focus mainly on management control and
corporate coordination over organizational structure, whereas the production con-
trol system and the coordination of the work organization will be discussed in the
next part.
Tight financial control through the annual planning process and monthly reports
is exercised over the insurance lines and the regional insurance companies. The
corporate level shows little interest in how business units plan to reach their own
goals as long as corporate global goals (as defined in the previous part) are met. This
approach to management control is consistent with the regionally oriented business
model that highlights the responsibility of the regional board of directors.
Management control is focused on collecting information for corporate manage-
ment. The insurance lines generally showed very little interest in questions of
control until corporate management started demanding reports from them. With
growth as the primary goal for so many years, management control is very revenue
oriented. Additionally, the corporate goal that costs should increase less than
revenue has led to very detailed cost control over the last few years. During this
time the planning and control process has been getting more professional,
standardised and strict. At the same time new dimensions have been continually
introduced. Now so much information is available that it is time to get ‘back to the
roots,’ a corporate control manager pointed out. However, as a consequence of the
financial crises, with increasing pressure to reach positive results in the insurance
business,13 the control system has even been broadened in scope. With the limited
revenue from assets under management, more attention is currently paid to results
on the product level. It was previously acceptable for one insurance product to
offset the underperformance of another. This is changing. Since 2008 each insur-
ance product is planned, followed up and evaluated individually for the purpose of
eliminating products with negative results.
13
The return on assets has traditionally compensated for the small contribution or even the losses
from the insurance business. This changed with the financial crises, as the investment market
became more volatile.
An addition to the monetary measurements, customer and sales-channel satis-

faction surveys are conducted for the whole group on a regular basis. Even though
the surveys are closely connected to the global goal of a “customer and sales
orientation,” they only receive limited top management attention. In 2007 as well
as 2008 there were discussions on integrating these measures into the management
control system, but both times this idea was abandoned. Instead the analysis of the
results has been delegated to the insurance lines and to the department management
level. Managers at this level are responsible for the development of action plans and
implementation of the actions planned. Fulfilment of these plans is not given the
highest priority when resources are needed for other operations. In this situation,
although the service orientation is increasing, there is still potential for improve-
ment. As pointed out by one marketing manager, if the company paid as much
attention to the satisfaction survey action plans as they do to cost control, it would
be a service leader in the insurance market.
Moreover, little attention is given to production control on the group level. These
more operational issues are managed and controlled by regional Boards of
Directors and the insurance governing boards.14 The only regular measure reported
on the group level is the backlog situation. It is seen as an indicator not only of
productivity but also of quality, as a managed backlog ensures short response times
for customers. Although other operational measurements are not consolidated on
the Group level, projects in operational control are started and conducted at this
level. One principal project, managed by Corporate Control, was the cost bench-
mark project, conducted during 2005/2006. Based on benchmark results, it was
decided on the group level that the cost saving potential identified needed to be
reached within 4 years. The task of devising steps to achieve the potential identified
was delegated to the operational level. After identifying the targets, Corporate
Control covers only the level of the cost saving attained in relation to the adjusted
targets.
According to the managers interviewed, the insurer has a more complex control
structure than the other top ten insurance companies in Germany. The reason is
that the insurance lines and the regional insurance companies are given a high level
of freedom in conducting their business. This freedom is not only seen as a sign of
trust and giving the insurance companies a free hand. It is also viewed as a result
of limited coordination of strategic questions on the corporate level. The detailed
management control enables the corporate level to get a sense of coordination and
control over the units.
Except for the control system, control and management issues are discussed in
the boards and commissions set up for coordination of corporate resources and
activities. At the end of the period under study, one corporate holding company, one
insurance-line holding company, three insurance-line governing boards, and seven
supporting commissions were used for group-wide coordination (see Fig. 5.5).
14
The governing boards will be discussed in more detail later in this part.
124 S. Poth
Corporate Board of Directors
Product Board Product Commission
Risk Commission Sales Commission Marketing Commission
Capital Investment
Project Commission
Commission
Life Insurance Non-Life Insurance Health Insurance

Health Insurance Holding
Governing Board Governing Board Governing Board
Munich Retail Non-Life

Munich Life Insurance Bavarian Health Insurance Bavarian Health Insurance
Insurance
Munich Commercial Non-Life
Saarland Life Insurance Saarland Health Insurance Saarland Health Insurance
Insurance
Berlin/Brandenburg Life
Saarland Non-Life Insurance Travel Insurance Travel Insurance
Insurance
Berlin/Brandenburg Non-Life
Insurance
Sales and Marketing and IT Support Functions
Fig. 5.5 Boards and commissions coordinating business beyond the borders of the autonomous
insurance companies and regions
The principal institutions, the Life and the Non-Life Insurance Governing
Boards, were introduced in 2005. These governing boards are charged with
coordinating business beyond the borders of the autonomous insurance companies
and regions. The regional Board of Directors as well as the Corporate (Munich-
based) Board of Directors, which are responsible for the specific insurance lines, are
members of the governing boards. The board members of the supporting divisions
also attend the meetings. In these boards, product development, IT development,
market campaigns and insurance-line-specific operational issues are discussed, and
investments are prioritised. Owing to the dominance of the Munich-based
companies, the meetings mainly discuss issues of high importance in Munich. As
the governing boards cannot take any company-overlapping decisions, issues
regarding the whole group need to be approved by all regional Boards of Directors.
The Health Insurance Holding manages health insurance issues for all regions.
However, as supporting functions are not represented in the Health Insurance
Holding, a Health Insurance Governing Board was added in 2010 in order to ensure
coordination between the health insurance line and the supporting functions.
Commissions and a product board coordinate the operations of the centralised
supporting functions. Like the governing boards, they are not authorized to take any
decisions. The recommendations and prioritisations made need to be confirmed by
official decisions of the regional Boards of Directors.
Two major challenges concerning coordination were mentioned by all
interviewees: one is the absence of alignment of coordinating entities with regional
responsibility; the second is coordination among coordinating commissions and
boards.
As mentioned in the global goals, the insurance group follows a regional

business model with regional responsibility for profit, revenue, market development
and operations. The group is also supposed to reduce costs. In order to gain
synergies, some functions are centralised. From a regional point of view,
centralisation is a trade-off, as local flexibility is limited when synergies are
achieved on the group level. This trade-off can be mitigated if central functions
also consider the needs of the regional insurance companies in an appropriate
manner. The prioritisation of regional requirements within the centralised functions
is not yet fully regulated. Given the differences in size, prioritisation cannot be
based only on monetary value. There is also a political aspect that needs to be
considered: decisions relating to political aspects are often coordinated outside of
the official prioritisation rules of the boards and commissions. This limits the
coordinating power of the governing boards and decreases decision transparency
throughout the organization.
The second challenge mentioned is coordination among coordinating entities.
The insurance corporation has been introducing multiple commissions and boards
in recent years in order to coordinate business. Despite their increasing number, top
management finds the commissions very beneficial to the organization as they
support and structure the necessary coordination. Coordination among them is of
major importance. One mechanism of coordination is that decisions are not taken
by commissions and boards but by the regional Boards of Directors. Additionally,
the same persons are members of the three most important commissions and boards:
the product board, the governing boards of the insurance lines and the sales
commission. Nevertheless, the increasing number of commissions and boards
makes coordination a challenge. Although, the benefits of the boards and
commissions are apparent to corporate management at present, at the same time
their existence will need to be evaluated in the future in view of the challenge of
coordinating them.
To summarise, the insurance group uses a strict control system that for the most
part measures revenue and costs. The only operations-related measurement used is
backlog. Although customer and sales partner satisfaction surveys are conducted,
the measures derived from the surveys only receive very limited top management
attention. The focus on monetary and cost-based measurements is quite consistent
with the corporate aim of cost reduction. However, the fact that quality of service is
measured in surveys but is not given high priority by top management does not fit
well with the chosen aim of image differentiation. The image is based largely on the
inherited caretaker role, and its development is not covered by the control system.
The insurance-line and the regional control systems follow the corporate reporting
system. The main difference is that regional and insurance-line measurements
are somewhat more detailed. In addition, boards and commissions have been
established to coordinate the activities of the increasingly centralised functions.
The current challenge is to coordinate the coordinating entities and to prioritise the
demands of the different regions. The coordination of boards and commissions even
126 S. Poth
Table 5.4 Aspects of control and coordination system

Control and
coordination aspects Around 1995 Towards 2010
Management control Corporate control of business Corporate control of business units
system units through financial control through financial control
Limited control on insurance Insurance lines and regional
line level controlling units align the control
system to corporate measurements
Long term perspective Tendency towards more short term
orientation
Performance Narrow scope of financial Broad scope of monetary
measurements measurements based on internal measurements based on internal
information focusing on growth information focusing on growth
and cost efficiency
Customer and sales-partner Customer and sales-partner
satisfaction was not measured satisfaction surveys are conducted,
until 2000/2001 but measures derived from them
get limited top management
attention
Measurements not frequently Measurements supplemented with
adapted/changed additional measurements including
product-based results
Centralisation of None or very limited, as the Increased centralisation of
resources companies integrated into the functions which needs to be
insurance group had their own balanced with regional
resources responsibility
Coordination of No formal coordination until Additional commissions and
central activities the establishment of the governing boards introduced with
governing boards in 2005 the challenge of coordinating the
coordinating entities
Decentralised power and Centralised power and vertical
limited coordination (as coordination as the conclusions
coordination was not needed in drawn in the commissions and the
view of the decentralisation of boards need to be approved by the
resources) Boards of Directors
stands in contradiction to corporate financial control over goals. On the one hand,
the corporate level wants to delegate responsibility for achieving company goals to
the regions; on the other hand, regional responsibility is limited by centralisation of
functions and the coordination of corporate boards and commissions. Although
operational issues are discussed and agreed upon by the boards and commissions,
decisions are taken centrally by the regional Boards of Directors. This leads to
vertical coordination rather than the desired horizontal coordination intended when
multiple boards and commissions were set up. The aspects discussed concerning
control and coordination are summarised in Table 5.4.
5.3.5 Changed Service Production Through Introduction of the

Customer and Sales Channel Service Centre
After the discussion on control and coordination at the corporate and business unit
levels, the service production of the insurance corporation will be discussed from
the standpoint of production strategy, production control and workgroup organiza-
tion. The alignment with market position/business strategy and management con-
trol will also be included in the discussion.
The insurance corporation decided in 2004 to re-organise service production by
providing a customer and sales partner service centre for all insurance lines.15 The
aim was to establish a centre with highly competent staff offering personal contact
with sales partners and customers. Implementation of the customer and sales
channel service centre was intended to help achieve the global goals of customer-
and sales-channel orientation. Generally the intention was to increase quality of
service and at the same time to decrease costs. Short turn-around times, high
capacity utilisation and competence-based routing of incoming calls and paper
transactions were expected to increase productivity and thereby improve the cost
situation. The basic idea of the concept was that production processes should be
similarly organised in all insurance lines, thus facilitating a company-wide cus-
tomer view. Additionally, the service production of the different insurance lines
should be comparable through the use of common transparent measurements.16 All
service centre employees should be able to handle and fulfil a wide range of
requests, and customers and sales partners should be guaranteed a high level of
accessibility. This would lead to prompt answers to enquiries that would strengthen
the competitive position of the insurer.
In June 2008 the customer and sales partner service centre was launched. It was a
major reorganization of service production. Previously service production
employees were highly specialised, and could generally administer contracts for
only one type of insurance, or sometimes even just for special types of transactions
within one type of insurance. In the preparations the plan was to ensure that every
employee would be assigned a position appropriate to her/his know-how and
wishes. In the end, however, employees could only choose whether they preferred
15
Although the name indicates that only a service centre was established, nearly all service
production was re-organised into service centres. Only some special underwriting entities were
not integrated into the service centre model.
16
The service level agreements are the same for all entities of the customer and sales channel
service centre: 90 % accessibility for sales partners and 80 % for customers in the telephone
entities. In correspondence a response to a new application should be returned within 3 days and
for modification transactions within 8 days. The transactions are routed to employees based on
these service level agreements. The arrangement is a kind of FIFO (first-in first-out), though also
dependent on the application’s deadline flag. Department managers can overrule this routing for
special types of transactions or even for a specific transaction request. The service production
employees themselves, however, are supposed to handle transactions in the order in which they are
routed to their individual inboxes.
128 S. Poth
to work in a telephone or correspondence entity. The employees of the telephone

entities received training on all products offered as well as telephone training,
whereas the correspondence entities received only limited training, if any.
Employees with experience from different types of insurance were seated in groups.
The idea was that they could learn from each other and thereby broaden their skills.
As one aim was to decrease costs through increased productivity, manpower had
already been reduced when the customer and sales service centre began to operate.
This, combined with the low level of skills and the on-going training, had major
effects on service levels in the beginning. Because of backlog problems, it was
decided to suspend the training, leaving employees to administer the types of
requests with which they were already familiar. Additionally, the fact that the
different types of insurance are managed in different systems makes all-round
administration difficult. The planned development of a common tool was postponed
in order to save on costs. With the limited technical support, the work is very
stressful, especially in the phone entities, as employees need to switch between
systems in order to obtain an overview of the customer’s transactions.
Morale among employees at the customer and sales partner service centre was
low from the very beginning. Employees are required to work in open-plan offices,
and their working hours are not as flexible as they used to be. Employees feel that
they do not have any privacy and are subjected to increasing external pressure to
perform as their work is automatically routed to their individual electronic in-
boxes. They feel unable to influence their situation because of the high level of
formalisation and standardisation. Moreover, they find that their whole job situation
is moving towards industrial-type production. Although the insurer introduced a
management program to smooth the introduction of these changes, fluctuation rates
remain high.
Two years after introduction, the specified productivity-based service levels
were reached. The quality problems still remain, however, as a result of the high
fluctuation rates at the service centre and the postponed implementation of the new
systems. When the service centre was introduced, a high level of service was
promised to the sales channels. This raised expectations, which are still only
partially met. Therefore, the introduction of the service centre has not improved
the quality of service. In the sales partner satisfaction survey of 2009, 30 % of all
sales partners answered that they were dissatisfied. The customer and sales partner
service centre was given a particularly negative rating. The criticism was directed
primarily at the quality of information and the long response times. Although
accessibility has been improving, it is not rated by sales partners as an element of
service quality. The content and quality of the answers received was not considered
satisfactory. It was pointed out that when a sales partner calls multiple times she/he
gets differing answers.
As the sales channels have a rather long memory concerning quality problems,
the insurer has been acknowledging the importance of stabilising service produc-
tion and increasing the quality of the service offered. Production was stabilised by
assigning overtime and extra resources to the customer and sales partner service
centres. More long-term actions have been initiated, such as qualification and
training, enhanced operating control including load balancing and transparency,

communication with sales channels and steps to improve employee motivation. It is
commonly agreed, however, that process optimisation and increased automation
are needed in order to stabilise service production in the long term. The first
turbulent months of the service centre showed that a service-oriented production
model can only be combined with a productivity increase if the employees receive
an adequate level of training and if the necessary IT-based tools are in place.
Although it took 2 years to reach the first level of stability, all parties at the top
management level are convinced that the customer and sales partner service centre
is the right model for service production. With the common measurements, produc-
tion is better organised and performance is transparent. The service production
model has already achieved increased productivity and accessibility as well as
shorter processing times. In the next step the insurer plans to control costs more
strictly and to improve the efficiency of service production.
Overall it can be said that the insurance company, with the introduction of the
customer and sales partner service centre, introduced a mass service production
environment. The production control system based on response times is monitored
with productivity measurements for the purpose of increasing the efficiency of
service production. The aim of enhancing service quality has not yet been fulfilled,
at least if the satisfaction surveys are used as a measurement. The management of
the customer and sales partner service centres point out that better service can only
be achieved through more training and improvement of systems. This, however, is
not the intention of the top management, which seek in their next step to reduce
costs by increasing the efficiency of service production. Overall, improved service
production is quite consistent with the cost saving ambition of the insurer, though
not with the customer intimacy goals sought by an image differentiator. The
increased transparency and the possibility of comparing service production entities
are consistent with monetary-based management control with a strong focus on cost
control. The aspects of service production discussed are summarised in Table 5.5.
5.3.6 Competitive Position of the Insurance Group
It is one thing to analyse the factors shaping change episodes and a much bigger and
more intractable problem to produce convincing evidence that a pattern of change
initiatives contributes to organizational performance (Pettigrew et al. 2001). Nev-
ertheless, the competitive advantage of the insurance company will be analysed in
this part. In the discussion on competitive advantage, both quantitative financial
measurements and long-term qualitative measurements of performance are
included. In this way both a competitor-centred assessment and a sales-partner/
customer-focused assessment of a competitive advantage can be achieved (Day and
Wensley 1988).
Ever since the insurer’s establishment in 1995, profitability has been satisfactory
in all insurance lines. The principal reasons for this success have been the
favourable return on investments, especially in the initial years, and the low
130 S. Poth
Table 5.5 Aspects of service production including strategy, control and work-organization
structure
Service production Before introduction of the After introduction of the service
aspects service centre production model centre production model
Service production Non-standardised service Standardised and highly formalised
strategy production based on specialised mass service production
experts (tending more towards
professional service production)
Service control Caretaker role (quality) is given Productivity control given priority
system priority in service production
Few and not standardised Standardised production
measurements of production measurements of accessibility
and backlog
Social control through the inherited Control of output used as a control
caretaker role concept
Alignment of service Service production control based Service production control is well
production control on quality was well aligned with aligned with the mass service
the market position of a caretaker production strategy. However, it
and non-standardised service does not support the caretaker
production image. The production-oriented
measurements are well aligned
with the monetary-oriented
management control with a strong
cost focus
Work organization Service production employees are Aim for production employees to
experts within a limited area have broad knowhow enabling
them to take care of multiple
transactions. Transactions are
routed to employees based on their
knowledge profiles (actually
specialisation)
Low level of formalisation, High level of formalisation with
including flexible work conditions strictly organised work hours and
with less transparency of outcome work processes in a transparent
work environment
Within their area of expertise, The extent of functional power is
service employees have a high strictly limited. Employees feel
level of functional power to take viewed only as production
decisions concerning customer resources without flexibility to
issues and their own work react to individual customer needs
processes
Alignment of work The work group organization is The work group organisation is
group organization well aligned with the non- well aligned with the standardised
standardised service production. mass service production. As with
Flexibility to fulfil the caretaker production control, however, it
role and to ensure that individual does not support the caretaker
customer requests could be fulfilled image
acquisition cost due to the inherited monopoly portfolio and the Saving Bank sales
channel, which requests lower commissions than other sales channels. Thanks to
the conservative asset management strategy, the insurer has achieved acceptable
levels of return on assets even during the recent turbulent years. For these reasons
management has been able to focus more on market share than on profitability. The
primary goal has been to grow more than the market and thereby to increase market
share. This goal has been achieved mainly through acquisitions. Since the latest
major acquisition, the insurer has been struggling to maintain market growth. It can
be concluded, however, that from a financial point of view the insurer is still
performing well on the German insurance market as it has been exceeding the
market average for revenue growth and profitability.
As for qualitative measurements of performance, on the other hand, the picture is
somewhat different. Customer satisfaction surveys show that the company’s
wealthy elderly clientele appreciates the regional insurance model with consulting
sales channels. But the surveys also show that the insurer is having problems in
attracting younger clientele. Younger clients are more price-sensitive and tend not
to consult with the sales channels but to search for insurance offerings more on their
own. This trend suggests that the insurer is facing a challenge in attracting younger
clientele on a long-term basis.17 Overall, the insurer has been reporting increased
customer satisfaction, according to a Germany-wide insurance survey. In 2007 the
insurer reached the average German level, though that was also due to a decreasing
German average. Although the insurer is market leader in the region of Bavaria, a
regional market survey ranked them only third in a survey of first-choice insurance
companies. Generally it can be concluded that the insurer has a strong and loyal
elderly customer group but has not yet found the right strategy to attract new
customer groups.
For insurance sales channels are vital. The insurer is very strongly tied to its
main sales channel, the Savings Banks, as they are also the owners of the insurance
group. In addition, over the years the insurer has been broadening its sales channels
in order to reach customers outside the Savings Bank group. The more independent
sales channels, however, require more sales support. Generally, sales partner
satisfaction has been low. In 2009, shortly after the introduction of the customer
and sales partner service centres, it dropped dramatically following years of posi-
tive development. In summary, the insurer is benefitting from the loyal Savings
Bank sales channel but is still searching for the optimal way to support the new
independent and more demanding sales channels.
It can be concluded that the insurer is currently competitive. Ever since its
foundation, it has exceeded average market performance in growth and profitabil-
ity. The difference in relation to the market, however, has been diminishing in the
last few years, and in some ways it has even disappeared totally. When the more
long-term qualitative performance measurements are analysed, the picture is not
even that positive. Because of the long-term insurance business, especially in life
17
The insurer launched a price-sensitive internet insurance in 2008 in order to attract younger
clientele.
132 S. Poth
and health insurance, the financial effects shown by the mediocre qualitative
performance indicators will have a long time lag (Oletzky 1998). Nevertheless, as
Pettigrew and Whipp (1991) conclude from their study of de-regulated markets,
including life insurance, long-term success is based on reactions, change and
decision-making. They found that the high performers were distinguished by the
way in which they conducted environmental assessments, led change, linked
strategic and operational change, managed their human resources as assets and
liabilities, and managed coherence in the overall process of competition and
change. Though these have not been the strong points of the insurer studied, it
has still maintained its competitive position – at least partially – over the years. This
finding will be discussed in more detail in the next section.

According to the service industry model for competitive advantage (as illustrated
in Fig. 5.1), a company with a fit between its external position and its internal
activities will achieve a competitive advantage. Put another way, a company
with a strategy aligned with its competitive arena, with strategic congruence
between different strategic levels, with an integrated control system and with a
coherent organizational structure will gain a competitive advantage over other
companies in the same industry. As for the insurance company under study, some
aspects of alignment as well as some misalignments can be identified.
The corporate strategy is based on common goals with the primary emphasis
on growth. These goals are applicable to all insurance lines and regional
insurance companies belonging to the group. Corporate management follows a
portfolio management strategy and delegates goal achievement to the manage-
ment of the insurance lines and the regional insurance companies. At the same
time, more functions are being centralised, not to increase knowhow or activity
sharing, but to achieve synergies in the form of cost savings. In order to
coordinate centralised resources, a rather complex structure of multiple boards
and commissions has been introduced. Although these multiple entities have
been implemented to increase horizontal coordination, coordination is still
vertical owing to the limited decision rights of these entities. With the
centralisation of resources, their coordination is not yet optimally organised to
ensure the support of all insurance companies. Centralisation thus limits the
alternatives available to the individual insurance lines and the regional
companies for reaching their goals. At the same time, the external environment
has been getting more unstable and unpredictable during the period covered by
this study. Centralised resources and a centralised power structure do not seem to
be an optimal arrangement for responding appropriately to market changes.
The insurance corporation, including all its insurance companies, is positioned
as a service insurer, not competing on price but still offering good prices. The
market positioning as a customer-oriented caretaker (marketing differentiation
strategy) is based on the inherited image. There are no current activities
strengthening this position other than the marketing message that “we insure you
as we would insure ourselves”. Instead, cost saving activities have dominated daily
business since the financial crises. With the introduction of the customer and sales
partner service centre, a mass service production environment was established,
with the principal aim of increasing productivity and decreasing costs. During
introduction, quality declined. This attracted some top management attention and
led to investments in additional resources. It was underscored by operational
management that in order to achieve a sustainable increase in service quality,
more training and supporting IT systems would be needed. After stabilisation,
however, the main goal of top management is to increase the efficiency of service
production, rather than to improve service quality through added investment. This
feature is not consistent with the differentiation strategy based on the caretaker
image, but it does fit with the cost-saving orientation of the insurer.
Overall it can be concluded that the insurance company around 1995 as well
as towards 2010 was not ensuring strategic congruence among different levels18
through their activities. In 1995 the misalignment could be explained by the
limited interest in strategic issues due to the company’s background as a
monopoly insurer. Towards 2010 the misalignment can be explained by the
cost-centred orientation of the insurer, which does not support a marketing
differentiation strategy based on a caretaker image.
The management control system is tight, based on financial measurements
and concentrating on revenue and cost control. This type of system fits the
principal target of growth and the cost reduction initiative taken in the last few
years in reaction to the market tendency toward lower costs. Although customer
and sales partner satisfaction are measured in common market surveys, they do
not receive much top-management attention. The activities resulting from the
surveys are not given high priority, and responsibility for their implementation is
delegated to the operational level. It was pointed out that if the insurer paid as
much attention to service quality as to cost control, it would be the market leader
in service and thus strengthen the marketing differentiation strategy of a care-
taker. Instead, however, the internal organization is being trimmed for
controlling and reducing costs. Production control, based on productivity and
measurements of output, is well aligned with the system of tight management
control. It also fits with the mass service production that has been introduced,
which is based on formalised and standardised processes with very limited
functional power delegated to service production employees. But the organiza-
tion of production control and work do not strengthen the caretaker image, as
quality and flexibility are given lower priority than efficiency. To conclude, the
insurance company does not have either an overall well integrated control
system or a coherent organization structure. Although supporting the cost orien-
tation of the insurer, neither the control system nor the organization of the tasks
is well-aligned with the marketing differentiation strategy.
18
Corporate strategy, market positioning or business strategy and service production strategy.
134 S. Poth
The insurance company has been successful in regard to market share and
profitability. Its competitive advantage, however, is diminishing. As for qualita-
tive measurements, which are important for strengthening the image of a care-
taker in the longer term, the situation is not encouraging. The introduction of the
customer and sales partner service centre has been further eroding quality as
perceived by customers and sales partners. Still, although the insurance company
has not been developing any strategies for better utilising its unique inherited
image of a regional caretaker to strengthen their differentiation from
competitors, they have in fact been able to maintain a unique reputation as a
caretaker. It therefore seems that the value of resources remains rather stable for
a longer time in an environment that only changes very slowly. The importance
of trust in insurance and the apparent stability of value give the company under
study a competitive advantage, though no activities have been undertaken to
strengthen or even just to retain the resources required for this purpose.
Overall there are many signals of change. Yet top management is hesitant to
take a clear position on the future priorities of the insurance group. In fact, there
were multiple changes during the time frame under study. The executives of the
insurance company have been making some changes in individual elements, as
in introducing the customer and sales partner service centre, for example. What
seems to be missing is an understanding of what is necessary to combine those
elements into an integrated whole (cf. Collis and Montgomery 1998). Therefore,
the finding of decreasing competitive advantage could also be interpreted as a
lack of consideration for the relationships among many different elements.
Neither environment, strategy, control system nor organization structure is
sufficient alone to explain the company’s performance (cf. Lenz 1980; Olson
et al. 2005). In order to achieve a long-term competitive edge, there is a need to
coordinate different elements within a corporation (Porter 1996; Surowiecki
1999) and to find a strategy, a control system and a structure with a high degree
of internal complementarity (cf. Miller 1996). Meeting this need would give the
company a sense of mission and direction, and it would be harder for a rival to
match an array of interlocked elements and activities than merely to imitate a
particular activity or to replicate a service offered (Porter 1996, p. 73).
To sum up, although multiple areas of mismatch were identified in the
analysis, the competitive situation of the insurance company is only weakening
very gradually. This could be explained by the characteristics of the insurance
industry in regard to frequency and speed of change. It seems that quick reaction
is not as relevant in the insurance industry as in industries with a more competi-
tive environment. Although a semi-protected environment gives management
more time for reflection, the deteriorating competitive situation of the insurer
also shows that a company still needs to react to changing conditions. In
conclusion, although the competitive model stressing internal and external
alignment may not seem to be so important for the insurance company at present,
this situation will quite probably change as the market is increasingly affected by
deregulation and thereby becomes more and more competitive.
Acknowledgement A seminar at the Department of Business Studies at Uppsala University, has

been contributing to the development of this chapter, especially the comments made by Anna-
Karin Stockenstrand.
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Strategy, Management Control and
Organizational Design: Empirical 6
Illustrations from SCA Packaging
Katarzyna Cieslak
6.1 Introduction
As pointed out in the introductory chapter, how to create competitive advantage and
improve organizational performance is a central question in the strategy field, and
numerous perspectives have been applied in order to understand competitive advan-
tage. This book proposes one explanation based on a contingent fit between
strategies and management control systems (Nilsson and Rapp 2005), and the
current chapter outlines organizational issues linked to the fit between a manage-
ment control system and strategy at SCA Packaging (SCAP), a strong competitor
on a paper-packaging market in Europe. At the time this chapter is being written,
SCAP belongs to the SCA group, which was founded in Sweden in 1929.1 SCAP
is ‘a leading European company in customer-specific packaging, with a focus on
state-of-the art packaging design and local service close to customer facilities’
(www.scapackaging.com). SCAP emphasizes its innovation focus, and the
company has received numerous awards in recognition of the innovative design of
its products.2 While trying to foster innovative design in its products, SCAP also
pays attention to production costs and to ensuring the sustainability of its operations.
The company has been granted numerous sustainability and business ethics awards.3
1
In January 2012 an acquisition of SCAP by DS Smith was announced. It was finalized in July the
same year.
2
One example of an innovative design is the Moët et Chandon champagne premium box that keeps
the drink cool for 2 h. It received the Formes de Luxe award at the luxury packaging fair Luxe Pack
in Monaco in 2010.
3
Examples include “Nordic Sustainability Stars,” “The New Economy Carbon Leadership
Awards”, “2012 World’s Most Ethical Companies” by American Ethisphere Institute, “Corporate
Knights 2010,” “FTSE4Good Index”.
K. Cieslak (*)
e-mail: katarzyna.cieslak@fek.uu.se

140 K. Cieslak
The model of Nilsson and Rapp (2005) emphasizes the role of vertical congru-
ence of strategy on the corporate, business unit and functional levels in creating an
integrated control system, based on an assumption that with different strategies
there are different key success factors, different contexts for decision-making and
different information needs; these differences translate into different requirements
for control systems (Anthony and Govindarjan 2003; Langfield-Smith 1997;
Nilsson and Rapp 2005). Strategic congruence entails a common business logic,
which facilitates designing and using the control system in a more uniform manner,
leading in turn to competitive advantage (Nilsson 2002; Nilsson and Rapp 2005).
Whereas Nilsson and Rapp (2005) accentuate vertical fit, attention is directed in this
chapter to the horizontal dimension of strategic congruence among subunits within
business units and horizontal integration of a control system. Thoughts from
theories of organizational design (Fredrikson 1986; Goold and Campbell 2002a)
and cognitive psychology (Halford et al. 1998; Simon 1957) complement Nilsson
and Rapp’s (2005) argumentation in an effort to achieve a better understanding of
horizontal strategic congruence. The aim of the chapter is to provide an empirical
illustration of how a management control system well-fitted to strategy may
function, and to discuss organizational design as a facilitator of horizontal strategic
congruence, which in turn facilitates integrated management control systems in
organizations.4
The chapter is organized as follows: after the introduction in Section 6.1.
Section 6.2 presents the theoretical underpinnings of the chapter. Section 6.3
provides a sketch of different product businesses of SCAP and their varying
strategies, together with the characteristics of corresponding control systems. This
section also presents a general outline of the organizational design at SCAP. In
Sect. 6.4 there is an empirical illustration of a control system well-fitted with
strategy at a representative business unit with high horizontal strategic congruence,
followed by a shorter sketch in Sect. 6.5 of a case where temporary challenges with
horizontal strategic congruence could occur. Section 6.6 provides a summary and
conclusions.
6.2 Strategic Congruence, Integrated Control System and

Issues of Organizational Design
The model of Nilsson and Rapp (2005) introduces the important concepts of
strategic congruence and integrated control. As different strategies suit different
characteristics of control systems, it follows from the model that strategic congru-
ence, understood as compatibility among strategies on corporate, business unit and
functional levels supports creation of an integrated control system, characterized by
‘a coherent strategic planning and monitoring of results throughout the firm’
4
The chapter is based on a study presented in the doctoral thesis by Cieslak (2011), defended at the
Institute of Economic Research, Lund University.
6 Strategy, Management Control and Organizational Design: Empirical. . . 141
(Nilsson and Rapp 2005). For example, a corporate strategy of portfolio manage-
ment is congruent primarily with a low cost business unit-level strategy5 and a
manufacturing strategy of low technical flexibility. These strategies correspond to
tight, monetary control with a short-term perspective, and on the manufacturing
level to reactive adjustment of capacity needs and infrequent changing of
manufacturing plans, manufacturing goods to stock, and a just-in-time approach.
By contrast, a corporate strategy of activity sharing is congruent primarily with a
business unit-level strategy of differentiation and manufacturing strategy of high
technical flexibility. These strategies correspond to loose, non-monetary control
with long-term perspective, and on the manufacturing level to active adjustment of
capacity needs and frequent change of manufacturing plans, manufacturing goods
to order and a materials-requirements planning approach (ibid.).
Nilsson and Rapp’s (2005) model emphasizes the vertical dimension of strategic
congruence, i.e. the fit between corporate, business-unit and functional organiza-
tional levels. The two corporate strategies of portfolio management and activity
sharing are distinguished in the model, based on Porter (1987) and Goold and
Campbell (1987). Interestingly, however, and in line with the extended list
of parenting propositions (Goold and Campbell 2002b), Johnson et al. (2008)
distinguish a third type of corporate strategy, namely parental development. In
comparison to activity sharing, parental development is
[. . .] not so much about how the parent can develop benefits across business units, or
transfer capabilities between business units, as in the case of managing synergy. Rather
parental developers focus on the resources and capabilities they have as parents, which they
then can transfer downwards to enhance the potential of business units.
(Johnson et al. 2008, p. 276)
The role of portfolio manager, which is often linked with tight monetary short-
term controls, may not suit business units with a differentiation strategy, and the
role of activity sharing, often linked to loose controls, might be potentially at odds
with business units focusing on efficiency and low costs (Nilsson and Rapp 2005).
It can be argued, though, that the parental developer is congruent with both low
cost and differentiation strategies. Rather than exercising tight control or its opposite
of loose control while actively managing cooperation across business units, head-
quarters in the role of parental developer focuses on helping business units through
transferring downward capabilities and resources developed centrally (Johnson et al.
2008). As parental developer, headquarters provides an overall strategic intent/
mission; it follows the profitability of all business units and at times ‘intervenes’
to improve performance, but its main focus is on delivering ‘central services and
resources’ (Johnson et al. 2008, p. 277). Examples of such a central service could be
brand management, specialist skills in financial management or product
5
The term “business unit-level strategy” is used interchangeably with “product-market strategy”
in the business literature; two generic business unit-level strategies are “low cost” and
“differentiation”.
142 K. Cieslak
development (Johnson et al. 2008). Adding the role of parental developer to the
picture gives rise to the proposition that different types of business unit strategies can
successfully coexist when parental development is used as a corporate-level
strategy. For a corporate strategy of parental development, the vertical fit can be
present for different business unit-level strategies.
Even if coexistence of different business unit strategies may be compatible with a
corporate strategy of parental developer, this chapter tries to argue, based on
evidence from SCAP, that it is important to achieve horizontal strategic congruence
within business units, where business unit-level strategy is designed, as it is condu-
cive to coherent business unit-level strategy. Business units are generally not single
entities, but are often composed of sub-businesses (Goold and Campbell 2002a).
Sub-businesses are often distinguished with the aim of ‘combining the benefits of a
broader and a narrower market focus’ (Goold and Campbell 2002a, p. 164). For
example, at SCAP business units are organized mainly on a geographical dimension
as management clusters of plants, with the plants being sub-businesses.6 Most
business units consist of a number of plants delivering the same product types,
although few business units included plants of considerable diversity at the time of
the study, the results of which are partly reported in this chapter (see Appendix).
Relations between the sub-businesses can become tricky, given a tension between
their independence and the cohesion of the business unit. According to Goold and
Campbell (2002a), bottom-line performance, i.e. the profitability of sub-businesses,
is usually followed up, but their accountability depends on the degree of autonomy.
Goold and Campbell (2002a) also suggest that the aim of sub-businesses is to work
as a “quasi-team,” collaborating with other sub-businesses to form a cohesive
business unit; sub-businesses thus have limited autonomy, and consequently they
are usually not strongly accountable. As product-market strategy is created by the
business units, horizontal strategic congruence within business units, which can be
defined as similar strategic focus by the sub-businesses (be it low cost or differenti-
ation), arguably facilitates and simplifies management of the business unit as it
facilitates development of a common strategy and an integrated control system. The
concept of horizontal strategic congruence inside an organization, coined in this
chapter, has not been used earlier, but it bears a resemblance to thoughts of Goold
(2005), who discusses the importance of facing similar challenges among members
of organizational peer groups. In inter-organizational research on alliances concepts
referring to strategic fit have been used to a higher extent to explain the success of
horizontal alliances (Douma et al. 2000; Swoboda et al. 2011).
6
There are many definitions of business units, but the main characteristic appears to be the ability
to create strategy by exercising control over most of the factors that affect long-term performance
(for example, the ability to decide on investments) (Hax and Majluf 1996). The analysis in this
chapter applies to SCAP, and the management clusters are referred to as business units, a
nomenclature in line with relatively strong decentralization of management in the company.
Headquarters is referred to as the corporate center. Note, however, that SCA as a corporate
group has recently started to refer to companies within the group as business units.
As noted earlier, strategies differ in respect to key success factors, contexts for
decision-making and information needs; this translates into different requirements for
control (Nilsson and Rapp 2005). In the case of low horizontal strategic congruence
within business units, it becomes difficult at some point to manage the different
control tools suited to the needs of all sub-businesses (plants). The underlying logic
may be based on the assumption that managers, and people in general, have limited
cognitive capacities (Simon 1957): ‘Managers have neither the time nor the capacity
to process all the information available to them’ (Simons 1990, p. 135), and it is
complexity rather than the amount of information that limits processing capacity for
individuals, cognitively restricted as they are (Halford et al. 1998). Whereas Nilsson
and Rapp (2005) discuss integration of control systems in a vertical dimension, this
chapter also touches upon the horizontal dimension of an integrated control system,
which means that the control tools are used by all sub-businesses within the business
unit and that they complement each other. High horizontal strategic congruence is a
driver of horizontally integrated control systems.
The current chapter highlights linkages of organizational design with horizontal
strategic congruence. There is a traditional argument that organizational structure is
a corollary of strategy, i.e. that ‘structure follows strategy’ (Chandler 1962). This
argument has been reformulated by some academics, who have suggested that the
opposite is also true, namely, that the structure built into an organization thereafter
constrains the strategic choices of organizational members (Hall and Saias 1980).
The relationship between strategy and organizational structure can therefore be
reciprocal. This line of thought is followed in the present chapter, where an attempt
is made to show that organizational design determines the degree of horizontal
strategic congruence, which subsequently affects the sustainability of a particular
design.
Goold and Campbell (2002a) conceptualize organizational design according to
nine tests of a “well-designed” organization. This chapter refers to three of those
tests perceived as most relevant to strategic congruence in its horizontal dimension,
in an attempt to explain how organizational design impacts and is impacted by
horizontal strategic congruence. The tests are in the form of questions referring to
design. The first is the “market advantage” test, which relates to product-market
strategies (i.e. business unit-level strategies) by posing a question: ‘Does the design
allocate sufficient management attention to the operating priorities and intended
sources of advantage in each product-market area?’ (Goold and Campbell 2002a,
p. 33). The aim of this test is to make managers ‘more explicit about operating
priorities and sources of advantage’ (ibid, p. 33). For example, organizing
operations by country means giving less attention to product groups.
The other two tests of Goold and Campbell (2002a) are the “feasibility” and the
“redundant hierarchy” tests. The feasibility test concerns constraints that can
potentially make the design unworkable. An example, according to the authors, is
IT systems. Different businesses may need different IT systems or different set-ups
of the system, possibly creating problems with particular organizational designs in
the case of sharing the system by different units.
144 K. Cieslak
The hierarchy test is intended to analyze the value added by each management
layer in an organization and to determine whether responsibilities at higher levels
are based on better knowledge and competence, as decentralization is seen as a
desirable default for responsibility assignment (ibid.). Applying the logic of the
hierarchy test to issues of strategic congruence and integrated control, one could
argue that in case of low horizontal strategic congruence between sub-businesses,
and given the cognitive limitations of people in complex situations, it may become
difficult to manage the sub-businesses jointly. If so, one may question the value of
the business-unit management level and thus the design of placing the sub-
businesses in the same business unit.
6.3 Strategies, Characteristics of Control Systems and

