THE ROLE OF MANAGEMENT CONTROL SYSTEMS IN CREATING COMPETITIVE

ADVANTAGE: NEW PERSPECTIVES*

For the last two decades, management control systems have been conccputaIized in terms of implementing a firm’s strategy. This view falls to recognize,
however, the power of management control systems in the strategy formulation process. Based on a 2 year field study, a new model is presented to show how
interactive management control systems focus 0rganizatIonaI attention on strategic uncertainties. This process is examined in two competing Erms to
illustrate how top managers use formal systems to guide the emergence of new strategies and ensure continuing competitive advantage.

We know surprisingly little about the effects of strategy on management control systems or, alternatively, about how
these systems affect strategy. How do top managers actually use planning and control systems to assist in the achievement
of organizational goals? What formal processes are emphasized at top management levels where responsibility rests for
strategy formulation and implementation? Does the strategy of the firm affect the administrative systems used to set
competitive policies?

Most writing on this subject has been normative and not based on analysis of organizational practices; as a result, the
function of management control described in accounting literature has changed little since Anthony ( 1965) defined
management control in terms of assuring that organizational objectives are achieved. During the 1960s and 1970s
researchers built on Anthony’s work and that of others by attempting to develop the best way to design and use formal
systems to help organizations implement their strategies and objectives

Meanwhile, new directions were emerging in the strategy field. While early normative research had focused on the
processes used by managers to develop successful strategies, descriptive research in the 1970s and early 1980s began to
identify patterns and commonalities in the ways that firms compete in different industries (e.g. Mint&erg, 1973a;
Utterback & Abernathy, 1975; Miles & Snow, 1978; Porter, 1980). The identification of patterns in strategic activity
posed a new question for management control researchers: what is the relationship, if any, between the way a firm
competes and the way that it organizes and uses its management control systems?

The few recent studies that have addressed this question indicate that there are systematic differences in management
control systems among firms that compete in different ways (e.g. Miller & Friesen, 1982; Govindarajan & Gupta, 1985;
Simons, 1987a). But these large sample, cross-sectional studies reveal little about the process of management control in
these firms. The studies begin to provide answers to “how” management control systems differ among firms, but not to
“why” they differ

As part of a broader research program (Simons, 1987b,c), the present study seeks to address this question directly by
focusing on managementprocess as it relates to management control and strategy. The familiar normative approach to
management control describes a feedback process of planning, objective setting, monitoring, feedback and corrective
action to ensure that outcomes are in accordance with plans. Two attempts have been made in the past to link this
framework with strategy. The first is Anthony’s ( 1965, 1988) - strategies are taken as given and management control
systems motivate, monitor and report on their implementation. Another attempt to couple strategy and management
control can be seen in the concept of strategic control. Strategic control has been described as a system to assess the
relevance of the organization’s strategy to its goals, and when discrepancies exist, to highlight areas needing attention
(Lorange & Scott Morton, 1986, p. 10). Although strategic control has been identified as an important topic of strategic
management (Schendel & Hofer, 1979, p. IS), the area has yet to generate a vigorous research program (Shrivastava, 1987).
This failure is due in part to a lack of understanding of the relationship between management control systems and
strategy.

The view of management control presented in this paper differs from the traditional tiamework. My research indicates
that management control systems are not only important for strategy implementation, but also for strategy formation. I
define management control systems, therefore, to recognize that these systems are more than devices of constraint and
monitoring: management control systems are the formalized procedures and systems that use information to maintain or
alter patterns in organizational activity. Using this definition, these systems broadly include formalized procedures for
such things as planning, budgeting, environmental scanning, competitor analyses, performance reporting and evaluation,
resource allocation and employee rewards (Simons, 1987a).

Although most strategy theorists correctly recognize that strategy formulation and strategy implementation are
interrelated ( Andrews, 1980, p. 24) researchers still tend to conceptually separate strategy implementation from strategy
formation. This split has contributed to a lack of understanding of the nature of management control. Separating strategy
formulation and implementation results in an artificial dichotomy that equates strategic planning with formulation and
management control with implementation. The findings from the current study underscore the shortcomings of this
approach by demonstrating the power of management control systems in empowering organizational learning and
interactively inlluencing strategy.

