Accounting, Organizations andSociety, Vol. 15, No. 112,pp. 127-143, 1990. 0361-36B2/90 t3.00+.

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Printed in Great Britain Pergamon Press plc

THE ROLE OF MANAGEMENT CONTROL SYSTEMS IN CREATING COMPETITIVE

ADVANTAGE: NEW PERSPECTIVES*

ROBERT SIMONS
Harvard University Graduate School of Business Administration

Abstract

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 plan-
ning and control systems to assist in the achieve-
ment of organizational goals? What formal pro-
cesses are emphasized at top management levels
where responsibility rests for strategy formula-
tion and implementation? Does the strategy of
the firm affect the administrative systems used to
set competitive policies?
Most writing on this subject has been norma-
tive and not based on analysis of organizational
practices; as a result, the function of manage-
ment control described in accounting literature
has changed little since Anthony ( 1965) defined
management control in terms of assuring that or-
ganizational 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 com-
monalities in the ways that firms compete in dif-
ferent industries (e.g. Mint&erg, 1973a; Utter-
back & Abernathy, 1975; Miles & Snow, 1978;
Porter, 1980). The identification of patterns in
strategic activity posed a new question for man-
agement control researchers: what is the rela-
tionship, if any, between the way a firm com-
petes 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

*For comments on an earlier draft of this paper, I wish to thank my colleagues Robert Anthony, Chris Argyris, Joseph Bower,
C. Roland Christensen, Evelyn Christiansen, Robert Eccles and Howard Stevenson. I also thank the participants of the Harvard
Business School Control Workshop, especially Charles Christenson, Rajib Doogar, Julie Hertenstein, Robert Kaplan, Jean-
Francois Manzoni, Kenneth Merchant and Richard Vancil. Last, but not least, I thank Anthony Hopwood for encouragement
and suggestions.

127
128 ROBERT SIMONS
(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 moti-
vate, monitor and report on their implementa-
tion. 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 tiame-
work. My research indicates that management
control systems are not only important for
strategy implementation, but also for strategy
formation. I define management control sys-
tems, therefore, to recognize that these systems
are more than devices of constraint and moni-
toring: management control systems are the
formalized procedures and systems that use in-
formation to maintain or alter patterns in organi-
zational activity. Using this definition, these sys-
tems broadly include formalized procedures for
such things as planning, budgeting, environmen-
tal 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 conceptu-
ally separate strategy implementation from
strategy formation. This split has contributed to
a lack of understanding of the nature of manage-
ment control. Separating strategy formulation
and implementation results in an artificial
dichotomy that equates strategic planning with
formulation and management control with im-
plementation. The findings from the current
study underscore the shortcomings of this ap-
proach by demonstrating the power of manage-
ment control systems in empowering
organizational learning and interactively inllu-
encing strategy.
I have three objectives in the discussion to
follow. The first is to review the limited cross-
sectional studies that have uncovered systema-
tic 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 intro-
duced to describe the use of management con-
trol 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 uncer-
tainties. 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 ADVANTAGE AND
MANAGEMENT CONTROL
Before attempting to discuss the relationship
 CREATING COMPETITIVE ADVANTAGE
between management control and strategy, we
must Rrst differentiate among a number of inter-
related concepts in the strategy literature:
strategy as process, strategy as competitive posi-
tion, 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 organiza-
tion 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 com-
petitors and gain competitive advantage. Unlike
the process analysis, the positional approach
examines the strategic choices made by firms in-
dependent of the management process by which
those choices were made; patterns in business
unit strategic action are the unit of analysis.
Patterns in strategic actions have been iden-
tified at both the business level and the corpo-
rate level of the firm. Businessstrategy refers to
how a company competes in a given business
and positions itself among its competitors
(Andrews, 1980, p. IS). Defining strategy as pat-
terns of action (Mintzberg, 1978; Mintzberg &
Waters, 1985), this vein of research has de-em-
phasized the link between observed strategies
and prior, explicit managerial intentions. Re-
search 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 1 provides a summary of four
illustrative studies that identify and describe
strategic archetypes).’ Strategic archetypes de-
monstrate that Rrms can compete successfully in
a variety ofways: for example, superior value can
be offered to customers through new product
’ Other studiesthathave attemptedto identifystrategicarchetypesinclude Miller & Friesen( 1978), Wissema eta!. (1980).
Galbraith & Schendel ( 1983) and Herbert & Deresky (1987).
129
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 con-
cerned with determining what business(es) the
organization chooses to compete in and the
most effective way of allocating scarce resources
among business units (Schendel & Hofer, 1979,
p. 12). Patterns have been identified using
typologies that describe the operating and
financial characteristics of the divisions in diver-
sified 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 a firm achieves competitive advantage)
and the Rrm’s use of management control
systems. The analysis considers 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
addressed briefly in the conclusion of the paper.
Previous studies of strategy and 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 than this 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 difFeramong
Rrms following different strategies. Khandwalla
130 ROBERT SIMONS

