Cock Vs Pepsi

Introducing the First Management Control Systems:

Evidence from the Retail Sector

Tatiana Sandino

sandino@marshall.usc.edu

Assistant Professor

University of Southern California

Abstract

Focusing on a sample of US retailers, I study the management control systems (MCS) that firms introduce when they first invest in controls, and identify four categories of initial MCS, which are defined in terms of the purposes these MCS fulfill. The first category, "Basic MCS," is adopted to collect information for planning, setting standards, and establishing the basic operations of the firm. The other three categories are contingent on more specific purposes: "Cost MCS" focus on enhancing operating efficiencies and minimizing costs; "Revenue MCS" are introduced to foster growth and be responsive to customers; and "Risk MCS" focus on reducing risks and protecting asset integrity. I hypothesize and find that the choice among these categories reflects the firms' strategy, and that firms that choose initial MCS better suited to their strategy perform better than others.

Keywords: management control systems; corporate strategy; entrepreneurial organizations; firm growth

I want to thank my dissertation committee: Srikant Datar (Co-Chair), Robert Simons (Co-Chair), Robert Kaplan and Alvin Silk as well as Dennis Campbell, Henri Dekker, Fabrizio Ferri, Paul Healy, Susan Kulp, Kenneth Merchant, Mina Pizzini, Edward Riedl, Dhinu Srinivasan, Wim Van der Stede, Christiane Strohm, Ingrid Vargas, Terry Wang, Mark Young, workshop participants at ESADE, Emory University, Harvard University, IESE, INSEAD, Instituto de Empresa, Lancaster University, New York University, University of Southern California, University of Texas at Austin, Washington University in St. Louis, and discussants and reviewers at the Global Management Accounting Research Symposium 2004, AAA Annual Meeting 2004, MAS Midyear Meeting 2005, for their comments and suggestions. All errors remain my own.

I. Introduction

Managerial concerns tend to change frequently in young companies in an early-stage of their growth phase (hereinafter "early-stage" firms). New functions emerge, levels in the management hierarchy multiply, jobs become more interrelated and new coordination and communication needs arise (Greiner 1998). A growing firm confronts not only an internal transformation, but also increasing environmental complexity (Miller and Friesen 1984). As a result, managers of early-stage firms introduce formal management control systems (hereinafter MCS), which are "formal (written and standardized) information-based procedures and statements, used by managers to monitor and influence the behavior and activities in a firm." (Simons 1994, 5) Such MCS enable managers not only to cope with increasing information needs, but also to avoid loss of control because of lack of monitoring (Child and Mansfield 1972). However, MCS are costly and time-consuming to install and operate. As a consequence, early-stage firms are likely to choose their first set of MCS selectively.

Prior accounting research has studied MCS choices in mature firms, however, the issues underlying the choices of MCS in early-stage firms differ from those confronted by mature firms for three reasons. First, mature companies usually have an extensive amount of formal systems already in place, and thus, are less concerned about running "out of control" than early-stage firms. Second, the first MCS introduced provide a foundation for the future development of MCS in the firm (Davila 2005, Davila and Foster 2005b, Nelson and Winter 1982). In this respect, while the main concern in a mature company will be how to integrate new MCS with the existing ones, a young firm must consider how the first MCS will affect the choice of future MCS. Third, early-stage firms utilize informal control systems more intensely than do mature firms (Cardinal et al. 2004; Moores and Yuen 2001) and, thus, they might decide to invest only in those formal MCS that liberate managers from routine operations and allow them to informally focus on the firm's strategy.

Notwithstanding that MCS are critical to the success, and even the survival, of early-stage firms (Merchant and Ferreira 1985), academic work in this area has been sparse and offers little guidance to practitioners. Thus, conditional on the firms' decision