Organizational Design at SCAP
SCAP is the second-largest manufacturer of corrugated-board packaging with a

market share of around 10 % in Europe. The general strategy of SCAP is to continue
changing from an image of a manufacturing company to one of a company
perceived as a full-service provider (www.scapackaging.com). This implies that
the company can assist the customer with the design skills necessary to make
packaging an effective channel of marketing communication, an effective aid in
transport (maximum strength-to-weight ratio of the packaging products), and effec-
tive protection for the goods transported. These three criteria are expressed in the
company’s motto ‘BE SEEN, BE MOVED, BE SECURE’. On the whole, SCAP
provides high-quality and functional products with appealing design. Design skills
are located in 16 design centers across Europe and one Innovation Center in
Brussels. New products are often developed locally at all plants in cooperation
with customers and with assistance from the design centers. At the same time,
efficiency enhancements in production are regarded as “strategic cornerstones,”
and a major cost cutting program began in 2005 and was completed in 2011 (www.
scapackaging.com).
SCAP manufactures different types of products. The principal product types are
the following: conventional brown boxes (produced in large series with printing
directly on the box); consumer packaging boxes (with higher print quality, with
printing often done on paper, which is later stuck on to the box); display (promo-
tional) packaging (produced in shorter series, these are, for example, point of sale
stands for direct marketing in stores); industrial packaging (larger, stronger “brown
boxes”); protective packaging (including, for example, wood, foam or plastic
components for maximum protection), as well as packaging services. The products
appear similar, as they are all based on corrugated board, yet their manufacturing
and selling proposition tend to differ to the point where they thus arguably follow
different business unit-level strategies. Although SCAP aims to be perceived
generally as a high-quality provider, the emphasis on the design component is
somewhat different depending on the product. The products primarily discussed
in this chapter are conventional boxes, consumer packaging boxes and displays, as
they account for the largest share of the product portfolio. The display business pays
the most attention to the role of the product as a “communication medium,”
whereas the conventional packaging business focuses on minimizing costs of
production.
Conventional boxes are produced in long series, and production costs are given
considerable attention. The LEAN corporate program has been introduced, primar-
ily in conventional plants, for the purpose of improving efficiency in production and
instilling a mentality of continuous improvement. Manufacturing is characterized
by rather low technical flexibility; adjustment of capacity tends to be reactive;
changes in manufacturing plans are rare; manufacturing is often to stock (although
there is an aim to reduce stock levels through, for example, vendor-managed
inventory arrangements with clients), and just-in-time deliveries are offered to
selected customers. Both monetary and non-monetary measures are used for
controlling the conventional business, with price and conversion costs per square
meter, square meters per hour, set-up times and waste percentage of machines being
important indicators. Conventional plants appear to follow a strategy of low cost
and striving for excellence in production efficiency, with caveats that quality and
functional design are also important, and measures of quality are also an integral
part of LEAN. At the same time, even simple boxes may include an element of
differentiation; for example, a folding service can often be offered, so that
customers obtain the box ready to use.
With regard to the strategy of the consumer-packaging business, it could be
perceived as approaching the differentiation end of the scale. Consumer-packaging
products include, for example, perfume or champagne boxes, with an innovative
design often emphasized as a prominent part of a selling proposition to customers.
Production efficiency is still important in the manufacturing process, which entails
long series, mostly to a particular order, in case of absence of a clear agreement with
the customer on a reserve stock. Manufacturing plans are usually not changed often
(although there are some optimization changes, as will be described later). When it
comes to investments, however, an active approach may be taken to adjust machin-
ery not only to capacity requirements but often to the special requirements of a
particular order. Both monetary and non-monetary measures are used to control the
consumer packaging business.
Display packaging is produced and sold in short series. Displays are usually
produced for special events or promotion campaigns, and special design is an
important value-adding component, as is first-rate service including on-time deliv-
ery in full. The business unit-level strategy for displays resembles one of differen-
tiation. Manufacturing is characterized by greater technical flexibility than for the
other product types – production is always to order, and the plans can change to
assure on-time delivery for orders with delivery on short notice. Adjustment to
capacity needs is required, for example in holiday seasons, when there are many
promotions. The approach to production costs is therefore more flexible. While
paper accounts for a large share of the cost of conventional packaging or even of a
consumer-packaging box, for a display the ratio of paper cost in relation to a total
cost is much lower. Design and sales account for a larger share of costs for displays
146 K. Cieslak
in comparison with the other products. From the customer’s perspective the cost of
the box is often not linked directly to products, but to an advertising campaign.
Non-monetary performance indicators play an important part in control of the
display business at SCAP. Examples of such indicators include on-time delivery
in full and hit rates, the latter being defined as the number of design orders that
finalize in a sale. A Financial Director of one business unit with a display site
described the control of design costs in the following way:
What we are doing right now is monitoring [hit rates] and we have conversations with
customers saying: [. . .] “You should start giving us some orders,” so [we are] trying to
recognize the value [of design] and using that as a selling tool, to reinforce the message
“you need us, we are the company you need”.
(Finance director)
Referring to the differences between conventional and display packaging, a

display-site manager noted:
The display business is different from others in SCA Packaging. We don’t give any
consideration to the square meters, because our run lengths are short. [. . .] Running
speed is not a driver of the business; set times are. Breakdowns we clearly have to keep
to a minimum, but if the machine breaks down obviously we do all we can to fix it as quick
as we can. [. . .] This business is very customer focused; it has to be, as everything we do is
promotionally based. In this business cost efficiencies and production efficiencies become
harder to deal with. For this type of business we cannot say “we cannot afford to work
overtime tonight”. We have to do whatever is necessary to deliver to the customer the day
they want it. Because when they miss the slot for their promotion, then the implications for
this business would be huge. Without a temporary workforce we would not be able to run
the business. But what we have managed to do here is to handle that flux, for we are a
profitable business.
(Plant manager, display)
SCAP underwent intensive expansion during the 1990s and the beginning of the
2000s, through both acquisitions and green-field investments. There are around 170
SCAP plants across Europe which are profit centres; this large number can be
explained by the relatively high cost of transporting corrugated board packaging
over long distances, as well as the ambition of offering ‘local service close to
customer facilities’. The plants are grouped into business units, called management
clusters, and these are quite self-contained (there are few links with other business
units). On the whole, management is decentralized – the number of management
clusters is quite high, and they have considerable freedom of action. Business units
(management clusters) are organized along geographical lines (there are no overlay
units spanning product categories in Europe). However, the product dimension is
also taken into account in most cases; for example, in one country there may be two
business units, one for consumer packaging and one for conventional products, with
the plants as sub-businesses. Between the business units and the corporate parent
there is also a management level with seven managing directors who are responsi-
ble for groups of countries or for individual countries. This situation represents a
change since the study was performed, when there were numerous country
managers and five regional managers. In some cases the change has taken away
one level of management, contributing to a simpler structure and with potential
positive implications for strategic congruence, as will be noted in Sect. 6.5.
With regard to parenting style, SCAP’s headquarters can be seen as a parental
developer. They follow the profitability of all business units and plants and perform
‘interventions’ such as turn-around plans for clusters with performance problems.
At times, underperforming plants are disposed of, but such actions are not typical;
rather than strict appraisal of plants, which is characteristic of portfolio managers,
corporate headquarters at SCAP focuses on transferring their knowledge and
competence to the business units. Examples of the centrally developed specialized
expertise are product development and branding expertise from the innovation
center, the corporate LEAN program for continuous improvements in production
efficiency and a corporate enterprise resource planning (ERP) system introduced at
selected locations. As parental developer the headquarters also provide envisioning
and strategic intent/mission (SCAP as sustainable and innovative full-service
provider).
As earlier noted, the parental developer style seems congruent with both
low-cost and differentiation strategies at the business-unit level. At the same
time, a vertical fit between the functional manufacturing strategy and the
business-unit strategy appears to have been easily achieved at SCAP, as the types
of machines determine to a great extent the types of products that can be produced
and how they can be produced; these constraints then affect the business-unit
strategy. The following sections will focus on the horizontal dimension of strategic
congruence in business units.
6.4 Empirical Illustration: Horizontal Strategic Congruence

and Integrated Control System in Practice
After the review of SCAP, this section is devoted to outlining in more detail how
horizontal strategic congruence and an integrated control system well-suited to
strategy may function in practice. This section concerns a management cluster
(business unit) that can be representative for most management clusters in SCAP.
The business unit described has high horizontal strategic congruence, with plants
working jointly as a team. The description is in the past tense, as some time has
elapsed since the study was made, although it can be assumed that the strategic
focus and the control system have remained quite stable. The description shows
how a well-integrated control system is used interactively in day-to-day manage-
ment, rather than being a coercive monthly follow-up of performance.
148 K. Cieslak
Shared Service Center, ½ data validation

Financial Controller, employee
Assistant
1 data validation Separate

employee
Consumer
packaging
Industrial Controller,
Assistant Industrial Controller, Display
2 assistants, 1 SSC employee
Separate
Fig. 6.1 Sketch of the business unit (Based on Cieslak 2011)
6.4.1 Organization and Horizontal Strategic Congruence
The representative case illustrated in this section concerned one of the two
independent business units in a European country. The business unit included five
plants, of which four were consumer-packaging sites and one was a display site.
The display site had its own management team and was run independently of the
management cluster – only at month-end were its results reported to the cluster’s
Financial Controller for corporate reporting. The Industrial Controller of the cluster
referred to the display site in the following way:
It is completely different; we cannot compare the display site with the other plants because
it is not at all involved with the same machines, not the same processes or the same things in
any respect. There is nothing of interest to compare.
(Industrial controller)
One consumer-packaging site from a neighboring country – the only SCAP plant
in this country – was also included in the business unit, but like the display site it
had its own separate management team, and contacts were limited mostly to
reporting the month-end results.
Figure 6.1 is a sketch of the business unit, showing the geographical location of
its plants and its controlling department (the sizes of the plants on the picture
represent relative revenues).
As can be seen in the graph, the plants in the cluster were all consumer-packaging
facilities, apart from the display site, as noted earlier. The horizontal strategic
congruence among the consumer-packaging plants was high as these sub-units
followed the same strategy, implying the same critical success factors, context of
decision-making and information needs. The four plants in the country were man-
aged as a single entity, and a single approach to management could be established.
Information about the bottom-line financial performance of the plants was received
by the plant managers from the shared service center (reports on actual monthly
performance vs. budget performance for all plants), but it was not the main focus.
Joint accountability was more important, and the Financial Controller reported
monthly to corporate headquarters on the joint performance of all the plants. The
strategy at the business-unit level could be regarded as differentiation with a careful
tracking of costs at the same time – production efficiency was considered important.
As stated earlier, this strategy was congruent with the parenting style of the
parental developer. Also, the manufacturing strategy for the cluster was congruent
with the business unit-level strategy; manufacturing was characterized by quite
limited flexibility, with attention given to production efficiency; however it was far
from being totally inflexible. Rather, it was adjusted to the needs of the business-
unit strategy. For example, orders were analyzed every day before the planning for
optimizing the production process. Similar orders could be handled together to
decrease set-up times for machines, while at the same time orders for packaging of
luxury goods could be split off in order to minimize risk in case of faults in
production and to ensure top quality. Manufacturing was done to order, and
incremental investments in machines could be proposed for increasing the value
of orders, especially those of considerable size.
The controlling department was organized in such a way that the shared service
center and the Financial Controller, who prepared monthly performance reports for
headquarters, were based in a central location (where the Managing Director and
Sales Director were also located, though there was no plant). The Industrial
Controller and his team were based at the largest site, but the Industrial Controller
often visited the other plants. The Industrial Controller was a pivotal member of the
management team. He ran the control system and was referred to as ‘the person that
is really at the center of the different information flows,’ as one employee aptly
stated. Two data-validation employees were located at two other plants, and their
responsibility was to ensure the correctness of data registered in the ERP system
(one data-validation employee was responsible for two plants). There was also
rotation of plant managers and production managers between plants, which
contributed to the functioning of the business unit as a single entity.
6.4.2 Management Control and Strategizing in Practice
The horizontal strategic congruence meant that critical success factors, context of
decision-making and information needs were similar for the sub-businesses, which
thus needed the same management controls. The control system was integrated – it
150 K. Cieslak
Table 6.1 Examples of ORDERLINE measures (Based on Cieslak 2011)

Order Price variance Value added Waste Other variance Pre- versus
No. (%) variance (%) variance (%) (%) post-performance
Price obtained in Estimated Real versus Estimated Targeted versus
negotiations machining time estimated versus real actual EBIT
versus estimated versus real waste of costs for e.g.
price from the machining time at paper transport,
calculation model standard machine- subcontracting
cost rates
was used by all the sub-businesses and well suited to the strategy of differentiation
with attention to low costs.
One of the principal tools of control used in the business unit was a balanced
scorecard report, prepared monthly for each plant separately. The figures in the
scorecard were discussed when the Industrial Controller visited the plants during
the month, and also at a meeting of the business-unit management team once every
2 or 3 months. The balanced scorecard was a mixture of monetary and non-
monetary indicators of performance, including overall measures of plant perfor-
mance, numerous measures of production efficiency for the low-cost element of
strategy and also measures of quality. Examples of indicators were different
measures of plant results; costs of subcontracting, temporary labor, maintenance;
waste variance; value of production destroyed because of customer complaints; and
the so-called “value added” variance, a sum of differences between estimated and
real machining times at standard machine-cost rates.
The indicators were selected to provide a snapshot of performance. The value of
the report lay to some extent in the format of data presentation: an Excel table with
scores for each measure, shown for all months so that trends could be detected. In
addition, different colors for fonts and cells were used, such as a red font for
negative numbers:
This report is very important for you as a plant manager since it gives you your result month
by month and shows the way you have chosen in order to improve. [. . .] The report is very
interesting, as I have all the main numbers necessary to tell me how the results of the plants
are achieved. This is a really good support for internal communication with the plant.
(Technical Director of the cluster and plant manager)
The balanced scorecard report was complementary to another instrument of

control, an Excel spreadsheet linked to the IT system, referred to in this chapter
as ORDERLINE. Whereas the balanced scorecard related to the plant as a whole,
ORDERLINE tracked a few selected measures estimated in the calculation model
versus actual profitability for each customer order (Table 6.1).
The information about orders could be aggregated for a selected customer, a
customer sub-segment or a customer segment. The tool was used as an internal
communication channel, to link all departments in the plants, including the
calculations department led by the Industrial Controller, sales representatives,
production departments and plant managers. ORDERLINE was used not only to
control performance of sales employees (the price variance), or performance of
production (plants) (the value added and waste variances), but also, importantly, for
active management of customer orders.
For use in negotiations, sales representatives could obtain historical data from
ORDERLINE to check how orders of a particular customer had performed in the
past in terms of profitability; this information was useful in deciding on price
decreases, for example. The Industrial Controller assisted sales representatives
and was often a final arbiter in pricing decisions. Additionally, to offer increased
value to customers, the calculations department, sales employees, or plant
managers could suggest incremental investments in machines, with the Industrial
Controller again in the role of final decision-maker. The Industrial Controller
contacted the design center and a technical department to assess how these
investments would impact on the parameters in the calculation model. Achieving
a higher price on an order could cover the investments. This process of incremental
investments supported by the calculation model and the ORDERLINE instrument
was part of the differentiation element of the business unit’s strategy. Customers
could be offered improved product design and functionality, especially when the
order was of considerable size.
The ORDERLINE tool was used jointly by organization members in ongoing
processes of pricing, negotiating and incremental investments. Moreover, by
outlining profitability of different market segments, ORDERLINE could provide
input for the strategy process where significant investments were being made to
develop chosen market segments. On the business-unit level, ORDERLINE was
used by the Managing Director and the rest of the management team to outline
future investments for development of the most profitable customer segments.
As part of the parental development proposal, corporate headquarters decided to
introduce the LEAN corporate program in the business unit. The aim of LEAN was
to improve efficiency and quality by creating a “continuous improvement” mental-
ity, mainly on the shop floor. The LEAN program included monthly tracking of
nine KPIs (key performance indicators) including non-monetary measures of pro-
duction efficiency (for example, paper waste), monetary measures of cost and profit
(for example, conversion costs per 1,000 m2), but also indicators of quality for
exceptional service to customers (for example, on-time in full deliveries and
number of customer complaints). The set of indicators showed the importance of
both differentiation and low cost. To achieve the nine KPIs, workers at plants had to
suggest and implement the so called tactical implementation plans. The value of the
LEAN program was evidenced in the organized daily meetings on the production
floor. Production employees met at performance boards for machines, where the
machines’ performance parameters of the previous day were shown. There was a
discussion on how production could be made more efficient and thus help to
achieve the KPIs. A template form could be filled in by employees, with suggested
solutions for machine breakdowns or other complications in the process. The
generally positive view on LEAN was that it mobilized all workers to share their
tacit knowledge and thus contribute to the company’s success. On the whole, as
152 K. Cieslak
with the calculation model and ORDERLINE, LEAN was a control instrument that
was used interactively in on-going management.
Business unit management had a rather flexible attitude toward the LEAN
indicators. As described in the previous section, LEAN was best suited to conven-
tional packaging sites, as the strategy for consumer packaging entailed more
emphasis on differentiation. For example, an increase in paper-waste percentage
for a particular order could mean achieving higher customer satisfaction through
better box design. Higher satisfaction could then make it possible to obtain a higher
price for the product. Similarly, an increase in conversion costs could be linked with
higher value for customers and higher revenues. The LEAN program, although seen
as a useful compliment to the control system, especially for its meetings in the
production area, was translated to the needs of the cluster, with an unspoken
agreement on the importance of achieving some of the performance indicators.
There was also a “veto” process as part of the integrated control system that
aimed at ensuring both high production efficiency and high product quality, in line
with a mix of differentiation and attention to production costs. One important part
of the process was an analysis of all the orders in a search for possibilities of
improvement. For example, two similar orders recorded for the same day of
production could be linked so that only minimal set-up modifications were needed.
At the same time, for new luxury orders in large quantities, a decision could be
made to split production into two runs as this was safer, to ensure top quality.
Changes in orders could be followed by changes in cost calculations, which
affected the price in the calculation model and the time allowed for production.
This could cause occasional objections, chiefly from sales representatives when
orders were split (a higher price was required to defray the additional cost of double
set-ups). In any “veto” case, the Industrial Controller acted as final arbiter to resolve
any disagreements.
A few words can be devoted to the use of budgets in the business unit. Budgetary
control was rather loose, and the budget was not a tightly binding contract; these
features are typical of a differentiation strategy. Sales budgets were not the only
criteria in the appraisal of sales employees. Similarly, budgets were not extensively
used in the appraisal of plants. The Industrial Controller allocated capacity plans by
assigning customer segments (sub-segments) to the plants, and there was an
understanding that the plants did not fully control their revenues – rather they
worked as a team as “sub-businesses” of the business unit. The analysis of budget
versus actual results was still prepared separately for plants by the Financial
Controller: plant managers received a budget report, but they did not pay much
attention to it. The appraisal criteria for plant managers included the joint profit of
the business unit, together with each plant’s efficiency measures (for example, the
value added variance). Considerable attention was given to production efficiency,
but as stated earlier, lowering costs was not the only objective. One example was
the incremental investments in machines to fulfill customer-specific needs; these
were discussed by the Industrial Controller with the design center. The selling price
could then be increased to cover these investments.
The control system organized communication among organization members in

the business unit. Information from the control system was discussed in detail
during management meetings of the business unit. The communication not only
provided information for decision-making; it could also generate ideas for improve-
ment of control instruments. With regard to the management meetings, twice a year
there was a strategy meeting attended by the Managing Director, the Sales Director,
the Technical Director, the Industrial Controller, and the Financial Controller. The
Industrial Controller had a high profile in the discussions; with the ORDERLINE
tool, he could provide input for the strategy process by outlining the profitability of
the different market segments.
There was a more widely attended management team meeting every 2 or 3
months, where plant managers and, interestingly, regional level management were
present. At the meeting the results of the latest period were presented, and
indicators from the balanced scorecard report were discussed, followed by updates
on the LEAN program. The meeting was also an occasion to discuss with plant
managers and regional managers the overall investment strategy for development of
selected customer segments. The regional-level managers who attended the
meeting had a direct link with corporate headquarters and played a role as liaison
in the subsequent approval of major investments by the corporate center.
As exemplified by the case description, the control system was suited to the
needs of the business unit-level strategy as one of differentiation with attention to
low costs. The control system was integrated, as it was used by all sub-businesses,
and the different instruments of control complemented each other according to the
needs of the joint strategy. The information used for control of manufacturing and
commercial activities was also used to manage the entire business unit and at times
was also utilized in communication with headquarters.
6.4.3 Tests of Organizational Design
Organizational design can be seen as an important factor in achieving horizontal

strategic congruence, and thus a common strategy and integrated control, which
subsequently affects the sustainability of a particular design. Arguably the organi-
zational design in the business unit passed the tests of good design. It is suggested
that the organizational design in this case passed the market-advantage test. The
strategic business unit was composed of homogeneous sub-businesses – plants with
the same strategies – and the horizontal strategic congruence was high, with a
corollary of ‘sufficient attention’ given to the needs of the consumer-packaging
product category, i.e. to the operating priorities and intended sources of competitive
advantage (Goold and Campbell 2002a). In the business unit described, the
operating priorities of consumer packaging were given attention through processes
of tracking production efficiency with the balanced scorecard and LEAN. Attention
to the “sources of advantage” was ensured by measures of quality and processes of
incremental investments to meet customer needs in each particular order, as well as
pricing and general investment plans based on the ORDERLINE tool.
154 K. Cieslak
In the business unit described, all sub-units received data on their individual
monthly financial performance compared to budget. However, as mentioned earlier,
since all plants were of the same type, they were jointly managed as one entity, and
less attention was given to their separate financial results. The role of management
at the business unit level was clearly defined and included strategy formulation (for
example, investments in machinery for development of new customer segments),
organizing relations between sub-businesses (for example, in capacity sharing),
discussing production quality and efficiency issues with the help of balance score-
card indicators; and a daily management of orders by the Industrial Controller. It
can be argued that the hierarchy test was passed, as the role of business-unit
management was clearly adding value.
With regard to the feasibility test, there emerged no constraints linked with
organizational design at the business unit, and thus the test could be regarded as
passed. The IT system was shared by the consumer-packaging plants, as they had
the same information needs, and the knowledge provided by the system was seen as
satisfactory:
I think that with this structure we have good level of knowledge, we have broad information
from the different plants, we have the right things to manage, we have a very good IT
system.
(Industrial Controller)
6.5 Challenges of Low Horizontal Strategic Congruence
Following the description of the business unit that can be considered representative
of SCAP, this section is devoted to a rather unique situation where a business unit
was formed as a result of acquisitions of three packaging companies in the same
country. At the time of the study, this business unit had many plants and was faced
with challenges related to temporarily low horizontal strategic congruence. At this
time, the business unit was undergoing organizational changes. After the interviews
a few plants were sold, possibly in connection with processes of consolidation – a
few words about organizational changes will be given in an epilogue to this section.
6.5.1 Organization and Strategic Congruence
Figure 6.2 is a sketch of the business unit, showing the geographic location of its
plants and its controlling department (the sizes of the plants on the picture represent
relative revenues). As can be seen in the figure, the strategic business unit
was composed of plants producing many different product categories including
conventional packaging, consumer packaging and display, merchandise, EPS
Finance Manager,
Controller Controller
Conventional
Controller packaging
Merchandise
Controller Shared Service Center,
Finance Director
Controller
Controller Display
Consumer packaging
EPS (expanded polystyrene),

EPP (expanded polypropylene)
Packaging systems
Fig. 6.2 Sketch of the business unit (Based on Cieslak 2011)
(expanded polystyrene), EPP (expanded polypropylene) and packaging systems.

Given this considerable variety, it was challenging to manage the business unit as
one entity, and horizontal strategic congruence was limited. As described in
previous sections, different product types imply different critical success factors,
different contexts of decision-making and different information needs; these
differences translate into different controls.
The Managing Director and the Financial Director of this business unit were
based at a central location, where there was a shared service center (SSC). At the
business-unit level there was also the Marketing Director, but no technical or sales
directors. The Financial Director was a head of the SSC, which to some extent
determined his responsibilities, mainly relating to issues of financial reporting (in
contrast to the business unit previously described, where there was a separate SSC
manager). The financial reporting of the numerous and diverse plants took a
considerable amount of the Financial Director’s time, possibly leaving less time
for other issues concerning the plants. Plants were assigned controllers (at the
largest conventional site there was both a controller and a financial manager for
all the conventional plants), but not every plant had its plant manager. For example,
at the time of the interviews, the Managing Director not only managed the business
unit as a whole, but he also fulfilled the role of general manager for the three
conventional packaging sites.
The business unit was not functioning as an integrated entity, and some plants
argued for more freedom. Centralization of decision-making on the business-unit
level was at times seen as problematic in the business unit, in contrast to the
business unit described in the previous section. The Finance Manager and the
Controller of the conventional plants stated that they would like to be more
involved in internal projects at plants, but that many matters ‘come from above’.
156 K. Cieslak
I think more power should be given to the local managers. Decisions should not be as
centralized as they are today. If you give local managers more authority, they will take
more responsibility and that could lead to more joy in working.
(Controller of the smaller consumer-packaging site)
We are not able to make decisions to go in the direction we want [. . .] We deliver the
figures and the analysis, but we don’t have a say in what the strategy is going to be.
(Controller of conventional plants)
With regard to business-unit management, it can be argued that overall respon-

sibility for the business unit in case of high heterogeneity limits the capacity to
analyze the different plants in detail. There is usually a trade-off between the
breadth and depth of management involvement. In the case of centralization,
cognitive limitations of managers are the main constraint on the comprehensiveness
of the strategy (management) process (Fredrikson 1986), and cognitive challenges
are posed by the complexity rather than the amount of information received
(Halford et al. 1998).
6.5.2 Management Control
As mentioned earlier, low horizontal strategic congruence may hinder integration

of a control system within a business unit, understood as the use of complemen-
tary instruments of control by all the sub-businesses. In the business unit
described, there were a variety of sub-businesses with different critical success
factors, which translated into a need for a variety of controls. As noted in one of
the previous sections, the display business focuses on products often sold for
sales promotions with mostly an advertising function, and delivery on time is
very important. Production efficiency becomes relatively less crucial than control
of design and sales costs via for example hit rates and project-based costing. In
consumer packaging, profitability of orders is often managed with incremental
investments in machines for meeting particular customer needs, whereas in
conventional plants measures of production efficiency and analysis of contribu-
tion are very important.
In the business unit described, there were also plants with EPP (expanded
polypropylene), EPS (expanded polystyrene), packaging systems and merchandise
sites. In EPP and EPS plants, environmental controls and control of suppliers
constituted an important part of a control system. The merchandise sites sold
boxes and packaging accessories manufactured at other plants. The principal
instrument of control for merchandise sites was expanded sales statistics. The
sales statistics included continuously updated visualized reports about the share
of different customer products, including products that a particular customer did not
buy although it potentially could.
In sum, there was a variety of controls in the business unit that were not used by
all the sub-businesses; neither did they complement each other. The Finance
Director observed:
For different types of products, you need different KPIs [key performance indicators]:
different for EPS, different for consumer packaging, for brown boxes and display.
(Finance Director)
Similarly, the Managing Director mentioned that KPIs were discussed

‘locally,’ as they differed. ‘You have another focus,’ he added. In fact, at the
management meeting of the business unit, information from the control tools of
the different plants was not discussed in detail, in contrast to the business unit
previously described. The explanation could have been the limited time assigned
to one meeting. While some complexity can be well managed, when complexity
rises to a certain point, managing variety becomes difficult. Given the limited
cognitive capabilities of human beings and the fact that complexity rather than
amount of information poses a cognitive challenge (Halford et al. 1998; Simon
1957), it was arguably not possible to analyze in detail all the sub-businesses at a
single meeting. The management meeting for the business unit concerned mostly
general issues, and financial performance in relation to budget was reported by
all sites though perhaps not fully relevant to the needs of some product
categories (e.g. display):
[During the management meeting of the business unit] we discuss monthly results,
expectations for the future – what can we do to fulfill our budget, what is coming from
Stockholm, from Brussels, how is the company running. [. . .] We have also a big meeting,
where we include all reporting to me. [. . .] It [the meeting] is more general, what we from
the management have to communicate to everybody – finance situation, cash flow situation,
HR items.
(Managing Director)
Because of low horizontal strategic congruence, it was not possible to analyze

all the sub-businesses in detail during one management meeting. At the same
time, the sub-businesses were still part of one business unit, with considerable
decision-making authority in the hands of business-unit management, most
notably the Managing Director. The decision-making authority of local manage-
ment was limited, whereas more independence for sub-businesses (plants or
groups of plants) could arguably be relevant in this case. For example, the
Controller and the Finance Manager of the three conventional plants attempted
to introduce pre- and post-cost calculations of machining time to assess produc-
tion efficiency at plants (this corresponds to the value-added variance used in the
case previously described); however, no regular process for this performance
appraisal had been established at the time of the interviews. The Finance
Manager and the Controller did not have full decision-making authority, whereas
the Managing Director was directly responsible for managing both the three
conventional plants and also the entire business unit. To a certain extent the
problem might have been due to lack of management time and attention. Also,
the Controller and the Finance Manager argued for more involvement in
controlling pricing processes in real time in the sales department in order to
analyze ‘which customers are the good customers’ and to ‘try to increase the
158 K. Cieslak
profitability of some customers’. However, the Managing Director met with sales
employees instead. The Managing Director emphasized achieving full margin on
all orders, a policy questioned by the Controller and the Finance Manager, given
the dropping sales at that time.
6.5.3 Tests of Organizational Design
The organizational design at the time of the study led to low horizontal strategic
congruence within the business unit, which in turn made it difficult to preserve this
design. With regard to the feasibility test, in the business unit described, a new IT
system was being introduced at all plants. Although it cannot be claimed that the
organizational design with high complexity of the business unit was ‘unworkable’
for the introduction of the IT system, organizational members observed that
adjusting the IT system to the information needs of all plants was taking consider-
able time and effort. It could be argued that much less time and effort would have
been spent on introduction of a new IT system in the previous case, where there was
high horizontal strategic congruence. The Managing Director mentioned that the
business unit was seen as an experiment from the headquarters’ point of view,
and he stated:
If it is possible to implement [name of IT system] in [name of country], where we have all
the different product groups, then it should be possible to implement it all over Europe.
(Managing Director)
As for the market advantage test, i.e. whether the design gives sufficient
attention to the operating priorities and sources of competitive advantage for
the different businesses, one could argue that the attention from business unit-
level management, dispersed as it was among a variety of different product
businesses, was not sufficient. For example, being located closer than the
Managing Director to the customers, the Controller and the Finance Manager
questioned the emphasis of the Managing Director on achieving full margin on
every order, yet they could not manage orders flexibly as they did not have
enough decision-making authority.
Finally, the organizational design was arguably at the origin of the hierarchy-test
problem in the business unit. One plant manager noted: ‘In an organization like ours
it is layer, on layer, on layer, and communication has a long way to go before it gets
to our level.’ The manager of the merchandise site provided an example. Namely, it
took too long to obtain approval from business-unit management to set up a meeting
of the business unit’s controllers, as management was preoccupied with other
issues. As noted, managers at the business-unit level had considerable complexity
to grasp, and this fuelled the view that knowledge and competence were located at
plants rather than at the business-unit level. The plants of the business units were
formally sub-businesses of a single management cluster, but they were neither
sufficiently integrated to function as one entity, nor sufficiently independent to
fully manage their own operations. For example, the Controller and the Finance
Manager of the three conventional plants expressed dissatisfaction with the lack of
authority to make decisions in activities related to control systems and a strategy
that would ‘be binding’ and ‘provide a holistic view’.
6.5.4 Epilogue
Significant changes in the organizational design of the business unit were made
after the study was performed, and they can be briefly described. The business-unit
management level was dissolved, and plants or groups of plants started to report
directly to a regional Managing Director, of whom there were seven in the new
regional management structure. At the same time, the new regional Managing
Director was responsible for just the one country where the business unit was
located. With reporting directly to the regional-level Managing Director, plants
could gain more independence, potentially resulting in the emergence of small new
business units. At the same time, some plants were disposed of, as noted above; this
step somewhat decreased the prevailing complexity, opening up new opportunities
for integration. The organizational changes can be perceived as helping to increase
horizontal strategic congruence.