TABLE 1. Illustrative studies of strategic archetypes

Study IdentiEed archetypes Features

Mintzberg( 1973a)
Entrepreneurial Opportunity seeking founding CEO, bold decisions, growth-
oriented, high uncertainty. I
Adaptive Reactive, incremental goal setting relative certainty in
decision-making.
Planning mode Analysis dominates decisions, integrated strategies, placid
environment.

Utterback & Abernathy Performance-maximizing Uncertain environment, offers unique products, searches for
(1975) new opportunities.
Sales-maximizing Standardized products, more stable environment, high level of
competition, some product differentiation.
Cost-minimizing Standard product, extreme price competition, high efficiency,
low innovation, sophisticated control techniques.

Miles & Snow ( 1978)
Defender Stable environment, limited product range, competes through
low cost or high quality, efficiency paramount, centralized
structure.
Prospector Always seeking new product and market opportunities,
uncertain environment, flexible structure.
Analyzer Hybrid. Core of traditional products, enters new market after
viability established, matrix structure.
Reactor Lacks coherent strategy, structure inappropriate to purpose,
misses opportunities, unsuccessful.

Porter ( 1980) Overall cost leadership Low price, high market share focus. Standardized product,
economies ofscale, tight cost control.
DIIferentiation Product uniqueness brings brand loyalty, emphasis on
marketing and research.
Focus Focus on defined buyer group, product line or geographic
market. Niche strategy.

(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 relation-
ship was strongest for product competition,
moderate for marketing competition and
weakest for price competition. This study, like
others focusing on the relationship between for-
mal 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 relation-
ship between two strategic archetypes, which
they labelled “entrepreneurial” and “conserva-
tive”, 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) “Adap-
ters”: low differentiation, homogeneous markets
and stable environments. The second subsample
was the entrepreneurial firm, similar to Miles &