I have three objectives in the discussion to follow. The first is to review the limited crosssectional studies that have
uncovered systematic relationships between management control systems and a firm’s strategy. This literature suggests
that the identification of these patterns remains an important agenda for management control research. Second, based on
extensive field research, a dynamic process model is introduced to describe the use of management control systems at the
top level of the firm. In this model, systems are used by top managers to set agendas for the discussion of uncertainties
that arise as the firm attempts to create competitive advantage. Management control systems are used not only to monitor
that outcomes are in accordance with plans, but also to motivate the organization to be fully informed concerning the
current and expected state of strategic uncertainties. This general model may provide insight in explaining the
fragmented relationships noted in previous empirical studies. Finally, a research agenda is outlined that may provide
further knowledge about the relationship between management control systems and strategy. This leads to a discussion of
some of the methodological issues that have to be addressed in future research.

STRATEGY, COMPETITIVE ADVANTAGEAND MANAGEMENT CONTROL

Before attempting to discuss the relationship between management control and strategy, we mustRrstdifferentiate among a
number of interrelated concepts in the strategy literature: strategy asprocess, strategy ascompetitive position, strategy at the
business level and corporate strategy.

Strategic process describes the managerial activity inherent in shaping expectations and goals and facilitating the work of the
organization in achieving these goals. Many inlluential writers from Barnard (1938) through Andrews ( 1980) have considered
how business leaders should manage organizational processes to gain competitive advantage.

A firm’s strategic position, by contrast, refers to how the firm competes in its markets,i.e. the product and market characteristics
chosen by the firm to differentiate itself from its competitors and gain competitive advantage.Unlike the process analysis, the
positional approach examines the strategic choices made by firms independent of the managementprocess by which those choices
were made; patterns in business unit strategic action are the unit of analysis

Patterns in strategic actions have been identified at both the businesslevel and the corporate level of the firm. Business strategy
refers to how a company competes in a given business and positions itself among its competitors (Andrews, 1980, p. IS).
Defining strategy aspatterns of action (Mintzberg, 1978; Mintzberg & Waters, 1985), this vein of research has de-emphasized the
link between observed strategies and prior, explicit managerial intentions. Research has concentrated instead on uncovering
recurring patterns in the way that firms deliver value to customers.

These recurring patterns have been identified empirically and clustered into strategic archetypes (Table 1provides a summaryof
four illustrative studies that identify and describe strategic archetypes).’ Strategic archetypes demonstrate thatRrmscancompete
successfullyin avariety ofways: for example, superior value can be offered to customers through new product features,high
service levels, outstanding quality or low cost (Porter, 1985).

Other research has investigated patterns in strategic activities at the corporate level of diversified firms. Corporate strategy is
concerned with determining what business(es) the organization chooses to compete in and the most effective way of allocating
scarce resources among businessunits (Schendel & Hofer, 1979, p. 12). Patterns have been identified using typologies that
describe the operating and financialcharacteristicsof the divisions in diversified firms.These typologies are exemplified by
the portfolio approach to corporate strategy popularized by U.S.consulting firms in the 1970s and reviewed in Hamermesh (
1986, pp. 9-l 7)
The research discussed in this paper focuses on the relationship between business strategy (i.e. how afirm achieves competitive
advantage) and the Rrm’s use of management control systems.The analysisconsiders the importance of both strategic process and
strategic position in understanding the role of formal systems.The relationship between control and corporate strategy, while not
a focus of this research, is addressedbriefly in the conclusion of the paper.

Previous studies of strategyand management control

If firms compete in identifiable but different ways, e.g. low cost or product uniqueness,what are the opportunities to design
management control systems in accordance with the strategy of the firm? Three strategy researchers,Miles & Snow (1978) and
Porter (1980), for example, agree that overall cost leadership and Defender strategies require sophisticated cost controls. Other
thanthis simple observation, the strategy studies that have identified strategic archetypes offer little insight into how management
control systems might be designed in different strategic situations.

