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Summary - article "Introducing the first management control

system: evidence from the retail sector", complete
Management Control (Universiteit van Amsterdam)

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Introducing the first management control system: evidence from the

retail sector
Introduction
Managers of early-stage firms introduce formal managememt control systems (MCS), which are
formal information-based procedures and statements, used by managers to monitor and
influence the behavior and activities in a firm. However, MCS are costly and time-consuming to
install and operate. As a result, early- stage firms are likely to choose their first set of MCS
selectively. Conditional on the firms decision to start investing in MCS, this study examines
managers choices regarding the first MCS introduced in early- stage firms.
Research questions
Previous studies assume that all firms in the same growth stage introduce the same type of MCS.
In addition, contingency theory shows that firms design MCS as a function of a number of
contextual variables, inclusing strategy, environment ect. These two avenues of research lead to
the first question:
1. What types of initial MCS do early-stage firms put in place? Do initial MCS vary across
early-stage firms?
Since 1980s, the contingency theory in managerial accounting has focused on strategy as the
most important driver of MCS design. And there is extensive research supporting an association
between MCS and strategy in mature firms.
However, the type of initial MCS introduced will not reflect the firms strategy if early-stage firms
rely heavily on informal communications to support their strategy but would instead aim at
monitoring non-strategic routine issues or collecting risk-related information. Thus, the second
question is:
2. Are the choices of particular types of initial MCS in early- stage firms associated with the
firms strategy?
3. Are business performances and the perceived usefulness of initial MCS related to the fit
between the initial MCS introduced and the firms strategy?
Research method
The study is conducted using data from 40 exploratory field interviews with experts in
entrepreneurship and retailing. Besides, it gets 97 responses to a survey directed to early-stage
store-based retailers. Focusing on retailing industry provides depth to the study.
Findings
Field study on initial MCS
After interviews, the author came up with 20 individual control systems. The interviews reveal
that entrepreneurs characterize initial MCS in terms of the purposes MCS should fulfill. The three
purposes are: minimize cost; enhance revenue; minimize risk. In addition, three individual control
systems do not appear to be associated to any particular purpose, and they are described as
basic MCS commonly adopted because they are essential to the development of early-stage
firms. Research question 1 is answerd
Category of
initial MCS
Basic MCS

Purposes by these MCS

Set plan, standards and support basic
operations

Cost MCS

Revenue MCS

Minimize costs
Improve operation efficiency
Using internal and financial
information
Enhance revenue
Support growth
Learn about market

Individual control systems

associated with these MCS
Budget
Pricing
Inventory control
Cost controls
Quality controls

Marketing database
Sales productivity

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Risk MCS

Using external and non-financial

information
Avoide internal risks
Protect asset integrity
Using internal rules and
procedures

Loss prevention
controls
Internal audits,
trasaction tracking
Checks and balances
Codes of conduct
Credit controls
Policies and
procedures

The choice of initial MCS

Question 2 is examined by testing two hypotheses relating the categories of initial MCS to the
firms strategy, which is cost leader and/or differentiator.
H1: Early-stage retailers following low cost strategies will introduce cost MCS and Risk MCS
initially more intensively than retailers not following low cost strategies. Not supported
H2: Early-stage retailers following differentiation strategies will introduce Revenue MCS
inicially more intensively than retailers not following differentiation strategies. Supported
Results show that firms following a differentiation strategy tend to place more emphasis on
Revenue MCS than on Cost MCS. However, low cost strategies do not appear associated with
a more intense use of Cost MCS. This may occur because (1) Basic MCS already incorporate
controls that support a low cost strategy, or because Cost MCS and Risk MCS are
implemented by most early-stage firms perhaps to avoid the risk of failure or to control
routine operations that distract managers from informally docusing on strategic decisions.
Performance implications of the choice of initial MCS
H3: Early-stage firms with a better fit between initial MCS and their strategy experience (a)
superior business performance and (b) a higher perceived usefulness of MCS. Supported
Result shows that there is a significant positive association between FIT and all the
performance measures. (Performance, usefulness of MCS, sales growth and store growth)
Conclusion
1. Provide insights about the choices made by entrepreneurs when deciding the type of
initial MCS to introduce and the determinants and consequences of such choices.
2. Early stage firms tend to introduce four categories of MCS based on the purposes
pursued.
3. The choice among the categories of MCS depends on the firms strategy and structure.
4. Firms that choose initial MCS better suited to their strategy perform better than other
firms.
Limitation
1. Focusing on one industry limit the generalizing the result.
2. The study should have used real time data and should have employed triangulation.
3. Finding may be lack of power due to small sample size.
4. Potential survival and self-selection bias.

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