’ In the Miller & Friesen ( 1982) study, “controls” was a single variable among a set of 13 variables. The 13 variables measured
organizational attributes such as environment, information processing, structure, and decision making. The “controls”
variable was calculated by averaging the scores of sbt Likert-type scales that related to the comprehensiveness of controls,
and the use of cost and profit centers, statistical quality control practices, variance analysis and formal personnel appraisals.
 CREATING COMPETITIVE ADVANTAGE
Snow’s “Prospector” and Mintzberg’s “Entrep-
reneurial” firms. These Brms experienced more
hostile environments and competed through
product diReren&tion.
Miller & Friesen’s analysis indicates that the
strategy of the firm a@ects the way that manage-
ment 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 specu-
lated that conservative firms use formal control
systems to signal market opportunities an&or
declining results; as a result, innovation in-
creases. For entrepreneurial firms, however,
control systems flag innovative excess and result
in less innovation.
Govindarajan 81 Gupta ( 1985) studied the re-
lationship between corporate strategy and one
aspect of management control - bonus remun-
eration. The research focused on corporate-
level, 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 follow-
ing a “build” strategy, but detrimental to busi-
ness units pursuing a “harvest” strategy.
Building on the Miles & Snow (1978) typol-
ogy, Simons ( 1987a) studied firms classified as
either Prospectors or Defenders to determine
whether management control systems differ
between the two groups. Using concepts de-
rived firorn the management control literature,
factor analysis was used to reduce questionnaire
scales to ten dimensions of management con-
troL3
Statistical analysis and interview data indi-
cated that control systems differ systematically
between Prospector and Defender firms.
Successful Prospectors use a high degree of fore-
cast data in control reports, set tight budget
SThe ten factorsdeveloped and used in the Simons( 1987a) studywere tightnessofbudget goals,extentof externalscanning,
monitoring of results,use of cost control, use of forecast data,extent to which goals relate to output measures,reporting
frequency,use-of formula-basedremuneration,extent to which controtsystemsare tailoredand the degree of changeabiky
of control systems.
131
goals and monitor outputs carefully. Cost con-
trol is reduced. Moreover, large Prospectors em-
phasize frequent reporting and use uniform con-
trol systems that are modified frequently. These
results led to speculation that Prospectors use
their mangement 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 remun-
eration based on achieving budget targets and
report little change in their control systems over
time.
A CLOSER LOOK AT STRATEGY AND
MANAGEMENT CONTROL SYSTEMS
The studies cited in the preceding section
suggest that there is a link between the way that
Erms achieve competitive advantage and the
design and use of their management control sys-
tems. Little is known, however, about how this
association should be conceptualized to in-
crease our knowledge and improve our predic-
tive ability.
The research which provides the basis for the
present analysis, conducted over a 2 year period,
focuses on the use of management control sys-
tems by top management - those responsible
for ensuring that strategies are formulated and
implemented. (In some organizations, top man-
agement refers to one individual; in large com-
plex organizations, top management commonly
refers to an operating committee, comprising
heads of businesses or sectors, chaired by a
CEO.) The concepts and model presented in the
paper were developed during a series of field
studies in a single U.S. industry. The first stage of
the project involved in-depth interviewing and
132 ROBERT SIMONS
document review in three competing com-
panies in this industry. The concepts reported in
this paper were developed from this work and
were then tested by expanding the sample to in-
clude an additional 13 firms in the industry. In
all, over 70 interviews (augmented by reviews of
relevant documentation and, in some cases,
observations of company meetings) with top
managers, each of approximately 2 hours dura-
tion, were conducted in the sixteen firms that
agreed to participate in the study.
The subsequent analysis focuses on how two
competing firms in this industry organize their
management control systems at top manage-
ment levels. The strategy of each firm is
described followed by a brief overview of
selected aspects of their management control
systems. The control system aspects described
are those identified by top managers of these
firms as important to the way they manage their
business. If a particular aspect of management
control was identified as important by the mana-
gers in one firm, then a description is also pro-
vided of how the competing firm uses this aspect
of management control. After this brief descrip-
tion, a conceptual model is presented to explain
the differences in control system configuration
between the two firms.
Company A and company B compete in the
same industry; each company employes over
30,000 people and both companies are success-
ful. Over the last 10 years, both companies have
recorded compound growth rates of approxi-
mately 10% in sales and earnings and each has
outperformed industry averages in terms of
growth in sales, earnings, and cash flow. The
shares of both company A and company B are
rated by market analysts as high quality invest-
ments. Each company, however, follows a
distinctly different strategy.
Company A competes in its various markets
through cost leadership and customer service.
Its products are a diverse group of well-known,
mature products concentrated in high volume,
low price categories. The company specializes
in offering products that heighten efficiency and
cut costs for the customer. Some of its inter-
mediate products are licensed from com-
petitors. Compared to competitors, the com-
pany has done historically little R&D (approxi-
mately 4% of sales in 1986) and is ranked as the
lowest R&D spender in the industry.
“We are now definitely the low-cost producer
in the markets we serve,” observes the CEO of
company A. “However, once in a while, by seren-
dipity, we come across something promising.
We have a habit of seizing on products the pack
has scored”. Company A rarely introduces revo-
lutionary new products, although existing pro-
duct features evolve over time to take advantage
of new technology and perceived customer
needs. In terms of the strategic archetypes
described in Table 1, company A might be
described as a “Defender” (Miles & Snow, 1978)
an “Adaptive firm” (Mintzberg, 1973) an “Over-
all Cost Leader” (Porter, 1980) or as a “Cost-
Minimizing” firm (Utterback & Abernathy,
1975).
The company is organized into approximately
100 divisions which are grouped into four major
sectors. Business Week magazine reports that
company A is “considered to be one of the best-
managed firms in the industry.”
In contrast, company B competes through
product inovation and marketing. Its products
are premium priced and have advanced features.
Products are developed internally and the
features of most products are updated and
improved on a regular basis. Marketing is inten-
sive, using both media and sales representatives.
The company has been successful in developing
new markets through research-based product
development. The company is widely regarded
within the industry as an innovation leader. Most
of the company’s R&D effort is concentrated on
product development; in 1986 company B spent
approximately 10% of sales on R&D, making it
the largest spender on R&D in its industry.
Company B differentiates its products on
quality and innovativeness. The company at-
tempts to achieve market leadership by aggres-
sively marketing new products and enhancing
its leadership image. Since it is often developing
new markets, it competes in rapidly changing
environments. Its Statement of Strategic Direc-
tion states, in part, “We are dedicated to profita-
 CREATING COMPETITlVE ADVANTAGE 133

