A REVIEW OF LITERATURE IN MANAGEMENT CONTROL SYSTEM (MCS), BUSINESS STRATEGY, AND FIRM S PERFORMANCE.pdf

ISSN: 2249-7196
IJMRR/Feb 2017/ Volume 7/Issue 2/Article No-4/99-112
Saeed Awadh Bin-Nashwan et. al., / International Journal of Management Research & Review
*Corresponding Author www.ijmrr.com 99
A REVIEW OF LITERATURE IN MANAGEMENT CONTROL SYSTEM (MCS),
BUSINESS STRATEGY, AND FIRM’S PERFORMANCE
Saeed Awadh Bin-Nashwan*1,3
, NurFarhana Salihah Abdullah2
, Mohammed Mahdi Obaid1,3
1
Tunku Puteri Intan Safinaz School of Accountancy, Universiti Utara Malaysia, Malaysia.
2
School of Government, Universiti Utara Malaysia, Malaysia.
3
Dept. of Accounting, Faculty of Applied Science, Hadhramout University,
ABSTRACT
The influence of Management Control System (MCS) on business strategies and firms’
performance has been empirically investigated in numerous studies during the past decade in
several developed and emerging economies. Based on the contemporary competitive,
complex, and mutable global business environments, organizations are being challenged in
order to adopt business models which assist them to address the strategic uncertainties and
risks faced in their business environment. The main purpose of this study is to review some
empirical researches from different perspective from journals which have been conducted on
MCS and its role in firms’ strategy as well as their performance. The results found are diverse
in terms of the published studies trend, industries, key informants, and countries. Moreover,
research study revealed a strong linkage between MCS, strategy, and firm’s performance that
may positively influence and support the formulation and implementation of competitive
strategies. Thus, it is imperative for managers to match the appropriate control system with
the right strategy, and implementation of an efficiency-based strategy to lead to higher
performance.
Keywords: Management Control System (MCS), Business Strategy, Firms’ Performance.
1. INTRODUCTION
The relationship between Management Control System (MCS) and strategy has been noticed
for the past 2 decades as it enriches the organizational performance. Some research stated that
MCS should be highlight clearly to match with the business strategy in order to improve the
competitive advantage and encourage superior performance (Dent, 1990). Basically, MCS
defined as the process of managing and certifying the gained and utilized resources
effectively and efficiently in achieving the firm’s goals (Anthony, 1965).High organizational
performances were caused by an equivalent combination of an organization’s environment,
strategy, internal structures and systems (Govindarajan, 1998). Therefore, MCS comprises
internal structures and systems. In this modern competitive, multifaceted and mutable global
business environment, firms need to implement business models that can assist them in
identifying the strategic uncertainties and risks in their business environments.
The main issue of this study is that management accounting researchers argue that one of the
ways that enable firms to continually regenerate their businesses to last and thrive in a