The model of Nilsson and Rapp (2005) focuses on vertical strategic congruence
and the accompanying integration of the control system, and the importance of
the vertical dimension of strategic congruence is highly acknowledged in this
chapter. At the same time, the concepts of strategic congruence and integrated
control are further utilized to elucidate the horizontal dimension of strategic
congruence within organizations. The chapter provides evidence when the
vertical strategic congruence was achieved, but integration of the control system
was problematic in case of limited horizontal strategic congruence. The focus of
previous research on horizontal aspects of strategic fit was on inter-company
relations in horizontal alliances (e.g., Douma et al. 2000; Swoboda et al. 2011),
or on intra-company relations between business units (see Palich et al. 2000 for a
review). This chapter looks more closely inside an organization and emphasizes
the importance of horizontal strategic congruence within a business unit, that is,
inside an organizational unit where the product-market strategy is being pursued.
The concept of horizontal strategic congruence coined in this chapter is
defined as similarity in the strategic focus of the sub-businesses (be it low cost
or differentiation), and it is linked with horizontal integration of a control system,
a joint use of complementary control tools by all sub-businesses. Strategies differ
in regard to success factors, context of decision-making and information needs
(Nilsson and Rapp 2005), which translates into different needs for control.
Horizontal strategic congruence then facilitates horizontal integration of the
control system within the business unit. Business-unit management is responsible
for actively running operations and developing strategy for the business unit.
160 K. Cieslak
With rising complexity in case of low horizontal strategic congruence, their task
may at some point become very difficult to handle, given the cognitive limitations
of human beings and the fact the cognitional challenges arise from the complexity
rather than the amount of information (Halford et al. 1998; Simon 1957). In
sum, horizontal strategic congruence simplifies management as it facilitates
development of a common strategy and an integrated control system.
In the illustration of temporary difficulties with horizontal strategic congru-
ence at one business unit, the plants manufactured different types of products.
As a corollary, the control system was subject to differing requirements. This
occasionally led to tension between autonomy of plants and cohesion of the
business unit. It was difficult for business-unit management to address the
needs of all the plants. At the same time, limited autonomy of plants and in
some cases limited decision-making authority of plant employees may have
hindered the development of the control systems for the different plants. The
organizational design, with low horizontal strategic congruence, was tempo-
rary and not sustained – the organizational changes implemented in the
business unit can thus be viewed positively for having led to elimination of
the incongruence.
In the representative business unit, there was horizontal congruence of plant
strategies, with the plants as sub-businesses working as a “quasi team” within the
business unit (Goold and Campbell 2002a). The profits of the individual plants
were tracked, but their separate accountability was limited by their lack of full
autonomy. Among the plants the control system was integrated, and it was well
suited to the strategy of the business unit of differentiation with attention to low
costs, creating a process of coherent strategic planning and monitoring of results.
Not only was the control used diagnostically to ensure effective implementation
of strategy, but in addition an interactive analysis of information supplied by the
control tools allowed decision-making about the future, thus enabling the orga-
nization to move forward.7
In line with Nilsson and Rapp’s model, as well as the other contingency-based
research on strategy and management control systems (see Langfield-Smith
2005 for a review), this chapter underscores the importance of a fit between
strategies and management control systems. The chapter constitutes an attempt
to outline a management control system at SCAP well suited to the strategy of
innovative design and efficient production; the system that goes beyond monthly
reporting of financial performance to headquarters and utilizes instruments of
control tools interactively. SCAP has been skillful overall at incorporating
differences in the need for controls for the different product strategies in their
organizational structure of mostly homogenous business units. The chapter also
argues that horizontal strategic congruence within business units cannot be taken
7
This corroborates a line of thought where accounting, and more generally management control
systems, are regarded as tools not only for strategy implementation, but also for strategy creation
(Jørgensen and Messner 2010; Simons 1990; Skærbæk and Tryggestad 2010).
for granted. Further, it appears essential to the development of a coherent system

of control well suited to strategy, which facilitates management in an organiza-
tion. In summary, the concepts of congruence and integration, which are central
to Nilsson and Rapp’s (2005) model, remain powerful means of describing and
explaining organizations.
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www.scapackaging.com, information retrieved in January 2012.
Linking Strategy and Inter-organizational
Relationships: The Case of Volvo and 7
Scania
Zita Ambrutytė
7.1 Introduction
Strategic congruence and integrated control to improve strategy continuously are

seen as one of the ways towards creating competitive advantage and is the central
theme of this book (Nilsson et al. 2011; Nilsson and Rapp 2005). This chapter
extends the discussion in Chap. 4 in this volume, presenting Scania as an example
of how strategic awareness and priorities are conveyed by the integrated manage-
ment controls of the organization. The example of Scania is further explored in a
discussion on how different strategies adopted by two companies result in different
control systems for managing inter-organizational supplier relationships. Scania’s
truck manufacturing is compared to Volvo’s truck business, which has also
demonstrated sustainable management control systems (MCS) and a strong culture
of strategic planning and performance controls leading to goal achievement.
Further, this chapter focuses on how the truck businesses at Scania and Volvo
integrate the controls of the suppliers. The evidence (Dekker 2004; Harland 1996)
shows that firms increasingly engaged in forms of collaboration, especially
recently, are characterised by expansion of outsourcing and competitive
partnerships. Some previously intra-organizational functions have thus been placed
outside organizations. As a result, the development of competitive advantage has
extended beyond organizational boundaries to include both intra- and inter-
organizational cooperation and its controls. The purchasing function is analysed
here as an important interface between intra- and inter-organizational issues, where
different models of coordination are applied, depending on the critical aspects
involved in controlling the inter-firm relationships and interdependence of firms.
These differences are also analysed by relating business strategy to controls of
inter-organizational relationships.
Z. Ambrutytė (*)
e-mail: zita.ambrutyte@gmail.com

164 Z. Ambrutytė
The chapter is based on the two studies by Ambrutytė (2005, 2008), where
relationships between strategy and the internal purchasing function as well as inter-
organizational controls were analysed and compared. Findings from earlier
research (Ambrutytė 2005) led to the assumption that the control patterns for
relationships displayed by the different manufacturers could be influenced by
factors other than merely the relationships themselves. Advancement in theory,
method, methodology, and new knowledge in qualitative field studies, as proposed
by Ahrens and Chapman (2006), are intertwined through the on-going development
of hypotheses in the field. One such hypothesis developed through earlier interac-
tion in research was that strategy might have a very significant influence on the
differences observed. The purpose of this chapter is therefore to analyse the effects
of strategy on management control systems used in controlling relationships with
suppliers, while also reflecting on the management control systems within the
purchasing function.
7.2 Fitting Strategy with Intra- and Inter-organizational

Controls
The strategy-MCS model of Nilsson and Rapp (2005) introduces the concepts of
strategic congruence and integrated control, proposing that certain combinations of
strategies on the corporate, business unit and functional levels are compatible and that
controls throughout the firm can be employed towards their achievement. The
alignment of strategies and control systems is believed to affect the chances for
firms to successfully position themselves as competitive (Nilsson and Rapp 2005).
Further, as the importance of strategic partnerships increases, there is a need to control
inter-organizational relationships as well. The coordination of inter-firm relations, as
proposed by Seal et al. (1999) and van der Meer-Kooistra and Vosselman (2000),
requires the establishment of suitable management control systems and processes.
Different coordination models are applied in different situations, depending on the
critical aspects involved in controlling inter-firm relationships and the interdepen-
dence of firms. Alignment of strategy and intra-organizational controls could be seen
as one of the principal factors shaping inter-organizational controls.
The strategy-MCS model of Nilsson and Rapp (2005) is thus extended to include
the inter-organizational dimension. The three principal areas in focus here are
therefore strategy, management control and inter-organizational relationships.
The contingency approach to management control is based on the premise that
there is no universally appropriate control system which applies equally to all
organizations in all circumstances. The effectiveness of an organization is posi-
tively correlated with the fit between contextual variables and structure. According
to Merchant and Simons (1986), contingency research focuses on the relationships
among organizational characteristics, controls, and performance, suggesting that
organizations can be customized to facilitate performance in a variety of settings.
Business strategy, which is in focus here, refers to how a company competes in a
given industry and positions itself among its competitors (Simons 1990, 1995).
7 Linking Strategy and Inter-organizational Relationships: The Case of Volvo. . . 165
Researchers agree that typologies of strategy are comprehensive profiles of

different types of strategies and make it possible to measure relationships
between strategy and management control systems (Langfield-Smith 1997). The
use of typologies is assumed to be valuable in conceptualizing the strategy-MCS
relationship (Macintosh 1994), and Porter’s (1980) business strategy typology is
given special acknowledgment for providing a solid basis for linking different types
of MCS to generic strategies (Chenhall 2005). For the purpose of the analysis in this
chapter, Porter’s (1980) typology has been adopted with the aim of linking business
strategies and MCS configurations in managing supplier relationships. Classifi-
cation of business strategy into differentiation and cost leadership, however, is
not expected to perfectly fit the organizations studied. It is assumed that these
generic strategies represent ideal types and that contemporary organizations posi-
tion themselves closer to or further from these types. Furthermore, each ideal type is
assumed to possess certain organizational requirements like control procedures,
incentive systems, that must be met for the strategy to succeed (Porter 1980). In
accordance with Porter (1980), a differentiation strategy would ideally require
strong inter-functional coordination, less rigid controls, individualised incentives
and the ability to attract skilled and creative people; low cost strategy would
emphasise tight cost control, frequent reporting, structured organizational responsi-
bilities and incentives based on quantitative targets. It is also expected that large,
complex organizations will be similar in respect to the design of MCS (Simons
1990); however, the use of management controls should vary, illustrating the
interactivity of MCS.
Definitions of management control and management control systems have now
been under development for a couple of decades. The definition of MCS has
evolved from one focusing on the provision of more formal, financially quantifiable
information to assist managerial decision making to one that includes a much
broader range of information, such as external market information and non-
monetary information related to production processes, as well as informal personal
and social controls (Chenhall 2003). In the MCS package proposed by Malmi and
Brown (2008, p. 290), MCS are viewed as a number of various systems introduced
in an organization at different times by different interest groups, where
management controls include all the devices and systems managers use to ensure that the
behaviours and decisions of their employees are consistent with the organisation’s
objectives and strategies.
The MCS package includes elements of planning, cybernetics, rewards and

compensation, administration and culture. These elements encompass the variety
of MCS components and definitions based on the results-actions-people categories
developed by Merchant (1998) and extended by developments in MCS research
including the specific aspects of planning, financial and non-financial measures,
BSC, governance etc. (Malmi and Brown 2008).
Traditionally, management information and management control systems have
focused on intra-firm control and development. However, increasingly inter-
organizational activities also require appropriate management. Internally, as argued
166 Z. Ambrutytė
by Håkansson and Lind (2004), activities are complementary and similar, while
externally they can be complementary but dissimilar; i.e. the boundary of the
company distinguishes two modes of coordination (internal – “hierarchical” and
external – “market”), with matching needs for information.
When relationships need to be taken into consideration [. . .] there is neither a clear
boundary, nor do we have any matching form of internal coordination.
(Håkansson and Lind 2004, p. 54)
Existing accounting (and management control) techniques, as illustrated e.g. by

Tomkins (2001), are also appropriate in business alliances and networks. With
increasing interdependence, closer relationships are recommended; in building
such relationships, cross-organizational management control and accounting
systems are necessary (Seal et al. 1999; van der Meer-Kooistra and Vosselman
2000). Different models of coordination are applied in different situations,
depending on the critical aspects involved in controlling inter-firm relationships
and the interdependence of firms. Empirical evidence shows (e.g. Mouritsen et al.
2001) that within vertical supply chains, there have been a variety of efforts to
control the interrelationships between suppliers and buyers, such as those embodied
in concepts of just-in-time, lean production etc., focusing on the principal measures
of supply-chain management, such as time-to-product and time-to-market. Open-
book accounting was introduced to keep the outsourced production process in view,
and target cost management was one of the principal control mechanisms.
The literature on inter-organizational relationships distinguishes three types of
management controls used, i.e. outcome controls, behaviour controls and social
controls (Kraus and Lind 2007). Outcome controls focus on the relationship’s
results and often include goal setting, cost reductions and financial rewards (profit
sharing). The most common techniques for outcome controls are open books, the
use of integrated information systems, target costing, inter-organizational cost
management, value-chain analysis and rank-based awards. Policies and procedures
constitute behaviour controls, and social controls relate to values, norms and
culture. Outcome and behavioural controls have become standardised or similar
for different companies, whereas social controls are influenced by the choice of
partner and through meetings and negotiations; trust plays an important role in this
regard (Kraus and Lind 2007).
Inter-organizational relations are based on the same principles of rationality as
intra-organizational relations, but the coordination and control of inter-
organizational relationships focus on managing interdependence, solving power
and dependency issues, preventing opportunistic behaviour by the parties, and
achieving the mutual benefits of the relationships. While the model of Nilsson
and Rapp (2005) emphasizes the vertical fit between the integrated system and the
strategy within a firm, the incorporation of inter-organizational relationships
suggests a need for some sort of horizontal congruence in the relationships
established between a firm and its partners. As with the idea of coherent horizontal
controls on the business-unit level, as discussed in Chap. 6 in this book, it could be
claimed that management of different inter-organizational relationships might

require different controls in view of the contingent nature of the relationships
themselves. However, the existence of a coherent strategy for relationship manage-
ment must be assured at strategic levels.
To analyse the issues of vertical and possibly horizontal fit among business
strategies and inter- and intra-organizational controls, the empirical evidence is
discussed with reference to patterns of planning and follow-up in regard to out-
come, behaviour and social categories of management control.
7.3 Scania
Founded in 1891, Scania is one of the world’s leading manufacturers of heavy

trucks and busses. Unlike its competitors, Scania has concentrated its resources on
the heavy transport segment.
Employing 37,500 people, Scania operates in about 100 countries (as of year-end 2011). In
2011, invoiced sales totalled SEK 87.7 billion, and net income was SEK 9.4 billion.
(www.scania.com)
A technologically advanced modular specification system has made Scania the

heavy-vehicle industry leader in terms of profitability. For more than seven decades,
Scania has reported a profit every year; 1934 was the last year with red figures.
Trucks, Busses and Coaches, Industrial and Marine Engines, and Service-related
Products comprise the major business areas of the company. This case focuses on
truck production, which is Scania’s principal business, accounting for some 64 % of
revenue (www.scania.com). Consequently, the case description deals with
planning, monitoring and implementing strategies envisaged for production of
trucks. Scania is presented in more detail in Chap. 4 in this book.
7.3.1 Strategic Focus
This research started with the assumption that Scania pursues a strategy which is
predominantly one of differentiation. This assumption is discussed here through a
review of company publications, business community commentaries and research
findings.
The achievement of “profitable growth,” according to Scania, is secured by
providing customers with high-quality vehicles and services; the business focus is
thus on meeting customer needs in this way. ‘Scania vehicles have a reputation for
being robust and economical. Scania’s manufacturing quality is renowned for being
the highest on the market’ (Scania 2002). Modular principles give the customer
almost unlimited options for tailoring a vehicle to a specific transport task. Vehicles
are characterised by high operating economy, that is, excellent fuel consumption,
reliability, low maintenance requirements, and assured servicing and supply of
168 Z. Ambrutytė
parts. With these attributes, Scania vehicles consistently maintain ‘the best second-
hand value in its market segment’ (Scania 2002).
Since the 1990s, product quality has been claimed to be the primary competitive
strength of the company. From 1995 on, Scania has focused on integration forward,
i.e. buying up distributors with the aim of raising their service level, and the service
part of Scania’s business has been continuously growing since then. Customer
financing was added in 1997, enhancing the distinction of the brand in sales and
service (Gripenberg 2008).
Scania trucks are among the brands with ‘the highest quality, as perceived by the
customer, which is where quality counts’ (Nilsson and Dernroth 1995, p. 288), and
have been termed a “fantastic” brand with the truck industry’s most loyal customers
(Jansson 2006). Scania’s repeat sales percentage of 70–80 % clearly exceeds that of
competitors, which is 50–70 % (Johnson and Bröms 2000). Expressions like “the
King of the road” (Åsberg et al. 2008) and “the Rolls-Royce of the European truck
industry” (Schmid 1997) show the exclusive positioning of the company.
Nilsson and Dernroth (1995) argue that truck manufacturers differentiate through
quality and truck downtime, i.e. the time that the vehicle is out of use for maintenance
and service. Leading product quality and operating performance, a strong brand, an
exclusive offering, leading technical innovations, loyal customers – these laudatory
comments support the claim that Scania is ‘a differentiator in the heavy truck
industry’ (Nilsson and Dernroth 1995, p. 288).
Moreover, Scania is acknowledged to be the most profitable truck manufacturer
(Bergström 2005; Mulligan 2006); its established brand and manufacturing excel-
lence make it an attractive company on the market:
Scania’s strong brand, juicy margins and engine know-how make it one of the most
attractive companies in the industry.
(The Economist 2006, p. 72)
According to analysts, Scania has been the most profitable company in its peer
group, with average margins of 9.4 % over the past 15 years (The Economist 2006).
Scania’s margins reached 15.2 % in 2007 and rose further to a record high of 16.4 %
in the first quarter of 2008 (Affärsvärlden 2008).
Scania is also considered to have achieved high cost efficiency, which is argued
to stem from its modular component system and retaining control of its competitive
R&D and manufacture of principal parts (Nilsson and Dernroth 1995). Conse-
quently, Scania’s strategy is defined as a combination of differentiation and cost
leadership (see Chap. 4).
7.3.2 Purchasing Strategy
For many years, Scania has focused on a limited number of markets for product
sales and material sourcing. Recently, with company’s rapid growth, the sourcing
policy has been changing, i.e. increasing global sourcing, changing supplier geog-
raphy, and a shift to dual sourcing (i.e. two suppliers are used).
The strategy emphasises the importance of choosing the right supplier, rather
than the “right number” of suppliers. Single-sourcing or systems suppliers have
been rare at Scania. Traditionally, many parts have been produced in-house,
especially those believed to contribute to the core competence. For example, the
engine and the driveline have been produced and assembled in-house.
Systems suppliers? I do not think we have them. We have worked with systems suppliers,
and, to be honest, it did not turn out well.
(Scania, Purchaser)
In view of this policy in regard to suppliers, Scania’s purchasing strategy can be

said to focus on multi-sourcing and the search for the “right” supplier, where
cooperation runs smoothly and well. Such a position presumably reflects the
business strategy of focusing on in-house production of strategically important
products and outsourcing less important components, as well as maintaining good
relationships with available suppliers.
7.3.3 Strategy for Relationships
Focusing on long-term relations is something that we always emphasise, with fairness and
openness in the relationship with the supplier.
(Scania, Controller)
Traditionally, long-lasting and smoothly functioning relationships are emphasised

in purchasing, and considerable resources are allocated to this end. Suppliers
have always acknowledged their cooperation with Scania and are proud to
supply to Scania because of its brand image. In addition, their reputation has
benefitted from being trusted by Scania and having good working relationships
with the company.
The supplier-relationships strategy is based on supplier participation in the
product development process, active contribution towards lower total cost, 100 %
quality assurance and reliability of delivery. In practice, however, these principles
are followed only to a limited extent. Supplier involvement in the development
process is much less than with other automotive producers. Many suppliers with
development capability would prefer earlier and greater participation in product
development both to improve product features and to reduce costs. A higher degree
of supplier involvement is a sign of a more open and trusting relationship with
suppliers. Limited involvement and the short-term perspective of cooperation, i.e.
from one competitive contract to another, create considerable uncertainty, despite
Scania’s declared focus on long-term relationships and declared policy of ‘fairness
and openness in relations with suppliers’ (Scania, Controller).
Components of strategic importance are still primarily produced in-house.
Unlike many other companies in the industry, Scania has not pursued an
170 Z. Ambrutytė
outsourcing and supplier-reduction strategy. Most relationships tend to be long-

term. In addition to good contacts and established relationships, the longevity of a
relationship is affected by the use of Scania-owned tools at supplier sites.
We have more or less the same supplier base now as we had 10 or 15 years ago. We are
bringing in some new suppliers when new technologies come along, but it is very tough to
become a supplier and it is hard to get out as well.
(Scania, Purchasing Manager)
Purchasing strategy and other aspects of supplier-relationships strategy echo

Scania’s central business principles, i.e. focus on quality, customer satisfaction and
respect for individuals. Purchasing strategy has been recently influenced by increas-
ing globalisation, but the focus on quality and good relationships remains. In-house
production of strategic parts still predominates, and the sourcing of other
components is characterized by long-term relationships and little supplier change,
and also the “right number” of suppliers. An established supplier base,
characterised by good relationships, seems to be the prerequisite for quality sourc-
ing, i.e. open relationships with suppliers and support in case of problems.
7.3.4 Inter-organizational Relationships, Management and Control
Strategic components are produced in-house, but purchasing staff claim that
relationships with suppliers of non-strategic components are also approached
responsibly. The majority of supplier relationships are well-established,
long-lasting and well-functioning, and Scania devotes considerable resources to
improving relationship performance and quality.
Relationship management is subject to established requirements and
expectations, such as actively proposing suggestions for reducing costs, while
requirements like absolute quality and delivery assurance serve more as targets.
However, supplier relationships are not strictly monitored as long as they are
perceived to be working well and quality is satisfactory. Indeed, most relationships
are long-term, and switching suppliers is rare; each year Scania phases out only
three or four of some 200 suppliers. Supplier-relationship management follows a
number of rules and established procedures and includes supplier segment
strategies, supplier structure, and requirements for suppliers and their selection.
Like all purchasing at Scania, supplier-relationships management is rather
formalised, with numerous established regulations. However, the human factor is
also important here, and considerable responsibility is delegated to purchasers,
particularly in establishing and maintaining relationships with counterparts at
supplier companies. The primary task of purchasers is to maintain good
relationships with the current suppliers and assure best value for the company
through commercial negotiations. It is also their responsibility to search for new
and possible alternative suppliers, and to select new suppliers. Purchasing directors
join meetings and negotiations with strategic suppliers, i.e. those supplying high
volume products and those involved in development of new products. The more
important the relationship is to Scania, the more communication is exchanged, and

at higher level.
Openness in Regard to Costs

It is a purchaser’s responsibility to track costs, to insist on competitive prices and
costs and to achieve cost reductions. During the interviews in 2002–2003, it was
found that target costing and cost/price comparisons were the most important and
frequent elements of negotiations. Open books would be used only in rare cases:
We try to avoid open books because we say that suppliers know better than we do so we
don’t use that. [. . .] We do not have open books with strategic suppliers; we try to have a
good idea of the cost of the parts, and we are learning more and more. We do get open
books, but only rarely. Some suppliers have tried to show how it looks for them, and it’s
always much more expensive than we think it should be.
The cost details requested were shown to depend on how much is supplied; e.g.
catalogue suppliers (i.e. standard products, no need for a relationship) are not
required to produce any cost details. This is the case with items in the small series
category, where pricing is not very important since this product group is rather
small in proportion to total turnover. According to purchasers, it is useful to know
cost details for parts that are complex or under development. However, if a quote
from a supplier looks reasonable, purchasers accept it without extensive
deliberations.
Very often, the supplier is chosen on the basis of the current relationship. If the
current suppliers have a good performance record, and as is usually the case, a long
history with Scania, they tend to be preferred.
We are trying hard to be partners with suppliers, we are working with an open mind, so that
the supplier knows that becoming a supplier for Scania may be the start of a long-term
relationship. We terminate very few suppliers.
Supplier Development
Supplier development is treated as important in Scania’s relationship policy, and it
is implemented primarily by the Supplier Development Group (SDG). SDG works
with suppliers who fail to meet agreed standards of quality, cost reduction or
performance. Supplier development incurs additional cost for Scania, but it has
been a common practice in solving supplier-related problems, as ‘most times it is
better to improve a supplier.’ The other sphere of supplier-development support is
in implementing the Scania Production System (SPS). If suppliers express interest,
Scania allocates resources for helping the suppliers with the SPS.
172 Z. Ambrutytė
Controlling Inter-organizational Relationships

The strategic toolbox, i.e. segment strategy, supplier strategy and planned actions,
guides purchasers in dealing with suppliers. The information necessary for describ-
ing current supplier strategy is updated periodically by the purchasers. This infor-
mation comprises details on tools, parts supplied, turnover and Scania’s share of a
supplier’s sales portfolio, part number, quality certification, and assessment of SPS
thinking.
It has been emphasised by both controllers and purchasers that the costs involved
in attracting and developing suppliers, and in managing relationships, is not an issue
for consideration. What is important is to have good relationships and good
suppliers. However, performance details, like cost, quality and delivery status,
among other key performance indicators (KPIs), are measured every week.
Historically there has been considerable emphasis on the technical performance
of suppliers. Quality and delivery have been the principal supplier performance
indicators, and based on these, new orders would be assigned. A couple of years ago
there was a change in focus within Purchasing:
We have worked a lot on technical things in recent years [. . .] A year from now (i.e. 2004)
we must focus on commercial aspects. It has been more important to have better quality.
[. . .] If you take the marketing organisation and the purchasing organisation – where is the
focus on financial results? – In marketing. There has not been so much of that focus in
Purchasing, but do we see a change.
(Scania, Purchaser)
As in 2007, the suppliers’ performance results are monitored on a weekly basis

in terms of material cost changes. If the price change is unfavourable, i.e. has
increased, the reasons are investigated and if needed, the purchaser’s action plans
are reviewed and corrective action is taken.
The principal KPIs used thus consist of the main cost parameter, that is to say
change in cost of materials, and quality parameters, such as reliability of delivery
and the number of quality reports. Quality reports are issued for each unsatisfactory
delivery. A number of quality reports have replaced the rejected materials measured
in parts per million (PPM) indicator as a better measure:
PPM is a good tool but you don’t get action.
(Scania, Purchaser)
7.3.5 Suppliers’ Experience of Relationships
Suppliers believe that Scania’s purchasing and supplier-relationships strategy

is heavily influenced by the company’s decision to conduct the main part of
development in-house. This policy impacts the degree of supplier involvement in
developmental work, the supplier structure and the character of supplier
relationships.
Suppliers perceive Scania as a good partner that is flexible in relationships and is

“entrepreneurial”. During the second period of interviews (2007), suppliers men-
tioned noticing a change in the way Scania was managing its relationships. The
reason for the change was thought to be the rapid growth of the company, which
could influence the shift from single-sourcing towards double-sourcing of some of
the more complex aspects of development.
Overall, Scania is well reputed among its suppliers for being a very good partner
to work with. In cost reduction, Scania is not as insistent as Volvo or large car
manufacturers. In negotiating price changes, Scania requires an average annual
reduction of 2.5 %, close to the industry norm of 2–3 %. Suppliers contrast this
percentage with the reduction of 5–7 %, or more drastic decreases during genera-
tion shifts, required by some other large manufacturers; this is not at all the
experience with Scania. With regard to open books, none of the suppliers found
that Scania had pushed hard for open books or detailed cost information. Normally,
Scania would ask for information about costs, but they never made this a firm
request or asked for open books. Payment terms with Scania are considered very
generous – ‘I think Scania still pays in 30 days’ (Supplier VS, Manager) – in
contrast to the tendency in the industry for terms to be extended up to 90 days. Very
often, Scania is compared to Toyota, which is also considered to be an excellent
partner in regard, for instance, to reliability, meeting contract requirements, timely
payment, and favourable conditions for suppliers.
Another aspect that contributes to the smoothly running relationship is Scania’s
engineering capacity. For suppliers, Scania represents an excellent engineering
company which is well aware of its requirements. Scania’s engineering skills
make the work of suppliers easier, as they permit productive discussions on
engineering and design. The principal complaint of suppliers is related to Scania’s
not allowing them to participate in development. For some suppliers, involvement
in development means greater trust and a long-lasting relationship, whereas little
involvement is indicative of a lack of trust and also of uncertainty.
Volvo involves us more in their product development, and involves us earlier and more in
our common development. By doing more development together, we build a closer
relationship. They get to know us as supplier and we feel we are more trusted. Scania
communicates less with suppliers in the development process, but it is easy to satisfy them;
that is, if they get good products at competitive prices, they are happy.
(Supplier C)
These opinions confirm the principal strategies and inter-organizational controls

described by Purchasing representatives. With development predominantly in-
house and good knowledge of the supplies required, no complex parts from
suppliers are needed. This contributes to loose controls in relationships and a
focus on good relationships rather than financial results.
174 Z. Ambrutytė
7.4 Volvo 3P
Founded in 1927 as a producer of cars for Swedish roads and cold temperatures, the
brand name of the Volvo Group now applies to two principal companies: the
Zhejiang Geely Holding Group, owner of Volvo Car Corporation (VCC), and
the Swedish Volvo Group (the Group).
In 2011, Volvo Group sales increased to nearly SEK 3,150 billion, and the
workforce rose to more than 100,000 employees at production facilities in 20
countries, with sales in 190 geographical markets. The truck business accounted
for SEK 200 billion in sales and had 19,000 employees at the end of 2011. Volvo
Trucks supplies complete transportation solutions to professional and commercial
customers in more than 130 countries worldwide. The largest markets are Europe
and North America (www.volvogroup.com).
The company has a complete product offering of medium to heavy trucks with a
strong global network of 3,000 service operations. Some 75 % of the Group’s
workforce is employed at nine product-related companies: Volvo Trucks, Mack
Trucks, Renault Trucks, Nissan Diesel, Volvo Buses, Volvo Construction Equip-
ment, Volvo Aero, Volvo Penta, and Volvo Financial Services. Linked to these
companies are a number of business units that supply components and services to
the companies globally. The task of the business units is to develop components,
services and support and supply them to the Group’s companies. The principal
business units are Volvo Powertrain, Volvo IT, Volvo Parts and Volvo 3P.
The focus in this case is on the function of purchasing to supply truck produc-
tion. Purchasing (Purchasing or Purchasing Department in the text), together with
Product Development and Product Planning, comprise Volvo 3P (also 3P). The
business unit was established after the acquisition of Mack and Renault in 2001.
The company description below focuses on strategies and inter-organizational
relationships management and control in the purchasing organization.
7.4.1 Strategic Focus
The Group’s business strategy is focused on growth and particularly on the tremen-
dous growth potential in Asia. The aim is to expand the product offering so as to
generate long-term growth in established markets, and to develop new technology
for a better environment. A central feature of the Volvo Group’s growth strategy is
to expand its presence in emerging markets, primarily in Asia and Eastern Europe;
in 2006, for example, the Group increased its sales in Eastern Europe by 41 % and
in Asia, Volvo implemented investments in Japan and China.
One of the principal objectives is increased profitability stemming from the
lowest possible cost and a premium price. A number of strategies are used for
cost reduction: expansion of production and markets, a common architecture, low-
cost sourcing and utilisation of the competence available at suppliers and within
group companies. The ambition, however, is to maintain brand values and provide a
premium product with an emphasis on safety, technological enhancement and
environmental care. As an illustration of this ambition, Volvo is among the 10
strongest brands on the Stockholm Stock Exchange and also well-known interna-
tionally, partially through its established car brand. Profitability, however, has
proven moderate, with an average annual operating margin for the Volvo Group
of 6.7 % from 2003 to 2007 (Volvo 2007).
The Volvo strategy described above includes a substantial number of low-
cost-related features like market share, favourable sourcing, economies of scale
in R&D, sourcing, marketing and distribution, wider product range and volume
customers. However, the brands of Volvo as well as Mack and Renault are
very strong in themselves, indicating that the company needs certain features
of differentiation. Nevertheless, a number of aspects like strategic priorities,
expansion mode and expected benefits of expansion, suggest that Volvo has a
stronger focus on low cost strategy than in the case of Scania.
7.4.2 Purchasing Strategy
Volvo 3P is a purchasing organization serving the truck brands. Volvo 3P perfor-

mance targets follow the strategic perspectives of customers, i.e. Volvo, Mack and
Renault. Product Range Management, Product Development and Purchasing are
jointly affected by strategic decisions. Cost reduction, sourcing in emerging
markets and market expansion strategies shape the required tasks of development,
supplier-relationships management and the scope of purchasing.
Functional strategies and challenges are a consequence of the overall strategic
direction of the company. Serving the truck brands, Volvo 3P performance targets
are congruent with customers’ strategic perspectives.
Strategy awareness at lower levels differs from one function to another. The
engineering community is not very familiar with strategic aims and discussions, nor
do they actively participate in the strategic planning process. Purchasing personnel,
on the other hand, have always been active and knowledgeable in regard to strategic
priorities and plans, the possible reasons being their business focus on daily work
and their educational background.
Purchasing strategy is influenced by emphasis on driver efficiency, operational
excellence, complying with administrative rules, processes and IT, highlighting
adherence to the rules and procedures. Communication of strategy in the Purchas-
ing Department is facilitated by availability of processes and procedures.
7.4.3 Strategy for Relationships
Volvo has established itself as a manufacturer that involves suppliers both in

cooperation and, increasingly, in the early stages of development. With the com-
plexity of products in particular, relationships are becoming increasingly close:
176 Z. Ambrutytė
If you start a project where the supplier plays a big part in development, you can’t have too
many suppliers. You can at the beginning, but at some point you need to decide on your
supplier because it takes so much time and effort to work with the supplier like this. Then
the strategy becomes – select one supplier, work closer together, and really start sharing
resources like engineering hours and testing facilities to become more of a single company
than two companies.
(3P, Cab Purchaser)
Given the close collaboration and complexity of development, single sourcing

increasingly becomes a predominant strategy. Even though there is a concern about
dependence on suppliers, the increasing size of the business requires larger
suppliers. Currently, suppliers vary in size, and the risks involved, as well as
supplier size, depend on the complexity of the part. Cooling systems for example,
are provided by large global suppliers, whereas sheet metal is characterised as a
local business, where Swedish suppliers supply parts only to Swedish
manufacturing. Even complex parts are still obtained from a few suppliers, but
the purchasing strategy and its future orientation are expected to change:
[. . .] more business with fewer suppliers, and definitely, that is what we are working
towards. [. . .] More systems suppliers, bigger modules – yes.
(3P, Chassis Purchasing)
With the strategy of global sourcing, access is gained to a larger number of

sizeable suppliers, and it also makes it possible to leverage the global business
better. As a global organization with a good visibility across borders, 3P is trying to
leverage business in Europe to benefit the US and Asia.
We do that all the time, especially with the big global suppliers; you give us good savings in
Europe, and you can get the business in the US.
The extent of supplier involvement in the development process varies depending

on the parts. In certain cases, resident engineers work at Volvo as a part of the
Volvo team and serve as a bridge back to the supplier. A more traditional way of
working is with parts engineered internally at Volvo 3P. Increasingly, development
of complex parts is being delegated to suppliers. In complex systems, the suppliers
get involved at an early stage and then have a delegated responsibility for local
testing throughout the process. In addition, it is becoming more common for the
supplier to perform the final test validation of the parts and the quality assurance
approval process.
We have moved toward a kind of delegation where the supplier sends the documentation to
us; we sometimes supervise measurements and tests at the supplier and that’s done by the
supplier’s quality assurance department. We supervise, but they do the job.
The business goal of cost efficiency through increased purchasing volumes

translates into a purchasing strategy that underlines operational excellence
(including supplier performance), more business with fewer suppliers and strong
relationships. These tendencies have already been present in the management of
supplier relationships, where increased supplier involvement in development often
results in single sourcing.
7.4.4 Inter-organizational Relationships, Management and Control
Supplier-relationships management and control consist of a number of important

elements, such as relationships/supplier strategy, requirements and standards
posted to suppliers and performance assessment. Supplier-relationships manage-
ment is the sole responsibility of purchasers:
We have tried to delegate authority down to the purchaser as much as possible, meaning
that we expect the problem to be solved, and by the purchaser.
Purchasers decide on the pattern and timing of communication, and choose their
manner of interaction with approved and potential suppliers.
I think it is a personal thing, if you are able to build relationships very quickly with people
or if you are sociable, it influences how fast you build a relationship and also how you
manage it.
(3P, Electrical Purchaser)
A close relationship is more common in cases of complex parts and single

sourcing. In commodity-like segments with a higher number of suppliers,
relationships with suppliers are not necessarily managed as described above.
If you have a sheet metal segment, then you always have like 10 suppliers [. . .] there is a
distance between the purchaser and the supplier. But when you have only one, then you try
to get together and work as a team.
(3P, Cab Purchaser)
In new projects, purchasers are extensively involved in processes for evaluating

suppliers and assigning new businesses. Initially, a large part of the work is
technical and involves deciding on the nature of the product or part to be bought.
When the decision to conduct development together with the supplier has been
taken, the process is divided into a concept phase and a development phase. In the
concept phase, a couple of potential suppliers are presented with the basic
prerequisites and asked to propose a concept. That procedure is a competitive
one, and 3P do not pay suppliers for their participation. When necessary, the 3P
project team participates in the work on the concept together with the suppliers.
After the concept has been chosen, a few suppliers might be sent requests for bids,
to which they respond with quotations of part cost, tool cost, and development cost.
This information is sent back to the project, which approves or rejects the
quotations based on the total budget. If the quotations are rejected, the purchasers
178 Z. Ambrutytė
have to go through the Global Sourcing process and get a new supplier or a new part
approved.
Communication
Formally, interaction with suppliers takes place via the Supplier Portal, through
which actual supplier performance in regard to result, delivery and quality is
communicated. Communication between suppliers and plants is through electronic
data interchange, call-offs and materials planning information.
Normally, information about quality and delivery or problems incurred ends up
on the desk of the purchaser. However, certain problems are often forwarded to
specialist departments, i.e. quality-related problems in the purchasing organization
are the responsibility of Supplier Quality Development (SQD), and delivery
problems are often forwarded to the plants.
It is a big organisation and our jobs are split. [. . .] As long there is no risk of a production-
line stop, we urge the plants to take direct contact with the supplier.
Openness in Relationships
We have a big issue with openness. And mainly cost openness. This is something we have
seen changing in the last couple of months. In the past I did not have a breakdown of my
components. I did not know exactly what margin they had, or know how much each
component costs. Nor did I know how much they add on manufacturing and overheads
etc. This has been a big problem for us because this is something Volvo always requests.
The policy at Volvo is to select a supplier that is open. It is the purchaser’s

responsibility to negotiate and receive all the required cost data. To do this,
purchasers receive management support during the annual business review
meetings with suppliers, where the openness issue is emphasised by management.
But how honest are they, are there any hidden figures in there? I never trust them 100 %.
This is the area where purchasers try to check costs internally with cost and
development engineers. In the development process suppliers are said to be more
open about disclosing their activities and schedules. Presentation of this informa-
tion and cost transparency are standard requirements that suppliers must meet when
development jobs are assigned.
Supplier Development
Supplier development is usually handled by the departments that incur problems,
but it is not directly managed by the purchasers. Most often, Product Development
and Product Range Management initiate projects to solve problems incurred by
suppliers. According to the purchasers, supplier development practice is different at
Volvo than at Scania:
I am hearing a lot from our suppliers about Scania – they always say Scania does this and
they are so good, and they are helping us to develop as a supplier. [. . .] They say – now that
we have Scania, they are actually looking into our production, and they are helping us to
solve our bottlenecks. [. . .] I do not think we have done that in the past. We are better now,
but we still have a long way to go.
Purchasers see supplier development as an important cost-saving activity. How-

ever, at Volvo this has not been a practice:
We have not been doing those kinds of activities at Volvo. I think that it is a matter of
management attitude; they appoint that kind of people and that kind of department.
Even though Volvo is extensively involving suppliers early in development, the

standards are high, and open books, for example, have become mandatory; supplier
development focuses more on cost reduction than on support to suppliers in
addressing the causes of quality and cost problems.
Controlling Inter-organizational Relationships