ble high growth. To achieve this, we must be
well positioned in growth markets. Each
management must be aggressively innovative,
willing to take risks, and strive to grow faster
than the markets in which it competes”. This
company could be described as a “Prospector”
(Miles & Snow, 1978) a “Differentiation firm”
(Porter, 1980) “Performance-maximizing” (Ut-
terback & Abernathy, 1975), or “Entrepreneu-
rial” (Mintzberg, 1973).
The company is decentralized. It is structured
into three sectors with over 100 operating com-
panies worldwide that manufacture and seiI over
20 basic product categories. Fortune magazine’s
annual survey recently rated this company as
one of the most admired companies in America.
Management control systems in the two
companies
Given that these two highly-regarded com-
petitors follow different strategies, what are the
differences in the way they organize their man-
agement control systems? Companies of this size
and complexity are bound to have many differ-
ences; the analysis is limited, therefore, to the
use of management control systems at top man-
agement levels, since it is this group of individu-
aIs that has ultimate responsibility for strategy
making and implementation. At this level, the
differences in management control systems

TABLE 2. Comparison of competitive characteristics and top-level management control systems used at two companies

Company A Company B

Competitiw characteristics

Miles&Snow ( 1978) Defender Prospector

Mintzberg( 1973a) Adaptive Entrepreneurial
Porter ( 1980) Overall cost leader Differentiation

Management control systems at top management levels

1. Strategic planning review Sporadic. last update 2 years ago. Does Intensive annual process. Business mangers
not motivate a lot of discussion in the prepare strategic plans for debate by top
company. management committee.

2. Financial goals Set by top management and Established by each business unit and rolled
communicated down through up after a series of review and challenge
organiization. meetings.

3. Budget preparation and Budgets prepared to meet financial Market segment prepares budgets with
Review goals. Budgets coordinated by Finance focus on strategy and tactics. Intensive
Dept and presented to top management debate at presentations to top mangement
when assured that goals will be met. committee.

4. Budget revisions and updates Not revised during budget year Business units rebudget from lowest
expense levels three times during year with
action plans to deal with changes.

5. Program reviews Intensive monitoringofproduct- and Programs limited to R&D which is delegated
process-related programs. Programs cut to local operating companies.
across organizational boundaries and
affect aii layers of company.

