868761.pdf

7/30/2019 868761.pdf

1/5

7/30/2019 868761.pdf

2/5

(2) development of different products

(product competition); and

(3) an in-between strategy, market focus

(focus competition).

But as these strategies have by now become a

standard for major competitors, businessstrategists have been trying to refine them into

more subtle ways of competition, which

cannot be easily transferred across companies.

Prahalad and Hamel (1990), for instance,

argue that a company's competitive advantage

should build on ``core competencies'' which

are far more difficult to imitate than the

traditional strategies. Chan Kim and Renee

Mauborgne (1997) argue that, to be

sustainable, product differentiation should

add real value to existing products rather than

marginal alterations. Constantine Markides

(1997) argues that product differentiation

and focus should be ``strategic'', i.e.

entrepreneurial, discovering consumer trends

and finding novel ways to satisfy them.

Emphasizing strategic competition, Michael

Porter (1996) also argues about the

importance of ``entrepreneurial edge'', but he

adds that differentiation and focus should be

based on activities rather than products, on

``deliberately choosing different activities to

deliver a unique mix of value''. But how do

entrepreneurs discover business

opportunities? How do they decide which

opportunities to pursue? How do they keep

ahead of the competition?

As is the case with many discoveries,

entrepreneurial discoveries are either a matter

of good luck or a matter of systematic search

based on integrated knowledge, i.e.

knowledge that combines technology and

market information. And since good luck is

not always on the same side, it is hard to arguethat a company can consistently achieve

sustainable competitive advantages just on the

base of luck alone. But it is not so hard to

argue that systematic search based on

knowledge integration leads to sustainable

competitive advantages (Iansiti and West,

1997; Powell and Dent-Meicallef, 1997;

Pankaj Ghemawat, 1995; Forrest, 1996; Ross

et al., 1996). But technology and market

information is scattered both inside and

outside company boundaries. Technologyinformation, for instance, can be purchased in

the market, produced internally or in

cooperation with other companies, research

institutes and universities. Likewise, the

market information can be acquired through

the market, by tapping into private market

research databases or it can be gathered

internally with the cooperation of the

marketing and sales departments, distribution

centers, and suppliers and customers. But

what does it take to integrate technology and

market information?

Integrating technology and market

information requires a necessary and a

sufficient condition. The necessary condition

is the acquisition and installation of hardware

technologies, i.e. information and

telecommunications hardware, such as

Internet, intranets, group-ware, and

videoconferencing, technologies that allow

corporate members to share information and

logistical support instantly. The sufficientcondition is the development of effective

management control systems, i.e. managerial

practices that match hardware technologies

with human resources and discover and

exploit new business opportunities, especially

in high-technology industries that rely on

employee-creativity. As Cusumano (1997)

puts it: ``While having creative people in a

high-technology company is important, it is

often more important to direct their

creativity.''

Hardware technologies certainly are

transferable across companies. Information

and telecommunication networks can be

purchased in the market and installed in every

company. In fact, the use of hardware

technologies in the internal and external

communication is no longer an option but a

requirement for competing in a global

economy. What has not, and cannot, be

transferred across companies is the

management control practices that match

human resources with technologies:``Competitiveness depends crucially on how

enterprises organize themselves, how they use

and develop the human resources available to

them, how they match technology and

workers, and their relationship to suppliers

and customers and to other firms'' (Vickery

and Wurzburg, 1996, p. 17).

In short, competing in global industries

takes more than hardware technologies. It

takes management control systems that

develop and match human resources withtechnologies for the discovery and

exploitation of new business opportunities, an

issue to be further addressed in the next

section.

42

Effective integration of management control systems

Shogo Kimura and Panos Mourdoukoutas

European Business Review

Volume 12 . Number 1 . 2000 . 4145

7/30/2019 868761.pdf

3/5

3. Management control systems andcompetitiveness

Conventionally, the term ``management

control systems'' refers to the deployment of

various techniques in hierarchical

organizations in order to monitor and

measure employee performance against

certain management targets. In this sense,

conventional management control systems

focus on improving operational effectiveness.

But as operational effectiveness is no longer

sufficient to create sustainable competitive

advantages, management control systems

must be expanded to managerial practices

that cultivate employee cooperation and

creativity in the discovery and exploitation of

new business opportunities. This is especially

the case in the high-tech industries that are at

the forefront of globalization and employee

teams must combine efficient communication

with creativity. ``Project managers and

product designers in software and other

industries thus need to find ways to divide up

products and tasks so that even teams of

hundreds of talented people can work and

communicate efficiently as well as creatively''

(Cusumano, 1997, p. 10).