Many procedures in the buying process have become increasingly formalised and
standardised. Particularly because of the global focus of purchasing and the
increasing use of common parts for different truck brands, unification of processes
and new systems has been implemented, and supplier policy is aligned globally.
The most important indicators for measuring supplier performance are price,
quality and delivery. These indicators are traced by logistics personnel at truck
production plants and also by the purchasers responsible, and are followed up by the
Finance and Business Control Department (FBC). A number of key performance
indicators used to evaluate Purchasing, and individual purchasers’ results are also
used to measure supplier performance, except that administrative performance
indicators for suppliers do not apply. These indicators are available to Purchasing
personnel and also to suppliers via the Supplier Portal, where the Finance and
Business Control Department places electronic scorecards with data on supplier
performance. The scorecard provides Volvo with information about the perfor-
mance of different suppliers. The information concerns delivery, PPM (rejected
parts per million) level, quality level and price development, as well as current
terms of payment.
For internal use, financial indicators (KPIs) material cost evolution and payment
terms) and quality KPIs (PPM level, delivery position and capability of delivering)
are used to follow supplier performance. Financial KPIs are monitored on a
monthly basis and report on actual KPIs, budgeted KPIs levels and forecasts. One
of the most important quality KPIs is PPM. The Quality Department, not the
purchasers themselves, works together with suppliers on the quality aspects of
deliveries from suppliers. Another important indicator for delivery is measured at
production plants.
180 Z. Ambrutytė
Delivery and delivery precision are very important, even though we do not include these in
our KPIs. It is usually the logistics department at the plants that follows this.
(3P, Financial and Business Control)
Information about supplier performance is communicated via the Supplier

Portal. The FBC produce electronic scorecards that contain periodical information
about deliveries to Volvo. The purchasers use the scorecards when choosing
suppliers for new business.
The other part of assessment and communication consists of business review
meetings arranged with the major suppliers once or twice a year. Actual perfor-
mance is discussed based on scorecard information; then the actions needed to solve
the problems incurred are planned, and agreement is reached on future cooperation.
The Volvo vision, expansion strategies and geography are also presented and
discussed here. Suppliers are asked about their expansion plans, and intended and
possible strategies are discussed together.
7.4.5 Supplier Experience of Relationships
Suppliers have experienced changing purchasing strategies at Volvo 3P and an

especially significant change after the merger with Renault back in 2001. The
change is believed to be a result of new management within and of purchasing; in
other words, of the “French” purchasing style.
After the merger with Renault their purchasing became much more professional. Much
more professional, I think, because they brought a French mentality into a Scandinavian
company. [. . .] If you look functionally, you get some fantastic engineering in Sweden –
you know your product very well, and you really understand your customers. But typically
you are not that good at purchasing. [. . .] Volvo has done a nice job balancing aggressive
French purchasing with understanding of engineering. [. . .] And they have obtained better
prices.
(Supplier VS)
According to suppliers, Volvo’s purchasing system, compared to Scania’s, for

example, seems to be better organised in terms of negotiating, tightly managed
relationships, involving suppliers and communicating performance. This has
resulted in improved purchasing performance. But it has also increased pressure
on suppliers in a number of areas, including a change to mandatory open costs,
heavier price pressure and extended payment terms. In addition, Volvo has changed
its purchasing strategy from double sourcing to single sourcing.
Both suppliers have signed the Global Purchasing Agreement, which required
commitment to significant cost reduction. Reductions for Volvo have ranged from
3 % to 5 % and are sometimes much greater in connection with a generation shift or
introduction of a new product. One of the suppliers was faced with a 30 % cut for
the generation shift. In this case, Volvo’s tactic was to threaten to bring all suppliers
together and force them to share technological ideas with each other. Only after
Volvo engineers agreed to join the supplier development team and were ready for
changes in the truck was the Volvo target of a 30 % reduction in purchase price
achieved.
Suppliers and purchasers of Volvo agreed that partnerships bring the company
substantial savings and considerable technological innovation. However, Volvo
continues benchmarking and has switched to very detailed price breakdowns;
they have been very successful in obtaining these concessions as well as reducing
suppliers’ overhead and other costs.
With regards to payment terms, Volvo is also seen as the toughest customer,
managing to achieve 90 days in general agreements. In addition to strict contractual
requirements, delivery performance is carefully monitored, and monthly results are
communicated to suppliers via the Supplier Portal:
They have quality control, the PPM number, and precision in delivery. They have a system
where you either get 100% or 0%: you have to deliver neither too late nor too early.
Sometimes it is tough, even if you delivered a day earlier, you get zero points. They monitor
that very strictly.
(Supplier BG)
Suppliers are very positive about being involved in development processes. In

their opinion, such a strategy is beneficial to Volvo as it enables the company to
profit from supplier know how and to utilise their innovative capacity. In addition,
supplier involvement is believed to improve relationships, resulting in more com-
munication and better understanding.
Involving suppliers early in development is of great advantage to Volvo, which
then does not need to make its own investment in concept development; suppliers
take all design and development risks at no cost to Volvo. Later, development is
managed by special development agreements; Volvo provides the financing but
also gains access to specialised supplier knowhow.
7.5 Comparison
7.5.1 Strategies for Business, Purchasing and Inter-organizational

Relationships
Compared to Volvo, Scania’s strategy was assumed to lean more towards differen-
tiation. The analysis indicated that Scania is associated with exclusivity and
uniqueness, differentiating through distinctive features of brand image, technology,
quality and performance, and earning higher margins as a result. These strategies,
established in the 1940s, have not changed; thus, strategy and awareness of core
values are deeply rooted in the company. Purchasing strategy is heavily influenced
by the choice taken back in the 1940s to produce strategically important parts in-
house in order to maintain core competence. Purchasing therefore deals mainly with
sourcing of non-core materials. Purchasing and supplier-relationships strategy has
been influenced by the core values, which include respect for employees and
customers, and also for business partners. Relationships with suppliers are
182 Z. Ambrutytė
managed, and suppliers are customarily offered various sorts of support and
development. Policies for suppliers, supplier size and number of suppliers have
not changed much, and they emphasise the importance of a well-functioning
relationship.
Volvo’s truck business has been assumed to pursue more of a cost (volume)
strategy than Scania, as illustrated by horizontal growth and a search for economies
of scale. This strategic direction was set in the 1970s, when the horizontal and
vertical expansion commenced, resulting in a merger with Renault. The objectives
were to benefit from economies of scale, joint development and product planning,
cost savings in purchasing due to increased volumes, and a changeover to common
platforms. However, although the company intends to benefit from standardised
purchasing and commonality of parts, maintaining brand differences is also an
objective. The three brands are both substitutes and competitors of each other. As
an example: Mack trucks are targeted solely at the US heavy truck market, Renault
trucks focus on Southern Europe, and Volvo serves Northern Europe. In addition,
the latter two brands compete in terms of market segment and quality; Volvo
competes through its image as a more exclusive brand, while Renault is
characterised as a brand offering modern solutions at somewhat less cost. Expan-
sion in Asian markets is planned through acquisition of Nissan Diesel and produc-
tion of a low-cost truck for the Chinese market.
Volvo’s overall expansion and cost reduction strategy has the following features:
a strict purchasing strategy, with close monitoring and aggressive cost reductions; a
search for large suppliers, which results in volume reductions and reduced expenses
of supplier administration; early supplier involvement in development, aimed at
cost reductions from cheaper development work and the savings thus generated,
and limitation of Volvo’s own design capacity. Consequently, supplier-
relationships management is based on the high bargaining power of the Group,
although there is a preference for single sourcing that facilitates close cooperation
with the partners selected. Cost transparency, continuous cost reductions and
extended payment terms are common relationship management techniques. Strict
purchasing management is largely a result of the sourcing policy, with considerable
outsourcing, including developmental work: here cost control is of great
importance.
As noted, the two companies chose different expansion strategies, with Scania
opting to grow organically and Volvo to expand horizontally. These choices have
influenced the way in which purchasing MCS and inter-organizational relationships
control are implemented. These strategies can be traced back to the problems which
the companies needed to address, such as standardisation of the product platform and
merging different MCSs. These strategic differences also influenced purchasing and
the control of inter-organizational relationships.
7.5.2 Control of Supplier Relationships
The management and control of relationships seems to be affected by company

values and overall strategy. Scania’s policy of in-house sourcing limits the number
and importance of suppliers; nevertheless, as in any relationship, a good working
atmosphere is valued most. Scania’s suppliers have not been pressed on prices to
the same extent as Volvo’s, and performance problems are tackled jointly by
suppliers, purchasers and quality engineers. Historically, Scania has focused on
the technical performance of suppliers, primarily with respect to quality and
delivery. Material price change is a new indicator in supplier assessment. Suppliers
have been selected largely on the basis of their relationship record, and less so on
price information. Moreover, supplier support and development have been of great
significance.
Supplier selection and management at Volvo is closely related to the supplier’s
financial indicators, and cost comparison and the limits of the project budget are
often the decisive factors. Selected suppliers have to provide open books, accept
long payment terms and tough negotiations on cost reduction. The most important
indicators of supplier performance are material cost development and payment
terms, quality KPIs like PPM level, delivery position and capability of delivering.
On the other hand, Volvo involves suppliers early in the development process, and
the suppliers chosen can often expect a contract for the entire duration of the project
and beyond.

The cases show that Volvo’s strategy entails purchasing from fewer suppliers
and utilising their development potential, resulting in lower development costs
for Volvo and early initiatives for cost reduction. Scania’s strategy emphasises
maintaining in-house development of strategic parts, i.e. the parts that differen-
tiate the product. Although the outsourced parts are of lesser importance to the
final Scania product, even the suppliers of these parts are treated with care, and
the importance of relationships is kept in mind. In view of Scania’s overall
business strategy, this policy is a clear example of how values are expressed in
MCS; for example, declared company values like respect for employees are
discernible not only within the firm in the purchasing function, but also in
managing relationships with partners. The Scania case, with considerable in-
house sourcing, might be an exception; however, differentiators could be
expected to emphasise relationships and the developmental-quality aspects of
the outsourced products, taking more responsibility in managing differentiation,
as claimed by Porter (1980). These examples indicate how the different
strategies are associated with different purchasing priorities.
Sourcing priorities and purchasing guidelines were found to affect the way in
which relationships with suppliers are managed. This can be observed both in the
indicators used to control supplier performance, and in how the suppliers
experience the relationship. Supplier performance indicators used for
184 Z. Ambrutytė
Social controls Behaviour controls Outcome controls
Inter-organzational
Inputs Outputs
relationship activities
Fig. 7.1 Control model for inter-organizational relationships
monitoring material price change, quality, and delivery performance are the
same in both companies, but the focus is different. At Volvo, reporting perfor-
mance outcome is emphasised. In addition, Volvo is known for its strict
requirements, insistence on cost reductions and long payment terms, as well as
for a tight approach to performance control. At Scania, reporting is focused on
the reasons for any variance, searching for solutions and problem-solving in the
shortest possible time. These findings may be explainable by the limited
outsourcing of core development, so that most of the responsibility for costs is
borne by the development departments.
The case evidence thus leads to a hypothesis that strategy also affects the
organizational controls. Using the concepts of social controls, behaviour controls
and outcome controls, the inter-organizational controls observed in the two
companies could be analysed according to the model in Fig. 7.1.
Social controls serve here as an input for controlling relationships. The
established approach and traditional way of managing relationships with
suppliers can best be used in defining this area of controls. Behaviour controls
constitute policy documents, procedures, and the structures set up for regulating
the selection of suppliers and for contracting and maintenance procedures.
Overall in the industry, supplier relationships have been characterised by stan-
dard formalised procedures and have many similarities. Suppliers increasingly
serve the same competing manufacturers as the number of suppliers has
decreased. The extent of outcome control of inter-organizational relationships –
i.e. the use of KPIs and cost reduction targets – was also observed to be different
in the two companies.
Business strategy, an outline of supplier-relationship management and
control, and the pattern of social, behaviour and-outcome controls in the case
companies can be illustrated by Fig. 7.2 below.
Overall, the discussion indicates that Volvo employs an outcome-oriented
form of control, whereas people-oriented controls are not used to the same
extent. Scania, on the contrary, uses strong traditionally established social
controls in relationships. It has the same outcome controls as other companies
but does not rely much on them. In addition, most of the responsibility for costs
is taken internally with the retention of in-house development. Behaviour
controls of both companies largely resemble industrial practice, i.e. most
relationship-specific procedures are standardised, but there is a difference in
the extent to which these procedures are used (e.g. “open books”) and how the
procedural requirements are controlled (e.g. a separate department at Volvo 3P).
The different aspects of the inter-organizational relationship controls could be
summarised in metaphoric labels for the companies analysed. Scania acts as a
Scania Volvo
Business unit
strategy
· Stronger differentiation focus · Stronger cost focus
· In-house development of strategic parts

· Early supplier involvement in development
Purchasing · No systems suppliers
· More business with fewer suppliers
strategy · “Right number” of suppliers
· Supplier performance matters
· Relationships matter
· Historically established focus on quality · Material price change

Supplier and delivery · Payment terms
performance · Material price change: reasons (a recent · Quality and delivery position
indicators trend) · Capability of delivering
· Good relationship record · Importance of meeting budgeted goals
· Tight control
· Caring and flexible attitude
Suppliers’ · Aggressive cost reduction
· Gained good reputation
experience · Extended payment terms
· Little supplier involvement in development
· Early supplier involvement in development
· Historically established, long-term, · Market-based supplier selection

respectful relationships, caring attitude · Very open relationships once established,
Social toward suppliers but also very results-oriented; heavy
controls · Suppliers proud of supplying Scania and reliance on suppliers and strong
being appreciated; however, supplier interdependence, but also highly controlled
involvement is limited results
· Very formalised relationship requirements, · Very formalised relationship requirements,

Behaviour
documentation and interface documentation and interface
controls
· Dual sourcing procedures · Increasingly single sourcing procedures
· Tools similar to the ones established in the

Outcome industry (cost reduction, negotiations, open
· Strict control of results, especially evident
controls books) in open-books requirement, large cost
reductions and extended payment terms
· However, controls not strictly enforced
Fig. 7.2 Relationship between business unit strategy, purchasing strategy and inter-
organizational relationship management, control patterns and categories of inter-organizational
relationship controls observed in the cases
“parent” in managing its relationships with suppliers, i.e. caring, supporting and
not extremely concerned about the result, while still taking responsibility for and
control of the entire process. On the other hand, Volvo is more of a “challenging
partner” (“sibling”) in its relationships, insisting, challenging with development
186 Z. Ambrutytė
and pricing requirements but also passing on the responsibility for the work of
development.
The summary data suggest that cost leaders have strongly emphasised out-
come controls for inter-organizational relationships, with weaker social controls,
while differentiators focus on social controls in inter-organizational
relationships. A high degree of standardisation in the industry and the sharing
of the same partners have led to standardised procedures and control techniques,
although differences might emerge in the extent to which the controls are used.
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The Role of IT Systems in the Strategy
Process: The Case of Electrolux 8
Fredrik Nilsson and Jan Lindvall
8.1 Introduction
Globalization has sweeping consequences for the competitive situation of firms.

Markets are integrated, customers are more demanding, new competitors appear,
etc. These developments change the conditions for control in companies (Rom and
Rhode 2007; Sutton 2006). Consequently, the subject of strategy has acquired
greater importance and attracted the interest of many scholars in the field of
management control (see for example Bhimani and Langfield-Smith 2007). For a
long time research focused on studying how the design and use of management
control affect implementation of strategies. In recent years, there has also been a
growing interest in examining the role of management control in formulating
strategies (Langfield-Smith 2007). This is a welcome expansion of the focus of
research in the field, since the primary purpose of the strategy process is to channel
attention and distribute it to the areas of special importance for making the firm a
strong competitor (cf. Ocasio 1997; Ocasio and Joseph 2008).
The strategy process, which is central to dealing with the many questions raised
by globalization, is affected by the possibilities offered by new IT, one of which is
the use of so-called enterprise resource planning systems (ERP systems). Granlund
and Mouritsen (2003) highlight that ERP systems will permit integrated planning
and follow-up:
It has been suggested that the new technologies such as ERP systems make it possible to
model the details of the firm’s operations in computer technology and make a highly
integrated mode of management possible (Davenport 1998). The prospect of an intense
mapping of organizational processes in computer representations is there, and therefore the
management of the firm can be made real time.
(ibid, p. 77)
F. Nilsson (*) • J. Lindvall

e-mail: fredrik.nilsson@fek.uu.se; jan.lindvall@fek.uu.se

190 F. Nilsson and J. Lindvall
New IT solutions thus appear to have potential for being the link which – better
than before – will connect the formulation of strategy with tactical and operative
planning and follow-up (cf. Anthony and Govindarajan 2007). Although consider-
able research has been done on the strategy process, knowledge on this subject is
fragmented, and there has been no significant interest in certain areas of importance
(Hambrick 2004; Hutzschenreuter and Kleindienst 2006). In management control,
as previously mentioned, there has been a focus on studying the implementation of
strategy, whereas the formulation of strategy has not received the same attention
(Marginson 2002; Nilsson et al. 2011). The attempts to introduce a more outwardly
directed form of management control in order to improve analysis of markets and
competitors, so-called Strategic Management Accounting, have not left any clear
imprint either on the literature or in practice (Langfield-Smith 2008; Roslender and
Hart 2003). As for the role of IT in the strategy process – for example, the possible
use of information from an ERP system for strategic analysis – research in that area
is quite limited. Moreover, there is a need for further studies on how the strategy
process actually works and on the role of central participants in it (Hutzschenreuter
and Kleindienst 2006; Whittington 2006).
In light of the above, the purpose of this chapter can be expressed as follows: to
obtain greater knowledge and understanding of the role of IT systems in the strategy
process. By IT systems is meant the computer-based information systems that
support the management control of an organization in a larger sense. The definition
includes both ERP systems and independent system solutions (such as data
warehousing solutions and project control systems) that support processes of
planning and follow-up in management control. The data that can be processed
by an IT system may be monetary and/or non-monetary in nature and historical
and/or future-oriented, and should be intended to facilitate strategic decisions.
The chapter continues with a review of the literature. This section is followed by
a description and an analysis of how Electrolux started to change its strategy
process in the 2000s. This corporate group is a global leader in household
appliances and appliances for professional use. Particular emphasis is placed on
the contribution of the strategy process to focusing the attention of leading
participants on strategically significant areas of change, and on the role of IT
systems in this regard. The study covers significant changes occurring up until
2008. The analysis shows how IT systems can be instrumental in strengthening the
integration of control systems in a corporate group and how this can facilitate the
development and modification of strategies at both group and business unit levels.
Finally, the chapter offers a number of overall conclusions and implications.
8.2 Strategy, Management Control and IT Systems
Research on the content of strategies and on their formation, development, and

implementation is extensive and has led to the emergence of several large and
influential schools of thought (Mintzberg 1994; Mintzberg et al. 2009). This has
made the broad field of strategic management rather fragmented, thus limiting the
8 The Role of IT Systems in the Strategy Process: The Case of Electrolux 191
integration of different perspectives in this field (Hambrick 2004). For example,

there is still a tradition of focusing on the content of either corporate or business
strategy, despite studies showing that congruence between these strategies is of
great importance to the competitiveness of the organization (Nilsson and Rapp
2005, p. 33ff). Another example is that researchers often tend to focus either on the
content of strategies or on the process by which they emerge (Hambrick 2004).
Based on a review of a full 227 studies of research on the strategy process,
Hutzschenreuter and Kleindinst (2006) conclude that greater interest should be
devoted to determining and analyzing how the work involved in the strategy
process is actually conducted. In the authors’ opinion, research on strategy has
not sufficiently investigated how the attention of decision-makers is channeled and
distributed within the organization (cf. Ocasio 1997; Ocasio and Joseph 2008).
Today there is substantial agreement that management control provides an
essential structure for the strategic discussion within the firm (Nilsson et al. 2011).
An IT system of great importance in management control is the ERP system (see for
example Davenport 1998; Davenport and Harris 2007). However, the interest of
researchers in the relationship between management control and ERP systems
remained modest for quite some time before beginning to increase in the 2000s.
This development, long overdue according to Chapman (2005), is in line with a
strong general trend toward focusing on the meeting between IT and management
(cf. Orlikowski and Barley 2001). It is probably even more significant that ERP
systems are considered to have the potential for establishing integrated control in
large and complex organizations. At the same time, there is doubt about whether
these systems can actually live up to expectations as an instrument of strategic
control or should be viewed only as transaction systems (Granlund and Mouritsen
2003). Regardless of the answer to this question, there is agreement that ERP
systems affect management control and the work of centrally placed decision-
makers. For example, greater automation of the task of accountants can be expected
to release more resources for activities where economic analysis and active decision-
making are emphasized. Hunton (2002), among others, contends that this develop-
ment calls for knowledge of both IT and management control. In his opinion, it is
important to understand both the opportunities offered by the new technology and its
impact on the work of those in central positions in the organization.
An ERP system affects the work of many individuals in various positions; this is
apparent, for example, from the study by Lodh and Gaffikin (2003) on the process
of implementation at a large Australian steel producer. Their study shows, not
surprisingly, that in addition to the technical design, it is important how the change
process is conducted. Caglio (2003) as well highlights the individual participant,
with special focus on how the ERP system alters the role of accountants. In a case
study of an Italian pharmaceuticals company, she shows how a large portion of the
accountant’s knowledge is transferred to the system. In that way such knowledge
can be made available to other participants and spread elsewhere in the organiza-
tion. The accountant thus assumes a broader role that extends to other functional
areas. Such a tendency may offer an opportunity, but also pose a threat. Chapman
and Chua (2003, p. 91) summarize this development as follows:
[. . .] it is worth considering that for those interested in the study of accounting, it is

increasingly unclear that making accountants and their work the focus of research is
appropriate. ERP-type technologies enhance and support the structured representation
and management of activity, and so would seem to increase the organizational significance
of accounting; however, at the same time these technologies raise serious questions as to
whether or not such accounting activity will be carried out by accountants in the future.
So far, though, the accountant’s position does not appear to be in danger. This is
apparent, for example, from the study by Granlund and Malmi (2002) of how ERP
systems impacted management control at ten companies in Finland. The authors
describe and analyze the effects of ERP systems on techniques such as performance
measurement (including the balanced scorecard), strategic management account-
ing, and budgeting and forecasting. One conclusion is that the introduction of ERP
systems was accompanied by relatively minor changes in management control. At
the same time, many routine tasks disappeared, enabling accountants to spend more
time on analysis. Similar conclusions are drawn by Dechow and Mouritsen (2005)
in their study on the role of the ERP system in the process of integration at two
companies. One of these is a world leader in the manufacture of pumps; the other is
one of Denmark’s largest industrial corporate groups. As a major effect in both
enterprises, financial accounting improved in regard to both promptness and preci-
sion. The authors note that management control does not necessarily become more
sophisticated – but it does provide good basic order and enhances transparency in
the company. One interesting conclusion is that the ERP system helps to involve
more participants, and not just accountants, in the establishment and reshaping of
management control. In the opinion of Dechow and Mouritsen, this situation tends
to undermine the power of accountants over management control.
A paper by Quattrone and Hopper (2006) has a similar focus; it treats the
paradox arising from the ERP system requirement of homogeneity and the actual
heterogeneity of users. The authors conducted a longitudinal study on implementa-
tion of an SAP (System Application and Products) at a large US manufacturer and
distributor of building materials. The authors describe in detail how the system is
constantly changing – there is a tension between stability and flexibility, between
heterogeneity and homogeneity. At the same time, the ERP system appears to have
several partly inconsistent qualities. Bhimani (2003, p. 6) shows similar thinking in
speculating on how a number of established contingency-theoretical relationships
can be changed by an IT system. He summarizes his thoughts as follows:
What is becoming clear is that in contexts where the contingencies between cost objects,
structures of information capture, and the attributes of economic engagements submerge,
decouple, or become reformulated, the basis for information systems design reflect changed
notions of balance. Ultimately, certain features of management accounting systems may
come to transcend past conceptualizations of rational linkages and appropriate novel
contingencies in predicating formulations of organizational reality.
Finally, Hyvönen et al. (2006, 2008) demonstrate that ERP systems form
complex structures that are not necessarily stable. The first paper provides a
description and analysis of how an ERP system, together with an ABC module,
can help to spread knowledge about management control in a large multinational
firm in the forest products industry. The results show how this type of system can be
useful not only in providing decision-makers with many opportunities for data
processing, but also in helping to reduce resistance to change. The system gave
divisions a clear standard for ABC (Activity-Based Cost) calculation – important
for transferring knowledge in management control. The second paper, which
appears to be a continuation of the 2006 study, describes and analyzes a so-called
‘virtual integration’ that above all would improve strategic decision-making. The
study shows how the system affects the logic on which the accounting and manage-
ment philosophy of the organization are based.
In summary, the review of the literature establishes that ERP systems have had
an impact on management control even though the changes may not actually
measure up to expectations. One explanation – in accordance with the comprehen-
sive literature review by Rom and Rhode (2007) – may be that many of the studies
focus on processing transactions, with less emphasis on the use of ERP systems in
strategic and tactical decision-making. Research on the role of IT in the strategy
process – for example, how management control information from an ERP system
can be used for strategic analysis – is virtually nonexistent. One reason for this may
be that many researchers adopt a narrow definition of the concept of ERP system,
where neither BSC (Balanced Scorecard) nor SEM (Strategic Enterprise Manage-
ment) solutions are included (cf. Rom and Rhode 2007). However, we argue that
unless other types of IT systems are considered as well, the use of the new
technology in management control will be insufficiently understood. Our assess-
ment is that the development of new accounting systems, data warehousing,
computer-based project planning systems, etc. also has a substantial impact on
the strategy process.
8.3 Emergence of a New Strategic Orientation
Electrolux is a global leader in household appliances and appliances for profes-

sional use. It sells its products in almost all countries of the world. In 2008 – when
the interviews were conducted – sales were SEK 105 billion and 55,000 people
were employed. Operations were organized into six business sectors (Fig. 8.1).
The next two subsections describe and analyze how Electrolux’ strategies have
changed and how the elements of a new strategic orientation have emerged. The
first section treats the changes in the orientation of corporate strategy. The second is
devoted to changes in the orientation of business strategy, with a special focus on
the Floor Care business sector.
8.3.1 From Portfolio Management to Activity Sharing
Electrolux is strongly associated with an international growth strategy based on

acquisitions. Under the leadership of its CEO Hans Werthén (1967–1974), a large
number of companies were acquired, all for the purpose of rapidly gaining market
President and CEO
Chief Financial Officer Legal Affairs
Human Resources and Organizational

Communications and Branding
Development
Major Major Major Major Floor Care and

Professional
Appliances Appliances Appliances Appliances Small
Products
Europa North America Latin America Asia/Pacific Appliances
Fig. 8.1 Electrolux’ corporate structure (Electrolux 2008a, p. 103)
share. This method of growth was also used under the leadership of Werthén’s
successors. There are data showing that the aggregate number of companies
acquired up to the present is roughly 500. During the initial phase of Electrolux’
expansion, production was conducted by numerous companies located in many
countries. Often the companies concerned were strong domestically and served as
bridgeheads to new markets. Two examples are the acquisitions of White
Consolidated (United States) and Zanussi (Italy) (Bartlett and Ghoshal 1989).
At Electrolux, the prevailing management ideal was that acquired companies
should not be integrated. This view applied to all areas of the business – from
production facilities to information systems and language used. The fragmentation
was reinforced by CEO Werthén’s own management philosophy, expressed as
letting ‘a thousand flowers bloom,’ with minimal formalization of the company’s
management and control (Uggla 2008). In many respects, the company was a
conglomerate, characterized strategically by portfolio management based on a
philosophy of “the bigger the better.” Through an ever-increasing volume of
production, it would also be possible to achieve economies of scale and reduce
costs.
One effect of the portfolio strategy was far-reaching decentralization of major
strategic decisions to the business unit level. Consequently, there was very little
co-ordination of Electrolux’ total product offering, an extremely wide-ranging
sprawl of products. At the end of the 1990s, the corporation offered over 15,000
different customer solutions (Ghemawat 2007, p. 113). With its engineer- and
technology-dominated group culture – Electrolux exemplified what is sometimes
referred to as a “heavily production-oriented company,” where the technical
properties of a product were important to its positioning on the market. As one
interviewee put it, ‘what mattered were differences in rpm and watts.’ Special
features of that nature are of little use in differentiating competitors when costs of
production tend to homogenize and approach each other (McKinsey Quarterly
2006, p. 77).
For the two most recent CEO’s, Leif Johansson and Hans Stråberg, comprehen-
sive streamlining of the group’s production apparatus has been an important strate-
gic issue. Often this process has been expressed in terms of major restructuring
programs initiated by group management. In recent years, for example, the global
“Electrolux Manufacturing Systems” (EMS) program has been launched. It includes
a number of tried and proven common standardized methods intended to improve

production efficiency through increased knowledge- and activity-sharing within the
corporation, i.e. a focus on synergy realization. The program has been established at
almost all Electrolux plants and is an important element in the implementation of a
corporate strategy which entails a low degree of diversification and a high synergy
potential (i.e. a corporate strategy based on knowledge- and activity-sharing).
8.3.2 From Cost Leadership to Greater Emphasis on Differentiation
Although Levitt explained almost 30 years ago that the future belonged to the
global firm, which seeks to ‘[. . .] sell the same things in the same way everywhere’
on a global market, such a position is not easy to achieve (Levitt 1983). Distinctive
national and cultural features cannot always be ignored; often they are also difficult
to change. Thus, when Baden-Fuller and Stopford (1991) studied the development
of the white goods industry a few years after Levitt’s vision of the future had been
published, they found that the market was not yet global. Even in the twenty-first
century there still appear to be significant differences in customer preferences
between different countries – for example, between top-loading and front-loading
washers (Electrolux 2007, p. 8).
Electrolux tries to take differences of this kind into account, but without lowering
its level of ambition for developing global solutions. This can be seen, for instance,
in the organization of operations into geographic regions: Europe, North America,
Latin America and Asia/Pacific (cf. Fig. 8.1). One justification for subdividing
operations along geographic lines is that for certain products there is a need for
physical proximity, since these items are bulky and therefore expensive to transport:
It is often less expensive to produce large household appliances close to the end-user
market, rather than transport them from e.g. China.
(Electrolux 2005, p. 14)
Nearly 30 years after Levitt’s article, the opportunities offered by globalization

remain an important strategic issue for the company. If rapid expansion was
stressed earlier, today it matters more to seek co-ordination of the product range
and work methods on relatively mature markets. Operations are focused and
concentrated, and the linkages to other remaining operations are strengthened.
This is the overall driving force in the process of change at Electrolux, where in
recent years these efforts have been aimed at transforming the enterprise
[. . .] from a production-focused industrial company to an innovative, pro-active market-
driven group.
Within the framework of this overall transformation, a combination of factors –

primarily changed customer preferences, the emergence of global retail chains, and
growing global competition – has led to a market polarization that Electrolux must
now confront. The polarization means that an increasing number of customers are
willing to pay more for products with advanced design and functioning, whereas
another large category of customers are looking for functional basic products at a
low price. In strategic terms, one might say that the customer market is increasingly
characterized by requirements of simultaneous differentiation and high cost
effectiveness.
At the business unit level, strategy used to focus on competing through low costs –
“Cheap products in high volumes.” But as can be seen from the reasoning above, this
strategy became increasingly hard to follow successfully when competition from
low-cost countries intensified. Management’s assessment was that the company,
based on its historic situation, was in no position to compete with these new
producers. Electrolux’ production structure was regarded as fragmented and also
located to some extent in the wrong places, with too heavy a presence in high-cost
Western countries.
To prevail against competition in the lower-end segments, but also to create
profitability elsewhere, it was considered necessary to relocate production capacity
to countries with a clear low-cost profile. Much of management’s strategic attention
in the past years has been devoted to this question, and the level of ambition is high.
At the same time, it has become increasingly evident that the brand name and
building the brand are now central to putting the company in a position to charge the
premium price sought by management:
For a consumer-goods company like Electrolux, the brand is one of the most important
assets.
Consequently, a significant part of the company’s strategy process has involved

building up a uniform brand profile. In 2006 the company invested 1.5 % of its sales
in market communication; the percentage is to increase to more than 2 % (Electrolux
2006, p. 22). These endeavors are aimed at overcoming a legacy of the many
acquisitions: the sprawling diversity of brands. One problem in this regard is that in
many countries the Electrolux brand has not been “visible” on the local market. Of
some 40 million products sold by the company in 2007, roughly half bore the
Electrolux brand (Electrolux 2007, p. 1). The difference is clear compared to the
year 2000, when the proportion was only 10 % (McKinsey Quarterly 2006, p. 78).
This change in regard to costs and image building was a result of an on-going effort to
‘build a Strong, Global Electrolux Brand.’ Thus, even though much of Electrolux’
current business remains in the mid-range price segment, there is a strong ambition to
move up to higher-end segments, where customers are more prepared to pay for
differentiated products. In all segments the driving forces for the business are still to
be innovation, design, and strengthening the brand. As summarized by one
interviewee:
We are not going to be the company with the lowest costs. Because where we want to play,
in the higher end – for example, we won’t offer the cheapest microwave oven – where cost
is less important, you need innovative products and strong brand names. At the same time,
of course, we cannot keep all our plants the way they are right now. We have presented a
large-scale program where we relocate plants so that we won’t have too great a cost
disadvantage.
(Executive at corporate level)
In other words, the customer is to occupy center-stage, and product development

is to be governed by customer needs. In this way the company intends to create
profit margins and growth in sales. Previously, for example, there was a focus on
developing the vacuum cleaner with the most powerful motor, an ambition driven
by company engineers rather than actual customer needs. Today product develop-
ment has changed; the aim is now to offer the quietest vacuum cleaner, the vacuum
cleaner with the longest reach, etc. At the same time, Electrolux must also seek to
be highly cost effective; otherwise profit margins will not be sufficient to finance
brand building through product development. Future shareholder value is to be
created through a successful process of innovation. This tendency – an increasing
emphasis on product differentiation – is especially prevalent in the Floor Care
business sector. Despite greater strategic focus, however, Electrolux will still have
some strategies directed only at enhancing cost effectiveness and other strategies
directed only at differentiation.
8.4 Change in the Strategy Process
The strategic changes discussed in the previous section are a result of a partly new
approach to planning and follow-up of Electrolux’ operations. The strategy process
in particular has been given a new design and orientation under the leadership of
Hans Stråberg, CEO 2002–2010. As mentioned earlier, CEO’s for a period of over
30 years – i.e. Werthén, Johansson and Treschow – ran Electrolux as a conglomer-
ate. They set clear financial targets for all businesses, and a high rate of return was
given priority. Somewhat simplified, their message was: ‘You are to meet these
targets, and we don’t care how you do it.’ The corporate group was characterized by
far-reaching decentralization, where the various businesses were run like largely
independent companies.
Today there is still considerable decentralization, and group management seeks
to avoid detailed control. As a practical matter, the head of each business sector
(cf. Fig. 8.1) controls the entire value chain, and the system of rewards is based to a
considerable extent on the financial performance of the sector. It is therefore
important to have clear structures to ensure that the company’s new corporate
and business strategies extend to all sectors. This is true not least in regard to the
importance of being a leader in innovation and product development.
One part of this endeavor is the “Consumer Innovation Programme” (CIP), a
staff function that is heavily involved in operations and closely connected to the
strategy process. It is intended to provide support for the group’s innovation efforts,
which have included establishment of a standardized product development process
that starts with a strategic market plan and ends with the phase-out of the product.
Fig. 8.2 The innovation Identification of Primary Development Product Development

