Effective integration of management control systems for competing in global industries

Shogo Kimura and Panos Mourdoukoutas

1. Introduction
As non-human resources have become increasingly transferable in global industries, many business strategists have come to recognize that sustainable competitive advantages can no longer be based on the acquisition of such resources. Conventional strategies that focus on the acquisition of technology and logistics for the purpose of cutting of costs or adding marginal features to existing products, for instance, are not sufficient to give a company a sustained edge over its competitors. Sooner or later they can be easily imitated by its competitors. Instead, business strategies have been turning their attention to the acquisition of non-human resources, especially in the development of company-specific human capital that cannot be easily transferred across companies. But developing human capital and turning it into a source of sustainable competitive advantage takes effective management control systems, not just in the narrow sense of monitoring employee performance, but in the broad sense of a system of beliefs, boundary systems and incentives that cultivate both employee conformity and creativity (Simons, 1995). Extending Simon's work, the remainder of the paper takes a close look at the conventional and modern competitive strategies and proposes an effective management control framework in three sections. The second section is a review of the conventional and modern competitive strategies. The third section is a discussion of the positive and the negative effects of management control systems, and the fourth section is a discussion of a proposed effective management control system.

The authors Shogo Kimura is Associate Professor, School of Life Studies, Department of Social Sciences, Sugiyama University, Japan. Panos Mourdoukoutas is Professor of Economics, Department of Economics, Long Island University, USA. Keywords Strategic management, Competitive advantage, Participation, Control systems, Entrepreneurialism Abstract Extending Simon's (1990) work, this paper proposes an effective management control system that allows companies to integrate different management control systems in order to improve operational effectiveness, employee creativity, and company competitiveness. Reviews conventional and modern competitive strategies and discusses both positive and negative effects of management control systems. Argues that to be effective, diagnostic management systems must be supplemented by boundary control systems, interactive control systems, and belief systems. Effective integration of the four different management control systems, it is argued, is dependent on companies applying them in a way that maximises operational effectiveness without limiting employee creativity. The importance of starting the design of a management control system with the specification of a system of beliefs which defines the company's values and direction is highlighted. Electronic access The current issue and full text archive of this journal is available at http://www.emerald-library.com

2. Sustainable competitive advantages: resources and control

The intensification of competition in recent years has revived the interest in the concept of ``sustainable competitive advantage'', i.e. in the ways a company can develop competitive strategies that cannot be imitated by the competition. Traditionally business strategists have identified three alternative forms of competition: (1) operational effectiveness (cost and quality competition); 41

European Business Review Volume 12 . Number 1 . 2000 . pp. 4145 # MCB University Press . ISSN 0955-534X

Effective integration of management control systems

Shogo Kimura and Panos Mourdoukoutas

European Business Review Volume 12 . Number 1 . 2000 . 4145

(2) development of different products (product competition); and (3) an in-between strategy, market focus (focus competition). But as these strategies have by now become a standard for major competitors, business strategists have been trying to refine them into more subtle ways of competition, which cannot be easily transferred across companies. Prahalad and Hamel (1990), for instance, argue that a company's competitive advantage should build on ``core competencies'' which are far more difficult to imitate than the traditional strategies. Chan Kim and Renee Mauborgne (1997) argue that, to be sustainable, product differentiation should add real value to existing products rather than marginal alterations. Constantine Markides (1997) argues that product differentiation and focus should be ``strategic'', i.e. entrepreneurial, discovering consumer trends and finding novel ways to satisfy them. Emphasizing strategic competition, Michael Porter (1996) also argues about the importance of ``entrepreneurial edge'', but he adds that differentiation and focus should be based on activities rather than products, on ``deliberately choosing different activities to deliver a unique mix of value''. But how do entrepreneurs discover business opportunities? How do they decide which opportunities to pursue? How do they keep ahead of the competition? As is the case with many discoveries, entrepreneurial discoveries are either a matter of good luck or a matter of systematic search based on integrated knowledge, i.e. knowledge that combines technology and market information. And since good luck is not always on the same side, it is hard to argue that a company can consistently achieve sustainable competitive advantages just on the base of luck alone. But it is not so hard to argue that systematic search based on knowledge integration leads to sustainable competitive advantages (Iansiti and West, 1997; Powell and Dent-Meicallef, 1997; Pankaj Ghemawat, 1995; Forrest, 1996; Ross et al., 1996). But technology and market information is scattered both inside and outside company boundaries. Technology information, for instance, can be purchased in the market, produced internally or in cooperation with other companies, research institutes and universities. Likewise, the 42