Saeed Awadh Bin-Nashwan et. al., / International Journal of Management
Research & Review
Copyright © 2017 Published by IJMRR. All rights reserved 100
multifaceted and ambiguous environment is to know the role of MCS in framing a business
strategy that can produce a sustainable competitive advantage which would enrich the firm’s
performance (Simons, 2000; Widener, 2007). It is important to note that the vital role of
MCS is to offer information which is useful for managerial decision making, planning,
monitoring, and evaluation of organizational activities to change employee behavior
(Merchant & Otley, 2007). Besides that, MCS also offers strategic direction for firms to be
more innovative in making efforts so that their competencies in production can sustain up
resources for innovative activities (Marginson, 2002). The strategy and accounting
researchers proposed that MCS is critical in helping top managers in conveying strategies,
specify the operational actions which are needed to apply these strategies, explaining mutual
expectations, recognizing priorities for operational improvements and also set targets that
may stimulate current and subsequent performance (Simons, 1994).
The purpose of this study therefore, is attempting to carry out a review of relevant literatures
on the relationship between MCS, business strategy, and firm's performance based on 10
articles published in a wide variety of journals spanning different periods. For simplicity
purpose, the study has been divided into seven parts. The first section is a general review to
briefly trace the background and gives an insight of MCS. The second part review in detail
the concept of MCS according to the selected studies. Furthermore, the concepts of business
strategy and firm’s performance were discussed in the third section. In the fourth part, the
methodology used in this study, with special emphasis on data sources and the selected
articles was stated. Section Five summarizes the reviewed articles, followed by discussion of
the findings in Section Six. Finally, the last part gives a general conclusion of the study which
showed some limitations and recommendations for future researches were made.
2. MCS
From the many literatures reviewed several definitions have been found on the subject matter
of MCS. One definition sees it as procedures and systems which are formalized by using
information to conserve or change a pattern in organizational activities and it also includes
planning system, reporting system, and monitoring procedure which are relied on the
information given (Henri, 2006). While, Akroyd and Maguire (2011) use MCS concept
which was developed by Anthony (1965) as the process of managing and certifying the
gained and utilized resources effectively and efficiently in achieving the firm’s goals. On the
other hand, Bisbe and Otley (2004), focused on MCS definition described by Simon’s (1995)
where MCS is the formal, information-based routines and procedures which was used by
managers to conserve and change patterns in organizational activities. Besides, according to
Lopez, Gonzalez, and Gomez, (2015) they applied Chenhall (2003) definition which,
explained that MCS comprises management accounting in a systematic use in order to obtain
some objectives and also includes further controls (i.e. personal and clan controls).
MCS has been classified into several forms in the literature. These classifications include
“formal and informal controls, action and results controls, tight and loose controls, and
financial and nonfinancial controls” (Kald, Nilsson, & Rapp, 2000; Langfield-Smith, 1997;
Simons, 1991). All these numerous categorizations were used to test the relationship between
MCS and strategy, while the division between financial and nonfinancial controls was at the

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center of the significance lost the consideration (Otley, 1994; Kaplan & Norton, 1992;
Johnson & Kaplan, 1987). Financial and nonfinancial analysis need to be discussed as it has
been claimed that it can make MCS more related in the present environment of
competition(Chenhall, 2003; Nyamori, Perera, & Lawrence, 2001). According to Simons
(2005), to understand the division between financial and nonfinancial MCS, categorization of
controls into diagnostic and interactive are needed as assistance. This is because, the
diagnostic control system (DCS) tends to be “backward and inward” looking which is related
to financial MCS, however interactive control tends to be “forward and outward” looking and
related to nonfinancial MCS (Widener, 2007; Henri, 2006;Tuomela, 2005; Simons, 1995,
2000). However, in developing strategy, financial and nonfinancial MCS remain crucial in
the process (Bhimani & Langfield-Smith, 2007).
3. STRATEGY AND FIRM’S PERFORMANCE
By reviewing several literature, there are numerous definitions of business strategy, which
in most cases is defined as business strategy as how competitive advantage will be achieved
by a business as it has been recommended that MCS should be explained clearly in
maintaining the business strategy which could lead to a greater performance (Acquaah, 2013;
Tsamenyi, Sahadev, & Qiao, 2011; Henri, 2006).
As proposed by Porter (1980) and a study conducted by Auzair and Smith (2005), an
organization may select one of two generic strategies either “cost leadership or
differentiation” to compete effectively regardless of industry context. According to Porter
(1980), cost leadership needs aggressive construction of efficient scale facilities, vigorous
pursuit of cost reductions from experience, tight cost and overhead control, avoidance or
marginal customer accounts and cost minimization in areas such as research and
development, customer support, sales force, and advertising. While differentiation focuses
on creating products or services that were perceived by customers as unique which means it
may be based on the quality of the product, wide availability of product offerings, product
flexibility, technology and customer service.
Performance can be defined as the results of the activities of an organization or investment
over a given period of time. Based on literature review, the results of MCS on organization
performance are hard to predict. A positive relationship between performance and the
implementation of MCS will be expected if MCS provide significant information for
coordination and learning, and there is some indication about this matter in the performance
field (Akroyd & Maguire, 2011; Bisbe & Otley, 2004; Davila, 2000).
4. METHODOLOGY
This study provides a review of the relationship between MCS, business strategy and firm’s
performance research which are published in academic research journals for several years.
These are the following online journal databases that have been used for searching in order to
have a broad bibliography of the academic literature on the relationship between MCS,
business strategy and performance:
 Emerald Fulltext
 Google Scholar;