6. Evaluation and reward % of bonus based on contribution to Bonus based on subjective evaluation of
generatingprofit inexcessofplan. % effort. MB0 system used throughout
based on personal goals (usuaily organization.
quantified).
134 ROBERT SIMONS
between the two fhms (highlighted in Table 2)
are striking.
Company A Company A has a S-year strategic
plan that has not been revised for over 2 years.
The plan is prepared by operating managers with
the assistance and coordination of head office
staff groups and presented to the top managers
who comprise the Office of the Chief Executive
(OCE). These managers report that the plan is
for informational purposes and is not used
actively in running the business.
Based on prior operating performance and
market expectations, profit goals are established
each year by the CEO and President of company
A and communicated to division heads. Each
division then prepares an annual budget to meet
these goals. After the finance department verifies
that the consolidated budget will meet corpo-
rate profit goals, the completed budgets are sub-
mitted to top management for approval. Annual
budget presentations to top management are
characterized by the CEO as “show and tell”;
problems and issues have been identified and
worked out in person with the CEO and Presi-
dent prior to the meetings. Once approved,
budgets are never changed.
Budget reviews by top management during
the year are limited to monthly reports to the
OCE of sales, gross margin percentages, total
operating expenses, tax rates and earnings per
share.
Top management pays extremely close atten-
tion to a series of ongoing programs: these
programs are established for the review of new
product technologies, changes in existing pro-
duct features and a variety of “value improve-
ment” efforts. Since programs are designed to
explore new ways of doing things, they often cut
across organizational boundaries and involve
many people at different levels of .the company.
Each program is reviewed regularly (at least
once every 6 weeks and often more frequently)
using formal reports and presentations to the
highest level of management. Coals are estab-
lished for all individuals working with each pro-
gram and achievement against goals is measured
on a regular basis. The ongoing review process
generates product and process ideas throughout
the organization that are tested and ultimately
implemented. New programs are often estab-
lished from ideas generated during existing
program review.
Bonuses at company A are received by a
relatively small group of middle and senior man-
agers (the management group eligible for
bonuses is 2.5% of total employees). Bonuses
range from 15% to 50% of salary and are allo-
cated to employees based on corporate perform-
ance against budget (‘A), operating unit per-
formance against budget ($4) and individual ob-
jectives that are negotiated with superiors (1/3).
Company B. Company B invests heavily in
long range planning. All planning, however, is
done by operating managers; there are no plan-
ning staff groups. Long range plans are based on
5 and 10 year forecasts and are updated each
year by comparison with the plan prepared the
year before. All changes in estimates require
proposed tactics to deal with the changed
environments. Included in the plans for each
operating company are forecasts of competitive
environments, pro formu income statements by
product category for each major competitor, as
well as an analysis of each competitor’s per-
ceived strategy.
Long range plans are debatetl heavily in the
organization and must ultimately be sent, in
summary form, to the CEO. The final debate and
approval of long range plans takes place annually
in an Executive Committee meeting which com-
prises the CEO, President and key sector heads
and company group chairmen.
In company B, budgets, as well as a second-
year forecast, are prepared annually by operat-
ing managers throughout the organization.
Budgets are formally revised three times during
the year; each revision requires a full re-estima-
tion of all budget items and programs. Budgets
are the focus of a great deal of debate among
operating managers and are used, not as purely
financial documents, but rather as agendas to
discuss tactics, new marketing ideas, and pro-
duct development plans throughout the organi-
zation and ultimately at the top management

level. To focus the debate on strategies rather
than Bnancials, the plans and budgets are re-
duced at the top management level to four num-
bers only (estimated unit sales, revenues, net
income and ROI) and to the tactics that will be
used to achieve these numbers.
Profit goals are established on a bottom-up
basis as managers throughout the organization
set personal and business unit goals based on
perceived corporate needs. These goals are
challenged rigorously at all levels in the organi-
zation during a series ofprofit planning meetings
held at various times during the year. Once the
review process at lower levels is complete, top
management rarely makes a formal request to
operating managers to reconsider their budget
to deliver more profit.
Unlike company A, the use of programs is gen-
erally limited to the R&D area, which is
decentralized to operating companies. Programs
are therefore managed at the local level and are
not typically an agenda for top corporate man-
agement.
Bonuses at company B are entirely subjective
and are based on effort and innovation rather
than performance against predetermined
targets. Managers throughout the organization
spend a great deal of time each year discussing
and reviewing suggestions concerning approp-
riate bonus levels for subordinates. Bonus
recommendations for all managers with salaries
in excess of $95,000 are reviewed by the Execu-
tive Committee. Below the executive commit-
tee level, all managers are eligible for annual
bonuses, the amount of which is determined
subjectively by operating company presidents.
After bonuses have been awarded, the Executive
Committee also uses a “post audit” to review the
reasons for unusually high or low bonus awards
throughout the organization. Through a special
bonus plan for entrepreneurial accomplishment,
the company distributes additional bonuses in
excess of s 1 million annually; recommendations
for these special bonuses, which typically repre-
sents l&50% of an individuals salary, are re-
viewed and acted upon by the Executive Com-
mittee.
135
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 commonplace tools in virtually every large,
professionally managed corporation. But the il-
lustrative 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 con-
trol 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 manage-
ment control systems and to delegate other
aspects to subordinates. Four concepts are used
to develop the model: limited attention of mana-
gers; strategic uncertainties; interactive manage-
ment 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 avail-
able 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 re-
source (Williamson, 1986, p. 5) and must be
viewed as a constraint on the information pro-
cessing capabilities of managers. Second, top
managers must engage in many concurrent ac-
tivities. Mint&erg ( 1973b) argues that top man-
agers have ten working roles including that of
figurehead, leader, liaison, monitor, dis-
seminator, spokesman, entrepreneur, distur-
bance 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 import-
ant implications for management control. A
136 ROBERT SIMONS