Studies in other areas,however, are beginning to illustrate how these systems may differ among firms following different
strategies. Khandwalla (1972, 1973) in the first study of its kind, focused on the relationship between formal accounting-
based control systems and the type of competition in an industry. He concluded that increased competition leads to
increased use of management control procedures. This relationship was strongest for product competition, moderate for
marketing competition and weakest for price competition. This study, like others focusing on the relationship between
formal control systems and external environments of the firm (e.g. Gordon 81 Narayanan, 1984; Ewusi-Mensah, 1981;
Hedberg 81 Jonsson, 1978), did not consider the strategies of the firm, but did suggest that control system design was
sensitive to the way that the firm competes.

Miller & Friesen ( 1982) studied the relationship between two strategic archetypes, which they labelled “entrepreneurial”
and “conservative”, and the use of control systems.’ The firms in their sample were split into two strategic groups based
on ratings of innovation and risk taking. The conservative subsample possessed many of the attributes of Miles & Snow’s
( 1978) “Defenders” and Mintzberg’s (1973a) “Adapters”: low differentiation, homogeneous markets and stable
environments. The second subsample was the entrepreneurial firm, similar to Miles & Snow’s “Prospector” and
Mintzberg’s “Entrepreneurial” firms. These Brms experienced more hostile environments and competed through
product differentiation.

Miller & Friesen’s analysis indicates that the strategy of the firm a@ects the way that management controls are used to
either encourage or discourage innovation. Control was positively correlated with innovation for conservative firms and
negatively correlated with innovation for entrepreneurial firms. The authors speculated that conservative firms use
formal control systems to signal market opportunities an&or declining results; as a result, innovation increases. For
entrepreneurial firms, however, control systems flag innovative excess and result in less innovation.

Govindarajan 81 Gupta ( 1985) studied the relationship between corporate strategy and one aspect of management
control - bonus remuneration. The research focused on corporatelevel, portfolio strategies in diversified firms (e.g. build
market share, maximize cash flow, prepare to liquidate business). Govindarajan & Gupta concluded that long run
evaluation criteria and subjective, non-formula bonus calculations are effective for businesses following a “build”
strategy, but detrimental to business units pursuing a “harvest” strategy.

Building on the Miles & Snow (1978) typology, Simons ( 1987a) studied firms classified as either Prospectors or Defenders
to determine whether management control systems differ between the two groups. Using concepts derived firorn the
management control literature, factor analysis was used to reduce questionnaire scales to ten dimensions of management
control.

Statistical analysis and interview data indicated that control systems differ systematically between Prospector and
Defender firms. Successful Prospectors use a high degree of forecast data in control reports, set tight budget goals and
monitor outputs carefully. Cost control is reduced. Moreover, large Prospectors emphasize frequent reporting and use
uniform control systems that are modified frequently. These results led to speculation that Prospectors use their
management control systems intensively to monitor uncertain and changing environments. Defenders, by contrast, use
management control systems less actively. Negative correlations were calculated between profit performance and
attributes such as tight budget goals and the monitoring of outputs. Defenders, operating in stable environments,
emphasize bonus remuneration based on achieving budget targets and report little change in their control systems over
time.
DISCUSSIONAND CONCLUSION

The model presented in this paper departs from the traditional analysis of “fit” between formal systems and critical
success factors. Instead, new concepts are introduced to link management control systems with competitive advantage.
The research underscores the importance of the dynamic relationship between formal process and strategy: competitive
strategic positioning, management control and the process of strategy-making play one upon the other as the firm evolves
and adapts over time. The analysis shows that interactive management control processes can be used to manage emergent
strategy: rather than focusing on what the organization already understands and does well, these systems direct
organizational attention to emerging threats and opportunities.