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 ACM Digital library;
 Science Direct.
In this review, data sources and articles were selected using the above online databases, the
literature search was based on the keyword descriptor, relationship between MCS, business
strategy and firms’ performance of the selected databases, the databases were queried for the
keywords in the title, abstract and the keyword list. The review eventually yielded
approximately 10 studies related to MCS and its role in business strategies and performance
(see Appendix). Using content analysis the researchers analyzed the major outcomes of these
journals to arrive at an acceptable conclusion on the concept of MCS relationship with
business strategy on firms’ performance.
5. COMMON ATTRIBUTES OF THE SELECTED PAPERS
This section presents the results of the literature review exercise. Under this section, attempts
are made to highlight the similarities and common characteristics of the existing papers and
present the publication trend. Furthermore, the section also looks at investigated industries,
analyzed a number of countries analyzed and discloses the statistical approach adopted in the
reviewed articles.
5.1 Distribution of Articles by Journal
Table I below shows the categorization of 10 articles as per journals, and time-period and the
number of articles published during this time span. In all, 7 journals have published the
selected papers in the area of MCS, business strategy and organizational performance. The
majority of the articles have been published in Accounting, Organizations and Society
Journal (4 articles), during various years, and the rest of the journals have one article each.
Table I: Distribution of Articles in Journals and Year
No Year Journal
1 2015 Review of Managerial Science
1 2013 Journal of Family Business Strategy
2 2011
- Advances in Accounting, incorporating Advances in International Accounting
- Qualitative Research in Accounting & Management
1 2010 Accounting, Organizations and Society
1 2005 Management Accounting Research
10 Total
5.2 Distribution of Articles by Industries
The industry-wise analysis of research papers shows that the selected studies were spread
over 4 industries as depicted in Figure 1. This figure also indicates that the majority of
researches (four articles) for the articles were conducted in manufacturing field forming 50%
of the total (for example, Akroyd, & Maguire, 2011; Henri, & Journeault, 2010; Henri, 2006;
Bisbe, & Otley, 2004; Baines & Smith, 2003). This is followed by 3 articles making 30% of

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the total and which focused on business industry (Lopez et al., 2015; Acquaah, 2013;
Tsamenyi et al., 2011). While the other two industries, namely, Service and Medical Devices
had one article each with the two making just 10% of the total.
Fig. 1: Distribution of Articles by Industries
5.3 Distribution of Articles by Key Informant
The distribution of articles according to the key informant, shown in figure 2, roughly (30
percent of the papers or 3 articles out of 10) have collected data from managers as a key
informant. Similarly, 30% of the total selected studies focused on top management. However,
others used employees (one article out of the total), financial controller (one article), CEO
(one article) and different functional departments (one article) as their respondents.
Fig. 2: Distribution of Articles by Key Informant
5.4 Distribution of Articles by Countries
The country wise analysis of research papers reveals that the selected articles for review
covers seven countries (Figure 2). The maximum articles examined industries in two
countries, namely: Australia, and Canada. In total, three articles studied industries in
Australia followed by two articles for Canada. The figure also depicts that the research in this
area stretches across various countries as well.
30%
50%
10%
10%
Industry
Business
Manufactring
Service
Medical Devices Industry
30%
30%
10%
10%
10%
10%
Key Informant
Manager
Top Management
Emplyee
Financial Controllers
CEO

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Fig. 3: Distribution of Articles by Country
5.5 Distribution of articles by research approach and data collection method
The distribution of selected studies according to their research approach and data collection
method, it found that most of the research papers have used quantitative research design
(80% of the total). Questionnaire instrument was the main source for gathering data from
various key informants/ respondents as we discussed in the previous section.
6. FINDING AND DISCUSSION
The finding of this review study comprises an analysis of the selected studies that tests the
relationship between particular facets of MCS and business strategies as well as firms’
performance. In this part, we attempted to provide the entire discussion in terms of the
outcomes of these 10 existing studies.
The relationships between MCS, business strategies, and firms’ performance in both family
business (FB) and non family business (NFB) have been examined and compared by
Acquaah (2013). Based on the results, it indicated that DCS do affect the implementation of
cost leadership, however it doesn’t affect the implementation of differentiation strategy for
both FBs and NFBs. Cost leadership strategy is implemented to support fully the linkage
between DCS and firm's performance. Nonetheless, interactive control system (ICS) only can
support differentiation strategy implementation, and the only differentiation reconciles the
relationship between ICS and firm’s performance. The use of DCS and ICS stimulates and
supports the cost leadership strategy, but not the differentiation strategy and thus creating the
Dynamic Tension. It is proven that, the relationship between Dynamic Tension and
performance can be supported by the cost leadership strategy. For this reason, it can be
concluded that Dynamism Tension must be applied to support the implementation of a cost
leadership strategy; on the other hand, ICS also should be applied to support a differentiation
strategy for the firm’s own benefits.
In a study carried out by Lopez et al., (2015), which aimed to develop the arguments by
conveying “process and organizational innovation” into a brief literature. Besides, their study
contributes by highlighting the function of MCS and how it will improve the financial
performance of business organizations. Based on some previous studies, they have used a
multi-industry sample. The model suggested has examined by focusing on sample consists of
0
0.5
1
1.5
2
2.5
3
3.5
No.
of
articles
Country
Countries Investigated
No. of Articles