multitude of activities demand attention - ap-
pearing at outside functions, speeches to
employees, reading reports, making and ratify-
ing decisions, evaluating employees, planning
for succession - and daily choices must be
made. Thus, only limited subsets of the organiza-
tion’s formal management control process can
have the attention of top management; most
areas of management control are delegated, by
necessity, to subordinates.
Strategicuncertainties
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.4
Although firms competing in the same indus-
try 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 po-
tential 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 vari-
ous 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 inter-
actively and which aspects to program (Simons,
1987b). Management controls become inter-
active when business managers use planning and
control procedures to actively monitor and
intervene in ongoing decision activities of sub-
ordinates. 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 sub-
ordinates at all levels of the company. Program-
med controls, by contrast, rely heavily on stti
specialists in preparing and interpreting infor-
mation. 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 inter-
active 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 inter-
active 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 can-
not 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; Burgel-

4 Strategic uncertainties are different than the concept of critical success factors that was popularized by business consultants
in the 1960s and is taught in business schools today (Daniel, 1966). Critical success factors are the distinctive competencies
that the firm must possess to sustain current competitive advantage (e.g. manufacturing efficiency for a strategy ofoverall cost
leadership; research and development productivity for a strategy of new product introduction).
’ A critical uncertainty for all firms is the ability to internally generate profit to provide resources to fund business strategies
(Donaldson, 1984, p. 12). Thus, top managers always monitor personally the profit-generating ability of the firm.
 CREATING COMPETITIVE ADVANTAGE
man, 1983; Mintzberg et al, 1976; Cohen et al.,
1972). For this reason, top managers do not
know ex ante, and often not even expost, who in
the organization initiates and fosters important
policy decisions. By using interactive manage-
ment controls to monitor stratagic uncertain-
ties, top managers reveal their values and prefer-
ences to the many individuals in the organiza-
tion who have input in decision processes.
Surveillance is the search for surprises; inter-
active management controls provide guidance
to organizational members as to where to look
for surprises and what types of intelligence infor-
mation to gather. Feldman & March ( 1981)
describe this function:
Organizations, as well as individuals, ... gather informa-
tion that has no apparent immediate decision conse-
quences. As a result, the information seems substantially
worthless within a decision-theory perspective. The per-
spective is misleading. Instead of seeing an organization
as seeking information in order to choose among given al-
ternatives in terms ofprior preferences, we can see an or-
ganization as monitoring its environment for surprises
(or for reassurances that there are none). The surprises’
may be new alternatives, new possible preferences, or
new signilicant changes in the world (p. 176).
Finally, decision ratification by top managers
(as distinct from decision making) is necessary
when any strategic policy decision commits the
organization and its resources (Mintzberg,
1973b, p. 87; Bower, 1986, pp. 64). 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. Organiza-
tional learning describes the ways that organiza-
tions adjust defensively to reality and use know-
ledge to improve the fit between the organiza-
tion and its environment (Hedberg, 198 1, p. 3).
Comprehensive reviews of the concept of or-
ganizational learning are found in Argyris &
Schon ( 1978) and Fiol & Lyles ( 1985 ).
I have argued that the personal involvement of
top managers, the defining characteristic of
interactive control, influences strongly the in-
137
centives to produce and share information.
Moreover, this focusing of organizational atten-
tion and the interactive exchange of information
stimulates learning throughout the organization
about the strategic uncertainties that are per-
ceived by top management. By focusing atten-
tion throughout the organization, top managers
use interactive management control to intlu-
ence and guide the learning process - under-
standing that individual ideas and initiatives will
emerge over time in unsystematic ways. By em-
phasizing select management controls and mak-
ing them interactive (and programming and de-
legating others) top managers ensure that the or-
ganization is responsive to the opportunities and
threats that the firm’s strategic uncertainties pre-
sent.
The four concepts presented above can now
be summarized and integrated: the intended
business strategy of a firm creates strategic un-
certainties that top managers monitor. While all
large companies have similar management con-
trol systems, top managers make selected con-
trol systems interactive to personally monitor
the strategic uncertainties that they believe to
be critical to achieving the organization’s goals.
The choice by top managers to make certain
control systems interactive (and program
others) provides signals to organizational par-
ticipants about what should be monitored and
where new ideas should be proposed and tested.
This signal activates organizational learning and,
through the debate and dialogue that surrounds
the interactive management control process,
new strategies and tactics emerge over time.
The recursive nature of the model (Fig. 1)
illustrates why management control systems
should be considered as an important input to
strategy formation. We know that strategies can
be both intended and emergent (Mintzberg,
1978). This model illustrates, moreover, that
emergent strategies can be intluenced and man-
aged - serendipity can be guided by top mana-
gers who use formal process to focus organiza-
tional attention and thereby generate new ideas,
tactics and strategies. Management control pro-
cesses, which have been characterized solely as
tools for implementing goals, can be instrumen-
138 ROBERT SIMONS