market information can be acquired through the market, by tapping into private market research databases or it can be gathered internally with the cooperation of the marketing and sales departments, distribution centers, and suppliers and customers. But what does it take to integrate technology and market information? Integrating technology and market information requires a necessary and a sufficient condition. The necessary condition is the acquisition and installation of hardware technologies, i.e. information and telecommunications hardware, such as Internet, intranets, group-ware, and videoconferencing, technologies that allow corporate members to share information and logistical support instantly. The sufficient condition is the development of effective management control systems, i.e. managerial practices that match hardware technologies with human resources and discover and exploit new business opportunities, especially in high-technology industries that rely on employee-creativity. As Cusumano (1997) puts it: ``While having creative people in a high-technology company is important, it is often more important to direct their creativity.'' Hardware technologies certainly are transferable across companies. Information and telecommunication networks can be purchased in the market and installed in every company. In fact, the use of hardware technologies in the internal and external communication is no longer an option but a requirement for competing in a global economy. What has not, and cannot, be transferred across companies is the management control practices that match human resources with technologies: ``Competitiveness depends crucially on how enterprises organize themselves, how they use and develop the human resources available to them, how they match technology and workers, and their relationship to suppliers and customers and to other firms'' (Vickery and Wurzburg, 1996, p. 17). In short, competing in global industries takes more than hardware technologies. It takes management control systems that develop and match human resources with technologies for the discovery and exploitation of new business opportunities, an issue to be further addressed in the next section.

Effective integration of management control systems

Shogo Kimura and Panos Mourdoukoutas

European Business Review Volume 12 . Number 1 . 2000 . 4145

3. Management control systems and competitiveness

Conventionally, the term ``management control systems'' refers to the deployment of various techniques in hierarchical organizations in order to monitor and measure employee performance against certain management targets. In this sense, conventional management control systems focus on improving operational effectiveness. But as operational effectiveness is no longer sufficient to create sustainable competitive advantages, management control systems must be expanded to managerial practices that cultivate employee cooperation and creativity in the discovery and exploitation of new business opportunities. This is especially the case in the high-tech industries that are at the forefront of globalization and employee teams must combine efficient communication with creativity. ``Project managers and product designers in software and other industries thus need to find ways to divide up products and tasks so that even teams of hundreds of talented people can work and communicate efficiently as well as creatively'' (Cusumano, 1997, p. 10). Arguing along the same lines, Simons (1987, 1990) classifies control systems in four categories: (1) diagnostic control systems; (2) boundary control systems; (3) interactive systems; and (4) belief systems. Diagnostic systems are the same as the conventional control systems applied in hierarchical organizations discussed above. They include managerial techniques to measure and monitor employee performance and have both positive and negative effects on employees. On the positive side, management control systems such as budget control or performance measures that set targets can assist employees to acquire and improve their skills and knowledge. On the negative side, such management control systems may discourage employee initiative, i.e. employees may be reluctant to pursue any activity outside the targets set by the management. In this sense, diagnostic management control systems may contribute to operational effectiveness, but deter employee creativity with far reaching consequences for a company's competitiveness. 43

Less strict than diagnostic systems, boundary control systems set the bounds, the parameters within which employees can act. In this sense, boundary control systems are general guidelines, avenues that employees are allowed to take or not to take rather than strict management directives. As such, boundary controls empower employees to use their own judgement and discretion in making decisions, even to attempt new things. In this sense, boundary controls can contribute both to operational effectiveness and employee creativity, enhancing the company's competitiveness. Supplementing boundary control systems, interactive control systems include management practices that allow employees to interact with each other so as to assimilate new information and to keep up with ever changing market and technological conditions. This is particularly the case in high technology industries such as software development. ``If the underlying technologies and user needs are evolving very rapidly, product development teams must often invent or innovate in designs as they develop a product and show features to potential users and then respond. This has been the case with software for personal computers, especially for Internet applications'' (Cusumano, 1997, p. 10). Such practices can be further reinforced by a system of beliefs and values that create what UK sociologist Robert Cole once called, ``Community of fate'', i.e. the feeling that all employees share the same economic destiny. In short, conventional diagnostic management control systems can have both positive and negative effects on a company's competitiveness. On the positive side, they motivate employees to work hard to achieve certain objectives set by the management. On the negative side, they deter employee creativity. To be effective, diagnostic management systems must be supplemented by boundary control systems, interactive control systems, and belief systems. But how can all four systems be integrated effectively?

4. Effective management control systems

To integrate the four different management control systems effectively, companies must apply them in a way that maximizes

Effective integration of management control systems

Shogo Kimura and Panos Mourdoukoutas

European Business Review Volume 12 . Number 1 . 2000 . 4145

operational effectiveness without limiting employee creativity. This task can be accomplished by using diagnostic measures as a way to improve operational effectiveness and the other three types of control measures as a way to mitigate its negative effects on employee creativity. Specifically, the design of an effective management control system must start with the specification of a system of beliefs which defines the company's values and directions (see Figure 1). Such a system of beliefs can in turn be used together with interactive control systems to refine market information and set both performance and business conduct guidelines. Performance guidelines can in turn be used with diagnostic control systems to improve operational effectiveness while business conduct guidelines can be used together with boundary control systems in order to improve creativity. Though hard to test empirically the effectiveness of such a framework, studies of leaders in high tech industries such as
Figure 1 Effective management control systems