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230 firms in the Spanish agro-food industry. Each of the industry allows the analysis on some
particular aspects which may assist indiscriminate the findings. Therefore, a hypothesis has
been developed on the existence of a direct association between the interactive role of MCS
(iMCS), and process innovation and organizational innovation.
It has been debated that process innovation and organizational innovation to moderate the
relationship between iMCS, innovation and financial performance. The existing literature
elevates some important issues that should be debated within the field. Besides that, focusing
on the effect of MCS as an indicator for the development and success of technical
innovations, the study of the impact of iMCS on product innovations is therefore partial.
Consequently, this constraint indicates that iMCS can be reflected as a main factor in the
developments and the processes innovation success.
According to Akroyd and Maguire (2011), in a product development setting, both goal
congruence and uncertainty reduction role of management control are crucial. In order to
understand the roles of management control, they witnessed the role of management control
endorsed by organizational members in practice, comprising the three elements of
management control like input control, process control and output control. This explanation
supports Davila’s (2000) results, which refer that project managers should focus on activities
related to uncertainty reduction were ubiquitous in all stages. Furthermore, there was a strong
goal similarity on input control which is related to the existence of executive managers,
functional managers and functional specialists). It seems that it has a significant effect on the
management control role during the development of a product as concentrated on diverse
organizational matters.
Based on previous research by Auzair and Smith (2005), which used a contingency approach
to classify variables which are relevant to the role of MCS in service organizations, the
theoretical framework of this study combined literature from numerous perspectives,
including some areas that gained an enormous attention in MCS studies, such as like business
strategy and some areas that gained a limited attention such as like service process type and
organizational life cycle. Clearly, the findings of the current study reconfirm prior studies.
Besides, this study also proposed some new understandings of the concept of MCS in service
organizations. The previous studies indicated the evidence on the nature of the relationships
between the selected variables and in some circumstances, where appropriate, evidence from
the manufacturing sector was embraced to justify specific relationships. By exploring the
nature of this study, to test the direct relationships between the contingent variables or service
process type, business strategy and life cycle stage and MCS.
Henriand Journeault, (2010) have examined the effect of the integration of environmental
issues within MCS on both environmental, and economic performance. Specifically, to
examine the direct consequences of economic control on economic performance it used a
mediation model, same goes to indirect consequences through environmental performance.
Obviously economic control has no direct consequences on economic performance. The
relationship between economic control and economic performance and their mediating effect
on environmental performance have been observed from different perspectives. To be more