Business Strategic
low end-use cost: new, more efficient product
strategy *- Uncertainties technologies of competitors and changes in
4 buyer needs are potential threats.
To manage these strategic uncertainties, top
management has made a limited subset of man-
agement controls interactive and programmed
other controls. The program review system,
I l
Choice of Interactive
which operates from the lowest organizational
Organizational
Learning Management Control Systems level to the CEO’s office, is an example of an
bv Top Management
interactive management control system that is a
major information source for both top manage-
Fig. 1. Process model of relationship between business
strategy and management control systems. ment and all operating managers in the com-
pany. Programs focus on ways to improve value
tal in allowing the organization to learn and for customers (“cost improvement with equal or
adapt over time. better quality”), new technologies that build on
existing product lines and product enhance-
Applying the model ments to help customers be more efficient. Pro-
Since company A and company B compete in grams typically have the potential of affecting a
the same industry, each firm faces the same set of wide range of the company’s products and there-
potential uncertainties (Fig. 2). From this set of fore cut across formal organizational bound-
potential uncertainties, top managers of each aries.
firm have identified strategic uncertainties that Managers in company A know, by the em-
relate to their company’s individual strategy. phasis that top management puts on the review
From interviews at company A, it is clear that top of selected programs, which aspects of the busi-
managers believe that the major strategic un- ness are considered critical to long term organi-
certainty facing the firm is new product zational success. For each program, information
technologies or attributes that could shift exist- is continually gathered throughout the organiza-
ing low cost advantage. They recognize that tion, agendas are set to review progress and new
company A’s success derives from continually information, and changes and surprises are
providing customers with products that offer rapidly communicated. The organizational

Intwactiv.
Comp*nv strategic Managwnent
UllCWtWti~ Controls

‘Diffusion of
proprietary knowledge
Internal product
A innovation
Customer Service
Newtechnology
New competitor products
‘Chanaesinbuvertastes
Mark&g innovations
Buyer learning
‘Productintroductionsin
adjacent industries
lndustrv volume
Scaleeffects
Input costs
.Process innovation Tactical planning
Timing of new product
New industry entrants and budgeting
introductions.
~Government/regulatory - Subjective rewards
action I Market tactics of
Employee actions I 1 competitors. I
L-w-_-- ____ -__a I
1 I

Fig. 2. Summary of interactive process model in two firms.

