The Effects of the Diagnostic and Interactive Use of Management Control Systems on the Strategy-Performance Relationship

AbstractIn recent years there has been an increased interest in examining the relationships among management control systems (MCS), business strategy and organizational performance. In this study, the moderating effects created by two uses of MCS (diagnostic use and interactive use as per Simon's 'levers of control' framework) on strategy-performance relationship are examined.The results of the survey-based research support the postulate that these two uses moderate the relationship between business strategy and performance. However, it is found that the moderating effect created by the diagnostic use of MCS is more significant when the cost leadership strategy is used for performance.No evidence is found in favor of Porter's proposition on mutual exclusiveness of business strategies for better performance. Consequently, the results of this study have important implications for both management practice and the academic literature.KeywordsManagement Control SystemsStrategyPerformanceIntroductionIn recent years, both managerial accounting practice and research have taken a more strategic approach by focusing on potential associations among management control systems (MCS) and strategy for better organisational performance in different organisational contexts (Ittner and Larcker, 2001; Tucker et al, 2009). Evidence by Kaplan and Norton (2001) within the framework of the Balanced Scorecard (BSC) showed several organisations achieving performance breakthroughs by implementing and using MCS in congruence with organisational strategies. Langfield-Smith (1997) had observed that much of the empirical research in this area followed a contingency approach and involved a search for systematic relationships between specific elements of the MCS and the particular strategy of the organisation.Case studies, on the other hand, have tended to investigate the role of MCS in supporting and influencing the strategic processes within organisations (Langfield-Smith, 1997). In spite of the growing interest in the relationship between MCS, strategy and organisational performance, the picture presented in the literature is found to be incomplete, so that Tucker et al (2009) suggest that as at the mid- 2000's the MCS-strategy-performance relationship remained largely unexplored, little documented or understood.Decision Making Context and Motivation for the StudyThe focus of this paper is on the use of MCS rather than its design. As per the extant literature, MCS are predominantly subject to two types of use by management, namely diagnostic use and interactive use of MCS (Henri, 2005; Simons, 1995). These two types of uses determine the way that managers use their control systems to monitor organisational performance. Chenhall (2003), Simons (1995), Abernethy and Brownell (1999) have concluded that studies which attempt to understand the relationship between MCS and strategy should focus less on the extent of MCS use, and more on the manner in which management uses MCS. This paper therefore examines the influence of diagnostic and interactive uses of MCS on the relationship between strategy and organisational performance.It is also important to note that the nature of relationships available among MCS, strategy and organisational performance are contingent upon the organisational context. According to Wickramasinghe and Hopper (2005) only a limited amount of research has been done in the area of MCS and strategy by collecting data from organisations which are operating in less developed countries (LDCs). Thus, this current study is the first empirical research conducted based on data collected from Sri Lanka exploring relationships among uses of MCS, strategic capabilities, competitive strategies and organisational performance.Research Problem and ObjectivesThis research aims to examine the problem of "how do the uses of MCS influence the relationship between business strategies and organisational performance". …