Alignment of Strategy with Structure Using Management Control Systems

Alignment of Strategy with Structure

Alignment of Strategy with Structure

Executives of multibusiness firms are increasingly using management control systems (MCS) to align corporate strategy with organizational structure to create synergies across business units. Senior managers find that it is no longer practical to expend vast resources to continually restructure their organizations in order to align with changes in strategy and environmental conditions (Luke, Walston and Plummer, 2004). Instead, more organizations are learning a far more effective approach–choose an organizational structure that works without major conflicts, and then design MCS to align that structure with strategy (Kaplan and Norton, 2006).

In the past few decades, numerous studies emerged relating strategy, structure and MCS (Langfield-Smith, 1997; Chenhall, 2003). But the research examining the direct relationship between business level strategy and MCS produced ambiguous findings (Dent, 1990; Goold and Quinn, 1990). Simons (1987), for example, in a study based on classification scheme of Miles and Snow (1978), showed how innovative companies in fast-growing industries (prospectors) closely monitored financial results. By contrast, Govindarajan (1988), who followed Porter’s (1980) scheme of classification, demonstrated that financial results were less closely monitored at innovative companies (differentiators). Kald, Nilsson and Rapp (2000) argued the major reason for the ambiguous findings is that strategy has been operationalized using different classification schemes in different studies making it difficult to reconcile them.

Building on this research, Abernethy and Lillis (2001) also argued that inconsistent findings from prior empirical studies relating strategy with control systems arose because researchers did not consider the influence of organizational structure. To test this argument, they developed a statistical model that linked strategic choice in service innovation, structural autonomy and measurement systems. They found the relationship between strategic choice and measurement systems is not necessarily a direct one, but rather an indirect one that occurs via the organizational structure. Organizational structure was measured as the extent to which decisions were delegated to lower-level managers. They concluded that structure represented by the extent of decision-making autonomy and not strategy is the dominant imperative driving MCS design.

Kaplan and Norton (2006) contributed to this line of research by demonstrating that strategic MCS can be an effective means to align strategy with structure. The two authors work with multibusiness firms to apply the balanced scorecard, an advanced MCS tool, to align corporate and business unit strategies. In order to apply the tool, executives first articulate a theory of corporate synergy describing how headquarters creates value beyond what its individual business and support units generate on their own. Then the balanced scorecard is used both as a communication and control device to encourage business units to develop strategies that contribute to corporate level objectives while simultaneously addressing their local competitive situations. More importantly, executives used the balanced scorecard as a strategic MCS to align a variety of organizational structures to strategy without having to engage in expensive restructuring activities such as realigning authority, responsibility and decision rights.

From “Alignment of Strategy with Structure Using Management Control Systems” by S. Noorein Inamdar

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