Arguing along the same lines, Simons

(1987, 1990) classifies control systems in four

categories:

(1) diagnostic control systems;

(2) boundary control systems;

(3) interactive systems; and

(4) belief systems.

Diagnostic systems are the same as the

conventional control systems applied in

hierarchical organizations discussed above.

They include managerial techniques to

measure and monitor employee performance

and have both positive and negative effects on

employees. On the positive side, management

control systems such as budget control or

performance measures that set targets can

assist employees to acquire and improve their

skills and knowledge. On the negative side,

such management control systems may

discourage employee initiative, i.e. employees

may be reluctant to pursue any activity outside

the targets set by the management. In this

sense, diagnostic management control systems

may contribute to operational effectiveness, but

deter employee creativity with far reaching

consequences for a company's competitiveness.

Less strict than diagnostic systems, boundary

control systems set the bounds, the parameters

within which employees can act. In this sense,

boundary control systems are general

guidelines, avenues that employees are allowed

to take or not to take rather than strict

management directives. As such, boundary

controls empower employees to use their own

judgement and discretion in making decisions,

even to attempt new things. In this sense,

boundary controls can contribute both to

operational effectiveness and employee

creativity, enhancing the company's

competitiveness.

Supplementing boundary control systems,

interactive control systems include

management practices that allow employees

to interact with each other so as to assimilatenew information and to keep up with ever

changing market and technological

conditions. This is particularly the case in

high technology industries such as software

development. ``If the underlying technologies

and user needs are evolving very rapidly,

product development teams must often invent

or innovate in designs as they develop a

product and show features to potential users

and then respond. This has been the case with

software for personal computers, especially

for Internet applications'' (Cusumano, 1997,

p. 10). Such practices can be further re-

inforced by a system of beliefs and values that

create what UK sociologist Robert Cole once

called, ``Community of fate'', i.e. the feeling

that all employees share the same economic

destiny.

In short, conventional diagnostic

management control systems can have both

positive and negative effects on a company's

competitiveness. On the positive side, they

motivate employees to work hard to achievecertain objectives set by the management. On

the negative side, they deter employee

creativity. To be effective, diagnostic

management systems must be supplemented

by boundary control systems, interactive

control systems, and belief systems. But how

can all four systems be integrated effectively?

4. Effective management control

systems

To integrate the four different management

control systems effectively, companies must

apply them in a way that maximizes

43




Volume 12 . Number 1 . 2000 . 4145

7/30/2019 868761.pdf

4/5

operational effectiveness without limiting

employee creativity. This task can be

accomplished by using diagnostic measures as

a way to improve operational effectiveness

and the other three types of control measures

as a way to mitigate its negative effects on

employee creativity. Specifically, the design of

an effective management control system must

start with the specification of a system of

beliefs which defines the company's values

and directions (see Figure 1). Such a system

of beliefs can in turn be used together with

interactive control systems to refine market

information and set both performance and

business conduct guidelines. Performance

guidelines can in turn be used with diagnostic

control systems to improve operational

effectiveness while business conductguidelines can be used together with

boundary control systems in order to improve

creativity.

Though hard to test empirically the

effectiveness of such a framework, studies of

leaders in high tech industries such as

Microsoft Corporation provide support for

this framework. In ``How Microsoft makes

large teams work like small teams'', for

instance, Cusumano (1997) identifies several

key elements of Microsoft's human resource

strategy that are consistent with our proposed

framework of integrating various control

systems. Microsoft starts with a clear vision

regarding the products to be pursued and the

ways business should be conducted (system of

beliefs and boundary systems), and proceeds

with the specification of certain input and

output targets and sets standards to monitor

them (diagnostic systems). Frequent

communication within and across teams

allows employees the flexibility to adjust their

design to changes in technical or market

information (interactive systems).In short, to integrate various management

control systems, corporations must begin with

a system of core values and a mission that

defines its character and sets its long-term

direction, proceed with the establishment of

interactive control systems that filter market

Figure 1 Effective management control systems

44




Volume 12 . Number 1 . 2000 . 4145

7/30/2019 868761.pdf

5/5

information and shape performance and

conduct guidelines, and end up with

diagnostic and boundary control systems that

improve efficiency and creativity, improving

competitiveness.