Strategic
process at Electrolux. Consumer and Concept and Commercial
Market Plan
Opportunities Development Launch Preparation
(Electrolux 2007, pp. 24–25,
slightly modified)
Launch Range
Phase-out
Execution Management
One responsibility of the staff is to ensure that the different sectors and their
businesses act in accordance with the intended purpose of this process: to pursue
cost-effective and customer-oriented product development. The staff is to support
the sectors by providing advice, participating in workshops, etc. The innovation
process – called Product Management Flow – and its activities are described
graphically in Fig. 8.2.
Another element of the strategy process, and one closely related to the
process of innovation, has been the establishment of “Global Product Councils”
(GPC) for each product area (washers, tumble dryers, etc.). Previously there was
no co-ordination of the various regions, partly because of a corporate strategy
oriented toward portfolio management, but also because of substantial
differences in the traditions and customer preferences of the various markets.
At Electrolux it is said that the major-appliance market is not global and that the
group should therefore be regarded as a global, multiregional company. Never-
theless, there is an ambition to increase the degree of co-ordination, in the
generation plans of the various product areas, for example. In regard to purchas-
ing, too, group management has sought to improve co-ordination by setting up a
global purchasing unit. However, purchasing decisions are still largely
decentralized and are made by the local plant manager.
Financial planning has also changed. It used to be based on clear financial targets
for each sector; these would then be broken down by product line. The result was a
3-year financial plan, fully in line with the portfolio-management mentality that
characterized Electrolux at the time. There was no real discussion of strategy, just a
mathematical exercise in which the figures for the preceding year were raised by
some percentage. As previously noted, group management was not particularly
involved in the process of preparing plans where there was far-reaching decentrali-
zation. Another feature of planning was that the formulation and planning process
was largely governed by targets with strict requirements of precision in the financial
plans submitted. This approach has been abandoned; now it is emphasized that the
procedures established by group management are intended primarily to support the
strategy process at the sector level.
At present there is greater emphasis on so-called “strategic issues,” and sectors
are asked to describe their strategy in words rather than in terms of monetary key
numbers, although corporate financial targets – such as growth in profit margins and
the rate of capital turnover – are of course important as a starting point for the
discussion on strategy. The targets are communicated in late February or early
March; they extend 5 years into the future and are kept up to date. Among the
questions that should be treated in the strategic plan, and that relate to how
Electrolux is to meet its financial targets, are what is happening on the market, and
what strategic initiatives are planned. Not infrequently, group management adds a
number of more specific questions for the sectors to investigate. The areas identified
in this process are then linked to specific activities with measurable and clear
critical success factors, some of which are general and refer to the entire group
(such as the proportion of sales with the Electrolux brand), while others are
sector-specific (market share in the US in a particular customer segment). It is
particularly important to be able to describe the rationale behind the courses of
action chosen or proposed by the sectors.
The process may be termed interactive, with considerable variation in how
sectors prepare their plans. In other words, there is no clear mandatory planning
format. In some cases, planning is an activity for the president and the chief
financial officer; in other cases, all senior executives are involved through
participation in one or several workshops. In the largest sectors, co-ordination
is a comprehensive process where generation plans are important as a starting
point for the discussion on strategy. Identifying possible synergies, and deter-
mining, when appropriate, whether they should be exploited, is a central task of
“Global Product Councils” (GPC’s). Another area where co-ordination is needed
is sales; that is, given a certain product range, the sales companies estimate
possible prices and volumes. It may be noted, however, that the plans of one
sector are not available to other sectors (although they are stored in a database
for financial plans). Here group management gave priority to preventing the
spread of sensitive information, rather than facilitating co-ordination through the
sharing of strategic information.
In the next step, the sector plan is discussed with representatives of group
management (the CEO and the CFO). The purpose is to ensure that plans are
consistent with group targets and strategy and to determine whether they are
consistent internally and with each other. Admittedly, the representatives of
group management can provide a considerable number of detailed comments
during these discussions, which are normally held in so-called “Sector Boards,”
but they cannot be regarded as deeply involved in preparing the plans. One of
the interviewees described the CEO as both a ‘reviewer’ and a ‘preacher’. The
CEO’s ‘sermon,’ which is constantly communicated, concerns how Electrolux
should handle different threats and opportunities. Consequently, the CEO’s
views on various issues seldom come as a surprise by the time the strategy
process has reached this point. The CEO is very clear about how the sectors are
expected to proceed and where various structures, such as the “Consumer
Innovation Program” (CIP), have been put in place to support the process. By
virtue of these structures, achieving a coherent whole has become much more
important than before, when the group consisted de facto of a number of
independent parts.
When sector and senior management are agreed on general orientation, the
verbal plans of the sectors are translated into a financial plan. When the work has
come this far, the group controller’s staff determines whether the plans are consis-
tent internally and with each other: in other words, what will be the financial
consequences of the strategic plans? They do not consider it their function to

question the content at a detailed level; on the other hand, they may have views
that relate to the group as a whole. One example is to check whether the sectors are
actively seeking to reduce the number of product platforms. Another example is to
determine what volume of investments the group can sustain over the next 3-year
period.
Electrolux was formerly characterized by follow-up with an extreme financial
orientation. Today follow-up – which is described as comprehensive and tight –
focuses on both financial results and non-monetary key numbers tied to specific
activities and initiatives. Considerable emphasis is placed on ensuring that plans are
adhered to and that Electrolux is on the right track and can meet its targets. As for
the bonuses of senior management, they are still based primarily on group results
for the latest 3-year period. As a complement to nonstop follow-up, group
controllers conduct a major on-site review of each sector once a year. In this
review, strategic and financial plans and outcomes are examined in detail. These
meetings are intended to provide support and a discussion partner for sector
management.
8.5 Adapting IT to New Strategies and Planning Processes
The changes in the strategy process at Electrolux are reflected in the adjustments
already made in group IT, but above all in the adjustments currently in progress.
The following sections discuss how management designs and uses various IT
systems to call attention to changes in strategies (strategy implementation) as
well as encourage and support strategic discussions between all organizational
levels in the group (strategy formulation).
8.5.1 New Group Perspective: From Part to Whole
From earlier sections it is apparent that Electrolux is changing its corporate

strategy. This means that the group is moving from a strategy based on portfolio
management and decentralization to one that more heavily emphasizes knowledge-
and activity-sharing. The changes in strategy process implemented at Electrolux to
improve co-ordination of group operations are supported by several different IT
systems. Product development – a pivotal element of the strategy process – is
conducted largely at the sector level. A comprehensive and group-wide systems
support has been in place for some time in the form of a “Product Management
Flow Gate” (PMF Gate). This IT system, which is discussed in greater detail in the
next subsection, makes it possible to follow developments over time in regard to
innovation and new thinking for particular product lines and geographic regions.
However, co-ordination of product lines, such as major appliances in Europe and in
the US, is not handled in PMF Gate, although senior management can obtain reports
showing the entire portfolio of development projects and their financial potential.
Previously this was not possible without extensive manual processing. The intro-
duction of PMF Gate has thus helped to increase transparency in product
development.
Product development and other important initiatives and activities are
co-ordinated at an overall level in the group strategic planning and budgeting
process. This process, as shown in previous sections, has undergone many changes
since Hans Stråberg became group CEO in 2002. Perhaps the two most important
changes are that the degree of interactivity and the degree of iteration have
increased in the new corporate strategy in response to the need for far-reaching
co-ordination. It may be noted, however, that the strategic planning process is still
based in many ways on manual routines. These are intended to support and
encourage strategic discussion between all organizational levels in the group.
However, even if the different activities involved in the strategy process receive
systems support, for example in preparing financial forecasts and in the aforemen-
tioned process of product development, integration between various IT systems is
limited. The interviewees mention several consequences of the limited integration,
for example that transparency is not sufficient, that key concepts are used in
different ways, and that it takes too much time to extract information of strategic
importance. The greatest problem and challenge, though, is in the on-going follow-
up of the implementation of corporate strategies. Without prompt and efficient
reporting, it is hard to know how well the strategy process is advancing. Primarily
for these reasons, Electrolux initiated the so-called Compass Project (“Common
Processes, Administration and Systems Standardization”) in 2007. As a result of
this project, installation of a fully integrated ERP system commenced in 2008.1
One principal purpose of Compass (i.e. the SAP implementation) is to resolve
many of the problems associated with the fragmented systems environment at
Electrolux. According to several interviewees, the project is a way for group
management to speed up the process of strategic change. Today management
does not have full control over financial reporting. Since virtually every sector
has its own IT system for financial follow-up and reporting, uncertainty arises at the
highest level of management. For example, are the results or the costs reported
consistent and comparable between sectors? This uncertainty complicates both
planning and follow-up, and thus also makes it harder to highlight the vital areas
of strategic change at Electrolux. For this reason, processes in sales and purchasing,
accounting, and logistics and inventory management will be co-ordinated and made
uniform within the framework of Compass. Former CFO Fredrik Rystedt described
the ultimate objective of the project as follows (Electrolux 2008b, p. 9):
Compass is about allocating resources in the most efficient way possible based on a state of
the art and global information gathering system that covers sales order processing, admin-
istration and financial processes, and finished goods processing like inventory management.
1
Since the present study covers changes made before 2009, only the initial phase of this
implementation project was investigated.
The primary aim of Compass is to allow faster, better, and more cost-effective
decision-making than is the case at present. More efficient transaction processing,
the possibilities of a shared global service center, and lower costs of licenses and
maintenance are expected to enhance cost-effectiveness in decision-making. As for
the rapidity and quality of decision-making, the new SAP solution will permit day-
to-day monitoring of gross profit by product line. With Electrolux’ current solution,
which is based on reporting of results by all units via a joint system of group
consolidation, follow-up must wait 4–6 weeks after the end of the month. The
possibilities of obtaining detailed financial analyses will also be enhanced by
Compass. Today that can be done only in certain parts of the group where a special
IT system has been developed (see the next section for a more detailed description).
For follow-up of corporate strategy, it must be possible to analyze the degree to
which synergies are exploited. One point emphasized by interviewees was the need
for better analysis of the financial consequences of co-ordinated purchases. Greater
transparency and sharing of information within the group are also required if the
sharing of knowledge between sectors is to be improved. Being able to compare and
analyze why certain activities are developing better or less well than others is
essential if the sectors are to learn from each other. As underscored by group
CEO (until 2010) Hans Stråberg, Compass is intended to facilitate the knowledge-
and activity-sharing essential to successful change of corporate strategy at
Electrolux (Electrolux 2008b, p. 9):
Bear in mind that we operate in an industry of increasing global competition where
innovation is the key to success. The profit potential from efficient manufacturing alone
is not sufficient. We need to capture the benefits from the entire value chain. This is the
difference between creating superior value and competing on price alone. To do this, we
need to use best practice in the Group within all areas. With real time information at our
fingertips we can act fast and in line with what we foresee. This will be provided by
Compass.
8.5.2 New Business Perspective: From Costs to Both Costs and

Value
As described in previous sections, Electrolux is changing its business strategy, a

shift where sectors continue to emphasize cost effectiveness while also increasing
the degree of product differentiation. This change in strategy and the logic of
control – moving from a clear orientation toward production to an emphasis on
both customers and production – has posed considerable challenges. After previ-
ously emphasizing costs and internal efficiency, management now wants the sectors
to focus on value, i.e. to seek both internal efficiency and external effectiveness.
According to several interviewees, at the “old” Electrolux the sales companies and
plants were very strong and therefore focused far too little on customer needs.
At this point, however, the company has put in place a formalized and
centralized strategic planning process that clearly emphasizes customer needs –
fully in line with the change in corporate and business strategies. It has been a
considerable challenge for management to create the conditions that would make it
possible to implement the strategic plans that have been developed. For this purpose
a number of new positions have been established at the group level to support the
strategy process and to serve as ‘catalysts’ in it. One of the interviewees remarked
that these individuals may be regarded as central change agents who work very
closely with operations and with the sectors and their managements. Particularly
during the period when the group was undergoing strategic change and introduced a
partly new model of control, it was of great advantage to have personnel at the
group level who could support this effort. Moreover, the sectors realized early on
that the new strategy process had come to stay.
In order to support the new strategic orientation of the sectors, especially to
provide readily accessible information in areas that affect revenues as well as costs,
i.e. the value created by the product for customers, a new ITS was developed:
Centaur. It supports the analysis of profitability by product and customer for the
European major appliance business. According to one interviewee, it is a valuable
strategic instrument that facilitates decisions on which products to withdraw and
replace. In this way renewal of the product range can proceed more quickly and
with greater precision. Centaur generates comparable and consistent financial
reports, as Compass is also intended to do at present. But Centaur will probably
be replaced in time by a data warehousing solution. Together with the ERP system
solution implemented by Compass, this will make it possible to provide even faster
and even more reliable information to Electrolux’ customers – for example,
whether a particular product is in stock and if so when it can be delivered – thus
permitting further improvement in customer service.
Another example of a locally developed IT system is in Floor Care. This system,
like Centaur, is intended to improve financial follow-up of profitability and value
creation for different products. If the local product company could previously
decide what range of products to offer the sales company, the situation is now
different. The product range is decided to a greater degree by Floor Care manage-
ment. The starting point for this determination is the various product families of the
sector and the models offered within each family. Each product is assigned a
centrally determined standard cost based on the latest sales statistics and informa-
tion from subcontractors. Each month the sales company then reports its sales at the
product number level. These statistics can be compiled so that profitability for
entire product families can be calculated. To permit more rapid decision-making,
the aim is to have daily reporting and follow-up. In time this IT system will also be
replaced as a consequence of the Compass project.
PMF Gate, which was previously mentioned, is yet another IT system that is
web-based and a very important part of the strategy process for the sectors. Since
Electrolux management seeks to establish a much stronger customer orientation, it
is essential to detect and respond quickly to customer needs. PMF Gate was
developed as support in the product development of the sectors, where the prepara-
tion of new generation plans is the core of the process. This IT system is partly a
tool of project management for supporting the development of new products, and
partly a tool for follow-up by senior management that makes it possible to obtain
reports on the entire Electrolux portfolio of development projects (see also the
preceding sections).
The system is designed to control the innovation process from beginning to end.
It thus provides a central framework and a common language for discussions on
business strategy. The design of the system follows the overall process of product
development as defined by Electrolux (see Fig. 8.2). For each phase, there are a
number of checkpoints and delivery commitments. Through management of all
development projects in a consistent fashion, transparency and comparability are
enhanced, thus facilitating analysis – in regard, for example, to which investments
in product development should be carried out at all. It is especially important to be
capable of demonstrating more clearly that analyses of the volume and price of
various products, for example, are realistic. PMF Gate is also intended to ensure
that the aggregate skills and knowledge of the group are clearly identified and
utilized through documentation of all activities and steps in product development. It
is worth noting, however, that the system does not compel that data be submitted
nor require that all development projects be managed in a totally uniform fashion.
Thus, to some extent the local unit or product line may decide on its own what is to
be reported in the common group system. Examples of required information are
“market message” (what message is to be communicated to the market, such as that
related to the Electrolux brand name) and “target measure” (what financial targets
have been formulated for launching the product, such as what cost of production is
sought). The spaces for these mandatory items must be filled in to permit generation
of meaningful reports that cover the entire operations of the group. One interviewee
summarized as follows:
Everywhere the system is forgiving. You can do almost anything – even illogical things.
The system won’t stop you, but it rests on the assurance that there is a process that actually
works.
(Controller Floor Care)
Although PMF Gate was developed primarily as support for project managers,
there were initial doubts about the system, one reason being that it required more
reporting by project managers. The explanation for the increased reporting is that
PMF Gate is an independent system and that all information must be entered
manually. Integration with other IT systems is not currently on the agenda, as the
data used by PMF Gate are not uniformly formatted and are largely nonnumeric.
We try to find a balance so that it is usable for project managers – otherwise we won’t get
information. And if we don’t get information, the reports will not be good. If they feel that
management is asking for information and reports, they are pushed to actually enter things
in the system.
(Controller Floor Care)
Gradually thereafter, and through a comprehensive training program, but also as

a result of the project managers’ own experience with the system, the initial doubts
have been replaced by positive evaluations. One of the main explanations for this
development was that project managers, with the aid of the system, tend to find
more meaning in operations, more of an “aha experience”. Not least, they are
helped because the system gives more order and structure to the complicated task
of updating, renewing, and co-ordinating Electrolux’ generation plans.
Fig. 8.3 Ideas, models and Level of

information processing at abstraction
(high)
Electrolux
Strategic ideas
Strategic and management control models
Practical information processing
Time and maturity in

relation to strategic ideas
(high)

In this chapter we have shown the importance of modern IT systems in the
strategy process of the global enterprise Electrolux. This process is one in which
financial information, but also other business information, is or can be essential
for attracting the joint attention that is one of the primary determinants of what
Electrolux does. Such attention is often difficult to capture, but it is even harder
to retain very long among the many people who work for the company.
In today’s complex, information-rich and world-wide firms, the struggle for
attention is therefore important. To what extent – and how – can control call
attention to what is strategically important for the company and ensure that it
gets done? The strategy provides the framework for answering this question and
the content of the answer. Since the strategy process is an activity rich in
information, our initial assumption was that modern IT systems are important
in the strategy process.
From our empirical study at Electrolux, it can be seen that IT systems play a
significant part in the strategy process of this world-wide enterprise. Their
importance is not evident in extensive use of IT systems at every step – measured
in time, the use of IT systems in the strategy process would probably be limited –
but lies in its consequences. The availability of technology that is integrated
(better opportunities for communication) and powerful (better possibilities of
storing and processing large quantities of information) creates opportunities in
the strategy process that previously were too difficult or impossible to exploit.
To obtain a better understanding of these changes and the consequences of the
technology, it is important to describe the current strategy process of Electrolux
at three levels as depicted in Fig. 8.3: an abstract conceptual level (i.e. strategic
ideas), a concrete level of models (i.e. strategic and management control models)
and the most practical – often physical – level of information (i.e. practical
information processing).
The y-axis in Fig. 8.3 characterizes the strategy process in terms of the level
of abstraction. From highly abstract – such as ideas and thoughts – to more
concrete such as the models used for strategy implementation as well as
the practical information processing necessary for the use of these models. The
x-axis indicates the time spent on developing the ideas, models and information
processing as well as their level of maturity.
The case study of Electrolux broadens and expands the concept of strategy,
particularly when compared to some currents of literature, where strategic
thinking and concrete action are often regarded as one and the same. This
literature also appears to be based on the assumption that if a strategy is
formulated, it is also applied in operations. Another view – more realistic and
perhaps more commonly held – is represented by the classic conceptual frame-
work of Anthony and Govindarajan (2007). In this framework strategy is one
given element, and implementation – through the existing management control
system – is another. This view resembles that of Gavetti and Rivkin (2007,
p. 420) on the emergence of strategies:
First, strategy exists in managers’ minds – in their theories about the world and their
company’s place in it [. . .]. Second, strategy is embodied in a firms’ activities, rules and
routines.
It is therefore necessary, particularly in the case of strategic change, to clarify

the need for an intermediate level of analysis. Through strategic and manage-
ment control models, the initial abstract strategic thinking is given a more
concrete form, while at the same time raising and providing continued intellec-
tual meaning to the many specific and practical questions related to the
implementation of strategy.
On the abstract conceptual level – where strategic concepts originate and are
formulated (Fig. 8.3) – the principal changes for Electrolux relate primarily to an
increased customer orientation and closer integration of operations that used to
be highly fragmented. Such thinking is not unique to Electrolux. In an initial
simple overall form, many other global firms express the same thoughts on a
similar situation: in an increasingly competitive global environment, it is impor-
tant that every step in the business can perceive and identify customer needs in
order to meet them quickly and flexibly. What distinguishes one firm from
another is how the desired customer orientation and integration are realized.
This difference between what is to be achieved (attention focused on customers
and the situation of the entire enterprise), and how it is to be achieved, is the basis
for the frequently repeated view that formulating strategy is simple and takes
little time, whereas implementing strategy is difficult and time-consuming.
In research on strategy, the difference is also one of the explanations for the
increased interest in how the strategy process actually takes place. In much of
previous research, strategy is viewed solely in terms of market positioning, in the
form of differentiation or emphasis on greater cost effectiveness, for example. It
is less common to study the development leading up to, or proceeding from, an
established position. As for Electrolux, in most studies the company would be
considered as either production- and cost-oriented, or customer- and value-

oriented. In our study, it has been more relevant to regard the situation as an
on-going movement between strategic positions, a path of strategic conversion,
where strategy is an on-going activity, and the detailed explication of strategic
positions requires contributions from many more than senior group manage-
ment. It is about the evolution of Electrolux from an existing position toward a
desired new position. This task is comprehensive and takes time.
With such significant change, the language and particularly the concepts used
at Electrolux seem to be of central significance (cf. Tsoukas 2005). Through
language, ideas are formulated and attention is defined, and language provides
the vehicle for the communication essential to control. With strategic change it is
therefore natural for new language to precede practical realization. Language is
intended to help create the new reality. It is important that the concepts and the
new language be realized in practical action with relatively little delay.
One example of new strategic language at Electrolux relates to the
“Consumer Innovation Programme” (CIP as mentioned previously) that was
launched at an early stage and is supported by senior group management. It
refers to focusing attention throughout the business on customer needs. With the
set of concepts developed for this purpose and communicated with the aid of a
new IT system, senior group management seeks to help Electrolux to break free
of its historically entrenched view of itself as composed of largely independent
businesses with little integration and primarily a production orientation.
At an intermediate level – i.e. that of strategic and management control
models (Fig. 8.3) – strategic concepts are given further concrete form.
“Nebulous” strategic concepts from group management materialize here in
various kinds of supporting models, from very simple to highly sophisticated.
These models often have the important general feature of analyses and
presentations provided for visualizing and making visible the work that goes
on in the business (see for example Overby 2008). The need for such visualiza-
tion has generally grown with the increasing service content of many businesses.
Only after this process has been made visible will it be possible to control it and
to take the necessary action. Visualization of the business is intended to identify
“existing” situations, on the one hand, and “desired” situations, on the other,
often as a basis for designing the business and its ITS in a better way.
Electrolux has increasingly come into phase – i.e. reduced the gap between ideas
and models – after an initial period characterized by more abstract strategic thinking.
This is particularly the case in the visualization of the critical process of customer
innovation (CIP). The process describes how the company should proceed in order
to focus on customer needs and to meet these needs with new products. This simple
process description is used today both for internal guidance and in external commu-
nication (see Fig. 8.2). It also provides a map for the company’s own actions and is
an object of recurring reference in internal communication. It was around this
process, and in parts of it, that ITS were initially developed.
In other areas relevant to the new strategy of Electrolux, the development of
control models has not come so far. Admittedly, there are discussions on
important related concepts, such as customer value and customer profitability,

and with some additional work, it will be possible to retrieve information both
concerning customers and on overall aspects. Nevertheless, there are no
formalized strategic and management control models. For example: it is possible
to speak of increased customer profitability when discussing control; it is even
possible to obtain information on the profitability of specific customers, but there
are still no specific group-wide models for on-going analysis of individual
customers, for example in the form of an ABC calculation. This situation can
complicate both production and the communication of information of impor-
tance for control.
At the most practical level in Fig. 8.3, the ultimate purpose is to make
possible what is strategically desirable in regard to information and action
related to it. In general terms, this is a matter of establishing – in consistency
with the strategic ambitions and the models used at many companies – effective
vertical and horizontal integration of the organization’s flow of information.
Vertical integration means that formerly independent systems are integrated,
thus making it easier and simpler to go from a highly aggregate level to a
detailed level. Horizontal integration is about facilitating communication and
linking together different parts of the business. Such a linkage is ultimately
intended to result in better and faster information processing and thus in better
decisions.
The existence of common basic definitions is a precondition for achieving
depth (e.g. following up individual customers), breadth (e.g. comparing and
communicating across different organizational units), and flexibility (e.g.
enabling speedy and reliable delivery as required by changing customer
needs). One example is the need for a common coding plan where the same
kinds of transactions are classified in a similar way. Some of these definitions are
simple both to develop and to apply, with no personal prestige attached to using
them. Other definitions are much more difficult to introduce as differences
between businesses are considerable and a common solution involves a costly
compromise that few are prepared to make right away on their own. A recurring
problem at companies in general is that these strategically important details do
not receive the attention that they require. One reason is that the technical link-
up – getting different systems to “talk” to each other – is often complicated and
time-consuming.
Both technically and organizationally, integration at Electrolux is being
successively extended further and deeper down in the organization. First, indi-
vidual functional areas (such as sales) are linked together; thereafter, they are
joined in larger geographic areas (such as Europe). Moreover, with the new
integrated ERP system fully implemented (the Compass project), it will be
instrumental in designing global solutions. On the basis of the discussions
described above, it is clear that Electrolux’ involvement with its strategy is
on-going and is following a course in which concepts are transformed into
control models and IT systems; this process is one where different aspects are
in different phases in relation to time and maturity (see Fig. 8.3).
Figure 8.3 also shows that strategic concepts have a major impact on the way
the business is controlled through different models and on the role of IT systems
for that purpose. Thus, to a high degree, the thinking, or mental map, for the new
customer-oriented, integrated, global enterprise is already in place. In the Com-
pass project, there is a substantial likelihood of a major step forward in practical
information processing. Compass permits information processing both in-depth
and on a broad front – a necessity if the strategic concepts are to be fully realized.
One danger in such situations – a general one not related directly to Electrolux –
is that the increased wealth of information due to the integrated solution may
lead to severe attention failure, as attention can be disrupted by the volumes of
available information. To avoid this hazard, the strategic and management
control models of the organization should be developed concurrently. These
models provide the support that makes it possible to prune and sift the
company’s wealth of information and transform it into valuable knowledge.
These models link the company together and transmit essential knowledge –
about customers, for example – between different parts of the business.
The new strategic role of the accountant should be viewed in light of this
endeavor. The development of models called for in the discussions above
requires a link both to a more abstract level (i.e. knowledge of the company’s
strategic concept) and to a more concrete, practical level (i.e. knowledge of the
business). At many companies there is the concrete practical problem that this
development may be difficult to realize because many potentially applicable
models are considered “worn out” in some sense. People have been talking for a
long time about the need for new models of control, but since there has often
been no connection between these models and an IT system, they have lacked
concrete form. In our opinion, here is where management control can go wrong –
the link between the levels of strategy is absent, and there is often insufficient
awareness that the different levels can develop in diverse ways over time. Here
more research is needed, particularly on the importance of individual
participants and groups of participants in the strategy process (cf. Nordquist
and Melin 2008).
Acknowledgement Contributing to the development of this chapter have been presentations at

different seminars as well as presentations before the Accounting & Finance Association of
Australia and the New Zealand Conference in 2009 as well as the Accounting and Management
Information Systems International Conference that same year.
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Funding, Strategies and Management
Control Systems: Empirical Evidence from 9
Two Chamber Orchestras
Fredrik Nilsson and Anna-Karin Stockenstrand
9.1 Introduction
In recent years a great deal of interest has been focused on studying the relationship
between strategy and management control systems (MCS). However, it is well
known that the results from these studies are somewhat ambiguous and contradic-
tory. In an attempt to explain these types of conflicting results, as well as increase
our understanding of the relationship between strategy and MCS, two different, but
interrelated, areas of research directions have evolved.
The first research direction is characterized by the analysis of the methodo-
logical and theoretical foundations of contingency studies. Some examples of this
type of studies, also mentioned in Chap. 1 and the Appendix, are Gerdin and Greve
(2004, 2008) and Hartmann and Moers (1999, 2003) who argue that many quanti-
tative studies have flaws in their designs and weak theoretical underpinnings.
Another example is the study by Kald et al. (2000), concluding that there is no
common frame of reference for classifying business strategy, and therefore the
results are difficult to compare and integrate. As a solution the authors propose a
framework, integrating several well-known business strategy typologies. A final
example is Nilsson and Rapp (2005) who argue that strategies and MCS at different
organizational levels affect one another. Therefore the relationship between
strategy and MCS is more complicated than earlier anticipated. The authors suggest
that the use of multi-level studies, in line with the reasoning by Luft and Shields
(2003), could be used to enhance our understanding of the complex relationship
between strategy and MCS. To sum up, this strand of research has shown that the
ambiguous results can be explained, at least to some extent, by research designs that
do not fully capture the complexity and methodological challenges of studying the
relationship between strategy and MCS.
F. Nilsson (*) • A.-K. Stockenstrand

e-mail: fredrik.nilsson@fek.uu.se; anna-karin.stockenstrand@fek.uu.se

214 F. Nilsson and A.-K. Stockenstrand
The second research direction is based upon the notion that our understanding of
how strategies are formulated and implemented is still rather limited (Nixon and
Burns 2012b). According to these authors one reason is that the literature is based
upon a rather simplistic and linear view of the relationship between strategy and
MCS. To enhance our understanding of this relationship, they argue that more
studies in the field must be directed towards the practices and processes of strategy
formulation, implementation and the role of MCS in that respect. Hence, this
research direction is not only concerned with how the organization is aligned
with the environment but also with what Nixon and Burns (2012a, p. 227) call
‘[. . .] the internal practices, processes and issues that shape the formulation and
implementation of strategy.’1 Especially interesting areas of research are how
issues “outside” the organization affect the “inside”. One such very significant
issue is how the funding of the organization affects internal practices and process
(Brignall and Modell 2000; Budding 2004; Geiger and Ittner 1996) or as Nixon and
Burns (2012b, p. 235) put it when talking about the strategic management (SM)
process: ‘The shareholder-stakeholder orientation of an organization is important
because if affects both the content of strategy and the SM process.’ Even though
there are some studies indicating the importance of the funding arrangement, the
role of funders in both maintaining – and disrupting – the alignment between
strategy and MCS has not been observed in the literature before. To sum up, this
latter strand of research is trying to explain the ambiguous results by questioning
and developing the simplistic view on how strategies are formulated and
implemented and the role of MCS in that context.
The aim of this chapter is to investigate and elaborate on the relationship
between funding, strategies and MCS. The chapter will contribute to the research
direction focusing on methodological development since it is a multi-level study
(cf. Luft and Shields 2003; Nilsson and Rapp 2005) and uses the framework for
classifying business strategy developed by Kald et al. (2000). The chapter will also
contribute to the research direction focusing on strategy development and imple-
mentation and especially how these practices and processes are affected by
environmental influences not observed in the literature before – i.e. how funding
arrangements affects the strategies and MCS. By an unusual combination of
insights from these two research strands it will be possible to provide a much
more detailed, as well as a more dynamic, description and analysis of the
relationships between funding, strategies, MCS – and ultimately – performance.
1
Nixon and Burns (2012a, b) discuss the development of strategic management accounting
(SMA), an important strand of literature in the broad area of strategy and management control.
One of their conclusions is that there is no consensus of the definition of SMA. There exist
narrow definitions focusing on accounting techniques for the analysis of competitors to very
broad definitions including management accounting, financial accounting and financial
management. The authors seem to encourage a broader more integrative definition of SMA
(see also Langfield-Smith 2008).
9 Funding, Strategies and Management Control Systems: Empirical Evidence. . . 215
The paper focuses on the business unit and functional levels, since it is the
business unit that is competing on the market and therefore the unit is much affected
by environmental influences (Goold et al. 1994), such as funding arrangements
(Stewart 1999). By identifying the common business and production logic of the
unit, the value-creation processes can be made visible and also more easily
replicated in coherent strategies and MCS throughout the organization (Nilsson
and Rapp 2005). The analysis is based upon qualitative data from a study of two
chamber orchestras in the dissertation by Brettell Grip (2009). In the next section
we will elaborate on our theoretical approach. We will then present the cases and
the analysis. The chapter ends with conclusions and implications.
9.2 Theoretical Approach
9.2.1 Classification of the Business Strategy Construct
As noted in the introduction, studies of the relationship between strategy and MCS
at the business unit level have been somewhat ambiguous. Therefore Kald et al.
(2000) have proposed a framework based on the idea that the classification of the
business strategy must take into account many more features of the strategy pursued
in order to analyse how it affects MCS. This framework integrates earlier research
and identifies four configurations of strategy2 and MCS. The following two
configurations, based on the reasoning (i.e. arguments and references) of Kald
et al. (ibid), are especially interesting sine they have a strong strategic focus and
therefore can clearly be related to earlier research results.
The first configuration consists of prospectors competing with unique product
offerings, in other words a market position based on differentiation. Since
innovation and market opportunities are typical features of a prospector and
differentiation strategy a great deal of emphasis is put on building market share
(cf. Gupta and Govindarajan 1984; Miles and Snow 1978; Porter 1980). The
environment of the organization is turbulent, creating great uncertainty. One of
the reasons is that the demand for differentiated products is difficult to forecast
(Shank and Govindarjan 1993, p. 105). This uncertainty makes the budget less
important, with a loose MCS as a consequence (Govindarajan 1988). Since the
success of the strategy is dependent on product characteristics such as high quality,
high delivery reliability, etc., non-monetary control will be used. Furthermore,
since many of the products are in the build-up phase, and there is a dependence
on successful R&D-activities, the time perspective will be long-term (Govindarajan
and Gupta 1985).
2
Strategy is measured as strategic pattern (Miles and Snow 1978), strategic position (Porter 1980)
and strategic mission (Gupta and Govindarajan 1984).
The second configuration consists of defenders competing with standardized

products, a so-called cost leadership position. Since this is a common strategic
orientation in declining industries, management is focused on harvesting (cf. Gupta
and Govindarajan 1984; Miles and Snow 1978; Porter 1980). The environment of
the organization is stable with a low degree of uncertainty (Shank and Govindarajan
1993). Since the demand for standardized products is easy to forecast, the budget
will be an important planning tool. As a consequence the MCS will be tight, with
the budget considered to be a binding contract (Govindarajan 1988). The success of
this strategy is totally dependent on the cost effectiveness of the business unit, and
therefore cost control must be meticulous; in other words, monetary control will be
in focus (Porter 1980). This configuration is common in mature industries in which
many of the products are in a hold or a decline phase. In such a situation the time
perspective is short, since the need for market investments etc. is limited
(Govindarajan and Gupta 1985).
As can be seen from the characteristics of these two configurations, they
resemble a situation in which the strategic orientations of the units are focused.
The strategic pattern, mission and position are coherent and based on the same
business logic. In a situation in which the business unit has a less coherent strategic
orientation, it can be expected that the alignment with the MCS is weak. However,
despite the merits of such an analysis, very few studies use a business strategy
construct based on an integration of several different strategic variables as proposed
by Kald et al. (2000). One reason for this is probably that a large proportion of the
studies use quantitative data in which both the richness of the strategy and the MCS
variables, as well as the complicated relationships between them, are difficult to
capture (cf. Gerdin and Greve 2004, 2008). Therefore we believe that the arguments
put forward by Kald et al. (2000) are still valid today and that there is an urgent need
for rich case studies in order to truly understand and further develop the complex
relationships between strategy and MCS. We reject the position that strategy
typologies are outdated (cf. Gond et al. 2012). On the contrary, we believe they
are useful since they can make comparisons with earlier studies easier (Kober et al.
2007) – especially if the recommendations by Kald et al. (2000) are followed.
9.2.2 Multilevel Effects on Strategies and MCS
The advantages of multi-level studies for investigating what affects the design and
use of MCS have are well-known and have been discussed in the literature by for
example Luft and Shields (2003). By studying how strategies and MCS at different
levels affect one another, new insights of these important relationships could be
gained. It is therefore encouraging that the interest for multi-level studies has
increased lately (for an overview, see Chap. 1). Unfortunately, most of these studies
do not explicitly rely on contingency theory in analysing the relationship between
strategy and MCS, making it more difficult to understand the interaction of
strategies and MCS at different organizational levels. Hence there is still a need
for studies of the multi-level effects of strategies and MCS.
As mentioned, the interaction between different strategic levels and MCS has
been discussed at length by Nilsson and Rapp (2005). Their framework has
identified different configurations of strategies and MCS that fit together – what
they call a high degree of strategic congruence and integrated control. It has also
been tested and validated in several recent studies (see for example by Ahlstr€om
2008; Nilsson 2010). The weakness of this framework is that it only uses the
strategic typology of Porter (1980) when classifying the business strategy construct.
It is also too comprehensive for our purposes since it includes the corporate level as
well as how strategy affects, and is affected by, production control systems. We
have therefore used the framework by Kald et al. (2000) in our analysis, adding the
functional level as well as the performance variable. The typology by Ward et al.
(1996), also used by Nilsson and Rapp (2005), has been added to the Kald et al.
(2000) framework to be able to classify production strategy in the following generic
types: niche differentiator, broad differentiator, and cost leader.3 One important
advantage of using this typology is the explicit relationship to the generic business
strategies identified by Porter (1980). Based on the reasoning of Kald et al. (2000),
Nilsson and Rapp (2005) and Ward et al. (1996) the following relationships
between the business unit strategies, production strategies and MCS can be
expected.4
A niche differentiator is characterized by producing unique and highly
customized products with excellent quality. This type of strategy fits well with a
differentiation strategy. With its innovative and unique products it is also very
suitable for a prospector trying to build a strong reputation and increase market
share. Since this combination of strategies will lead to a high degree of uncertainty,
MCS will be loose. A broad differentiator strategy combines cost efficiency and
flexibility by having a lower level of product uniqueness compared to a niche
differentiator. Therefore this production strategy is possible to combine both with
a differentiation and a cost leadership strategy as well as a defender and a prospector
strategy. MCS will be either loose or tight depending on the business and production
strategies chosen. Finally, a cost leadership strategy is characterized by producing
standard products in high volumes and at a low cost. Not surprisingly such a strategy
is very suitable to combine with a cost leadership strategy, especially when the
mission is to harvest (i.e. maximize short-term earnings). Cost leadership is also a
suitable strategy for a defender. In this configuration MCS is expected to be tight as a
result of a stable environment and a low degree of uncertainty.
Following our earlier argument we also maintain that the funding arrangements
and the interests of funders are of importance in the choice of strategies. Depending
on how they act – for example with a short-term or long-term time perspective on
3
We have not included the generic strategy lean competitor also identified by Ward et al. (1996).
The reason is that this strategy is not very common, as it combines differentiation and cost
leadership.
4
For a detailed description and analysis of the Ward et al. (1996) production strategy typology and
its characteristics, see Nilsson and Rapp (2005).
the development of the organization – this can contribute to maintaining or

destroying the alignment between environment, strategy and MCS. This will be
discussed in more detail in the next section.
9.2.3 The Role of MCS in Formulating and Implementing