Microsoft Corporation provide support for this framework. In ``How Microsoft makes large teams work like small teams'', for instance, Cusumano (1997) identifies several key elements of Microsoft's human resource strategy that are consistent with our proposed framework of integrating various control systems. Microsoft starts with a clear vision regarding the products to be pursued and the ways business should be conducted (system of beliefs and boundary systems), and proceeds with the specification of certain input and output targets and sets standards to monitor them (diagnostic systems). Frequent communication within and across teams allows employees the flexibility to adjust their design to changes in technical or market information (interactive systems). In short, to integrate various management control systems, corporations must begin with a system of core values and a mission that defines its character and sets its long-term direction, proceed with the establishment of interactive control systems that filter market

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Effective integration of management control systems

Shogo Kimura and Panos Mourdoukoutas

European Business Review Volume 12 . Number 1 . 2000 . 4145

information and shape performance and conduct guidelines, and end up with diagnostic and boundary control systems that improve efficiency and creativity, improving competitiveness.

Summary and conclusions

As competition in global industries intensifies, the traditional competitive strategies that are based on operational effectiveness are no longer sufficient to create sustainable competitive advantage. They must be supplemented by strategies that cultivate collective entrepreneurship, i.e. strategies that empower employees to discover and exploit new business opportunities. To pursue such strategies successfully, companies must integrate successfully four different control systems, the beliefs system, the interactive system, the diagnostic system, and the boundary system. The beliefs system should be used to define a corporation's character and mission and to set guidelines both for performance targets and for acceptable employee behavior in pursuing such targets. The interactive system should be used to adjust the company guidelines to changing market conditions, while the diagnostic and the boundary systems should be used to set standards for improving efficiency and creativity.

Porter, M. (1996), ``What is strategy?'', Harvard Business Review, November/December. Powell, T. and Dent-Meicallef (1997), ``Information technology as competitive advantage: the role of human, business and technology resources'', Strategic Management Journal, Vol. 18 No. 5. Prahalad, C. and Hamel, G. (1990), ``The core competencies of the corporation'', Harvard Business Review, Vol. 68 No. 3. Ross, J. et al. (1986), ``Develop long-term competitiveness through IT assets'', Sloan Management Review, Fall. Simons, R. (1987), ``Accounting control systems and business strategy: an empirical analysis'', Accounting, Organizations and Society, Vol. 12 No. 4. Simons, R. (1990), ``The role of management control systems in creating competitive advantage: new perspectives'', Accounting, Organizations and Society, Vol. 15 Nos. 1-2. Simons, R. (1995), ``Control in an age of empowerment'', Harvard Business Review, March-April. Vickery, G. and Wurzburg, G. (1996), ``Flexible firms, skills and employment'', The OECD Observer, p. 17.

Further reading
Anthony, R.N., Dearden, J. and Bedford, N.M. (1989), Management Control Systems, 6th ed., Irwin. Dollar, D. and Wolff, E.N. (1993), Competitiveness, Convergence, and International Specialization, The MIT Press. Giovanni, B.G. and Bedeian, A.G. (1974), ``A conspectus of management control theory'', Academy of Management Journal, June. Gnan, L. and Songini, L. (1995), ``Management styles of a sample of Japanese manufacturing companies in Italy'', Management International Review. Gupta, V. and Kumon, H. (1996), ``A dynamic model of Japanese investment system'', Journal of International Economic Studies, No. 10. Hamel, G. and Prahalad, C.K. (1994), Competing for the Future, Harvard Business School Press. Haslam et al. (1996), ``A fallen idol? Japanese management in the 1990s'', Asia Pacific Business Review, Vol. 2 No. 4, Summer, special issue. Manager Update (1994), ``From lean production to lean enterprise'', Editorial, Vol. 6 No. 1, Autumn. Manager Update (1996), ``Managing out of bounds'', Editorial, VoI. 8 No. 1, Autumn. Mourdoukoutas, P. (nd), ``The global corporation: the decolonization of international business'', unpublished manuscript. Mourdoukoutas, P. (1997), ``Do Japanese companies have a strategy?'', presented at Nagoya University, July. Porter, M.E. (1979), ``How competitive forces shape strategy'', Harvard Business Review, March-April. Porter, M.E. (1980), Competitive Strategy, The Free Press. Porter, M.E. (1985), Competitive Advantage, The Free Press.

References
Cusumano, M. (1997), ``How Microsoft makes large teams work like small teams'', Sloan Management Review, Fall. Forrest, J. (1996), ``Japanese/US technological alliances in the biotechnology industry'', R&D Management, Vol. 24 No. 2. Ghemawat, P. (1995), ``Competitive advantage and internal organization: Nucor revised'', Journal of Economics and Management, Vol. 3 No. 4. Iansiti, M. and West, J. (1997), ``Technology integration: turning great research into great products'', Harvard Business Review, May-June. Kim, C. and Mauborgne, R. (1997), ``Fair process: managing in the knowledge economy'', Harvard Business Review, July-August. Markides, C. (1997), ``Strategic innovation'', Sloan Management Review, Spring.

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