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precise, economic control has an indirect effect on economic performance in the aspect of
(Henri, & Journeault, (2010):
 Higher environmental exposure
 Higher public visibility
 Higher environmental concern
 Larger size
Another study conducted by Bisbe and Otley (2004) which was utilized the balance score
card (BSC), it tested whether the interactive use of controls (including the BSC) leads
companies to cultivate and launch new products and how it contributes to the impact of the
new innovative products on organizational performance. The finding shows that the
interactive use of BSC did not moderate the relationship of the product innovation strategy on
performance. Bisbe and Otley (2004) defined BSC in their survey as multi-perspective sets of
both financial and nonfinancial indicators that intend to capture the scope of achievement of
strategic objectives. Generally, the study of the effect of the interactive use of control
systems on product innovation has been provided inclusively by Bisbe and Otley (2004).
They piloted a survey using 120 medium-sized mature Spanish manufacturing firms and have
tested whether the interactive use of control will lead companies to cultivate and launch new
products and on the other hands how it will contribute to the impact of the new innovative
products on organizational performance. The finding shows that in less innovative firms, the
use of interactive control system may increase their innovative stages by guiding in
searching, triggering and stimulating initiatives and providing legitimacy for autonomous
initiatives. In high innovation firms, the interactive use of controls will reduce the innovation
stages. This is because it will filter out the initiatives that are caused from ideas sharing and
exposure and this is similar to Simon’s (1987) conclusion. Moreover, another result shows
that the interactive effect of control moderated the impact of innovation on organizational
performance because of the direction, integration and fine tuning which is provided by those
interactive control systems. In totality therefore, it is obvious that the formal MCS gave a
positive impact on innovation and long-term performance.
Ina study carried out by Baines and Smith (2003) there is a slope in studying the relationship
between strategy and nonfinancial performance. This is a measurement of the antecedents of
management accounting change. Generally, they have found that a differentiation strategy
drives change for a range of technologies and organizational systems. In particular, they
realized that a more changes to a strategy of differentiation leads to more increase in the use
of practices of advanced management accounting (i.e. ABC, customer profitability analysis,
and improvement programs), and successively, a greater reliance on measures of nonfinancial
performance.
Furthermore, Davila (2000) viewed MCS as reducing uncertainty in projects of a new product
development by providing sources of information in order to close the existing gap between
the information required for executive a task and information on hands. He discussed it along
with structure and strategy affecting the MCS design, particularly in an area of new product
development, shaping the design of MCS through three forms of information gap
(uncertainty) namely, “market-related uncertainty, technology-related uncertainty, and project

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scope”. Using a combination of qualitative case studies and a postal survey, he included both
financial and nonfinancial information in his characterization of MCS. He found that cost and
design information impacted positively on the firm’s performance, while time information
impedes its performance. He also found out that cost information was related to a low-cost
strategy, and time-related information is related to a time-to-market strategy. However, there
was no significant relationship between customer information and customer strategy. MCS
was not the only source of information used to reduce uncertainty, and specifically when the
technology is considered as the key source of uncertainty, prototyping may substitute for
MCS. However, when uncertainty comes from project scope or from the market, MCS is
more suited to reducing that uncertainty.
The findings of Tsamenyi et al., (2011) that was aimed at testing the linkage between MCS,
business strategies, and firms’ performance among Chinese enterprises in order to understand
the effectiveness and efficiency of adopted MCS. Based on the data collected from 215
enterprises that were classified as “pursuing differentiation strategy”, they found that the use
of more nonfinancial based MCS positively influences firms’ performance. In addition, for
enterprises classified as “pursuing a low cost strategy”, the use of more financial based MCS
has a positive effect on the firm’s performance. Hence, Tsamenyi et al., (2011) have
contributed through their study to give a clear understanding of management accounting
practices in business strategies and performance in a country like China.
Finally, by reviewing the study by Henri (2006), it was discovered that a strong interactive
effect of performance measurement systems (PMS) enhances the capabilities of market
orientation, entrepreneurship, innovativeness, and organizational learning. He indicated that
organizational attention on strategic priorities and stimulating dialogue, let PMS usefully
contribute to the knowledge generation process and dissemination, as well as support
collaboration throughout the firms. The results of this study support model of Simon (1990),
which considers control system as more than a mechanistic tool used to support the
implementation of strategy. Also, it serves as a dominant device to motivate and manage the
emergence of strategy throughout the firms. Moreover, the findings of Henri’s (2006) study
are integral to the prior studies which were done by Abernethy and Brownell (1999) and
Bisbe and Otley (2004) which support the impact of MCS in the context of innovation and
changing. Nevertheless, these two researches proposed a moderate influence of interactive
use on the relationship between innovation, strategic change, and performance. Their results
revealed that a direct relationship between interactive role and capabilities leads to strategic
choice and performance.
7. CONCLUSION
The main purpose of this paper is to review and assess some empirical research which
investigate the relationship between MCS, and business strategies as well as firms’
performance in order to enhance the state of the knowledge in such area, outline imitations,
and suggest improvements and directions for future research.
Overall, most of the selected papers that have used quantitative research approach found there
is a strong linkage between MCS, strategy, and firm’s performance. The findings of these
studies clearly point out MCS and its role so as to support organizations in formulating and