Strategies
The somewhat disappointing results of the many contingency studies of how

strategy affects, and is affected by, MCS are probably an important explanation
for the increased interest in how strategies are formulated and implemented. As
mentioned in the introduction to this chapter there has even been a recent call, by
Nixon and Burns (2012b), for more studies of the practices and processes of
strategy formulation and implementation (cf. Hutzschenreuter and Kleindienst
2006). One example of this type of research is Maitlis and Lawrence’s (2003)
study of a British symphony orchestra failing in strategizing as a result of the
interplay of organisational discourse and political behaviour. Another example is
Jørgensen and Messner (2010) showing the role of accounting information in
mobilizing different strategic objectives in an R&D-intensive company. A final
example is a study by Modell (2012) showing how the strategy formation process in
a Swedish central government agency was conditioned by external regulations. By
these detailed studies new insights of the practicies of strategy-making, as well as
the role of influential stakeholders, can be obtained (cf. Nixon and Burns 2012a).
These studies also show the potential of studying how important issues outside and
inside the organization affect the strategies as well as the MCS.
One environmental issue that has tremendous impact on the organization is the
funding arrangements (see for example Stewart 1999). Even though there can be no
doubt about this impact, few studies exist that relate funding to the strategies and
MCS. In the corporate governance literature the importance of funding
arrangements is acknowledged, but the studies does not discuss strategies and
MCS in any detail (for a typical example see Gulamhussen and Guerreiro 2009).
The studies that exist of funding and how it affects MCS is mainly from a public
sector context. Brignall and Modell (2000) discuss how funding bodies affect
performance measurement and managerial choice in the public sector. One of their
conclusions is that strong pressure exerted by funding bodies leads to a managerial
emphasis on, and integration of, financial measures and measures of resource
allocation. Budding (2004) has analysed the role of funding for managers within
an organization. He describes how a Dutch municipality introduced funding uncer-
tainty as a means to create a larger sense of responsibility for self-funding among
managers and created more extensive, and more efficient, use of MCS. Finally,
Geiger and Ittner (1996) suggest that management accounting choice and the design
and use of government cost systems are influenced by mandatory requirements but
also the requirement to be self-funded. They found that organizations that were
required to fund themselves and recover all costs from their own revenue streams
made use of more advanced cost systems with a wider range of internal purposes.
As explained by Geiger and Ittner (1996), the effects of the funding

arrangements, and the corresponding level of funding uncertainty, could be
analysed and explained drawing on institutional and contingency theories of MCS
choice. However, the insight about the role of funding arrangements and uncer-
tainty has not had any major impact on the more detailed discussions on the
relationship between strategy and MCS. This study is positioned to contribute to
filling this apparent void in the literature.
9.3 Empirical Illustrations
9.3.1 Background to the Cases
[. . .] I think that the change to look at funders as customers is a necessity; it is a big mistake
to have an overreliance on the Arts Council, because it creates a lack of accountability and a
lack of vision.
(Board member, British orchestra)
The quote above from a board member of the British orchestra illustrates the most
fundamental change that has occurred for arts organizations in the UK, Sweden and
many other countries over the last few decades. The change means a change in
mindset with regard to how one, as an arts organization, can be sure to secure one’s
own existence where the days of relying on record companies or arts councils for
long-term survival are long gone. Instead, arts organizations are becoming well
aware of their responsibility to generate income, to plan and work in an efficient way
that not only make the best use of costs, but that also maximises income. Such a way
of thinking will have an effect on the running and the long-term visions of the
organization. The change in mindset can be directly derived from the substantial
changes in funding arrangements for the arts over a long period of time. The drastic
changes in funding comprise an excellent background to study the interplay between
funding, strategy and MCS in an organization. At the same time, the organizational
core is highly professionalised, with musicians working according to values and
routines rooted in a very strict and elitist tradition dating several 100 years back in
history. The large discrepancy between a drastically changing environment, on one
hand, and the very traditional way of working in the operational aspects of the
organization, is likely to create a strong tension and extensive challenge in regard to
creating a fit between strategy and MCS, a tension that can be seen, though often in
less drastic terms, in many more traditional profit-making companies.
The two cases in this study struggle with the above-mentioned tension.
However, to begin with, the two orchestras differ in how they were originally
created. The Swedish orchestra developed organically from the nineteenth century
first with a combination of military and amateur music making. The British
orchestra, on the other hand, was originally developed out of the idea that the city
it operated in needed an orchestra for radio broadcasting. It was hence professional
from the start. Also, employment structures differ between the two. The Swedish
orchestra is the only chamber orchestra in Sweden with fully employed musicians,
whereas the British orchestra works with freelance musicians – although with more
or less the same musicians over time. However, the orchestras also have similarities
in that the musicians are fostered in the same professional values and partly share
the same artistic dreams and aspirations.
9.3.2 Environment
Looking at the environment at the time of the study, the two orchestras existed in
very different environments. One significant difference was the degree of uncer-
tainty in especially the ability to forecast income. In the Swedish orchestra, some
concerts were more “secure”, with a good size audience. However, many concerts
were not certain to generate either an audience or any income at all. The policy
goals of the orchestra stated that the orchestra among other things should travel
within the region and give concerts in smaller venues. These concerts could mean a
situation where there were ‘more people in the orchestra than in the audience’
(Musician, Swedish orchestra). Also, some types of concerts – for example with a
program of modern classical music – could entail difficulty in predicting the
number of people in the audience. Also, recordings were not guided by the idea
that the orchestra should increase sales, but were done only for the purpose of
making an excellent recording per se, contributing to the unsecure environment.
To understand this unpredictable income and sometimes lower turnout in
audiences, one must analyse the market from a broad perspective. An orchestra
that performs live classical music competes on many different markets. One market
is classical music, but there are also other similar markets offering cultural
commodities that are related to that of live classical music, such as theatre or
opera, etc. However, the possible audience of an orchestra has many other very
different alternatives, ranging from going to the movies to meeting friends. Looking
at it from this angle, an orchestra such as the Swedish one, even though it is the only
one in its own town, still has very tough competition and a hard time in selling their
tickets – not least because of their sometimes challenging repertoire and choice of
venues within the region that makes predicting audiences even more difficult. In
sum, the Swedish orchestra, with its challenging, specialised and distinguished
product, operated in a very unpredictable – and in this sense turbulent –
environment.
The British orchestra existed in an environment where competition in one sense
was tougher in that there were several other orchestras in the area. On the other hand,
the larger number of orchestras, and the vast number of cultural organizations in
general – also meant that the demand for, and the possible number of people attending
a concert was much higher than for the Swedish orchestra. Especially if a “safe”
repertoire was chosen, a similarly “safe” number of attendees could be attracted. The
head of the marketing department explains that the orchestra is part of a large network
of orchestras where statistics and information regarding audience numbers are
kept for different programs and concerts, which is an important part of gathering
information in order to decide if a certain concert should be performed or not:
We do look at quite a lot of facts really about what works and what has sold. So if there is an
idea to do something like a contemporary work, we can go back and see whether we can
do that financially or if it would be best probably to revise the programme.
(Head of Marketing, British orchestra)
The British orchestra was very conscious in its efforts to choose a repertoire – to
offer products – with secure income generation and a secure and predictable
number of “bums on seats”. This governed both the repertoire and the choice of
venue, as well as the combination between the two, something that will be analysed
below in relation to strategy. In sum, the British orchestra, albeit still with a
professional core, had managed to create a more predictable environment.
9.3.3 Funding
The different positions that the respective orchestras were taking with regard to
markets, creating more or less stability in their environment, were closely linked to
predictability in funding. An unpredictable funding situation with high risk clearly
was leading the British orchestra to decrease risks in other sources of income. As
explained by a former board member:
The Arts Council has always been supportive but the funding rounds here in the UK make
it very difficult to predict how much you are going to be able to get. We are a regularly
funded orchestra but any increases and scrutiny going forward is dependent on govern-
mental funding cycles.
(Former Chair of the Board, British orchestra)
By trying to increase revenues from concerts and recordings, the orchestra’s own
income could become more stable. Also, by developing relationships with private
partners, private sources of funding could also be increased in order to deal with the
funding situation. The graph below indicates the volatility in public grants as
percentage of the British orchestra’s own income. Even though public grants had
increased over this particular time period, it was still much lower as a percentage of
total income than the equivalent figure for the Swedish orchestra (Fig. 9.1).
In Sweden, funding was not completely taken for granted. Organizational
members could talk about the fear that a new political party in the future would
change the funding attitude towards the orchestra. However, this was still more on a
hypothetical level, and comprised thoughts about the future, and not the short term.
This is also illustrated by how the Swedish Arts Council describes their work:
When it comes to allocating grants it is mainly routine work. Every year we get a budget
proposal from the government on how they see the development of the area, and then the
organization gets either only the grant with a compensation for increased wages and
inflation, or sometimes some more.
(Arts Council Representative, Sweden)
Looking at the development of funding over a longer period of time, it can be

seen that the Swedish orchestra in particular has experienced a more stable funding
40%
UK
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006
Fig. 9.1 Arts Council funding as percentage of income in the British orchestra (annual reports)
Table 9.1 Arts Council funding and regional funding in the Swedish orchestra as percentage of
total income (annual reports)
Swedish orchestra 1993 2006
Arts Council funding 60 % 43 %
Regional funding 31 % 37 %
situation with regard to public grants even though these sources of funding have
decreased over time as a percentage of total income (see Table 9.1). The amount of
regional funding has increased in relation to the central source of funding from the
Arts Council, increasing the local engagement of public funders and putting more
emphasis on the relationship between the orchestra and local funders. It was
interesting to note with regard to regional funders in Sweden that they had slightly
different objectives in funding the orchestra. Whereas the Arts Council had a
cultural policy as a main guideline for funding, local funders could have more
functional interests, such as wanting the orchestra to fulfil a marketing purpose in
the city and the municipality etc. Table 9.1 illustrates these developments (see also
Brettell Grip 2009, pp. 133–135).
In the Swedish orchestra, funders had more of an “arm’s length” character, with
little or no direct involvement in the day-to-day running of the organization,
especially with regard to the artistic work. Funders had a long time perspective
on the organization and did not primarily evaluate the organization based on
short-term financial results.
I don’t think we should interfere in what the orchestra is playing and not; we have a
general idea that the orchestra should bring good musical experiences to the inhabitants
of the city, but we should not put our nose in their artistic decisions.
(Politician, Municipality, Swedish case)
In the British orchestra, however, short-term financial results in the artistic

operation were crucial and closely monitored. Whereas funders in the Swedish
case were more homogeneous and acted in similar ways, funders in the British case
varied in character, had different levels of engagement in the organization and
communicated with the organization in different ways with different focuses in
their evaluation. For example the British Art Council had a more active role in the
day-to-day operations in the orchestra, and had more opinions on the daily running
of the organization than in the Swedish case. The Arts Council had increased their
demands for transparency being more detailed and frequent than ever, and made
demands for accountability with regard to more detailed parts of the MCS:
We assess an organization’s artistic quality and the quality of its governance, management,
we look at the finances, we look at the public benefits in the broad public.
I receive everything that they have, financial information, personnel information,
absolutely everything. So I go through this and if I notice any trends, any sort of worrying
trends, I will take it up with the organization. I am in touch constantly with the halls which
they perform at, and so constantly meeting with people that I can get feedback from the
organization.
(Representative Arts Council, British orchestra)
In both organizations, other funders than public had become more important over
the years; however, in the British case these private funders were now regarded as
the new core funders. This resulted in a more focused organizational orientation
towards fulfilling private owner demands, and complying with their preferences
regarding strategic direction, tools of evaluation and communication in general. The
increased importance of private funders could, according to many members in the
organization, be seen in a symbolic way in the move of the orchestra’s administra-
tive offices to modern and pleasant locations in the city centre. Giving a professional
impression during meetings with representatives from companies and potential
sponsors was crucial. Others, such as the Arts Council, did not care about the new
offices, but was rather sceptical towards the move, which in their eyes could cost
more than it was worth. This is merely one example of how the British orchestra
experienced much more severe conflicts between funder opinions, something that
posed a constant challenge. Especially against the background that the Arts Council
was more intrusive in terms of artistic directions and strategies. The British orchestra
had to struggle on different arenas at the same time in providing evidence that they
were constantly working towards satisfying all various funders.
In the British orchestra, funders were more intrusive monitoring all parts of the
operational processes and outcomes. In the Swedish orchestra, funding
arrangements meant that the general manager acted as a link between funders and
the organization so that the operational core remained protected from detailed
monitoring from funders. Funders in the Swedish case relied on the accounts of
mainly the general manager to evaluate the running of the organization, whereas
they were personally involved in monitoring the activities of the British orchestra
by for example visiting concerts and paying visits to the organization.
It can be concluded that the more intrusive role of funders in the British case
increased the unpredictable funding situation since more frequent and intrusive
monitoring with funders meant a situation where funders could all of a sudden have
a different opinion, and express doubt about their funding commitment. The
organization, down to its operational core, operated under constant fear that funders
would not approve of the organization’s decisions.
9.3.4 Business and Functional Strategy
The business strategy in the Swedish orchestra could best be described as being
directed towards creating product uniqueness. Porter (1980) argues that an impor-
tant characteristic of this strategic position is marketing and research, and both
these traits can be seen as crucial in the Swedish case, even though they must be
translated into the specific setting of the performing arts. One of the most important
aspects of the orchestra’s work was the development of a “unique sound”
(mentioned by musicians and management, as well as critics, in the Swedish
case). The unique sound was developed not only with deep artistic and instrumental
skills and knowledge, requiring many hours of work daily for many years; this
sound was also rooted in a long tradition of classical music. The chief conductor
had studied compositions and sounds and aimed at achieving a sound that was
“authentic”. In this respect a great deal of research and product development work
was devoted to achieving this business strategy. In order to build on this strategic
position, marketing was important. The most effective marketing that the orchestra
could achieve was critics’ reviews of concerts and recordings. Since the orchestra
garnered very positive critical acclaim, they could spread their reputation, and
became invited to do even more prestigious concerts and collaborate with some
of the most famous artists in the world. World famous artists travelled to the
orchestra and participated in concerts based on the orchestra’s eminent reputation
and the artistic ideas that they knew they could realise together with the orchestra.
Because of this, the orchestra could very well be described as having a strategic
position similar to the archetype of differentiation. A key to achieving this position,
however, can be found in the pricing of the products (Porter 1980). Because of the
funding situation of the organization, the orchestra could be seen as being able to
compensate for a lower price, or a lack of attendees, by using funding.
In the British orchestra, the organization had a strategic position that could best
be described using the archetype of cost leadership. No unique sound was aimed at
with regard to the core ensemble as a whole; rather the main goal was to create
music for as many as possible in as many ways as possible while maintaining high
quality. The basic logic in operations was to minimise costs; then, when cost issues
had been dealt with, artistic considerations were taken into account. The differences
between the orchestras were apparent looking at both concerts and recordings as
part of their production strategy. A recording in the Swedish orchestra meant
1 week of full-time work with the recording in itself. The recording was done in
a studio, a few brackets of music at a time, in order to achieve perfection.
Recordings were not made in order to create financial gain, but to develop the
ensemble and its sound.
The recording process is very good for building the ensemble, and to get a really good
result. Then that we don’t sell that many records, that doesn’t matter, the important thing is
that the end result is really good.
(Musician, Swedish Orchestra)
In the British orchestra, recordings were done live at concerts in order to

minimise the cost of resources. Concerts are another good example of differences
in production strategy. In the Swedish orchestra, concerts were developed over
1 week of full-time work with a conductor that stayed over the week. The concert
was then performed at the end of the week. In the British case, concerts were done
often with only minor rehearsals, from 1 day to a few hours. Because of this, it was
difficult to achieve uniqueness in a specific recording or concert, meaning each
concert and recording was more of a standard product, using the logic of economies
of scale (Porter 1980). Since the orchestra strived to minimise costs but also
maximise income through choosing “safe” programs and venues, the orchestra
could also be said to trying to maximise their market share.
However, using only Porter’s (1980) archetypes for strategic positions does not
fully explain the differences in the orchestras’ business strategies. Even though the
orchestras could fairly easily be separated by their strategic position, this does not
say that much about their strategic patterns, meaning strategic issues with a more
inward focus that explain how the organization deals with entrepreneurial,
engineering and administrative problems (cf. Miles and Snow 1978). By under-
standing strategic patterns as being the functioning of the entire organization, the
organization’s realised strategy can be understood (Kald et al. 2000). Looking at the
strategic patterns of the two organizations, it appears that the Swedish orchestra is
most similar to a prospector (Miles and Snow 1978). This means it is an organiza-
tion that acts in a turbulent domain (as has been concluded above), but also has the
intention to continuously seek and develop new markets. Doing this involves a high
degree of risk taking. The orchestra regularly elaborates on new ideas and
constellations for concerts. Such examples include creating opera concerts, creating
concerts for children, playing different kinds of modern classical music,
collaborating with controversial artists, putting on concerts in various venues.
Using the strategic configurations of Ward et al. (1996) the British orchestra
tried to follow a broad differentiation strategy; trying to outdo their competitors
by providing a range of products to a variety of markets, while striving to
maintain a large share in each market on the basis of quality and not price.
Musicians and other members of the organization generally embraced this
ambition regarding quality. It was well in line with the overall aim of the
organization trying to become a prominent classical orchestra. However, the
business strategies that were adopted as a result of funding conditions had pushed
the organization closer to being a cost leader, creating a situation with strategic
incongruence and much internal conflict.
Being more of a prospector, the Swedish orchestra had a more unambiguous
strategic position, also clearly being a niche differentiator (Ward et al. 1996) that
offered such things as geographic coverage and products to segments that are not
well served by other organizations, in this case children’s concerts, for example.
The funding conditions created a situation where a differentiation strategy could

be adopted. This was also combined with a build position in the artistic activity,
although in the focused area of high quality and elitist classical music, which
created a strong focus. This also created a good alignment with the decentralised
decision-making in the orchestra where musicians were involved in everything
from recruiting to deciding on the program. Musicians could also work
undisturbed and plan their work according to long cycles and non-monetary
evaluation tools.
Compared with the British orchestra, the Swedish orchestra appeared very
decentralised, both in that financial and general administrational work was
separated from the artistic work and in that the important observation that the
artistic managers – both the artistic director and the chief conductor – had much
more power in the Swedish orchestra than did the equivalent positions in the
British orchestra. Even the leader of the orchestra and the leader of each section
had much more power than the equivalent positions in the British orchestra. By
power we mean the degree of influence over artistic (operational) decisions and
also responsibilities and authority in relation to staff issues, something that was
not seen in the British case where musicians were divided into smaller groups to
fulfil different organizational objectives, but where decisions were taken in a
more centralised way.
Continuing with the typology of Miles and Snow (1978), in an attempt to
understand the organizational effects of the chosen strategy, the British orchestra
could best be understood as a defender with a much more centralised way of
running the whole organization. It was not able to take the risks or develop the
same kind of innovative and unique products, but focussed instead on a
standardised repertoire with a minimum of risk. The market, as mentioned above,
was stable and the organization strived constantly for efficiency, especially in terms
of costs but also to maximise and secure income for all productions. The quote
below illustrates the programming situation in the British orchestra.
In one sense they are free artistically but the problem is that they can’t take risks. What’s an
arts organization about if it can’t take risks? It’s got to take risk with contemporary art, with
trying new work, but lot of them are frightened to do this in case their year-end accounts go
into deficit and then the Arts Council will say “You’ve been very naughty, you made a
deficit budget.” They have taken a sense of freedom from them, which is a great shame.
(Partner, British orchestra)
Instead, the British orchestra also tried to find new business partners and
customers that could be interested in their products and concerts. In this sense
they could also be said to follow a build archetype with regard to strategic
mission (Gupta and Govindarajan 1984). This meant that they regularly tried to
find new ways of increasing their market share, although not within the elitist
field of classical music as in the Swedish case but rather by broadening the
product range and potential audiences. For example, the organization had
recently moved into the facilities of the city’s conservatory for higher music
education in order to try to connect future musicians to the orchestra, find new
collaboration projects, and also increase efficiency by being able to use the
venues of the college for concerts as well as using students as extras in the
orchestra for particular concerts. The Swedish organization could also be said to
fulfil the characteristics of the build archetype, trying to increase the market
share from a relatively low position by, in the long term, becoming a large
player in the small field of classical chamber music making, something that the
organization also succeeded in doing over the years 1995–2005 thanks to their
offensive (international) artistic strategic direction.
As explained by Kald et al. (2000), an organization that follows the defender
strategy focuses mainly on reducing production and distribution costs while trying
to maintain quality. Also, as discussed by Kald et al. (2000), this strategic pattern
has the characteristics of both cost leadership and differentiation, using the Porter’s
typology (1980). Because of this, an organization pursuing a defender pattern runs
the danger of becoming ‘stuck in the middle’ (Kald et al. 2000, p. 205). This is a
situation that can be seen in the British case – funding conditions have geared the
organization towards a cost leadership strategy by tight and frequent monetary
control of each activity. In addition, putting the condition on the organization to
also attract other kinds of funding to become more independent, the organization
has also been geared towards trying to pursue a build strategy with constant
attempts to try and find new business partners in many different cultural arenas,
creating a very disparate organization while still centralised in its decision-making.
Making it even more difficult, the orchestra and the musicians had great difficulty in
accepting a tight control system, and the orchestra strived to work according to a
looser and a more non-monetary reasoning. All in all, this created an extremely
challenging situation where artistic performance suffered. Hence, in the British
case, the organization – also striving to be a distinguished orchestra – ended up
being somewhere in the middle.
To sum up the discussion on business and functional strategies, we can
conclude that the strategies of the Swedish orchestra – classified as prospector,
build, differentiation and niche differentiator – were well aligned creating a
strong focus and a coherent internal structure. However, being under strong
pressure financially by intrusive funders, the British orchestra had been forced
to adopt a cost leadership strategy, something that had also, over time, meant a
development towards a defender strategy through centralised running focusing on
more standardised products with low risks. However, it did not fit with the build
strategy where the management of the orchestra tried to increase their market
share by developing new partnerships and trying to move forward on several
arenas simultaneously. At the functional level there was also an orientation – not
least among the musicians – towards more of a broad differentiator. This created
a strategic incongruence, as can be seen in Fig. 9.2, and became particularly
problematic in combination with the musicians’ aspirations and opinions, which
will be described in detail in the next section when we go on to analyse
the MCS.
British Swedish
Defender Prospector
British Swedish
Business
Harvest Hold Build
strategies
British Swedish
Cost leadership Differentiation Cost leadership Differentiation
British Swedish
Functional
Cost leader Broad differentiator Niche differentiator
strategies
Management
Tight control Tight or loose control Loose control
control system
Business unit
Performance
performance
Fig. 9.2 The strategic orientation of the Swedish and the British orchestras
9.3.5 Management Control Systems
In this last section, the MCS in both orchestras will be analysed looking at the
characteristics relating to the intensity of monitoring (tight/loose); a tight control
system being characterised by a short-term focus on monetary information, and a
loose control system being based on non-monetary information and a longer time
perspective. Looking at the Swedish orchestra, it had what could be characterized as
a loose MCS. The frequency of monitoring was not intensive, something that could
be seen especially in the fact that both the artistic manager (who planned the general
program of the orchestra) and the children’s concerts planner, could elaborate with
costs using the budget of an entire semester. Follow-up of costs was only done on a
yearly basis, something that meant that the artistic manager – who also had a budget
responsibility – could use a large amount of resources for one particular concert and
instead minimize the costs of another concert based on the artistic needs and
ambitions. The loose MCS enabled for artistic reasoning to guide operational
decisions to a larger extent and emphasised the arm’s length characteristic of
financial accountability in the organization.
It is a constant balance. This autumn we are doing one very expensive production, the most
costly over the entire year, and we will not be anywhere near to cover those expenses to the
extent that we probably should be. But then I have to try to ensure that other productions
cost less and then for those other concerts I can for example choose not to take in an extra
trombone that I actually need for that production. I have a whole year to play around with.
(Artistic Manager, Swedish orchestra)
In the British orchestra, elaborating with costs over a whole year was not
possible to the same extent because of a much more intensive monitoring process.
For example, the organization had broken down their income by activity, meaning
that they had specified how much income each activity generated, and that was then
showed to the Arts Council. The outcome of each activity was then evaluated in
financial terms but also followed up according to very specific demands to do
certain activities in certain venues. The communication with the Arts Council
appeared harsher and more frequent with a regular debate about whether or not
the orchestra was meeting the terms for funding in the funding agreement. Hence,
the monitoring process was more frequent. Also, it was, as has been mentioned
above, much focused on financial aspects. For example, the evaluation of the artistic
work and the quality of the orchestra’s as a performing arts organization was
sometimes linked to the fees that the orchestra charged for their production. When
for example the general manager benched-marked the orchestra’s artistic work,
comparing it with some of the best chamber orchestras in the UK, the representative
in the Arts Council answered by comparing the fees that those orchestras charged at
their concerts with those of the case orchestra. With many funders, the specific
activities that are requested are specifically outlined and followed up closely.
With most local funders there is a Service Level Agreement that is agreed on a general
level, and then we have to show how our activities fit their community strategy with local
schools and local businesses and how well it fits their objectives and then numbers of
attendees for each concert becomes important for example.
(General Manager, British orchestra)
Most important was the evaluation of each concert in order to adjust future
programming. After a concert with a bit more difficult program not generating a
particular good outcome financially, the program for the next season was quickly
adjusted to become safer with a standard program over the whole line. Also,
programs were continually being discussed with new funders investigating the
possibility of framing programs to attract additional funding from different sources.
We are a business and the aim is always to increase profits on engagements and to reduce
losses. Always.
(General Manager, British orchestra)
In the British orchestra, the MCS could generally be described as tight; it was
dominated by financial information and had a short-term focus. The organization
had demands to keep a certain amount of reserves in their finances as a buffer.
Financial measures were used even at the individual level, making individuals
perceive an overall need to achieve financial targets:
[. . .] there is always financial pressures, against the targets we have to achieve.
(Administrative staff, British orchestra)
Artistic decisions were not delegated to the artistic function but were kept
strictly on the general manager’s table, and with a strong focus on prioritizing
risk minimization:
We have our hands tied behind our backs artistically; it’s very difficult to take risks
musically, because there is no guarantee that people are going to come to the concert.
(Music Director, British orchestra)
In the Swedish orchestra, the activities, once decided upon within the overall
budget frame, were not directly discussed or evaluated in financial terms.
Information used was quite subjective and directed towards the artistic operations
and most often from the musicians’ perspective. What the audience thought of a
concert was important but it was equally or perhaps even more important what
musicians and the artistic manager thought of the outcome. Evaluating each concert
from a financial perspective did not happen as in the British orchestra.
As previously mentioned, the Swedish organization was decentralized, not only
in that different managers at operative levels had more responsibility but also in that
the artistic decisions were taken with a looser connection to the administrative
function. Cost control was exercised from beginning to end within the artistic
function, in line with a differentiation strategy:
All artistic decisions, from initiating contact, to negotiation, to deciding on the program to
writing the contract are done by the artistic manager.
(Administrative staff, Swedish orchestra)
An illustrative example of the differences between the orchestras’ MSC can be

given looking at the role of budgets. In the Swedish case, the budget was used
mainly as a broad cost frame within which the orchestra could plan the artistic
activities rather freely. In contrast, in the British case, the budget comprised a basis
for evaluation even on the individual level such as each individual in the marketing
department. It was a ground for evaluation of both costs and revenues and was
followed up frequently. This was also connected to the time perspective of the
planning. In the British case, the organization had long-term goals but was also very
flexible. The Swedish orchestra had their schedule more or less decided several
years ahead, whereas the British orchestra even stated that if they got an invitation
to come to Sweden, they could put together an ensemble and go on such a tour
within a few months (for a detailed analysis of the role of budgets, see Nilsson and
Stockenstrand 2012).
9.3.6 Performance
One of the most difficult tasks with regard to classical music is judging perfor-
mance. This difficulty stems mainly from the subjective nature of the outcome of
the orchestra’s work and the endless number of perspectives that the outcome could
be evaluated from. However, in several respects the Swedish orchestra must be seen
as more successful than the British one, at least artistically. Financially the British
orchestra was perhaps more successful, at least in the short term; however, in this
analysis we argue that performance in this case must be seen as the combination of
artistic and financial achievements, in which artistic achievements become crucial.
As mentioned, the Swedish orchestra was more successful artistically in a variety of
ways. One way to analyse the orchestra’s performance is to look at the level of
satisfaction among musicians with the performance of the orchestra. In the Swedish
case, working in the orchestra was according to many musicians a “dream come
true”, and they were very proud of the artistic outcome of the orchestra. Also,
critical acclaim was more frequent and more prestigious for the Swedish orchestra.
Table 9.2 Summary of empirical illustrations

British orchestra Swedish orchestra
Environment (volatility in Stable Turbulent
income from operational
activities)
Funding Turbulent and intrusive Stable and at arm’s length
Business strategy Defender, build and cost Prospector, build and
leadership differentiation
Functional strategy Broad differentiator Niche differentiator
Management control Tight control with mainly Loose control with mainly non-
systems monetary information and monetary information and a long
a short time perspective time perspective
Performance Mediocre performance High performance
The Swedish orchestra was also better known internationally and by connoisseurs
and had gained such prestigious critical acclaim most orchestras could only dream
of. The Swedish orchestra was also more successful financially in some respects in
that they could attract famous guest artists that would come for a lower fee only
because they sought the artistic challenge and possibility of perfection that the
orchestra could provide. So in that sense their higher artistic performance had some
financial benefits in the long run, even though these benefits were more unpredict-
able. Hence, one can conclude that the performance of the Swedish orchestra was
better in that it was more successful as an organization, and had live classical music
been a very lucrative business, they would have been hugely successful financially
as well.