Theories of information provide additional perspective to the ideas presented in this paper. Language theorists
differentiate between rules that constrain and those that open up new realms of activity (Campbell, 1982, p. 128). The
latter type of rule is capable of generating variety, novelty, and surprise. This distinction is analogous to that between
programmed and interactive controls. Campbell (1982) illustrates the power of fixed rules in producing unpredictable
amounts of complexity as information and meaning is generated. The necessity of structure to produce meaning a concept
fundamental to theories of information and language, is echoed in the way that managers use structured, formal process
interactively to motivate organizational learning. “Structure and freedom,” summarizes Campbell, “like entropy and
redundancy, are not warring opposites, but complementary forces” (p. 264).

Top managers use formal process to gain maximum advantage from these forces. These managers know that decisions
and actions affecting current strategies will emerge from all corners of the organization; their primary job is to provide
guidance, resources and incentives tomotivate the organization to gather and interpret new information so that the
organization can respond and adapt. Energy is channelled and directed by the interactive process; formal management
control systems provide a common language. The organization is energized: momentum is created to exploit existing
strategies and to anticipate strategic uncertainties. Information is shared and interpreted. Action plans are tested. New
strategies emerge.

Our analysis suggests that caution is necessary in interpreting previous studies that have focused on strategy and control.
Cross-sectional studies such as Khandwalla ( 1972, 1973) and Miller & Friesen ( 1982) were conducted using a single
measure for control that was computed as the simple average of the importance of various aspects of a firm’s
administrative controls system. Thus, scores to represent the use of cost control and variance analysis, formal appraisal of
personnel, capital budgeting techniques and flexible budgeting were averaged to produce one summary index. The
process model developed here, however, suggests that it is not the mean value that is of importance, but rather the
distribution of management attention among the various control subsystems.

Studies that have decomposed control systems into constituent elements support the process model presented in this
paper. Govindarajan & Gupta (1985) noted that subjective bonus systems were beneficial for emerging businesses
following “build” strategies, but detrimental to businesses in a “harvest” mode. Interactive reward systems based on
subjective evaluation of effort are appropriate for firms that need to motivate organizational learning in rapidly changing
environments and where rewarding team effort is important - typical conditions of firms in a growth phase. This
approach is costly, however, and generally uneconomic for businesses in slow decline.

Simons ( 1987a) found that Prospectors generally use a lot of forecast data, set tight budget goals, monitor outputs
carefully and emphasize frequent reporting with uniform control systems. Like company B, the prototypical Prospector
faces strategic uncertainties owing to rapidly changing product or market conditions; interactive management control
systems such as planning and budgeting are used to set agendas to debate strategy and action plans in these rapidly
changing conditions. Defenders, by contrast, use planning and budgeting less intensively. Like company A, which
operates in a relatively stable environment, many aspects of the business that are important in terms of current
competitive advantage are highly controllable and managers need only focus on strategic uncertainties - often related to
product or technological changes that could undermine current low cost positions.

Further research must also be sensitive to the unit of analysis. This study has focused on business strategy. But what are
the process relationships between management control systems and corporate strategy? Recently, the portfolio
management approach that has been the cornerstone of corporate strategy has been strongly criticized (Porter, 1987).
The ability of diversified firms to add value through portfolio techniques is argued to be increasingly limited in today’s
efficient capital markets. In terms of the process model presented here, a strategic uncertainty for the diversified firm is
the appropriate allocation of resources among diverse business units. Given the scarce attention of top mangement,
focusing attention on portfolio allocations may limit the attention that can be accorded to business-related aspects of
management control to the detriment of organizational learning and effective strategy making

This research offers a new perspective for understanding how and why firms make the design choices that we observe in
practice. But there are many other questions to be answered. How do managers identify strategic uncertainties? What
types of interactive management controls’ are used by managers in different organizations? Do patterns exist among
firms following similar strategies? Are strategic uncertainties unique to each tkn or do patterns exist across firms?
Research to answer these questions is ongoing and some further results are reported in Simons (1987c).