Summary and conclusions

As competition in global industries intensifies,

the traditional competitive strategies that are

based on operational effectiveness are no

longer sufficient to create sustainable

competitive advantage. They must be

supplemented by strategies that cultivate

collective entrepreneurship, i.e. strategies that

empower employees to discover and exploit

new business opportunities. To pursue suchstrategies successfully, companies must

integrate successfully four different control

systems, the beliefs system, the interactive

system, the diagnostic system, and the

boundary system. The beliefs system should

be used to define a corporation's character

and mission and to set guidelines both for

performance targets and for acceptable

employee behavior in pursuing such targets.

The interactive system should be used to

adjust the company guidelines to changing

market conditions, while the diagnostic and

the boundary systems should be used to set

standards for improving efficiency and

creativity.

References

Cusumano, M. (1997), ``How Microsoft makes large teams

work like small teams'', Sloan Management Review,Fall.

Forrest, J. (1996), ``Japanese/US technological alliances in

the biotechnology industry'', R&D Management,Vol. 24 No. 2.

Ghemawat, P. (1995), ``Competitive advantage andinternal organization: Nucor revised'', Journal of

Economics and Management, Vol. 3 No. 4.Iansiti, M. and West, J. (1997), ``Technology integration:

turning great research into great products'', Harvard

Business Review, May-June.Kim, C. and Mauborgne, R. (1997), ``Fair process:

managing in the knowledge economy'', HarvardBusiness Review, July-August.

Markides, C. (1997), ``Strategic innovation'', SloanManagement Review, Spring.

Porter, M. (1996), ``What is strategy?'', Harvard BusinessReview, November/December.

Powell, T. and Dent-Meicallef (1997), `Ìnformation

technology as competitive advantage: the role ofhuman, business and technology resources'',Strategic Management Journal, Vol. 18 No. 5.

Prahalad, C. and Hamel, G. (1990), ``The core

competencies of the corporation'', Harvard BusinessReview, Vol. 68 No. 3.

Ross, J. et al. (1986), ``Develop long-term competitivenessthrough IT assets'', Sloan Management Review, Fall.

Simons, R. (1987), `Àccounting control systems andbusiness strategy: an empirical analysis'',Accounting, Organizations and Society, Vol. 12No. 4.

Simons, R. (1990), ``The role of management control

systems in creating competitive advantage: newperspectives'', Accounting, Organizations andSociety, Vol. 15 Nos. 1-2.

Simons, R. (1995), ``Control in an age of empowerment'',

Harvard Business Review, March-April.Vickery, G. and Wurzburg, G. (1996), ``Flexible firms, skillsand employment'', The OECD Observer, p. 17.

Further reading

Anthony, R.N., Dearden, J. and Bedford, N.M. (1989),Management Control Systems, 6th ed., Irwin.

Dollar, D. and Wolff, E.N. (1993), Competitiveness,Convergence, and International Specialization, TheMIT Press.

Giovanni, B.G. and Bedeian, A.G. (1974), `À conspectus

of management control theory'', Academy ofManagement Journal, June.

Gnan, L. and Songini, L. (1995), ``Management styles of asample of Japanese manufacturing companies inItaly'', Management International Review.

Gupta, V. and Kumon, H. (1996), `À dynamic model ofJapanese investment system'', Journal ofInternational Economic Studies, No. 10.

Hamel, G. and Prahalad, C.K. (1994), Competing for theFuture, Harvard Business School Press.

Haslam et al. (1996), `À fallen idol? Japanesemanagement in the 1990s'', Asia Pacific BusinessReview, Vol. 2 No. 4, Summer, special issue.

Manager Update (1994), ``From lean production to leanenterprise'', Editorial, Vol. 6 No. 1, Autumn.

Manager Update (1996), ``Managing out of bounds'',

Editorial, VoI. 8 No. 1, Autumn.Mourdoukoutas, P. (nd), ``The global corporation: the

decolonization of international business'',

unpublished manuscript.Mourdoukoutas, P. (1997), ``Do Japanese companies have

a strategy?'', presented at Nagoya University, July.Porter, M.E. (1979), ``How competitive forces shape

strategy'', Harvard Business Review, March-April.Porter, M.E. (1980), Competitive Strategy, The Free Press.Porter, M.E. (1985), Competitive Advantage, The Free

Press.

45




Volume 12 . Number 1 . 2000 . 4145

868761.pdf

Documents