In Table 9.2 we summarise the empirical illustrations.5 We can conclude that the
British orchestra did not have strategic fit and evinced a lack of alignment
between environment, strategy and MCS. However, in the Swedish orchestra,
there was a strong fit between both strategies at different levels, and strategies
and the MCS.
In the Swedish orchestra, according to Table 9.2, there is a strong connection
between the environment, strategy and MCS. Not surprisingly its performance is
very good. The British orchestra, on the other hand, has a different situation.
There is no coherent strategic orientation, and its performance is not as good.
These results are in line with an overall expectation that organizations in which
environment, strategy and MCS are aligned perform better than organizations in
which this is not the case (cf. Langfield-Smith 2007, 2008).
5
These relationships are, as already mentioned, also discussed in Nilsson and Stockenstrand
(2012) but with a focus on the design and use of the budget and only using the business strategy
typology by Porter (1980).
Even more crucially, the cases show the importance of how business strategy
is classified. By using the frameworks of Kald et al. (2000) and Nilsson and Rapp
(2005), we have been able to show, in a more elaborate way, how strategy is
related to MCS. By using several strategic typologies, and also strategies at two
different levels, it has been possible to provide a more detailed analysis of how
strategy affects MCS and, ultimately, performance. This analysis has also been
able to show how a strategic orientation can be blurred and inconsistent as a
result of environmental influences. However, a more traditional approach and
research design, using one strategic typology (i.e. Porter 1980), studying one
organizational level (i.e. business unit level), would probably have provided us
with an analysis showing that both orchestras were in alignment: the Swedish
orchestra operating in a turbulent environment, pursuing a differentiation strat-
egy and applying a loose MCS, and the British orchestra operating in a stable
environment, pursuing a cost leadership strategy and applying tight MCS
(cf. Nilsson and Stockenstrand 2012). With such a result the performance of
the British orchestra would be very difficult to explain.
The results also show us the importance of the funders and how they affect the
strategy and MCS. This was especially prevalent in the British orchestra, in
which the funders were very intrusive, clearly affecting what was going on
“inside” the organization. By focusing on fulfilling financial targets, manage-
ment had been forced to change the strategic orientation towards a more standard
repertoire. At the same time there was still an ambition to develop new
repertoires and improve the orchestra’s presence on the market. The production
strategy was also more oriented towards differentiation. All in all the British
orchestra is a very good example of how strong environmental influences – in
this case influential funders – affect strategy and how this can lead to a situation
of strategic incongruence. Furthermore, the British orchestra is also an example
of how an organization with strategic incongruence seems even more susceptible
to funder demands, thus creating an even higher degree of strategic incongru-
ence. In contrast, an organization such as the Swedish orchestra, which
succeeded in keeping an “arm’s length distance” to funders, also managed to
maintain strategic congruence. This important result, highlighting the role of
funders in both maintaining and destroying strategic congruence, has not been
observed in the literature before.
This chapter has applied a structural perspective in the analysis of the creation
and the destruction of strategic congruence. It would be interesting to comple-
ment this perspective by studying the role of individuals as boundary spanners,
especially how they translate and create acceptance for the strategy pursued and
how they divert some strategic course of action to something other than was first
intended.
Acknowledgement An earlier version of this chapter has benefitted from the reviewers
comments as well as from comments from the participants at BAM 2012 in Cardiff.
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10
10.1 Introduction
In this final chapter we discuss the book’s principal conclusions based on its
empirical, theoretical and practical contributions. This is done in six subsections,
each focusing on a specific issue. In the first section, we discuss the significance of
strategic congruence and integrated control; in the second, the importance of the
environment for internal changes and competitive advantage, as well as perfor-
mance. We devote the third section to the control mix, the fourth to the role of IT
systems in creating strategic congruence and integrated control. Then, in the fifth
section, we treat questions of methodology before going on to the sixth subsection,
where we conclude with a discussion on central issues where further research is
needed. We would advise the reader that as the sections are clearly interlinked,
certain discussions recur in several places in the chapter.
E. Jannesson (*)
F. Nilsson
e-mail: fredrik.nilsson@fek.uu.se
B. Rapp
Institute for Management of Innovation and Technology, Gothenburg, Sweden
e-mail: birger@rapp.se

10.2 Importance of Strategic Congruence and Integrated

Control
One of the conclusions from Nilsson and Rapp’s (2005) theoretical discussion is
that strategic congruence and integrated control together are a factor that positively
affects the competitive advantage of firms and performance. Like many other
scholars (see for example Ittner and Larcker 2001; Langfield-Smith 1997; Luft
and Shields 2003), they call for additional empirical studies that illustrate this kind
of relationship between strategies and control, particularly in complex
organizations. Nilsson and Rapp (2005) hold that at an overall level these studies
should focus on how strategies and control systems at different organizational
levels affect each other. At a more detailed level, the studies should indicate what
design and use of a corporate-wide control system (integrated control) would be
appropriate given the corporate, business, and functional strategies followed and
how well these strategies fit one another (strategic congruence). Although there has
been growing interest in multi-level studies in recent years, their number is still
limited; studies that treat both strategies and control systems are particularly rare
(two examples are Brown and Anthony 2011; Oliva and Watson 2011). The
chapters in this book thus provide a unique addition to our knowledge and under-
standing of the relationship between strategic congruence and integrated control
and how it affects competitive advantage and performance of firms.
In Chaps. 2 through 5 and 9, the book presents longitudinal studies of how
strategic congruence and integrated control are developed over an extended period
and how competitive advantage and performance are affected. In Chap. 2 Jannesson
(see also Nilsson 2010) shows how Saab’s strategies and control at the corporate,
business, and functional levels are changed through mutual influence and that two
critical success factors have emerged in the firm studied. One of the success factors
is an improved capacity to manage uncertainty in regard to orders, i.e. increased
flexibility. The other success factor is improved precision in delivery, i.e. better at
delivering on time. These factors, in turn, have led to a situation where decisions
and actions at all levels within the firm often have the same purpose: to succeed on
export markets. The analysis of the firm’s competitive advantage and performance
during the period proves that it has been successful in this endeavour.
Sundberg’s study of Atlas Copco (Chap. 3; see also Sundberg 2009) shows
how the firm over the latest period of more than 30 years has developed its
strategies and control systems in a way that has created a coherent whole.
Strategies which appear to be less than fully congruent have nevertheless been
joined together through well-balanced control of both a formal and an informal
nature, at the same time as the firm has been clearly successful during the period.
The study thus shows how this type of control is an expression of what Atlas
Copco stands for and seeks to achieve, as well as how this objective is to be met
in daily operations. The informal control it thus a kind of “glue” that holds
strategies and formal control together. This realization is important for helping
us to understand how firms with elements of misfit between strategies and control
systems can nevertheless be successful.
10 Conclusions and Implications 237
Scania is one of Sweden’s most highly regarded and successful firms in the
engineering industry. In Chap. 4 Olve (see also Anjou 2008) illustrates how the
firm has long been consistent in its strategic orientation at the corporate, business,
and functional levels, and how its strategies are mutually reinforcing. One
explanation is that the product offering is strictly limited primarily to heavy
trucks (which are admittedly supplied in an almost endless number of variants).
Management and production control show a very high degree of integration and
are complemented by a well-balanced control mix. One contributing factor in
regard to the latter is that a strong company culture helps to strengthen formalized
control. Olve provides several illustrative examples showing how this “engineer-
dominated” culture permeates operations – in every way from the strong belief in
method control to the conduct of meetings. As in the conclusions of Sundberg’s
chapter, informal control helps to reinforce strategic congruence and integrated
control. Without a doubt, Scania has succeeded in achieving an extremely
focused strategic orientation and control that in conjunction have helped lead
the firm to major successes.
In Chap. 5 Poth shows how a German insurance firm has moved from a situation
with a relatively high degree of strategic congruence and integrated control to one
with a gradually increasing misfit in regard to strategy and control. As an example,
the firm now has a differentiated market message while still maintaining a strong
internal focus on costs. The study also shows that the firm’s competitive advantage
has been affected negatively over time, even though the slow pace of change in the
environment has limited this effect so far. There is much to indicate that the unclear
strategic orientation and control are among the factors contributing to this negative
tendency.
The next to last chapter (Chap. 9) describes how the funding of operations
affects strategic congruence and integrated control. Nilsson and Stockenstrand,
with a longitudinal study of two chamber orchestras (see also Brettell Grip 2009)
as a starting point, show that in organizations with a strong professional orientation,
production strategies will be heavily influenced by these values. If funders adopt the
position that business strategy should be changed, there is a clear risk that doing so
will “tear apart” the organization, with business strategies adapted to the demands
of funders while production strategies remain unchanged. Similarly, there is a risk
that management control will become indistinct and lose its link with strategic
orientation at lower organizational levels. As is shown in the chapter, such a
development would result in deterioration of competitive advantage compared to
a situation where funders maintain greater distance, or alternatively, do not have
demands inconsistent with the orientation of business and production strategies
appropriate to the organization and its environment. The importance of funders for
our understanding of strategic congruence and integrated control has not been
observed in the literature before and is thus a significant contribution to the
model by Nilsson and Rapp (2005).
The results in the preface of the book and the next to last chapter confirm the
overall relationships between environment, strategic congruence and integrated
control, as well as competive advantage and performance, as is highlighted by
Nilsson and Rapp (2005) and also help to develop the model further. In addition
Cieslak – in her cross-section study of SCA (Cieslak, Chap. 6) – holds a discussion
on horizontal congruence. Cieslak shows that similar business and production
strategies, also within a business area – in this case at SCA – contribute to, and are
facilitated by, integrated control. Ambrutytė’s cross-section study of Scania and
Volvo (Ambrutytė, Chap. 7) help to enhance our understanding of how differences
in the strategies and control systems of firms affect interorganizational relationships
with the firms’ suppliers.
Taken as a whole, the results show in addition that the relationships apply not
only in a traditional industrial context, but also in service industries (cf. Ahlström
2008). Poth’s Chap. 5 focuses on an insurance company that sells insurance
services. There is also a clear element of services in Jannesson’s Chap. 2 on
Saab, in the form of software production.
10.3 Importance of the Environment for Internal Change

and Competitive Advantage
The importance of the environment for the internal structures of firms has been
emphasized since the 1960s (Burns and Stalker 1961; Chandler 1962; Lawrence
and Lorsch 1967; Woodward 1965). It is in these studies that one finds the
foundation and point of departure for contingency theory. It took a couple of
decades before the strategy of the firm was identified as a significant contingency
variable (Langfield-Smith 2007).
One environmental relationship addressed in contingency research is the impor-
tance of competitive advantage for the co-ordination of strategies and control
systems. After Chandler (1962) had conducted his classic study of the relationship
between strategy and structure, there ensued a large number of follow-up studies.
From Galbraith and Nathanson’s research overview (1978), it is apparent in these
studies that the relationship between strategy and structure is only valid when there
is competition. Firms with a monopoly do not follow the same pattern as those
exposed to competition in regard to adaptation of strategies and control systems;
specifically, they take much more time to implement internal changes, provided
they do so at all. This type of inefficiency is not a great problem, however, as firms
in a monopoly position usually enjoy ample profitability. One example of a study
showing the importance of competitiveness is Khandwalla’s (1972) investigation of
92 US manufacturing firms. With a focus on management and production control,
the author notes:
We have seen that there is a positive association between competition and the use of
sophisticated management controls.
(Khandwalla 1972, p. 282)
In Chaps. 2 and 5 of this anthology, there are current findings that reaffirm the
conclusions of Khandwalla (1972) and other researchers (see Galbraith and
Nathanson 1978). In the study on Saab (Chap. 2), Jannesson shows how the firm –
primarily in the second half of the 1990s but also in the initial years of the 2000s –
found itself in what was largely a monopoly position by virtue of its extremely
far-reaching collaboration with the Swedish state. During this period strategies were
formulated at lower organizational levels, to a substantial extent with no knowledge
of top-level strategies, and the various instruments of control were used for the most
part independently of each other. This promoted the emergence of incongruent
strategies and a non-cohesive control system in the firm as a whole. But no clear
co-ordination of strategies and control systems was necessary; the relationship with
the Swedish state (specifically, the national defence establishment) ensured that there
would be orders, deliveries and thus good profitability.
Poth draws conclusions similar to Jannesson’s, and in summarizing her study
(Chap. 5) of the German insurance company, she notes among other things that:
[. . .] although multiple areas of mismatch were identified in the analysis, the competitive
situation of the insurance company is only weakening very gradually. [. . .] It seems that
quick reaction is not as relevant in the insurance industry as in industries with a more
competitive environment. Although a semi-protected environment gives management more
time for reflection, the deteriorating competitive situation of the insurer also shows that a
company still needs to react to changing conditions. In conclusion, although the competi-
tive model stressing internal and external alignment may not seem to be so important for the
insurance company at present, this situation will quite probably change as the market is
increasingly affected by deregulation and thereby becomes more and more competitive.
(Poth, Chap. 5)
Poth also emphasizes the importance of customer confidence for the firm’s
continued, if diminishing, success. During the period when the market was
regulated, the firm built up a large base of faithful customers; after deregulation
many of them were not interested in looking around after other, possibly cheaper
and better, insurance solutions. Thus, the firm’s goodwill appears to have
compensated to some extent for its shortcomings in regard to strategic congruence
and integrated control.
In this anthology the focus has been primarily on the importance of the business
environment from the perspective of exposure to competition. Moreover, in Chap. 7
the analysis has been conducted from an interorganizational perspective. Here in
Chap. 7 (see also Ambrutytė 2008), Ambrutytė highlights the relationship between
interorganizational conditions and internal structures. In Ambrutytė’s study of
Volvo’s and Scania’s supplier relationships, she shows how these affect and are
affected by the firm’s business and purchasing strategies. A consequence of this
effect for the control systems is that interorganizational control can be considered to
promote dissolution of the boundaries between the firm and its environment. With
the concepts of social, behavioural and outcome control (cf. Kraus and Lind 2007)
as a starting point, Ambrutytė shows how intraorganizational control affects inter-
organizational control.
Volvo, which follows a kind of cost-leadership strategy, uses output control to

manage its supplier relationships, whereas Scania, which follows a combined
differentiation and cost-leadership strategy, relies on social control. These findings
show that even outside their own boundaries, the two firms seek to maintain control
that is closely related to their strategic orientation. This may be taken to mean that
the firm has no clear boundary between itself and other organizations, but seeks a
high degree of strategic congruence and integrated control in its own network. In a
way this is obvious, as it facilitates control of suppliers, which at the same time can
be difficult to achieve – especially when the suppliers are strong.
The research on interorganizational control has previously (see Kajüter and
Kulmala 2005) focused on exogenous environmental factors (such as degree of
competition and economic trend), network-specific factors (such as type of net-
work, type of product, infrastructure and the social nature of network relationships)
and endogenous firm-specific factors (such as firm size, the capability of the cost
accounting system, competitive policy and commitment). On the other hand,
limited attention has been paid to the significance of the strategies and control
systems of the firm in focus for the design and use of interorganizational control.
Ambrutytė’s study is therefore a contribution to our understanding of how different
types of strategies affect interorganizational control.
10.4 Control Mix: The Relationship Between Control

Mechanisms
In Chap. 1 we noted an increase of research where control is considered from an

overall perspective, or as a so-called management control package. Through
considering the relationship between the control mechanisms used – formal and
informal – an overall picture emerges with a potential for explaining, more clearly
than previous theoretical points of departure, the relationship between strategy and
control. We noted that studies conducted with this starting point show the comple-
mentary picture in regard to the use of control tools presented by Nilsson et al.
(2011). The latter emphasize that the firm needs to choose the mix of control
mechanisms that contributes to successful formulation and implementation of
strategies. The purpose of a well-balanced control mix is to ensure that all control
mechanisms are designed and used in such a way that they are mutually reinforcing
and thus give the firm a clear orientation.
In this book there are several studies that emphasize the importance of the
complementary character of the control mechanisms, illustrating it at the corporate,
business and functional levels in a particular firm. Scania (Chap. 4) is a good
example. Olve summarizes his conclusions about Scania (Chap. 4) as follows:
Scania seems to be an unusually well-developed and successful example of integrated
control. Financial numbers are obviously important as the final objective, but the majority
of management decisions are guided by a mixture of culture, methods, information sharing
through meetings, non-financial metrics and rewards based on them. These are used in a
coherent way, and the mechanisms are complementary rather than used in isolation
(cf. Malmi and Brown 2008).
Olve also highlights the consistency in Scania’s use of various control

mechanisms, and how the firm has achieved a clear internal division of responsi-
bilities. The chapter shows how Scania has successfully established a
well-considered control mix based on cultural controls, cybernetic controls and
administrative controls. This control mix is an important element in maintaining a
high degree of strategic congruence and strongly integrated control. The problem,
which is also being considered by Scania’s own personnel, is whether strategies and
control have achieved such a high degree of congruence that new thinking and
innovation are threatened (cf. Miller 1996).
Sundberg, too, treats the importance of the control mix, highlighting the time
dimension in his description of Atlas Copco’s control (Chap. 3). He maintains that
it has taken a long time to establish a strong link between formal management
control and more informal control. The study of Atlas Copco shows:
[. . .] how formal management control can be supplemented with informal control in a
company with far-reaching decentralization. When a company consists of a number of
autonomous profit centres, something more than financial planning and follow-up of results
is needed to hold together the different units of a relatively diversified corporate group. That
something more might be a set of bureaucratic regulations with formal provisions for how
things are to be done. At Atlas Copco these formal rules are kept to a minimum; instead, they
speak of spreading “best practice” informally throughout the group.
(Sundberg, Chap. 3)
The studies of Saab (Chap. 2) and Volvo and Scania (Chap. 7) provide
descriptions of how a combination of different control mechanisms, both formal
and informal, interact to ensure desired behaviours and to create information for
new decisions. Overall, this shows that with the model developed by Nilsson and
Rapp (2005), which focuses on formal planning and follow-up, there is a risk of
missing important aspects of the design and use of control. Malmi and Brown’s
(2008) model, which includes both formal and informal control, is therefore a
significant contribution to research on strategic congruence and integrated control.
However, Malmi and Brown’s model is very general and actually just indicates the
existence of links between the different instruments of control. The model gives us
no description of these links, though it can be used as a starting point for extension
of Nilsson and Rapp’s (2005) model through the inclusion of other control
mechanisms. At the same time, it is important to keep in mind that that significance
of informal control has already been suggested implicitly by Nilsson and Rapp
(2005), particularly in their discussion of the design and use of management control
characterized as loose, non-monetary and long-term.
10.5 Importance of IT Systems for Creation of Strategic

Congruence and Integrated Control
The development of integrated computer-based information systems – so-called

Enterprise Resource Planning systems (ERP systems) – has led to major changes in
the accounting and management control of firms (cf. Rom and Rhode 2007). One
explanation is that important data are stored in a common data base, thus facilitating
access and analysis. Data needed at a detailed level can now be extracted rapidly. At
firms this is an advantage since it creates transparency and comparability between
different organizational units (Hedman et al. 2009). ERP systems are thus clearly
linked to integrated control, as these systems are based on the assumption of
uniformity and co-ordination of the firm’s procedures for planning and follow-up.
In order to exploit the advantages of the ERP system (and as discussed in Chap. 1),
strategic congruence and integrated control are required.
Nilsson and Lindvall’s chapter (Chap. 8) on Electrolux describes how corporate
management initiated an implementation of a new ERP system with the explicit
ambition of establishing a uniform control model throughout the firm. Previously
this corporate group featured an extremely disparate system architecture where data
from different units could not really be compared. Decisions at the strategic, tactical
and operative levels were therefore difficult. The introduction of the new ERP
system was also a part of creating a more focused Electrolux with a stronger
emphasis on synergies between units and their functions. In order for the new
activity-sharing strategy to be successful, it was management’s view that more
co-ordination was needed. The new ERP system was considered to be the solution,
but as it was being implemented, some other support was needed in order to initiate
the changes in strategy and control. As is shown in the chapter, several IT solutions
were therefore introduced in order to meet the same needs as would the ERP system
that was not yet in place.
Chapter 8 also shows the importance of implementing organizational changes
simultaneously. As is apparent in the cite from Lindvall and Nilsson below, only
then can the potential of new IT solutions be exploited. Starting from the so-called
“Relevance Debate” (Johnson and Kaplan 1987), the authors maintain that business
systems are a solution to the serious problems with management control
emphasized in the debate. Lindvall and Nilsson (2009, p. 114, translated) note:
These problems can now be reduced by a modern ERP system. Integration and real-time
orientation solve the time problem; integration and drill-down functionality, the aggrega-
tion problem. At the same time the irrelevance problem can be reduced in many aspects
through the flexibility and broader control enabled by data-base management and
modularization. It is thus possible to develop strategic management control that is rapid,
flexible and relevant. For such control to be realized, the potential of technology must be
combined in a purposeful way with organizational changes. This is done far too little at
present. As a consequence, the many advantages of the ERP system cannot be fully
exploited.
In addition to Chap. 8 of Nilsson and Lindvall, several of the chapters in the book
consider the importance of IT for creating integrated control. A recurring theme of
the book is that the chapters highlight how different IT systems, and not only ERP
systems, fulfil an important function for co-ordination and standardization. These
chapters thus confirm the view of IT and ERP systems that has prevailed in the
literature for quite some time – namely, that it leads to uniform control within a firm
(see for example Granlund and Malmi 2002; Granlund and Mouritsen 2003).
10.6 Methodological Aspects When Studying Strategy

and Management Control
Contingency research concerning the relationship between environment, strategy

and control has been for the most part quantitatively oriented. The main reason is
the clear focus on systematic links between the character of the environment, the
type of strategy and the type of control. Nilsson and Stockenstrand (Chap. 9) note
that the findings of these studies have been ambiguous in many cases, largely
because of differences in the design of the studies and between the various ways
of operationalizing and measuring central concepts (see for example Kald et al.
2000; Langfield-Smith 2007).
There is thus a need to improve how statistical methods are used in quantitative
contingency studies. This is discussed in detail by Gerdin and Greve (2004, 2008),
among others. At the same time, the question should be raised whether primarily the
type of quantitative research discussed above is needed for us to raise our level of
knowledge in regard to the relationship between strategy and management control.
We have our doubts and support the view of Langfield-Smith (2007, p. 779) where
she notes as follows:
[. . .] in studying MCS [Management Control System] and strategy, the interactions are
complex and perhaps only in-depth research can help us understand the complex nature of
these relationships. This is particularly so if we recognize that strategy is an evolving and
multifaceted concept. It is difficult to envisage how Simon’s theory of dynamic interactions
between MCS and strategy formation process could have emerged from survey-based
research!
The research presented in this anthology also confirms the view of Langfield-
Smith (ibid), which was based on several methodological areas of discussion. The
first area concerns the in-depth and longitudinal character of the studies. As we
noted in Chap. 1, the period under study has frequently been around 15 years. On
the basis of how the firm’s environment, strategies and control have changed during
the period under study, we may note that it is important to regard firms over long
periods. With substantially shorter periods, or with cross-section studies, there is a
risk that important relationships will not be captured. One example of this is the
misfit case presented by Cieslak in the study of SCA (Chap. 6). The author
describes a number of matching problems, but in the subsequent epilogue she
notes that a number of the changes took place after the study, indicating that the
measurement at the time captured what was clearly a phase of change. Being aware
of this, which is much harder in quantitative than in qualitatively oriented studies,
gives rise to the risk that erroneous conclusions will be drawn.
The other methodological point of departure is operationalization and measure-
ment of strategy and control variables. As presented in Chap. 1, the model of
Nilsson and Rapp (2005) consists of a large number of variables. These were
used in the studies conducted in the SiSK research program (see Ahlström 2008;
Anjou 2008; Nilsson 2010; Poth, Chap. 5; Sundberg 2009). Although each study
included a large number of in-depth interviews, and the researcher is quite
knowledgeable about the firm, it has been a challenge in every case to reach a final
classification of the firms on the basis of the variables used. Ultimately it has been a
matter of the researcher’s making an educated assessment based on the operatio-
nalizations made and the existing data. It is therefore reasonable to conclude that
these variables are even harder to capture with strictly quantitative instruments of
measurement. One strong contributing cause of this is the uncertainty as to who fills
in the questionnaire and this individual’s understanding and involvement in regard
to the issues. This in turn contributes to a risk of unjustified conclusions.
A closely related question is how competitive advantage and performance are to
be operationalized and measured. With no more than a couple of exceptions for the
sake of contrast, the book includes only firms and organizations that are strongly
competitive and create value. These firms and organizations1 were chosen precisely
because they could be considered successful according to the criteria presented in
the initial chapter of the book. As can be seen from the data reported in the
Appendix, these firms are capable of creating value (i.e. high performance) on a
sustained basis. Nevertheless, it is a very demanding task to form an opinion as to
whether a firm is strongly competitive and high performing. The experience of
these studies show that a long period facilitates that analysis, as does the existence
of similar firms to use for comparison. The fact that the firms are well known is also
an advantage since often there will then be secondary material where the firms are
analysed by other parties (stock market analysts, researchers etc.), which can help
in achieving greater depth in the analysis. In the final analysis, though, it is up to the
researcher to determine to what extent the firm should be considered successful or
not. It is therefore important for the researcher to be transparent so as to aid the
reader in forming an opinion on how the analysis has been conducted and how the
conclusions have been drawn.
It is also a challenge for the researcher to determine how to proceed in order to
show how the presence of strategic congruence and integrated control affect compet-
itive advantage and performance. Without a doubt there are numerous conditions that
impact the competitiveness of firms; it is therefore difficult to isolate the importance
of the firm’s strategies and control. The experience from the studies in this book
shows that the use of evidence chains is a fruitful way to attack the problem (cf. Miles
and Huberman 1994). With the aid of such chains, it is possible to detect how changes
in the environment lead to changes in strategies, control systems and the actual
behaviour of managers and other employees. It is not possible, however, to determine
exactly how and to what degree strategic congruence and integrated control affect
competitive advantage and performance. On the other hand, it has been proven
possible to form an opinion as to whether these two conditions contribute positively
to the firm’s business and development – in other words, to its competitive advantage
and performance. Just as with operationalization, it is ultimately the researcher alone
who decides; consequently, a transparent process of analysis is also needed.
1
In the following text we only use the word firm.
In conclusion, we may note that Nilsson and Rapp (2005) identified several
methodological challenges in their book. These concerned the importance of clearly
operationalizing the variables in the model and using both quantitative and qualita-
tive data in the analysis. Now that a large number of studies have been carried out
for the purpose of more closely examining strategic congruence, integrated control
and their importance for competitive advantage and performance, it may be noted
that these challenges are still present and well worth considering. Furthermore,
additional methodological changes have been identified. Above all, our studies
show the methodological strength of conducting qualitative studies in order to
understand the highly complex relationships between strategy, control and compet-
itive advantage.
10.7 Continued Research
This book has reported on some extremely comprehensive research on the relation-
ship between strategy, control, competitive advantage and performance. Many new
insights into this relationship have been gained, especially in regard to how
strategic congruence and integrated control affect competitive advantage and per-
formance. At the same time, the studies show that there is a need for continued
research in several important sub-areas within the broad field of strategy and
control. Below are some brief examples of areas where further research is
especially needed.
In the introductory chapter we emphasized that the focus of the book is on
structures rather than actors. Thus, it follows a long tradition in contingency-
theoretical research. In this book it is shown that ERP systems are an important
structure for creating strategic congruence and integrated control. This finding is
not new; it has also been emphasized elsewhere – including Nilsson and Rapp
(2005). We may note, however, that very few studies with such an orientation have
been conducted. Consequently, additional studies are needed in order to develop a
true understanding of how the complex interrelationship of strategy, control and
competitive advantage is affected by the design and use of ERP systems. It is far
from evident that ERP systems are a positive force in the process of creating
strategic congruence and integrated control; it is equally conceivable that the
system’s own logic forces the firm to establish a kind of control that is inappropriate
to the orientation of the firm’s strategy (cf. Hyvönen et al. 2006; Nilsson et al.
2011). Since these systems are used extensively in complex firms, this question is
important to study thoroughly.
Another area where structure is in focus is the issue of what affects interorgani-
zational management control. In much of contingency-theoretical research, interest
is concentrated on how the environment affects the strategy and control of a specific
firm. Less attention has been directed at how strategic congruence and integrated
control extend outside one’s own firm and even affect other firms (cf. Kajüter and
Kulmala 2005). This book contains two interesting cases where the focal firm
affects the management control used for handling supplier relationships. In these
particular cases the firms involved are two large groups that dominate their industry
and that by virtue of their size and power heavily influence interorganizational
control. It would be interesting to study what happens when there is a strong
supplier. How is interorganizational control then affected, and can it even lead to
a situation where the strategies and control systems of the focal firm are affected by
the demands of the supplier? If so, could it lead to deterioration in the degree of
strategic congruence and integrated control?
A third important area is how the actor affects structure. As we mentioned
previously, a central feature of contingency-theoretical research is that the actor
is not considered. On the other hand, the actor has a very prominent role in the
research that is customarily referred to as “strategy as practice” and is mentioned in
some chapters of the book (cf. Whittington 2006). The clearest example is found in
the studies on the two chamber orchestras and on how the actions and attitudes of
funders had a strong impact on both strategic orientation and the design and use of
control systems. This study shows clearly that we need to study structure and actor
simultaneously. So far a large proportion of the research has focused on either
structure or actor. The approach that we propose could advance both contingency-
theoretical research and practice-oriented research.
In conclusion, we wish to emphasize the importance of continuing to study what
effects actually result from aligning strategies and control systems, and to map out
how differences in design and use affect competitive advantage and performance.
This book shows that studies of this type are extremely complex, costly and long-
term. At a time when research is under increasing pressure to publish highly
delimited work in narrow academic journals, there is every reason to defend the
type of research presented here, which does not shrink from addressing important
major issues. We need more in-depth longitudinal case studies of how structures
and actors affect the development of firms!
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Appendix: Choices of Method
In this appendix we explain the choices of method for the studies presented in the
book. We begin by presenting the premises for the research on strategy and control
reported in this book, and the general choices of method for all studies. Thereafter,
we present criteria for choice of firms and period to study. In addition, we show how
the literature review, the starting point for Chap. 1, was conducted. Finally, the
choices of method in each individual study are presented separately.
Premises for Research on Strategy and Control: General Method
Studies treating the relationship between strategy and control often have a
contingency-theoretical approach, and a substantial portion use a quantitative
method as well (Langfield-Smith 2007). In this type of study, the focus is on
explaining which combination of strategies and control systems provides a good
matching and can thus be considered more advantageous than other combinations.
Langfield-Smith (1997, 2007) show, however, that the results are ambiguous even
though a large number of studies were conducted. As already mentioned in several
chapters, Kald et al. (2000) maintain that the ambiguity is primarily the conse-
quence of treating different strategic typologies as synonymous – commonly the
business-strategy typologies of Gupta and Govindarajan (1984), Miles and Snow
(1978) and Porter (1980) – despite the substantial differences between them and
thus in the kind of control appropriate to each strategy.
As pointed out earlier Gerdin and Greve (2004, 2008) present another reason,
namely that there are different types of contingencies and that the choice of
statistical method must therefore be adapted to which type is followed and
measured. They hold, however, that this factor is not considered in the research
on strategies and control, but that studies with different starting points are compared
with each other even though this is not actually possible. Thus, the ambiguity is a
fact. Indirectly, the authors maintain that the use of quantitative methods must be
further refined if we are to enhance our knowledge and understanding of the
phenomena under study. And they are not the only ones; rather, several researchers
discuss methodological challenges in contingency-theoretical studies that use a
quantitative method (see for example Hartmann and Moers 1999, 2003).

Management for Professionals, DOI 10.1007/978-3-642-39134-7,
250 Appendix: Choices of Method
On the other hand, it has been noted that in those situations ‘a phenomenon is
broad and complex, when a holistic, in-depth investigation is needed, and when a
phenomenon cannot be studied outside the context in which it occurs,’ qualitatively
oriented case studies are needed (Dubé and Paré 2003, p. 598, cf. Langfield-Smith
1997). As can be seen in Chap. 1, the relationship between strategy, control and
competitive advantage is an example of precisely this kind of phenomenon. There
the overall aim of the anthology is presented: to gain greater knowledge and
understanding of how strategic congruence and integrated control affect the com-
petitiveness of firms. In order to provide theoretical, empirical and practical
contributions linked to this aim, another type of data is needed than is used in
quantitative studies. With in-depth longitudinal case studies, it is possible to obtain
data that can explain what drives changes in strategies and control systems, how
these relate to each other and what meaning they have for behaviour in
organizations.
However, case studies are often criticized for their limited scope for generaliza-
tion. But these critics seem to neglect the fact that there are different types of
generalizations, and that these need to be applied in different situations
(cf. Gummesson 2000; Lee and Baskerville 2003):
[. . .] case studies, like experiments, are generalizable to theoretical propositions and not to
populations or universes. In this sense, the case study, like the experiment, does not represent
a “sample,” and in doing a case study, your goal will be to expand and generalize theories
(analytical generalization) and not to enumerate frequencies (statistical generalization).
(Yin 2003, p. 10)
Our ambition is to make analytical generalizations based on the empirical

material presented in the book, that is, ‘the investigator is striving to generalize a
particular set of results to some broader theory’ (Yin 2003, p. 37; cf. Lee and
Baskerville 2003). At the same time, there are considerable challenges in achieving
this type of generalization on the basis of the comprehensive studies presented. The
primary challenge is how to capture and explain the complex relationships between
the environment, through strategy and control, to competitive advantage and
performance.
So-called evidence chains are one of the ways used to handle these relationships
(Miles and Huberman 1994). In certain of the studies in the book, the use of
evidence chains is highly explicit, whereas in other studies it is implicit. As
mentioned in Chap. 1, an evidence chain provides a description regarding the
relationship between changes in the environment, strategies, controls, actual
behaviour among managers and employees, and, finally, what this in total has
meant for the firm’s competitive advantage and performance. The use of chains
of evidence has thus been essential for achieving the overarching aim of this book;
they provide a tool to describe complex relationships in a rather straightforward
way.
Appendix: Choices of Method 251
Criteria for Choices of Firms and Periods for Study
Most of the studies presented in the book originate with an empirical research
programme referred to as SiSK (initiated by Fredrik Nilsson and Birger Rapp). The
starting point for the programme is their book Understanding competitive advan-
tage: The importance of strategic congruence and integrated control (Nilsson and
Rapp 2005). The overall aim of the research programme is quite similar to the aim
of this book. In the research application, the overall aim is expressed in terms of the
following two objectives:
1. To describe and analyze how the competitive advantage of several large
corporations has developed, and the role of strategies and control systems in
this connection.
2. To develop an empirically based conceptual framework that describes and
explains how strategic congruence and integrated control affect the competitive
advantage of firms. The starting point for this work is the tentative model
developed by Nilsson and Rapp (2005). In addition to testing the hypothetical
relationships presented by Nilsson and Rapp, there is a need to enhance the
model. For example, there is reason to study more closely how the creation of
strategic congruence and integrated control can facilitate the introduction of
ERP systems.
The research programme was begun in 2004 and has been financed primarily by
contributions from the Jan Wallander and Tom Hedelius Research Foundations, the
Tore Browaldh Foundation and to some extent from the Swedish Research School
of Management and IT (MIT). Contributions have also been received from IMIT
(The Institute for Management of Innovation and Technology). In total, three senior
researchers and six doctoral candidates have been involved in the programme. At
present the last two doctoral candidates are in the final stages of their studies and
preparing to present their doctoral theses. Thus, this anthology is a report on the
research programme in which the general conclusions are presented. As indicated in
Chap. 1, the book also includes a number of studies that have not been part of the
SiSK research programme, namely the studies in Chap. 6 (about SCA), Chap. 7
(about both Volvo and Scania),1 Chap. 8 (about Electrolux) and Chap. 9 (about two
chamber orchestras).
At the outset of the research programme, considerable resources were devoted to
identifying appropriate case firms; this meant that a large number of potential
criteria were considered. As a general guideline, the choice of starting point
recommended by Kaplan (1984) was adopted, namely that where there is limited
knowledge of the phenomena to be studied – in our case the importance of strategic
congruence and integrated control – successful firms should be selected. The main
1
Note that the study in Chap. 7 is a comparative case study of Volvo and Scania from an
interorganizational perspective. Scania’s strategy and control system is treated in its entirety in
Chap. 4. This study is part of the SiSK programme.
reason for this is that they can tell us a lot about what contributes to success. He
develops this reasoning in a later article from 1986, where he states (Kaplan 1986,
p. 445 f.):
In order that academic research does not fall too far behind changes in the competitive
environment and the new procedures being introduced by innovative organizations,
researchers need to be informed about contemporary practice and the evolving skill of
the best practitioners.
Still today – after more than 25 years – Kaplan maintains the same view. He
remains highly critical of how research in accounting tends to be superficial and
does not provide enough knowledge about what is actually going on at firms.
Kaplan notes, and presents as an illustrative example, how little we actually
know about the way assets and risks are managed in well-run financial firms. In
view of the havoc caused by the financial crisis, this question must be highly
relevant both within and outside the academic community. Kaplan writes (2011,
p. 25):
To remedy this knowledge gap, more business school scholars, particularly in accounting,
need to shift away from coast-line studies, conducted on computer terminals in their offices,
and begin to explore the interior of leading-edge company practices. A detailed, qualitative
case study that documented and analyzed how innovative managers value and manage risky
assets would be far more informative than yet another study of the correlation between
public accounting data and average stock market returns. Careful clinical and descriptive
research gets done by scholars in other professions, such as medicine and engineering,
where practice innovation and small sample research coexists comfortably and collabora-
tively with randomized experimental trials and epidemiological research that test emerging
practices in large samples.
The orientation of this book is in line with Kaplan’s call for studies of successful
firms and organizations. As noted in Chap. 1, a total of seven such firms are studied
in this book: Saab (Chap. 2) Atlas Copco (Chap. 3), Scania (Chaps. 4 and 7), the
German insurance company (Chap. 5), SCA (Chap. 6), Volvo (Chap. 7) a German
and Electrolux (Chap. 8). The book also includes a chapter of two chamber
orchestras (Chap. 9). The cases represent well-known and successful firms and
organizations making the empirical material in this anthology unique.
Success is of course a multidimensional phenomenon, but one way of expressing
it is in financial terms. Therefore, Table A.1 shows a summary of selected financial
data from the case companies. The German insurance company and the two
chambers orchestras are not quoted companies and are therefore not included in
the aware table.
All data in Table A.1 have been hand-collected from firm’s annual reports at the
corporate library at the Almedalsbiblioteket at Uppsala University, Campus
Gotland. In addition, the stock price data was obtained from the Stockholm Stock
Exchange. The return on assets (RoA) is calculated as the ratio of net income to the
total book value of the firm’s assets. The firm’s price-earnings ratio (P/E) is market
capitalization divided by net income (equivalent to share price divided by earnings
per share), where market capitalization is number of outstanding shares multiplied
with closing stock price at the end of the calendar year. Dividends to shareholders
Table A.1 Financial data from the case companies

Return on P/E- Dividend Average Number of
Firm Year Asset (%) ratio yield (%) TSR (%) employees
Atlas 2000 4.7 14 2.6 26,392
Copco 2005 12 15 3.3 26,258
2010 13.9 15 3.3 31,214
2000–2010 20.0
Electrolux 2000 5.1 9 3.3 87,128
2005 2.1 34 3.6 57,842
2010 5.4 14 3.4 51,544
2000–2010 8.6
Saab 2000 5.9 8 3.8 15,453
2005 3.9 16 2.4 12,830
2010 1.6 31 2.8 12,536
2000–2010 9.3
SCA 2000 8.5 6 4 37,700
2005 0.3 161 4 50,916
2010 3.9 13 3.8 45,341
2000–2010 9.4
Scania 2000 5.2 14 3.3 26,904
2005 6 12 5.2 30,765
2010 9.3 14 3.2 35,514
2000–2010 15.2
Volvo 2000 2.4 14 5.1 54,270
2005 5.1 12 4.5 81,860
2010 3.5 22 2.1 90,409
2000–2010 19.6
are a cash outflow and we use two different measures to capture these flows.
Dividends divided by stock price reflects the dividend yield and is thus one
important part in the computation of the firm’s cost of equity (the other being
growth in dividends). When we add other cash flows to shareholders, for instance
proceeds from share repurchases, stock redemption plans and divestitures, we
obtain the measure total shareholder return (TSR). The latter is calculated as the
average TSR per year for the period 2000–2010.2
The success of the companies was not the only reason behind the selection. In
addition, they were chosen because they:
• Have been in business for a long time, thus permitting longitudinal comparisons,
• Have a number of business units, thus requiring both vertical and horizontal
co-ordination,
2
The calculations presented in Table A.1, as well as the description of each measure, are
conducted by Associate Professor Adri de Ridder.
• Have some form of production, whether goods, products or services, and