Management theoriests must strive to understand better the dynamic relationship between strategy and management
control processes. This means not only recognizing that strategy formation and implementation are intertwined, but also
opening up the meaning of management control to a broader notion that builds upon guidance rather than coercion, and
on learning as well as constraint. We need, in fact, a better language to describe management control processes. Control
systems are used for multiple purposes: monitoring, learning, signalling, constraint, surveillance, motivation and others.
Yet, we use a single descriptor – management control systems - to describe these distinctly different processes. Eskimos
use precise words to describe diflFei:nt types of snow and sailors have specialized words for ropes that perform different
functions. Management control theorists also need a precise vocabulary to develop and communicate the concepts
necessary to describe complex organizational phenomena.
A PROCESS MODEL

Casual observation suggests that all large, complex organizations have similar types of management control systems.
Short and long range plans, Bnancial budgets, capital budgets, variance analyses and project reporting systems are
common place tools in virtually every large, professionally managed corporation. But the illustrative example presented
above shows that there are distinct differences in the way that management control systems are used at top management
levels in different firms. How can we explain the differences in management control systems between company A and
company B? How do these differences relate to their strategies?

The answer lies in how and why top managers choose to personally monitor certain management control systems and to
delegate other aspects to subordinates. Four concepts are used to develop the model: limited attention of managers;
strategic uncertainties; interactive management control; and organizational learning.

Limited attention
Interviews conducted during this research reveal that managers have neither the time nor the capacity to process all the
information available to them. ‘Iwo concepts, well established in the literature, support this observation. First, managers
are rational only within cognitive boundaries (Simon, 1957). Mind is a scarce resource (Williamson, 1986, p. 5) and must
be viewed as a constraint on the information processing capabilities of managers. Second, top managers must engage in
many concurrent activities. Mint&erg ( 1973b) argues that top managers have ten working roles including that of
figurehead, leader, liaison, monitor, disseminator, spokesman, entrepreneur, disturbance handler, resource allocator and
negotiator. Decision-related activities represent only a subset of the activities of top managers; interpersonal and
informational roles are equally important.

The concept of limited attention has important implications for management control. A multitude of activities demand
attention - appearing at outside functions, speeches to employees, reading reports, making and ratifying decisions,
evaluating employees, planning for succession - and daily choices must be made. Thus, only limited subsets of the
organization’s formal management control process can have the attention of top management; most areas of management
control are delegated, by necessity, to subordinates.

Strategic uncertainties
Because of these attention constraints, top managers report that they implicitly rank the set of activities they monitor
from most critical to least critical: this ranking allows top managers to attend to strategic uncertainties-uncertainties that
top managers believe they must monitor personally to ensure that the goals of the firm are achieved.

Although firms competing in the same industry face the same set of potential uncertainties (changes in government
regulation, intensity of competition, advance of new technologies, nature of customers and suppliers, product life cycles
and diversity in product lines), the strategy of the firm strongly influences which uncertainties are critical to the
achievement of chosen objectives.5 For example, managers in company A believe that they can only sustain their low cost
position if their products evolve to offer superior efficiency to users. The strategic uncertainties that top managers in
company A monitor personally, therefore, relate to potential changes in product technology that yield superior cost-in-use
benefits to customers.

Although company B faces the same set of potential uncertainties as company A, its strategy has resulted in diiferent
strategic uncertainties. Top managers in this firm monitor the choice of appropriate competitive responses for its various
operating companies that compete through aggressive marketing tactics and new product introductions.

Interactive management control

Top managers must decide which aspects of management control systems to use interactively and which aspects to
program (Simons, 1987b). Management controls become interactive when business managers use planning and control
procedures to actively monitor and intervene in ongoing decision activities of subordinates. Since this intervention
provides an opportunity for top management to debate and challenge underlying data, assumptions and action plans,
interactive management controls demand regular attention from operating subordinates at all levels of the company.
Programmed controls, by contrast, rely heavily on stti specialists in preparing and interpreting information. Data are
transmitted through formal reporting procedures and operating managers are involved infrequently and on an exception
basis.
Modern companies have many different types of management control systems. How do top managers decide which
systems to make interactive and which to program? Top managers will choose to make a management control system
interactive if the system collects information about strategic uncertainties. The selected interactive system can then be
used by top managers for three functions: signalling, surveillance and decision ratification.