 CREATING COMPETITIVE ADVANTAGE
learning engendered through the interactive
management control system is a powerful intIu-
ence 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 at companyA pays little day-
to-day attention to aspects of the firm’s manage-
ment 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 and budget-
ing, an annualevent orchestrated by staffdepart-
ments, are not interactive because the environ-
ment is relatively stable and well understood;
top managers do not need to rely on these
systems to motivate the organization to con-
stantly scan changes in the market. The rewards
system is also programmed since bonuses are de-
termined largely by reference to quantitative
targets and require minimal attention from top
management. Even aspects of management con-
trol systems that are associated with the success
of current strategies, i.e. so-called “critical suc-
cess factors”, are programmed and delegated to
staff specialists.
The programming of critical success factors is
apparent in the way that top management at
company A deal with manufacturing and logisti-
cal 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
139
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 can review the entire businessin twenty
minutes each week. We have become very good
at understanding what 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 effi-
ciency, top managers want their organization to
focus on marketing tactics that can exploit new
product development and thereby build market
share or open new markets. Top managers per-
ceive strategic uncertainties that relate to the
timing of new product introductions and the
defensive actions of competitors. Accordingly,
the top management of company B has chosen 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 antici-
pated changes are coupled with action plans that
focus on marketing tactics and the timing of new
product introductions - both strategic uncer-
tainties for company B. These plans, which are
based on environment, competitor and technol-
ogy 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 Commit-
tee level. Staff units play no role in this process.
The highly interactive nature of long range plan-
ning results in intense organizational learning
about changes in the competitive product mar-
140 ROBERT SIMONS
kets and ideas on how to react offensively to
these threats and opportunities. From these dis-
cussions, new strategies emerge.
Top management has also made profit plan-
ning 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 com-
pany’s changing markets. Budget discussions
throughout the year revolve around unantici-
pated 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 elabo-
rated, “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 con-
tinually 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 chang-
ing market environments. Rewarding effort
rather than results requires evaluators to under-
stand competive business environments, poten-
tial 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 uncer-
tainties that arise from the actions of com-
petitors.
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 ob-
served also in the other 14 companies in the
sample. One CEO captured the spirit of the
phenomenon, “we can have all the formal pro-
cesses in the world and some of these, frankly, I
don’t give a damn about and others I do. And
everyone understands the difference.”
DISCUSSIONAND CONCLUSION
The model presented in this paper departs
from the traditional analysis of “fit” between
formal systems and critical success factors. In-
stead, new concepts are introduced to link man-
agement control systems with competitive ad-
vantage. The research underscores the impor-
tance of the dynamic relationship between for-
mal process and strategy: competitive strategic
positioning, management control and the pro-
cess 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 emer-
gent 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 vari-
ety, novelty, and surprise. This distinction is
analogous to that between programmed and
 CREATING COMPETITIVE
interactive controls. Campbell (1982) illus-
trates the power of fixed rules in producing un-
predictable amounts of complexity as informa-
tion and meaning is generated. The necessity of
structure to produce meaning a concept funda-
mental to theories of information and language,
is echoed in the way that managers use struc-
tured, formal process interactively to motivate
organizational learning. “Structure and free-
dom,” summarizes Campbell, “like entropy and
redundancy, are not warring opposites, but com-
plementary forces” (p. 264).
Top managers use formal process to gain
maximum advantage from these forces. These
managers know that decisions and actions affect-
ing current strategies will emerge from all
corners of the organization; their primary job is
to provide guidance, resources and incentives to
motivate the organization to gather and inter-
pret new information so that the organization
can respond and adapt. Energy is channelled and
directed by the interactive process; formal man-
agement control systems provide a common
language. The organization is energized:
momentum is created to exploit existing strate-
gies and to anticipate strategic uncertainties. In-
formation 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 sys-
tems into constituent elements support the
process model presented in this paper. Govin-
ADVANTAGE 141
darajan & Gupta (1985) noted that subjective
bonus systems were beneficial for emerging
businesses following “build” strategies, but de-
trimental 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 re-
warding team effort is important - typical con-
ditions of firms in a growth phase. This approach
is costly, however, and generally uneconomic
for businesses in slow decline.
Simons ( 1987a) found that Prospectors gen-
erally use a lot of forecast data, set tight budget
goals, monitor outputs carefully and emphasize
frequent reporting with uniform control sys-
tems. Like company B, the prototypical Prospec-
tor faces strategic uncertainties owing to rapidly
changing product or market conditions; inter-
active 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 con-
trast, use planning and budgeting less inten-
sively. Like company A, which operates in a rela-
tively 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 un-
certainties - 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 busi-
ness strategy. But what are the process relation-
ships between management control systems and
corporate strategy? Recently, the portfolio man-
agement approach that has been the corner-
stone of corporate strategy has been strongly
criticized (Porter, 1987). The ability of diver-
sified firms to add value through portfolio tech-
niques is argued to be increasingly limited in
today’s efficient capital markets. In terms of the
process model presented here, a strategic uncer-
tainty for the diversified firm is the appropriate
allocation of resources among diverse business
units. Given the scarce attention of top mange-
ment, focusing attention on portfolio allocations
142 ROBERT SIMONS

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 un-
derstanding 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 under-
stand 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 pro-
cesses. Control systems are used for multiple
purposes: monitoring, learning, signalling,
constraint, surveillance, motivation and others.
Yet, we use a single descriptor - mangement
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 de-
velop and communicate the concepts necessary
to describe complex organizational phenomena.

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