• Have assented to being studied.
Many of the case studies were conducted with a clear longitudinal dimension,
primarily because strategic congruence and integrated control need to be studied
over an extended period in order to provide relevant data (see for example Berry
et al. 2009). For most of the studies, a period of about 15 years has been chosen.
Such extended periods also mean that the firm’s actions over several economic
cycles have been captured. However, some of the studies cover shorter periods (i.e.
Electrolux and the two chamber orchestras). In some cases cross-section studies
have been performed instead, providing images at a particular point in time. The
reason why the latter type of studies is also included is that they illustrate specific
aspects in detail, thus serving as a valuable complement to the other studies.
Conducting the Literature Study
There are two parts to the literature study on which the content of Chap. 1 is based.3
The first includes a review of all issues of 18 selected journals from 2004 through
the first half of 2012. The journals have been chosen based on their prominent
position regarding research on strategy, management control and/or production
control:
• Academy of Management Journal
• Academy of Management Review
• Accounting, Organizations and Society
• Administrative Science Quarterly
• British Journal of Management
• Decision Sciences
• European Accounting Review
• European Management Journal
• Harvard Business Review
• International Journal of Operations & Production Management
• International Journal of Production Research
• Journal of Strategic Information Systems
• Long Range planning
• Management Accounting Research
• Production & Operations Management
• Production Planning & Control
• Scandinavian Journal of Management
• Strategic Management Journal.
The other part of the literature study consists of searches in the following data
bases: Scopus, Business Source Premier and Libris. The studies are limited to the
3
The literature review for the period 2004–2008 was also reported in Nilsson (2010).
period from 2004 through the first half of 2012, and the following search words
were used: goal congruence, integrated control, management control and align-
ment, management control and operations management, management control and
production control, performance measurement and alignment, strategic alignment,
strategic coherence, strategic congruence and finally strategic fit.
The total material from the literature review was then categorized according to
its primary focus, such as strategic congruence, competitive advantage or multilevel
studies of strategy and control. Thus, the literature in Chap. 1 consists of the works
within each category that were considered appropriate for the purpose: to provide a
picture of what we know today about the relationship between strategic congruence,
integrated control and competitive advantage. However, the review of the literature
is not claimed to be exhaustive.
Choice of Method for the Respective Studies
In the concluding section there is a report on the more detailed methodological

choices made in the studies presented in Chaps. 2, 3, 4, 5, 6, 7, 8, and 9. These
choices are presented chapter by chapter below. Please note and as earlier men-
tioned, all chapters, except one, are based on dissertation projects (including one
licentiate theses). Quotes from interviews in Swedish have been translated to
English.
Chapter 2: Driving Strategic Change at Saab AB: The Use of New

Control Practices, by Erik Jannesson
The study about strategy and control at Saab AB (Svenska Aeroplan Aktiebolaget
AB) presented in the chapter is based on a thesis by Nilsson (2010). The choice of
Saab has its roots in the sweeping changes in the corporation’s environment since
the 1990s, and on the implementation of comprehensive internal changes, in the
form of mutually consistent strategies on the corporate, business and functional
levels, to adjust the company to the new competitive conditions. As these changes
were occurring, the company maintained its competitive advantage. All these
factors considered, Saab is an appropriate object of study when the focus is on
creation of strategic congruence and integrated control over time in a corporation’s
efforts to be competitive. Aside from the corporate level, three business units were
studied in detail: Saab Aerosystems, Saab Bofors Dynamics and Saab Systems.
Together these three constituted the core of Saab’s business, accounting for over
40 % of total corporate sales. The time period for the study reaches from 1995,
when Saab-Scania AB was split in two and Saab AB became a company of its own,
up until the financial crises at the end of 2008.
Interviews, observations and internal and external written material have formed
the basis for the collection of information. A total of 74 semi-structured interviews
were conducted with 54 respondents. On average, these respondents had been
working within Saab for almost 13 years. The total aggregate time consumed by
these interviews was 116 h, with an average of 95 min per interview. Before each
interview, an interview guide was sent out to the respondent. Most interviews were
recorded, and all of them were subsequently transcribed.
Observations were made on a total of four occasions and were in each case
connected with interviews on production processes. The observations
complemented the interviews, making it easier to understand the processes. For
the last type of source – written material – the internal material was gathered in
connection with the interviews, for example descriptions of design of control
processes and documents on strategy. The publicly available material used has
consisted primarily of annual reports, press releases, and newspaper articles.
The information collected has been analyzed with the aid of two instruments:
Miles and Hubermans time-related matrix (1984) and evidence chain (1994). The
former were used to map changes in the environment, strategies, controls and
behaviour. The changes were described in cells in the matrix, each relating to
(1) a specific year under study, and (2) one of the different organizational units in
focus, that is, the corporate level and the three business units. In conjunction with
each cell, a description was made regarding the relationship between the change in
focus and other changes within the firm.
The information in the time-related matrix was then used to create evidence
chains. As mentioned previously in this appendix, an evidence chain provides a
description of the relationship between changes in the environment, strategies,
controls, actual behaviour of managers and employees, and, finally, what this has
meant for the company’s competitive advantage and performance. The use of
chains of evidence has thus been essential for fulfilling the aim of the study.
Chapter 3: How Management Control Affects the Implementation of

Strategies in a Decentralized Organization: Focus on Formal and
Informal Control in the Case of Atlas Copco, by Klas Sundberg
One relevant question is why Atlas Copco is at the centre of this study. As was
initially mentioned in the chapter, Atlas Copco is a world-leading company and
highly successful in its areas of business. The company also has a long history and
represents a proud Swedish industrial tradition with strong values. In addition, Atlas
Copco is interesting in relation to other companies in this book, mainly for its far-
reaching decentralization. Thus, it enables a focus on how the group has been able
to hold together in the past and how it can continue to do so.
The basis for the study is a licentiate thesis (Sundberg 2009) that contains a rich
body of empirical data about Atlas Copco. The material in the thesis was subse-
quently developed through collecting more data, particular on issues of informal
control. In total, the study presented in the chapter relates to a time period of over
30 years, from 1980 up until 2011.
The empirical data is based on 34 interviews held in 2005–2012, internal
company materials in the form of manuals and other written material on strategy
and control, Atlas Copco’s annual reports and quarterly reports for 1979–2011, and
articles in the Swedish business press. The annual reports have been a fruitful
source of data both for analyzing the company’s financial development, and also for
showing how management presented the company’s strategies and organization to
external readers. The review of the Swedish business press was, on the other hand,
conducted in order to obtain a picture of how the company has been presented in the
business media.
The interviews were mainly conducted with individual interviewees, but on
three occasions several interviewees participated in the same interview. In total,
33 different people were interviewed on 34 different occasions. Most interviews
were open-ended, allowing interviewees to talk about their experiences at Atlas
Copco. Roughly a third of the interviews, however, were structured, with more
precise interview questions. On average, the interviews took about 2 h. Almost all
of them were recorded and transcribed word for word, and the rest were transcribed
based on notes taken during the interviews.
The interviewees were primarily managers and controllers distributed over all of
the business areas, and at a majority of divisions and subsidiaries. The term
“managers” refers to business area heads, division heads, heads of sales companies,
heads of product companies and plant managers. The controllers interviewed have
served, and some still do, within divisions and business areas. Further, several
persons attached to corporate staff units were interviewed, as well was one CEO
and one board chairman. The interviewees have worked at Atlas Copco in different
periods during the years 1980–2011, and a few for the entire period of study.
Almost all have occupied several, or even many, different positions in the company.
In total, the collected empirical material consists of 330 pages of transcribed
interviews, about 3,600 pages of text in annual reports, some 500 pages of manuals
for management control, about 100 pages of newspaper articles, and 30 pages of
other written materials. The analysis of the material was made by structuring it in
regard to strategy at different levels (corporate, business area, functional), formal
management control, and informal control with a particular focus on person-related
control. Further, the material within each category was structured in relation to
time, i.e. when changes occurred, to make it possible to (1) determine when
phenomena and procedures took place, (2) how the changes have affected each
other, and (3) to match these data with environmental factors. Finally the changes
and their relations to each other were mapped against the financial performance of
the company.
Chapter 4: Success Through Consistent Strategy: How Does Scania’s

Management Control Matter? by Nils-Göran Olve
The chapter is based primarily on Anjou’s (2008) licentiate thesis which is part of
the SiSK research programme. Her choice of case study company was based on four
criteria: (1) a company listed on the stock market, (2) with an advanced production
process, (3) which has achieved competitive advantage, (4) and existed for more
than 15 years. Based on these, a thorough analysis was made of potential candidates
and the choice fell on Scania. It is a very successful manufacturing company on the
Swedish stock market, with an often higher profit than its competitors (Brunninge
2005, p. 113). Despite a cyclical market, they have also managed to earn a financial
surplus every year since 1934 (Johnson and Bröms 2000, p. 117), even during the
global financial crisis that started 2008. The length of the period of study was set to
15 years (from 1992 to 2006) to allow a thorough investigation of the relationship
between the environment, strategies and control.
Interviews were the main tool for collecting data. They were conducted in 2005
and 2006 with 24 Scania employees, some more than once, and on average, every
interview lasted 2h. The questions asked were mainly of open ended character, and
during the interviews, notes were taken that was later used to make a transcription
of the conversation. Most of the interviewees were in senior management positions,
and they represented a cross-section of different types of positions: representatives
of finance, production and HR at the corporate level, managers of production units,
union representatives, etc. A majority of them had been employed at Scania for
10–20 years, and had therefore been with the company during the period of study.
Anjou also used internal and external written material. Examples of the former
are accounting manuals, documents on Scania’s strategy process, and internal
training material relating to management and production control. Examples of
external written material are annual reports, brochures, newspaper articles, scien-
tific studies and books. The written material was used as a complement to the
interviews, but also as a tool for verification of the information collected from the
respondents.
The data collection started with a review of externally available material, which
Anjou analysed via a time-related matrix, in which the data were categorised by
year and type (change in the environment, business strategy, management control,
etc.). This was used as the basis for conducting the interviews. After each interview,
the transcription of the empirical data was incorporated into the thesis document,
assorting it under different headings relating to the different parts of the model for
analysis. After the interviews, the empirical parts were written up with a focus on
change in the environment, strategy and control, and the existence of strategic
congruence and integrated control was analysed via the use of the variables in the
model.
The author of the present chapter was one of Anjou’s thesis advisors. I have
revisited her report and combined her findings with notes and observations from
other contacts with Scania. An extensive interview with two Scania controllers
conducted in 2009 proved particularly valuable. An early draft of the chapter was
then sent to one of these controllers for further clarification, which led to another
interview and a revision and extension of the chapter. Following discussions in the
group of authors in this anthology volume, the chapter was again revised and
checked with Scania in the autumn of 2011.
Chapter 5: Changing Strategies and Control Systems at a German

Insurance Company, by Sanna Poth
The insurance group in focus in the chapter was mainly chosen as a case company
due to its long-lasting competitive advantage compared to its competitors. More-
over, access was granted over a longer time frame due to the commitment of the top
management, as well as the fact that the researcher was an employee of the studied
insurance group. Although the employee status might lead to bias in analysing the
field study material (more on that below), it also supported the understanding of the
empirical context.
In order to observe and understand changes in the environment, strategies,
control and organizational structure for the insurance company, a sufficiently
long time-frame must be chosen for the data collection. Therefore, a retrospective
data collection covering 10 years was combined with a real-time data collection of 5
years. 1995 was chosen as the starting point, as the case study company was re-
organised as an insurance group in that year, and 2010 as the end point of the study.
The company’s reactions to the changing market conditions as well as the
resulting competitive position were analysed in a holistic manner taking strategy,
control and organizational structure into consideration. But before initiating the
data collection, a theoretical frame of reference for the service industry was
prepared. From that, in-depth interviews with key informants at the corporate,
insurance-company and functional levels were conducted, as well as a review of
both internal and external documents dating from 1995 until 2010. This enabled
triangulation of data, thereby strengthening the validity. Interviews were conducted
with 52 different key persons between January 2006 and December 2010. Most of
the key persons were interviewed multiple times so that changes during the real-
time data-collection could be discussed. The interviews were not recorded but notes
were taken which were typed immediately after each interview.
Access to the information was facilitated by the researcher’s position as an
employee in one of the insurance companies in the group. In order to limit the
bias of being a part of the company studied, data that needed a higher level of
interpretation by the researcher, such as observations, were not used. Additionally,
the complete summarised field study material, upon which the analysis was
conducted, was submitted to the insurance company for feedback. This also
reduced the likelihood that the researcher’s own interpretation was influencing
the summary of the field material collected.
In order to determine the competitive position of the company, a market study
was conducted on the insurance industry in Germany between 1995 and 2010.
Quantitative measures like growth and profitability, as well as more qualitative
measures like customer and sales partner satisfaction, were compared to market
development.
After each interview round, the collected empirical material was mapped against
the dimensions in the theoretical framework. By doing that, it was possible to
confirm the theoretically based tentative conclusions or to find new aspects of
understanding. Thereby confirming as well as inconsistent information, or gaps of
information, were identified in order to refine the information gathering in the next
interview round. This iterative approach allowed new emerging explanations and
thereby enabled a refinement of the theoretical framework, as well as a deeper
understanding of competitive advantage in the studied context.
Chapter 6: Strategy, Management Control and Organizational

Design: Empirical Illustrations from SCA Packaging, by Katarzyna
Cieslak
The illustration from SCA Packaging presented in the chapter is based on a thesis
by Cieslak (2011). The later comprises an exploration of the content of different
roles of controllers and organizational drivers of these roles. The data, therefore,
relates to aspects that are in focus in this chapter. The packaging business is
dependent on economic cycles, but SCA Packaging has always managed to stay
financially successful, and it has gained an image of an innovative supplier of
packaging solutions. Also, SCA Packaging has grown strongly in Europe by
acquisitions of plants manufacturing a variety of products. These aspects made
the company an interesting candidate for studying alignment of strategies and
control systems.
The main methodological tool was semi-structured interviews carried out
between July 2008 and March 2009. A total of 62 interviews lasting on average
80 min were conducted, of which all but three were recorded and transcribed.
Interviewees included general managers, financial managers (controllers), sales and
production managers of seven business units (management clusters), three regional
financial directors and the CFO. Internal written material was also collected when
possible, including management control documents and internal management
reports. External material in form of annual reports and the company website
were also invaluable sources of empirical data.
The material presented in the chapter provides cross-sectional evidence, and the
focus is on mapping strategies, their alignment with control systems and outcomes
of this alignment. Even though the study is of a cross-sectional character, it is not
fully static. Apart from a description of alignment of strategies and controls, the
chapter also outlines a potential temporary misfit situation. This description is
followed by a short discussion of organizational changes that followed after the
study was performed, and could be interpreted as changes towards a potential fit.
For the purpose of the chapter, two business units within SCA Packaging – out of
the five units included in the thesis project – were selected and analysed through
cross-case comparison (cf. Eisenhardt and Graebner 2007; Yin 2003). The choice of
cases was based on finding and analysing “polar types” (Eisenhardt and Graebner
2007). In the first phase of the analysis, the empirical material was marked with
codes relating to the different categories of strategies and control systems within the
framework by Nilsson and Rapp (2005). Evidence was then summarized in a matrix
table with the cases as columns and different outcomes of interest in rows, including
strategies, the usage of control systems and the outcomes of the organizational tests.
This facilitated cross-case comparison regarding similarities/differences, which in

turn could be associated with strategic (in)congruence and (dis)integrated control.
The analysis also led to the recognition of a new pattern relating to horizontal
strategic congruence within business units. The material showed that the units
within the case with horizontal strategic congruence were similar to each other,
but different from the units in the case with incongruent strategies. From the
analysis, conclusions were drawn that are in line with the hypothesis by Nilsson
and Rapp (2005), and also, the first building blocks in a theory about horizontal
strategic congruence was established.
Chapter 7: Linking Strategy and Inter-organizational Relationships:

The Case of Volvo and Scania, by Zita Ambrutytė
The empirical data used in this chapter relates to two cases, Scania and Volvo,
which are abbreviated versions of the cases analysed in Ambrutytė (2008). The two
cases focus on purchasing for truck manufacturing, and specifically on relationships
between purchasing functions and suppliers. Data for the cases were collected
during the period 2006–2007. Data about the use of management control in
relationships between Scania (focusing on truck production) and its suppliers
served as a pilot study and were collected during 2002–2003 (Ambrutytė 2005).
For the purpose of the second research project (2006–2007), Scania remained as
one of the focal manufacturing companies for analysing the relationship between
strategy and purchasing management control systems, and between the latter and
control of supplier relationships. For comparative purposes, Volvo was chosen
under the assumption that it pursues a different business strategy and shares the
same or similar suppliers. Both Scania and Volvo were chosen for their success in
the truck manufacturing market.
The cases are based on data from 29 interviews with employees at Scania, Volvo
and 10 suppliers. The interviews took place at the premises of the respective
companies and lasted between 1 and 2 h. All interviews were tape recorded. At
Scania, several interviews were held with purchasers, representatives of the strate-
gic controlling function (in the Purchasing Department), the head controller and an
operational controller. At Volvo 3P, interviews were held with one of the Purchas-
ing Department’s Vice Presidents, two purchasers, and representatives of strategic
business planning and supplier-base management. One further interview was held
with the Director of Finance and Business Control to discuss the assessment of
purchasers and supplier performance. All the interviewed supplier representatives
consisted of people in senior positions, i.e. directors or key account managers with
long experience at their respective companies. Of the suppliers included, several of
them sold products to both Scania and Volvo, making it easier to get a holistic
picture of the relationships. Also, some of the suppliers are large, internationally
established producers of complex development components.
To form a solid base for the analysis, an analysis model was developed in which
variables for management control systems (MCS) were established. The empirical
material was then analysed via clustering of the data in relation to the variables.
Interview material, as well as insights and impressions gained from the visits and in
communication with the interviewees were used in that process. The descriptions of
people involved in purchasing and relationship management are considered impor-
tant for understanding the degree to which they are aware of strategies and ready to
implement them. Illustrations of employee responsibilities, skills and educational
backgrounds also make it possible to analyze the broader perspective of the control
systems by including people-oriented controls and to facilitate an understanding of
social and cultural constructs in purchasing organizations.
In addition, the analysis focuses on the role of strategy in purchasing
departments, i.e. the understanding of strategic direction, communication of busi-
ness strategy to employees, the relationship of strategic planning to management
control systems, and the design of supplier-relationship management and control.
The analysis has also been influenced by the cases themselves. The cases were
selected so that their analysis would be directed towards refinement of the existing
strategy-structure paradigm; i.e. the model to be used was extended to analyse the
purchasing MCS and IOR (inter-organizational relationships) controls. By
contrasting the effects of different strategies, the “polar cases” (Eisenhardt and
Graebner 2007) made it possible to highlight the relationships and the logic of the
strategy-IOR controls.
Chapter 8: The Role of IT Systems in the Strategy Process: The Case

of Electrolux, by Fredrik Nilsson and Jan Lindvall
The study presented in the chapter is based on an case study with an exploratory
orientation. With its focus on the role of management control and IT systems in the
strategy process, co-ordination becomes an important aspect, and therefore, it is
desirable to study a large and complex organization. The organization chosen was
Electrolux, a world-wide enterprise that has undergone, and is still undergoing,
sweeping strategic change. Furthermore, in 2007 (repeated in 2009) Electrolux
received the distinction of “best annual report in the world” from the organization
Report Watch. Without a doubt, Electrolux is a company actively engaged in
changing its strategy, control, and organization, with the simultaneous ambition
of describing this work in detail to its stakeholders. For these reasons, Electrolux is
considered, overall, to represent the type of innovative organization that is espe-
cially interesting to study for the purpose of determining and describing good
practice in management control and IT.
Five comprehensive interviews have been held with centrally placed individuals
at the group and business unit levels. The interviews lasted about 1 h on average and
both researchers were present. The interviews were conducted at the Electrolux
headquarter in Stockholm. They were tape-recorded but not transcribed. The
persons interviewed were selected because they can influence, and are also affected
by, the conduct and content of the strategy process. Specifically, they are the
following: the manager responsible for the strategy process, the group controller,
some executives responsible for different areas of IT, and a controller in the Floor
Care business unit. Priority has been given to identifying a limited number of key
people and conducting longer interviews rather than to hold a large number of
shorter interviews. The choice of interviewees is thus critical to the validity and
reliability of the study. One important criterion for selection was that the decision-
maker should be thoroughly familiar with the strategy process and the role of the IT
systems in it. In particular, the decision-maker had to be able to describe in detail
how attention in strategically significant areas is channeled and allocated.
The interviews have been open-ended in nature, were themes such as ‘the
strategic orientation of Electrolux’ and ‘the role of IT systems in the strategy
process’ have been up for discussion, rather than consisting of highly detailed
questions on the design and use of the strategy process. A valuable complement
to the interviews was written material in the form of annual reports, internal
presentations, and articles. The process of analyzing the data started with both
researchers listening to the interviews – taking notes of the passages especially
important for understanding the role of IT systems in the strategy process. In
parallel each researcher read the written material. After that the researchers met
to discuss their analysis and conclusions in order to reach a common understanding.
Two themes emerged as especially important and were used as the overall structure
for writing up the result, analysis and conclusions of the study: (1) the orientation of
Electrolux’ corporate and business strategy, and (2) the company’s management
control, with a focus on the strategy process and the role of IT systems in that
process. The results, analysis and conclusions was further refined in an iterative
manner and also affected by feed-back from presentations at several conferences
and work-shops.
Chapter 9: Funding, Strategies and Management Control Systems:

Empirical Evidence from Two Chamber Orchestras, by Fredrik
Nilsson and Anna-Karin Stockenstrand
In this chapter, we have based our analysis on a comparative and longitudinal case
study of two professional chamber orchestras, one in Sweden and one in the UK.
The study was conducted with the aim of understanding the role of external and
environmental factors in the overall running of the orchestras. The study gave rise
to several interesting observations with regard to what kind of strategies that could
be implemented in respective orchestra as a result of different relationships with
funders. Relationships with funders were analysed both in terms of what kind of
funding sources the organization had, and what the communication and continuous
process of evaluation from funders looked like.
The study of the organizations was conducted during 2006 and 2007. For six
months each in both Sweden and then in the UK, one of the authors lived at close
proximity to the orchestras and conducted a total of around 50 interviews with
individuals both within and outside the organizations such as funders, partners,
general managers, previous managers, artistic managers, conductors, guest artists,
administrators and musicians. On average an interview lasted between one and 2 h.

Some individuals were interviewed on more than one occasion. In addition to this,
many observations of the day-to-day life in the organization were made including
everything from board meetings, to staff meetings to rehearsals and concerts but
also more informal situations such as small talk after concerts or between
rehearsals. An important part of the data was also different kinds of documents
such as financial reports, board minutes and yearly programmes – something that
was studied in a longer time perspective in order to trace important changes in the
direction and strategy of the organization.
Studies of the relationship between strategies and management control have not
been frequent using performing arts organizations as study objects. However, many
things indicate that a professional orchestra is a very suitable and illustrative study
object for research questions revolving around the issue of fit between strategic
levels and management control. One interesting observation is that professional
orchestras have undergone substantial environmental change over the last few
decades, experiencing major changes with regard to funding conditions and
accountability demands. Especially, changes have meant that these organizations
must take into greater account the pressure to meet cost frames, but also to secure
“their own income” – rendering the organization much more exposed to turbulence
with regard to forecasted income. Also, a professional orchestra is a traditional form
of organization with funders, board of directors, management, and a very visible
operational core comprising musicians with strong professional values. Generally
this clear structure of the organization makes it illustrative but also more easily
accessible.
After the study was concluded, the empirical material was analysed using the
modified framework by Kald et al. (2000) including multiple strategic constructs that
in combination provided new insights into important aspects of the data. The analysis
was done by both authors, comprising thorough discussions of how data should be
classified according to the strategy constructs developed in the modified and compre-
hensive framework devised by Kald et al. (2000). By using several strategic
typologies, and also strategies at two different levels, a detailed empirical analysis
of effects on control systems and, ultimately, performance could be presented. Using
chains of evidence, logical reasoning could be developed, tracing the effects of a
change in funding on internal decisions and ultimately different strategies adopted.
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Index
A B
About the authors, ix–x Balanced scorecard (BSC), 44
Activity sharer, 20 Behaviour controls, 166, 184
Aeronautics segment, Saab AB, 30 British orchestra
Ahlström’s study, 9 Arts Council funding, 222, 223
Arts Council funding budget, 230
British orchestra, 222, 223 concerts, 225
Swedish orchestra, 222 core funders, 223
Atlas Copco, 81, 256–257 cost leadership strategy, 227
Asian crisis, 71 differentiation strategy, 225
business areas, 62, 64 employment structures, 220
company description, 63–64 environment, 220, 221
controlled diversification (1990–1999), monitoring process, 228
70–75 origin, 219
control mix, 241 performance, 230
cyclical dependence and globalization programming situation, 226
(2000–2011), 75–80 short-term finance, 223
decentralization/divisionalization, 65–70 strategic orientation, 227, 228
formal management control strategic position, 224
1980–1989, 67–68 Broad differentiator strategy, 217
1990–1999, 72–73 Business strategy
2000–2011, 77–78 defenders, 216
GDP growth, 64 prospectors, 215
informal management control
1980–1989, 68–69
1990–1999, 73–74 C
2000–2011, 78–79 Case companies, financial data, 4, 252, 253
management of global operation, 62 Centralisation, 112, 122, 125
operating organization, 62 Chamber orchestras, 263–264
performance British (see British orchestra)
1980–1989, 69–70 business strategy, 215–216
1990–1999, 75 formulating and implementing strategies,
2000–2011, 79–80 218–219
strategic congruence and integrated multilevel effects, 216–218
control, 236 strategic congruence and integrated
strategic development control, 237
1980–1989, 66–67 Swedish (see Swedish orchestra)
1990–1999, 71–72 Coherent organizational structure, service
2000–2011, 76–77 industry, 112–114
Compass project, 201, 202

Management for Professionals, DOI 10.1007/978-3-642-39134-7,
268 Index
Competitive advantage strategic congruence and integrated

performance, 14–16 control, 241–242
service industry model, 108 System Application and Products, 192
Consumer Innovation Programme (CIP), 197 techniques, 192
Consumer-packaging products, SCAP, 145 virtual integration, 193
Contingency approach, 164 Environment, 7–8
Contingency-theoretical research, 245–246 German insurance company, 114
Contingency-theory approach, 4, 60, 62 internal structure and competitiveness,
Control mix, 13, 240–241 238–240
Conventional boxes, SCAP, 145 orchestras, 220–221
Corporate-wide control system, 236 Saab AB, 32–34
Cost benchmark project, 123 Evidence chains, 250
Cost leadership strategy, 217 Exogenous environmental factors, 239
Cost of goods sold (COGS) project, 42 External matching, 5. See also Strategic
Cross-echelon meetings, in Scania’s congruence
management control, 98
Cross-functional meetings, in Scania’s
management control, 98 F
Customer and sales channel service Feasibility test, 143
centre, 127–129 Finance and Business Control Department
Customer satisfaction surveys, 131 (FBC), 179
First in mind-First in choice®, 79, 80
Formal management control mechanisms
D Atlas Copco, 81 (see also Atlas Copco,
Defence & Security Solutions, Saab AB, 31 formal management control)
Display packaging, SCAP, 145 bureaucratic mechanism, 61
feature, 60
vs. informal management control, 61–62
E market mechanism, 61
Electrolux, 262–263 organization’s goals, 61
business strategy, 202–205 perspectives, 60
Consumer Innovation Programme, 197, 199 Functional power, 113
corporate group, 197
corporate strategy, 200–202
corporate structure, 193 G
ERP system, 191–193, 242 Generalizations, 250
financial planning, 198 General model, 4–6
Floor Care business sector, 197 German insurance company, 259–260
Global Product Councils, 198, 199 competitive position, 129–132
ideas, models and information coordination and control systems, 122–126
processing, 205, 206 environment, 114–115
management to activity sharing, 193–195 goals of, 119
Product Management Flow, 198 insurance group, 115
Sector Boards, 199 internal resources and capabilities, 117–122
Strategic Management Accounting, 190 service production, 127–129
top-loading and front-loading washers, 195 German insurance firm, strategic congruence
uniform brand profile, 196 and integrated control, 237
Electrolux Manufacturing Systems Global Purchasing Agreement, 180
(EMS) programs, 194
Endogenous firm-specific factors, 240
Enterprise resource planning (ERP) systems, 12 I
activity-based cost, 193 Industrial controller, 148, 149, 151
decision-makers, 191 Informal management control mechanisms
Index 269
Atlas Copco (see Atlas Copco, informal definition, 165

management control) funding arrangements, 218
feature, 60 intensity of monitoring, 228
vs. formal management control, 61–62 package, 12, 165
perspectives, 60 and strategy, 165
Insurance company, in Germany. See German strategy formation process, 218
insurance company Swedish orchestra, 229
Integrated control, 5, 11–14 Method, 249–264
ERP systems, 12 Modular principles, Scania, 167
integrated information system, 12 Multi-level studies
service industry, 111–112 chamber orchestras, 216–218
Interactive controls, 101 definition, 1
Internal matching, 6. See also Integrated control
International Nickel Company, 29
Inter-organizational controls, 164–167, 239, 245 N
Intra-organizational controls, 164–167 Network-specific factors, 240
Niche differentiator, 217
Non-monetary performance indicators, 146
J
JAS 39 Gripen, 30, 32
Just in time (JIT) production, 111 O
Operationalization and measurement of
variables, 242–245
K ORDERLINE, 150–151
KUPP (a Swedish acronym for Calculation, Outcome controls, 166, 184
Follow-up, Planning and
Forecasting), 46 P
Parental development, 141
Parts per million (PPM) indicator, 172
L Porter’s business strategies, 110
LEAN program, 145, 147, 151–152 Portfolio manager, 17–19, 141
Life and Non-Life Insurance Governing Procter & Gamble’s (P&G) development, 2
Boards, 124 Product Management Flow Gate (PMF Gate), 200
Literature study Purchasing function, 163
data base searches, 254–255 Purchasing strategy, Scania, 168–169
journals, 254
Long-term in-house careers, in Scania’s
management control, 98 R
Loose control system, 228 RAKEL information system, 35
Low horizontal strategic congruence Relevance Debate, 242
management control, 156–158 Research programme, 251–254
organizational test design, 158–159 Return on assets (ROA), Saab AB, 49
organization and strategic congruence, Rolls-Royce, of European truck industry, 168
154–156 Royal Fire Insurance Chamber, 115
M S
Management control Saab AB, 255–256
German insurance company, 122 competition, exposure to, 28–30
package, 240 competitive advantage, 28–30, 49–51
Management control systems (MCS) control mix, 241
British orchestra, 229 customer financing, 42–44
change in mindset, 219 customer principal, 39–42
270 Index
Saab AB (cont.) long-term forecasts, 96

integrated control, 44–48 long-term in-house careers, 98
one Saab, 36–39 metrics, 87, 88, 102, 103
performance, 49–51 modified truck component manufacture, 97
radical change, environment, 34–35 module-based production, 89
ROA, 49 non-financial metrics, 98–99
segments and business units, 30–32 presentation materials, 85
strategic congruence and integrated control, production philosophy, 97
236 responsibilities, 88, 103
strategies and control systems, 32–34 strategic logic, 96
strategy and control, 53–55 strategic updates, cascading of, 100
Sales and production planning process, 2 SCA Packaging (SCAP), 260–261
Scania, 257–258, 261–262 consumer-packaging boxes, 145
behaviour control, 184–186 conventional boxes, 145
business unit strategy, 184–186 display packaging, 145
control mix, 240, 241 feasibility test, 143
cost details, 171 headquarters, 147
inter-organizational relationships, 172 hierarchy test, 144
outcome control, 184–186 management control, 149–153
purchasing strategy, 168–169 market advantage test, 143
social control, 184–186, 239 organizational test design, 153–154,
strategic congruence and integrated 158–159
control, 236 organization and horizontal strategic
strategic focus, 167–168 congruence, 148–149
supplier development, 171 sub-businesses, 142
supplier-relationship management, Silvestro’s service processes, 109
184–186 Social controls, 166, 184
supplier-relationships strategy, Sociological, Technological, Economic,
169–170, 172 Environmental and Political
vs. Volvo 3P, 181–183 (STEEP) model, 7
Scania Production System (SPS), 171 Specialisation, 113
Scania’s management control Stable environment, 7
benefits, 104 STEEP model. See Sociological,
changes in 1992–2006 period, 101 Technological, Economic,
characteristics, 91–93 Environmental and Political
company description, 89–91 (STEEP) model
core values, 85, 94 Strategic congruence, 5, 8–10
corporate identity, 89 and integrated control, 235–238
corporate relationships, 89 SCAP, 148–149
cross-echelon meetings, 98 service industry, 109–110
cross-functional meetings, 98 Strategic preparedness group, 45
customer loyalty, 96 Strategy-MCS model, 164
customer relations, 96 Strategy seminars, 37
cybernetic controls, 101 Supplier Development Group (SDG), 171
decentralised responsibility, 94 Supplier Quality Development (SQD), 178
decision models, 88, 103 Supplier-relationship management, 170, 177
development milestones, 90 Supplier-relationships strategy
financial vs. production contol Scania, 169
integration, 98–99 Volvo 3P, 175–177
industrial and commercial side, 95 Swedish orchestra
influencing employee behaviour, 87–89 Arts Council funding, 222
interactive controls, 101 budget, 230
leadership philosophy, 86, 91 business strategy, 224
Index 271
concerts, 225 Triple bottom-line phenomenon, 15

cost control, 230 Turbulent environment, 7
employment structures, 219
environment, 220
funding arrangements, 223 V
niche differentiator, 225 Volvo, 261–262
origin, 219 output control, 239
performance, 230 Volvo 3P, 174
short-term finance, 222 behaviour control, 184–186
strategic orientation, 227, 228 business unit strategy, 184–186
System Application and Products (SAP), 192 communication, 178
Systems & Products segment, Saab AB, 32 cost openness, 178
Systems suppliers, 169 inter-organizational relationships, 179–180
outcome control, 184–186
purchasing strategy, 175
T vs. Scania, 181–183
Tentative model, 17 social control, 184–186
activity sharer, 20 strategic focus, 174–175
portfolio manager, 17–19 supplier development, 178–179
Tight control system, 228 supplier-relationship management,
Total shareholder return (TSR), 184–186
Saab AB, 50–51 supplier-relationship strategy, 175–177
Toyota-inspired Scania’s Production System, 97

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Management for Professionals

For further volumes:

Strategy, Control and

ISSN 2192-8096 ISSN 2192-810X (electronic)

# Springer-Verlag Berlin Heidelberg 2014

Printed on acid-free paper

Springer is part of Springer ScienceþBusiness Media (www.springer.com)

This book is a consolidation of the research mentioned above, but it is not an

Linköping Erik Jannesson

1 Introduction to the Cases: Theories, Concepts and Models . . . . . . . 1

10 Conclusions and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

Zita Ambrutytė is currently a management consultant in the Mergers and

In 2005 the book titled Understanding competitive advantage: The importance of

E. Jannesson et al. (eds.), Strategy, Control and Competitive Advantage, 1

Table 1.1 Case companies included in the anthology

1.2 The General Model

Environment Strategic congruence Integrated control

External fit Internal fit

No matter what role individual controllers choose to assume, they are of

1.3 The Environment

limitations for firms, and to understand them is important in designing appropriate

1.4 Strategic Congruence

From this quotation, it is evident that strategic congruence is difficult to create

Hence, the production process is often complex and requires extensive

The difficulties of measuring the degree of congruence, however, are consider-

Thus, a sufficiently high degree of matching of strategies at different levels may

1.5 Integrated Control

Integrated control is thus about co-ordinating information within and between

empowerment and integration in a strategic performance measurement system

Clans Values Symbols

Planning Cybernetic Controls

Governance Structure Organisation Structure Policies and Procedures

There are a number of different frameworks that can be regarded as a manage-

control requirements vary depending on differences in the information needs of

1.6 Competitive Advantage and Performance

We have chosen to adopt this perspective and thus to regard competitive

Even though interpreting and analyzing measures of return entails difficulties,

1.7 The Tentative Model

1.7.1 The Portfolio Manager

A Portfolio Manager – commonly known as a conglomerate – is characterized by a

Sub-environment corporate Corporate strategy Management control Manufacturing control

Strategic congruence Integrated control

Sub-environment unit Business strategy Management control Manufacturing control

Business unit level

Strategic congruence Integrated control

Sub-environment function Functional strategy Management control Manufacturing control

External fit Internal fit

1.7.2 The Activity Sharer

An Activity Sharer is characterized by a low degree of diversification and substan-

E. Jannesson et al. (eds.), Strategy, Control and Competitive Advantage, 27

2.2 Exposure to Competition and Its Importance

Chandler’s Strategy and Structure, first published in 1962, provides background

A number of different phenomena in the business environment have thus affected

The limited interest in internal changes is based primarily on the company’s

Above all, he shows that product-related competition affects the importance of

2.3 Saab’s Business and the Changed Environment

Svenska Aeroplan Aktiebolaget (Saab), a company in the defence and security

CEO and corporate staff

Defence & Security Solutions Systems & Products Aeronautics

Saab Aerotech Saab Avitronics Saab Aerosystems

Combitech Saab Barracuda Saab Aerostructures

Saab Grintek Technologies Saab Bofors Dynamics Gripen International

Saab Security Saab Microwave Systems