Signalling is the use of information to reveal preferences (Spence, 1974; Meyer, 1979). Signalling is necessary since top
managers cannot always know when or where the impetus for important policy decisions will originate, how or why a
decision will be made, or by whom. The decision process is diffuse with inputs from multiple actors over a protracted time
period (Pinfield, 1986; Leifer & White, 1986; Burgelman, 1983…. For this reason, top managers do not know ex ante, and
often not even ex post, who in the organization initiates and fosers important policy decisions. By using interactive
management controls to monitor strategic uncertainties, top managers reveal theis values and preferences to the many
individuals in the organization who have input in decision processes.

Survellance is the search for surprises; interactive management controls provide guidance to organizational members as
to where to look for surprises and what typesof intelligence information to gather. Feldman & March (1981) describe this
function.

……………..

Finally, decision ratification by top managers (as distinct from decision making) is necessary when any strategic policy
decision commits the organization and its resources. Interactive management controls allow top managers to be fully
informed about such decisions throughout the organization.

Organization Learning

The final concept needed to complete the analysis is organizational learning. Organizational learning describes the ways
that organizational learning describes the ways that organizations adjust defensively to reality and use knowledge to
improve the fit between the organization and its environment.

……………

Applying the model

Since company A and company B compete in the same industry, each firm faces the same set of potential uncertainties
(Fig. 2). From this set of potential uncertainties, top managers of each firm have identified strategic uncertainties that
relate to their company’s individual strategy. From interviews at company A, it is clear that top managers believe that the
major strategic uncertainty facing the firm is new product technologies or attributes that could shift existing low cost
advantage. They recognize that company A’s success derives from continually providing customers with products that
offer low end-use cost: new, more efficient product technologies of competitors and changes in buyer needs are potential
threats.

To manage these strategic uncertainties, top management has made a limited subset of management controls interactive
and programmed other controls. The program review system, which operates from the lowest organizational level to the
CEO’s office, is an example of an interactive management control system that is a major information source for both top
management and all operating managers in the company. Programs focus on ways to improve value for customers (“cost
improvement with equal or better quality”), new technologies that build on existing product lines and product
enhancements to help customers be more efficient. Programs typically have the potential of affecting a wide range of the
company’s products and therefore cut across formal organizational boundaries.

Managers in company A know, by the emphasis that top management puts on the review of selected programs, which
aspects of the business are considered critical to long term organizational success. For each program, information is
continually gathered throughout the organization, agendas are set to review progress and new information, and changes
and surprises are rapidly communicated. The organizational learning engendered through the interactive management control
system is a powerful intIuence on strategy making.

The CEO of company A described how new strategies emerge from the process, “I really work those programs. Everyone
understands how important they are. New initiatives are not decided as part of the planning process, but as part of the program
review process. The Capital Expenditure Committee is not doing strategic thinking about programs - they just say “yes” when a
proposal is developed out of a program review and someone comes to them asking for money. In fact, many of our new programs
arise out of the review process. As we sit and discuss these things,someone will have a bright idea for product enhancement or a
new way of doing something. This often leads to new programs which can eventually take us into new technologies or open up a
whole new group of products.”

Top management atcompanyA pays little dayto-day attention to aspects of the firm’s management control systems that do not
relate to strategic uncertainties. Long range planning is programmed and is not an agenda item for top management: strategies
throughout the Iirm are clear and consistent.Profit planning andbudgeting, an annualevent orchestrated by staffdepartments, are
not interactive because the environment is relatively stable and well understood; top managers do not need to rely on these
systems to motivate the organization to constantly scan changes in the market. The rewards system is also programmed since
bonuses are determined largely by reference to quantitative targets and require minimal attention from top management. Even
aspects of management control systemsthatare associated with the success of current strategies, i.e. so-called “critical success
factors”, are programmed and delegated to staff specialists