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implementing the competitive strategies. As a result, managers have an imperative task to
match the appropriate control systems to the right strategies, and implementation of an
efficiency-based strategy leads to experience higher performance.
In spite of efforts devoted in this review to provide a comprehensive impression of the
published literature in the context of the relationship between MCS, business strategies, and
firms’ performance, some limitations still loom. However, the most important of them all is
that this review only concentrated on a limited number of studies, i.e. considering only ten
articles. Therefore, it is recommended that future studies cover a wider scope of studies to be
carried out in the field of MCS’s relationship with the firm’s performance. Secondly, the
majority of the selected articles were conducted in developed countries. Consequently, the
results of these studies cannot be generalized for developing countries. Since it is proposed
by the business system theory that different countries follow different business systems, the
outcomes of the developed countries could not be applied to developing countries without
further validation (Goyal, Rahman, & Kazmi, 2013). Future researches should therefore
conduct empirical studies in this field with focus on developing countries.
ACKNOWLEDGEMENTS
The authors would like to thank Nahd Developmental Foundation, Mukalla, Hadhramout
Governorate – Yemen (www.nhd-ye.org), for its commitment and willingness to support and
encourage a research and publication.
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APPENDIX
No Author Country Method Data collection Key
Informant
Industry Finding Name of journal
1 Lopez,
Gonzalez, &
Gomez, (2015)
Germany Quantitative Questionnaire Top
management
Business iMCS enhances process and
organizational innovation, and
moderates the relationship between
innovation and financial performance.
Review of
Managerial Science
2 Acquaah, (2013) Ghana Quantitative Questionnaire Top
management
Business The effect of MCS on business
strategies is depended on whether the
firm is a family businesse or non-family
businesse.
Journal of Family
Business Strategy
3 Tsamenyi,
Sahadev, &
Qiao, (2011)
China Quantitative Questionnaire Manager Business A positive influence on performance by
the use of more non-financial based
MCS.
Advances in
Accounting,
incorporating
Advances in
International
Accounting
4 Akroyd, &
Maguire, (2011)
Australia Qualitative observation Members of
different
functional
departments
Manufacturin
g
During product development, MCS is
essentially attempted to reduce
uncertainty in every stage and promote
goals congruence at a decision gate.
Qualitative Research
in Accounting &
Management
5 Henri, &
Journeault,
(2010)
Canada Quantitative Questionnaire Employee Manufacturin
g
It found no direct effect of eco-control
on economic performance.
Accounting,
Organizations and
Society
6 Henri, (2006) Canada Quantitative Questionnaire Top
management
Manufacturin
g
The interactive effect of PMS enhances
the capabilities by concentrating
organizational attention on strategic
priority and encouraging dialogue.
Accounting,
Organizations and
Society
7 Auzair &
Langfield-
Smith, (2005)
Australia Quantitative Questionnaire Financial
Controllers
Service It revealed that “mass service, mature
and cost leader firms place a greater
emphasis on more bureaucratic forms of
MCS, and service process type,
organizational life cycle stage, and
business strategies have a significant
influence on the design of a firm’s
MCS”.
Management
Accounting Research

8 Bisbe, & Otley,
(2004)
Spain Quantitative Questionnaire CEO Manufacturin
g
The findings of the study do not support
the postulate that a MCS interactive
effect favour innovation.
Accounting,
Organizations and
Society
9 Baines & Smith
(2003)
Australia Quantitative Questionnaire Manager Manufacturin
g
It indicated that “an increasingly
competitive environment has resulted in
anincreased focus on differentiation
strategies. This, in turn, has influenced
changes in organizational design,
advanced manufacturing technology and
advanced management accounting
practices”.
Accounting,
Organizations and
Society
10 Davila (2000) Italy Quantitative
&
Qualitative
-Case study
-Questionnaire
Manager Medical
devices
industry
Results indicated that “support the
relevance of the project uncertainty and
product strategy to explain the design of
management control systems. They also
show that better cost and design
information has a positive association
with performance, but that time
information has a negative effect”.
Accounting,
Organizations and
Society

A REVIEW OF LITERATURE IN MANAGEMENT CONTROL SYSTEM (MCS), BUSINESS STRATEGY, AND FIRM S PERFORMANCE.pdf

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