The programming of critical successfactors is apparent in the way that top management at company A deal with manufacturing
and logistical operations - clearly critical success factors for this low cost producer. Every Wednesday at 10:00 a.m.,a 20 minute
meeting is held with 15 key managers, chaired by a member of the top management group. Conversation focuses on one sheet of
paper that reviews twelve product categories in terms of unit sales, inventory levels, backorders, service levels and quality control
release times - all against target. The chairman described the meetings, “we run the day-to-day operations by focusing on things
off track If there is a problem, the individual had better have the answer before he walks in.In this way, we canreview the entire
businessin twenty minutes each week. We have become very good at understandingwhat we were looking at so we can just do
it.”

Because company B follows a diRerent strategy, its top managers focus on digerent strategic uncertainties. By competing through
product innovation rather than price and efficiency, top managerswant their organization to focus on marketing tactics that can
exploit new product development and thereby build market share or open new markets.Top managers perceive strategic
uncertainties that relate to the timing of new product introductions and the defensive actions of competitors. Accordingly, the top
managementof company Bhaschosen to make planning and budgeting highly interactive and tactical.

The development and discussion of 5 and 10 year plans,for example, is an important agenda for top management and, by
Implication, for all operating managers in company B. Each year, plans for each operating unit are revised with reference to the
previous year’s plan; product life cycles are carefully monitored. All anticipated changesare coupled with action plansthat focus
on marketing tactics andthe timing of new product introductions - both strategic uncertainties for company B. These plans,which
are based on environment, competitor and technology assessments,are prepared, challenged and debated over a period of several
months each year by successive levels of operating managers until they are debated at the Executive Committee level. Staffunits
play no role in thisprocess. The highly interactive natureof long range planning results in intense organizational learning about
changes in the competitive product mar kets and ideas on how to react offensively to these threats and opportunities. From
these discussions, new strategies emerge.

Top management has also made profit planning and budgeting interactive at company B by focusing attention, almost
continuously during the year, on budget changes and action plans to deal with changed conditions. Managers use this
bottom-up process not as a financial exercise, but rather to set agendas to debate current and future product/market
strategies in the company’s changing markets. Budget discussions throughout the year revolve around unanticipated
changes in the competitive environment, marketing tactics to preempt competitor actions, and the type and timing of new
product developments. Managers point out that they are planning and budgeting so frequently and with so much
discussion about appropriate tactics and targets that it is unnecessary to formally issue corporate goals. One top manager
elaborated, “the feeling that we are forever planning is due to the fact that you never have the luxury of putting the plan
on a shelf- it forces you to continually look at your mistakes and learn how to do better next time.”

The reward system at company B has been made interactive and thus also demands a great deal of attention from
managers throughout the organization. Managers cannot rely on a formula, but must rather attempt to subjectively
assess each individuals contribution in rapidly changing market environments. Rewarding effort rather than results
requires evaluators to understand competive business environments, potential opportunities and constraints, and the
range of action alternatives available to subordinate managers. This information gathering process generates learning
about strategic uncertainties and about possible new tactics and strategies.

Like company A, the top managers at company B are not normally involved in controls that do not focus on strategic
uncertainties. The review of detailed cost information is programmed and is not an agenda for top management.
Efficiency programs are typically overseen by staff groups. As a top manager stated, “I leave the analysis of variances,
etc., to the financial people. I let them bring any problems to me. I don’t check it or get involved in it myself.” Even
programs for new product development, a critical success factor, are managed at the local operating company without
regular attention Ram top mangement; given limited attention, top management chooses to focus instead on the strategic
uncertainties that arise from the actions of competitors.

Managers in each of these firms have made certain management controls interactive and programmed others. This
phenomenon is not limited to these two companies, but was observed also in the other 14 companies in the sample. One
CEO captured the spirit of the phenomenon, “we can have all the formal processes in the world and some of these,
frankly, I don’t give a damn about and others I do. And everyone understands the difference.